Evolution of DFIs in India

At the time of independence of India, the role of commercial banking was limited to working capital financing on a short-term basis. Though demand for capital was growing rapidly, there was a lack of providers of capital. The commercial banks of that time were not equipped well enough to provide for long-term capital needs in any significant manner. The government of India felt the necessity of establishing Development Financial Institutions (DFI) to provide development/Project finance to one or more sectors or sub-sectors of the economy. The process started instantly after Independence, with the establishment of IFCI Ltd (previously Industrial Finance Corporation of India) as a Statutory Corporation on July 1, 1948, for providing medium and long-term finance to industry under the ownership of the Ministry of Finance, Government of India. Hence, IFCI India’s first DFI was operationalised in 1948. After the formation of the IFCI, State Financial Corporations (SFCs) were formed under the SFCs Act, 1951 which came into effect in August 1952 to endorse state-level, small, and medium-sized industries with industrial finance.

(To know more: Role of IFCI)

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 backing and funding from 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).   

In June 1958, the Refinance Corporation for Industry was established, which was later taken over by the Industrial Development Bank of India (IDBI) after the establishment of IDBI.

Industrial Development Bank of India (IDBI) was constituted under the Industrial Development Bank of India Act, 1964 as a Development Financial Institution (DFI) and came into being on July 01, 1964, vide GoI notification dated June 22, 1964. It is the principal financial institution that provides credit and other facilities for developing industries and assisting development institutions.  Until 1976, IDBI was a subsidiary bank of RBI. Later it was made into an autonomous institution and its ownership passed from RBI to the Government of India (To know more details, read: the role of IDBI).

The Reserve Bank of India (RBI) set up the Agricultural Refinance Corporation (ARC) in 1963 to work as a refinancing agency in providing medium-term and long-term agricultural credit to support investment credit needs for agricultural development. In 1975, ARC was renamed Agriculture Refinance and Development Corporation (ARDC) to give focused attention to credit off-take, development, and promotion of the agricultural sector. Upon its formation in 1982, NABARD took over the functions of the erstwhile Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of RBI and ARDC ( To know more: read the role of NABARD)

Other DFIs that were launched included the Agriculture Refinance Corporation (1963), Rural Electrification Corporation Ltd (25 July 1969), and HuDco (April 25, 1970), as a private limited company.

Rural Electrification Corporation Ltd (RECL) was established in 1969-70 as a Government company to facilitate the availability of electricity for rural and semi-urban populations and to act as an organization for financing and promoting projects covering generation, conservation, transmission, and distribution of power in the country.

HUDCO Ltd (Housing and Urban Development Corporation Ltd (HUDCO) was set up in 1969-70 as a company, initially for financing public sector housing agencies such as Housing Boards and Development Authorities. Later, in the mid-seventies, it diversified into financing cooperative housing and subsequently undertook financing of corporates – both in the public and private sectors. It has further diversified into financing real estate builders and is progressively moving towards the provision of individual housing loans as well as extending techno-financial assistance to individuals. HUDCO Ltd., being a HFC is being regulated Our Company, the Housing and Urban Development Corporation Ltd (HUDCO), is the premier techno-financing public sector enterprise, in the field of housing and infrastructure development in our country. The Reserve Bank of India (RBI) regulates Housing and Urban Development Corporation Limited (HUDCO) under the supervision of the National Housing Bank (NHB) and the company is under the administrative control of the Ministry of Housing and Urban Affairs (MOHUA).

The first mutual fund, the Unit Trust of India (UTI), was set up by an Act of Parliament in 1963 to mobilize small household savings. In 1964 UTI launched its first, and still largest, investment scheme. The UTI Mutual Fund was carved out of the erstwhile Unit Trust of India (UTI) as a Securities and Exchange Board of India-registered mutual fund on 1 February 2003.

