Institutions of developmental finance

Institutions of developmental finance

A Development Financial institution (DFI) is defined as “an institution endorsed or supported by Government of india primarily to provide development/Project finance to one or more sectors or sub-sectors of the economy. the institution differentiates itself by a thoughtful balance between commercial norms of operation, as adopted by any financial institution like commercial bank and developmental responsibilities.

after independence the role of commercial banking was limited to working capital financing on short term basis so thrust of DFis was on long term finance to industry and infrastructure sector in india. india’s first financial institution was operationalised in 1948 and it set up state Financial corporations (SFC’s) at the state level after passing of the SFCs act, 1951, succeeded by the development of industrial Finance corporation of india (IFCI).

DFIs can be classified in four categories of institutions as per their functions:

  • National Development Banks e.g. IDBI, SIDBI, ICICI, IFCI, IRBI, IDFC
  • Sector specific financial institutions e.g. TFCI, EXIM Bank, NABARD, HDFC, NHB
  • Investment Institutions e.g. LIC, GIC and UTI
  • State level Institutions e.g. State Finance corporations and SIDCs

The role of DFIs was to recognize the gaps in institutions and markets in our financial sector and act as a gap-filler which was made due to incapability of commercial banks to finance big infrastructure projects for long term and support them to attain growth and financial steadiness. Therefore, Govt. of India set up specialized DFIs in India to fulfil long term project financing requirements of industry and agriculture. The financial institutions in India were set up under the full control of both Central and State Governments. The Government used these institutions for the achievements in planning and development of the nation as a whole.

Specialized development financial institutions (DFIs), such as, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), National Bank for Agriculture and Rural Development (NABARD), National Housing Board (NHB) and Small Industry Development Bank of India (SIDBI), with majority ownership of the RBI were launched to meet the long-term financing needs of industry and agriculture in India for driving growth in our economy post-independence. There have been three phases in the evolution of DFIs in India. The first phase began with Independence and spreads to 1964 when the Industrial Development Bank of India was set up. The second phase stretched from 1964 to the middle of the 1990s when the role of the DFIs grew in importance, with the funding disbursed by them amounting to 10.3 per cent of Gross Capital Formation in 1990-91 and 15.2 per cent in 1993-94. In third phase after 1993-94, the prominence of development banking declined with the decline being particularly severe after 2000-01, as liberalization resulted in the exit of some firms from development banking and in a waning in the resources mobilised by other firms.

Historical evolution of Institutions of developmental finance in india

The process started instantly after Independence, with the setting up of the Industrial Finance Corporation (IFCI) in 1948 to embark on long term term-financing for industries. State Financial Corporations (SFCs) were formed under an Act that came into effect from August 1952 to endorse state-level, small and medium-sized industries with industrial finance. In January 1955, the Industrial Credit and Investment Corporation of India (ICICI), the first development finance institution in the private sector, came to be set up, with backing and funding of the World Bank. In June 1958, the Refinance Corporation for Industry was established, which was later taken over by the Industrial Development Bank of India (IDBI). Other DFIs that were launched included the Agriculture Refinance Corporation (1963), Rural Electrification Corporation Ltd. and HUDCO. Two other major steps in institution building were the setting up of IDBI as an apex term-lending institution and the Unit Trust of India (UTI) as an investment institution, both starting operations in July 1964 as subsidiaries of the Reserve Bank of India. There were new initiatives at the level of the states as well in the 1960s. State governments setup State Industrial Development Corporations (SIDCs) to inspire industrial development in their territories.

Specialized financial institutions set up after 1974 included NABARD (1981), EXIM Bank (1982), Shipping Credit and Investment Company of India (1986), Power Finance Corporation, Indian Railway Finance Corporation (1986), Indian Renewable Energy Development Agency (1987), Technology Development and Information Company of India, a venture fund later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management Ltd. (1988), National Housing Bank (1988), the Tourism Finance Corporation of India, set up by IFCI (1989), Small Industries Development Bank of India (SIDBI), with functions relating to the micro, medium and small industries sector taken out of IDBI (1989).




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