DEVELOPMENT FINANCIAL INSTITUTIONS

DEVELOPMENT FINANCIAL INSTITUTIONS

Subject :Economy

Context : In her last Budget speech, Finance Minister Nirmala Sitharaman proposed to set up DFIs for promoting infrastructure funding.

Concept :

• About 7,000 projects were identified under the National Infrastructure Pipeline (NIP) with projected investment of a whopping ₹111-lakh crore during 2020-25.
• The proposed DFI would play a key developmental role, apart from providing conventional innovative financial mechanisms.

DFI

• Development finance institutions or development finance companies are organizations owned by the government or charitable institution to provide funds for low-capital projects or where their borrowers are unable to get it from commercial lenders.
• Types of Finance provided are – Medium (1 – 5 years) and Long term ( >5 years).

Classification

• 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.

Reasons for Decline

• After 2000-2001, the prominence of development banking has started to decline as many firms from development banking had quit post liberalization
• DFIs suffered huge NPAs, with many sliding to actual or near unviable status. It was also noted that (Desai-1999) the DFIs had failed in several crucial areas.
• They financed industrial groups rather than new entrepreneurs, diluted the standard of scrutiny of proposals, had weak project/ implementation monitoring skills, etc. The report also noted that DFIs had inherited a bureaucratic attitude, which prevented a comprehensive achievement of their founding objectives.
• This state of affairs confronted the two Narasimham Committee on Financial Sector Reforms in the 1990s which noted that the DFIs may not be viable, since these institutions were raising funds at the current market rates and lending to businesses with long gestation and often high risk of failure with high credit cost.