A bill for the creation of the Development Finance Institution (DFI) is listed for the ongoing session of the Indian Parliament that describes DFI as a provider, enabler and catalyst for infrastructure financing and as the principal financial institution and development bank for building and sustaining a supportive ecosystem across the life-cycle of infrastructure projects.
Finance Minister Nirmala Sithraman while presenting the Union Budget 2021-22 stated that India will set up a new DFI called the National Bank for Financing Infrastructure and Development.
The DFI will be set up on a capital base of Rs. 20,000 crores and will have a lending target of Rs. 5 lakh crore in three years. Debt financing through the infrastructure investment trust (InvIT) and real estate investment trust (REIT) routes will be enabled through necessary amendments in the rules.
In the year 2017, RBI specified that specialised banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing. Thus, it would revive the concept of DFI, if the government wishes to keep societal, cultural, regional, rural and environmental concerns intact.
Development Finance Institution (DFI)
The Development Finance Institution (DFI) are organizations which are either owned by the government or by charitable institutions to finance infrastructure projects that are of national importance but may or may not meet commercial return standards.
Categories of DFIs:
1- National Development Banks such as IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC.
2- Sector-specific financial institutions such as TFCI, EXIM Bank, NABARD, HDFC, and NHB.
3- Investment Institutions such as LIC, GIC and UTI.
4- State-level institutions such as State Finance Corporations and SIDCs.
Types of Finances:
1- Medium (1-5 years)
2- Long term (>5 years)
The need for DFIs in India:
India needs DFIs for the below-mentioned reasons:
1- To boost economic growth.
2- To improve long term finances.
3- To provide credit enhancement for infrastructure and housing projects.
4- Debt flows towards infrastructure projects would be improved.
Role of DFIs:
The role of the Development Finance Institution (DFI) is to take cognizance of the gaps in institutions and markets in the country's financial sector and to act as a gap filler.
DFIs have evolved in India in three below-mentioned phases:
1- The first phase began with Indian Independence to the year 1964.
2- The second phase began from 1964 to the mid-1990s.
3- In the third phase after 1993-94, the prominence of development banking declined, as liberalization resulted in the exit of some firms from development banking and in a waning in the resources mobilised by other firms.
Classification of DFIs:
1- Sector Specific Financial Institutions: They focus on particular sectors to provide finance for the project. For example, NHB, EXIM Bank and so forth.
2- Investment Institutions: They focus on facilitating business operations such as capital expenditure financing and equity offerings. For example, GIC, UTI and more.
List of important Development Finance Institutions (DFIs)
1- IFCI: Industrial Finance Corporation of India was established in 1948. It is India's first Development Finance Institution.
2- ICICI: Industrial Credit and Investment Corporation of India Limited was established in the year 1955 by an initiative of the World Bank and was the first DFI in the private sector. ICICI Limited established its subsidiary company ICICI Bank Limited in 1944 and in 2002, ICICI Limited was merged into ICICI Bank Limited, making it the first universal bank of India.
3- IDBI: Industrial Development Bank of India was set up in 1964 under RBI and was granted autonomy in 1976. The bank is responsible for ensuring adequate flow of credit to various sectors and was converted into a universal bank in 2003.
4- IRCI: Industrial Reconstruction Corporation of India was set up in 1971 to revive weak units and provide financial & technical assistance.
5- SIDBI: Small Industries Development Bank of India was established in 1989 as a subsidiary of IDBI and was granted autonomy in 1998.
6- EXIM Bank: Export-Import Bank was established in January 1982 to provide technical assistance and loan to exports.
7- NABARD: National Bank for Agriculture and Rural Development was established in July 1982 on the recommendation of the Shivraman Committee and functions as a refinancing institution.
8- NHB: National Housing Bank was established in 1988 to finance housing projects.
After two important DFIs, namely, ICICI and IDBI were merged with their banking units, many functions of DFIs are now performed by commercial banks and these are actively performed by commercial banks that finance projects like DFIs. Thus, Commercial banks are called universal banks which provide all kind of financial services under one roof.
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