DEVELOPMENTAL FINANCIAL INSTITUTION

  • March 17, 2021
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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DEVELOPMENTAL FINANCIAL INSTITUTION

Subject : Economy

Context : Cabinet clears plan to set up DFI for infra projects. The government will infuse ₹20,000 crore capital in the new financial institution, and gradually reduce its stake to 26% from 100%, said Sitharaman.

Concept :

  • Finance Minister Nirmala Sitharaman had on February 1, proposed creation of a DFI to accelerate investment in infra sector as a part Union Budget 2021.

Development Finance Institution

  • These are specialized institutions set up primarily to provide development/ Project finance especially in developing countries.
  • These DFIs are usually majority-owned by national governments.
  • The source of capital of these banks is national or international development funds.
  • This ensures their creditworthiness and their ability to provide project finance in a very competitive rate.

How is it different from commercial banks?

  • It strikes a balance between commercial operational norms as followed by commercial banks on the one hand, and developmental responsibilities on the other.
  • DFIs are not just plain lenders like commercial banks but they act as companions in the development of significant sectors of the economy.

Evolution of DFIs in India:

  • The first DFI was the Industrial Financial Corporation of India (IFC) that was launched in 1948.
  • IDBI, UTI, NABARD, EXIM Bank, SIDBI, NHB, IIFCL etc are the other major DFIs.
  • Later several of them were converted into banks as industry like ICICI Bank, IDBI Bank etc.

Classification of development Financial Institutions:

  • Sector specific financial institutions: These financial Institutions focusses on a particular sector to provide project finance. Ex: NHB is solely related to Housing projects, EXIM bank is oriented towards import export operations.
  • Investment Institutions: These are specialized in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs).Ex: LIC, GIC and UTI
DEVELOPMENTAL FINANCIAL INSTITUTION economy