Context: Years after some of India’s biggest Development Finance Institutions (DFIs), either reinvented themselves or faded away, the government is veering towards setting up a new DFI essentially to fill the gap in long-term finance for infrastructure sectors.

• The proposed DFI will be used to finance both social and economic infrastructure projects identified under the National Infrastructure Pipeline (NIP).

Development Finance Institutions (DFI)

• The vehicle for extending development finance is called development financial institution (DFI) or development bank.
• A DFI is defined as ‘an institution promoted or assisted by Government mainly to provide development finance to one or more sectors or sub-sectors of the economy’.
• The DFIs played a very significant role in rapid industrialization of the Continental Europe and Japan.
• The success of these institutions provided strong impetus for creation of DFIs in India after independence in the context of the felt need for raising the investment rate.
• The National Development Bank is a type of DFI. As the name suggests, it is a deposit-taking bank. In contrast, a majority of DFIs are non-deposit taking institutions.
• DFIs can be either wholly or partially owned by the government.
• The shareholding pattern is largely determined by the nature of the activities being financed, and their associated risk-returns profile.

There are three different institutional forms for a DFI.

• Deposit-taking wholesale banks
• Non-deposit taking financial institution
• Off-balance-sheet entities like infrastructure funds

Classification

• DFIs can be broadly categorised as All-India or State/regional level institutions depending on their geographical coverage of operation.

The Development Finance Institutions can be classified into four categories:

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

DFI in India

• The DFIs in India were set up under the full control of both Central and State Governments.
• In 1955, the first DFI in private sector, the Industrial Credit and Investment Corporation of India (ICICI), was set up with the backing of the World Bank.

Major institutions set up after 1974:

• 1981: NABARD; 1982: EXIM Bank; 1986: Shipping Credit and Investment Company of India (SCICI); 1987: Indian Renewable Energy Development Agency (IREDA); 1988: ICICI Venture Funds Management Ltd.; 1988: National Housing Bank (NHB); 1989: Tourism Finance Corporation of India (TFCI); 1990: Small Industries Development Bank of India (SIDBI)

Others are 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).