Indian Economy

DFIs are large global institutions that play a vital role in financing and channelling long-term finance required for infrastructure and development projects and to all those entities which banks and capital markets do not adequately serve.

Objectives & Key Features

1. Primarily, they aim to mobilise funds for projects where private finance is scarce due to the riskier characteristics of capital-intensive investments spreading over a long period and yielding lower returns such as mining, heavy industry, urban infrastructure, roadways, railways, and other capital-intensive projects.
2. As a secondary objective, they also operate within a sophisticated framework of prioritizing factors, like inclusivity, sustainability, and productivity ensuring higher economic growth and aiding social development.
3. M. Keynes promoted the concept of DFIs at the International level which resulted in the setting up of the World Bank and IMF after World War II. Initially, DFIs were a mechanism to offset delays in India’s industrialization due to inadequate capital post-independence.
4. The riskier characteristics of financing long-term projects made the sector less attractive for commercial banks since their primary customers are small to medium-term depositors who prefer short-term liquidation.
5. Thus, to bridge the gap DFIs were set up aided by the help of the government funded primarily through the capital markets via equity and bond offerings, annual budget, and surplus capital of the RBI.
6. Under relationship banking, they meticulously oversee the functioning of the projects. They also provide technical expertise and project management services.
7. Unconventionally, they invest in the equity of firms they lend to and provide merchant banking facilities for underwriting and listing of the equity capital and enhance the credibility of the equities offered by the firms to the small and medium retail investors.

Major DFIs

Post-Independence, various DFIs were incorporated which included IFCI (Industrial Finance Corporation of India ) the 1st DFI in India in 1948, ICICI (Industrial Credit and Investment Corporation of India Limited) in 1955, IDBI (Industrial Development Bank of India) in 1964, IDBI (Industrial Development Bank of India) in 1964, IRCI (Industrial Reconstruction Corporation of India) in 1971, SIDBI (Small Industries development bank of India) in 1989, EXIM Bank (Export-Import Bank) in 1982, NABARD (National Bank for agriculture and rural development) in 1982, NHB (National Housing Bank) in 1988.

Present Scenario

The role of DFIs was curtailed after 1991 LPG reforms, on the recommendations of the Narasimham Committee, due to rising NPAs (Non-Performing Assets). The merger of two crucial DFIs (ICICI and IDBI) into Universal Commercial Banks eventually led to the decline of the DFI in India.

Recently due to covid-19 induced economic recession and the presence of fewer institutions catering to this sector, the government under the Union Budget 2021 aimed to set up the National Bank for Financing Infrastructure and Development (NaBFID) which will be India’s first DFI to be established post -1991 reforms.