A Development Financial institution (DFI) may be defined as “a financial institution endorsed or supported by the Government of India primarily to provide development/Project finance to one or more sectors or sub-sectors of the economy. DFIs differentiate their role as providers of the long-term capital needs of the economy in a significant manner. They emphasize the long-term financing of a project rather than collateral-based short-term financing. They provide long-term loans, equity capital, guarantees, and underwriting functions. Development institutions are expected to upgrade the managerial and other operational requirements of the assisted projects. Their association with its clients is ongoing and being the companions in the project than that of plain working capital lenders like commercial banks. Therefore, 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 the incapability of commercial banks to finance big infrastructure projects for the long term and support them to attain growth and financial steadiness.
Broadly, DFIs can be categorised as All-India or State / regional level institutions depending on their geographical coverage of the operation. Functionally, All-India institutions can be classified as term-lending institutions like the Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Infrastructure Development Finance Company (IDFC Ltd), Industrial Investment Bank of India Ltd (IIBI Ltd.) extending long-term finance to different industrial sectors. Secondly, refinancing institutions (NABARD, SIDBI, NHB) extend refinance to banking as well as non-banking intermediaries for finance to agriculture, SSIs, and the housing sector, respectively. Thirdly, sector-specific / specialized institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.). Fourthly, investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management Co Ltd.). State / regional level institutions are various SFCs, SIDCs, and NEDFi Ltd.
Govt. of India set up specialized DFIs in India to fulfill long-term project financing requirements of industry and agriculture such as the Industrial Finance Corporation of India (IFCI) in 1948, (Read: Role of IFCI). Industrial Development Bank of India (IDBI) in 1964 (Read: the role of IDBI), National Bank for Agriculture and Rural Development (NABARD) in 1982 (Read the role of NABARD), EXIM Bank 1982 Read Role of, EXIM Bank, National Housing Board (NHB) in 1988 Read the role of National Housing Bank (NHB), and SIDBI with functions relating to the micro, medium, and small industries sector was separated from IDBI in 1989, 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. Besides, public sector DFIs, the Industrial Credit and Investment Corporation of India (ICICI), the first development finance institution in the private sector, came to be set up in January 1955, with the backing and funding of the World Bank. The primary objective of ICICI was to develop small and medium industries in the private sector. (To know the details of read: role of ICICI).
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