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Development Finance Institutions

Financial Institutions consists of plethora of institutions. They can be Commercial Banks, Insurance Companies, Investment Banks, Development Finance Institutions (DFI) and similar businesses.


What is DFI?


A DFI is defined as an alternate financial institution. Such institutions are generally promoted or assisted by Governments. It is mainly to provide development finance to one or more sectors or sub-sectors of the economy. The distinguishable factor of a DFI is, it maintains a balance between commercial norms of operation of a private financial institution and developmental obligations.


Need for DFI


During development, especially in developing countries, various kinds of special funds are required for progress. These are long term finance for infrastructure and industry, finance for agriculture etc. Generally, other financial institutions fail to provide it due to risks involved. Thus, Development Finance Institutions act as ‘gap-fillers’ in the existing financial system, targeting the development of economic activities or agents which other financial institutions are not willing to bear.


Working Model of DFI


Core approach of the DFI is ‘project approach’ – meaning the viability of the project to be financed, even if it is a long term is seen. Normally, DFI provides long-term loans, equity capital, guarantees and underwriting functions. But apart from it, it is also expected to provide managerial help to the assisted projects. Thus, DFI acts more as ‘partner’ rather than mere ‘financier’ in a project.


Importance of DFIin Other Countries


The DFIs played a very significant role in rapid industrialization of the Continental Europe be it Germany, France, Netherlands etc. In Asia, establishment of Japan Development Bank and other term-lending institution fostered rapid industrialization of Japan. Many of the DFIs were sponsored by national governments and international agencies.

The success of these institutions provided strong impetus for creation of DFIs in India after independence for accelerated growth. Subsequently, many DFIs were established by Government of India in collaboration with Reserve Bank of India and others.


DFIs in India can be classified (as per RBI):


1.       All India Financial Institutions

a.       Term lending Institutions – IFCI, IDBI, IDFC Ltd, IIBI Ltd

b.      Refinancing Institutions – NABARD, NHB, SIDBI

c.       Investment Institutions – LIC, UTI, GIC, IFCI Venture Capital Funds Ltd

d.      Sector specific/Specialized Institutions – EXIM bank, IREDA Ltd, REC Ltd, IRFC Ltd, HUDCO


2.       State level/Regional Institutions – SFCs, SIDCs, NEDFI Ltd

These DFIs are playing an important role in development of various sectors like agriculture, irrigation, housing, power, renewable energy, export and import, small and medium industries which are pushing forward the development and welfare in the country.

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