Specialized financial institutions set up after 1974 included NABARD (1981), EXIM Bank (1982), Shipping Credit and Investment Company of India (1986), the name changed later to SCICI and SCICI later merged into ICICI, and became wholly owned subsidiary of ICICI. Power Finance Corporation ((P. F. C.) is an Indian central public sector undertaking owned by the Ministry of Power, Government of India. Established in 1986, it is the financial backbone of the Indian power sector. Indian Railway Finance Corporation (IRFC) was set up on 12th December 1986 as the dedicated financing arm of the Indian Railways for mobilizing funds from domestic as well as overseas Capital Markets. IRFC is a Schedule ‘A’ Public Sector Enterprise under the administrative control of the Ministry of Railways, Govt., The Indian Renewable Energy Development Agency (1987) is an Indian public sector enterprise that provides financial assistance and other services to projects related to renewable sources of energy and energy efficiency/conservation, IFCI Venture Capital Fund Ltd. was set up by IFCI Limited (IFCI) in 1975 to broaden entrepreneurship base in India by providing risk capital for SC, S.T, and backward class. ICICI Venture was founded in 1988 as the Technology Development and Information Company of India Limited, through a joint venture between the ICICI Limited and Unit Trust of India. In 1998 it became a wholly owned subsidiary of ICICI Limited and was renamed ICICI Venture Funds Management Company Limited. ICICI Venture is a wholly owned subsidiary of ICICI Bank Limited (which is the successor entity to ICICI Limited). The  Tourism Finance Corporation of India Ltd.(TFCI) has been set up as an All India Financial Institution, under the recommendations of the “National Committee on Tourism” set up under the aegis of the Planning Commission in 1988. The main object of setting up the specialised financial institution was to expedite the growth of tourism infrastructure in the country by providing a dedicated line of credit on a long-term basis to tourism-related projects in the country.  SIDBI with functions relating to the micro, medium, and small industries sector was separated from IDBI in 1989.

Since the 1991 economic reforms Government of India reduced public funding to DFIs. With the change in the operating environment, the supply of low-cost funds has dried up for the DFIs forcing them to raise resources at market-related rates. The DFIs are unable to withstand the competition from banks due to their higher cost of funds. DFIs are also burdened with large NPAs due to exposure to certain sectors which have not performed well due to the downturn in the business cycle further adding to their cost of doing business. Further, their portfolio is almost entirely composed of long-term high-risk project finance and consequently, the viability of their business model has come under strain. Compared to DFIs Banks enjoy the natural advantage of low-cost funds and are, therefore, capable of providing long-term finance at lower rates despite higher intermediation cost and can derive at the same time the benefit of risk diversification across a wide spectrum of assets of varying maturities, subject of course, to the limitations imposed by their ALM considerations. With the change in the operating environment, the supply of low-cost funds has dried up for the DFIs forcing them to raise resources at market-related rates. The DFIs are unable to withstand the competition from banks due to their higher cost of funds. DFIs are also burdened with large NPAs due to exposure to certain sectors which have not performed well due to the downturn in the business cycle further adding to their cost of doing business. Further, their portfolio is almost entirely composed of long-term high-risk project finance and consequently, the viability of their business model has come under strain. Under the recommendations of the Khan Working Group on Harmonizing the Role and Operations of the Development Financial Institutions and Banks, a Discussion Paper was prepared outlining the issues arising out of the recommendations of the Narasimham Committee II and the Khan Working Group. Extensive discussions were held on the issues brought out in the paper and a broad policy framework was outlined in the Mid-Term Review of Monetary and Credit Policy of 1999-2000 of RBI. The principle of Universal Banking was recognised as a desirable goal. It was also recognized that the DFIs would continue to have a special role in Indian financial system until the debt market demonstrated substantial improvement in terms of liquidity and depth. However, any DFI that wishes to transform into a bank should have the option provided the prudential norms applicable to the banks are fully satisfied. To this end, a DFI would need to prepare a transition path to fully comply with the regulatory requirements of a bank. The DFIs were, therefore, advised to consult RBI for such transition arrangements which RBI will consider on a case-to-case basis. The need for strengthening the regulatory framework of RBI concerning DFIs, if they were to be given greater access to short-term resources for meeting their financing requirements, was recognized. It was expected that in light of the evolution of the financial system, the Narasimham Committee’s recommendation that ultimately there should only be banks and restructured NBFCs could be operationalised. The operational guidelines for enabling a DFI to convert to a universal bank were issued in 2001 following the policy pronouncement by RBI on the ‘Approach to Universal Banking’. The DFIs were advised that those who choose to convert into a bank may formulate a roadmap for the transition path and strategy for smooth conversion over a specified time frame. It was also advised that the plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period and should be submitted to RBI for consideration.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by ICICI and ICICI Bank shareholders in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. While ICICI Ltd. converted into a bank through a reverse merger with ICICI Bank in 2002, the IDBI (Transfer of Undertaking and Repeal) Act, 2003 was passed by the Parliament and notified by the Government of India on December 30, 2003. IDBI converted into a bank through a reverse merger with IDBI Bank effective from October 03, 2006.  (Source RBI reports)

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