DMPQ- Explain the Development Financial institution (DFI)

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.

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