closing down term finance institutions was a mistake in India

1. Development Finance
Institution in India

2. The Shutdown of development financial
institutions was a mistake in India.
Introduction
 Development finance institutions (DFIs) had done much of the lending to corporate entities for
investments in the manufacturing or services sectors. These began winding down in 2000 and
were closed down in 2005.
 For a while, companies used retained profits cash reserves, before turning to external commercial
borrowing, the domestic bond market, or equity market as sources of finance. It was not long
borrowings from commercial banks emerged as an important alternative source of corporate
financing.
 Apart from bidding, corrupt or lacking lending, some systematic problems arose. Commercial
bank simply did not have the capability to assess credit risk on long- term investment lending
because they have always been engaged in advancing short – term working capital. moreover,
commercial banks were caught in a maturity mismatch, because they borrowed short from
depositors but had to lend long to investors.

3. The term-lending institutions were the Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation
of India (ICICI), and Industrial Development Bank of India (IDBI), established in 1948, 1955 and 1964, respectively. The essential
objective of these national institutions was to provide long-term finance for private investment in the industrial sector, with funds
from the Central government and RBI on concessional terms.
State financial corporations (SFCs) and state industrial development corporations (SIDCs) were set up in the 1950s to provide long-
term finance for small and medium enterprises in the manufacturing sector of respective states, with funds from their respective
governments on concessional terms.
The third component, investment institutions, was unusual in this role. It was made up of Life Insurance Corporation of India (LIC),
Unit Trust of India (UTI) and General Insurance Corporation of India (GIC), established in 1956, 1964 and 1973, respectively.
These institutions raised finances by mobilizing the savings of households, by spreading insurance habits, and by opening up
avenues of higher returns on the financial savings of individuals.
Obviously, their sources of finance, either households or individuals, were mostly small savers. The provision of long-term
development finance, in the form of loans or equity, emerged as a secondary objective for these institutions, almost as a corollary.
The nature of their business resolved the problem of maturity mismatches, while their ownership by the government made it a
potential source of industrial finance.

4.  Opinion: shutdown was a serious mistake, because their role was necessary and could not be
dispensed with. It simply passed on the burden to commercial banks, not equipped for the task which
was accumulated NPAs as a consequence.
 the National Development bank (NBD) in India. Such a new institution would start with a clean
revile, without any case from the past. It may be incorporate lessons from our past experience with
DFIs to remove errors of omission and commission. It is just as important to introduced institutional
control mechanism that were missing from the conceptions and design of the former DFIs.
 Thus, it is essential to have an institutionalized system of check and balances that can prevent
collusion between governments and firms, or between developments banks and firms to capture rents
by imposing discipline on the self-seeking behavior of any stakeholder, or even two stakeholders who
wish to collude, by others stakeholders. the design and blueprint will need careful thought.at this
juncture, an NDB is both necessary and desirable, it will help in reindustrialized India. It would also
de-stress commercial banks.

We then had three development financial institutions (DFI’s) that focused on term finance namely,
IFCI, ICICI and IDBI. Commercial banks compact themselves mainly to providing working capital
there are some reasons for separating the two roles of bank’s funds are mostly short – term assets
being financed by short term funds. This exposes banks to interest rate and liquidity risk.
Opinion

5. Revive Development Finance Institutions in India
 The corporate sector’s need for long – term funds for projects implementation was earlier met by the three
development finance institutions which have change in course of reformers and liberalization of the
financial sector- industrial development bank of India (IDBI) Industrial Credit and Investment Corporation
of India (ICICI) and the industrial Finance Corporation of India (IFCI). This were formulating as
development finance banks and providing long term loans to the corporates.
 In the financial sector mend and conquering of the idea of “Universal Banking”, two of the Development
Finance Institution (DFI’s) are allowed to undertake commercial banking in case they transform into full –
fledged commercials only the DFI’s role disappear altogether, thus, left with IDBI, and ICICI banks but no
DFI. The third one namely is IFCI ran into the problem of non-performing assets and total
mismanagement.
A DFI for look after the units back to health, had long yield to the disorder it was supposed to cure. We are
left with a matter where development finance for corporates by way of long-term debt is absent in the
country. Many proposals have been mooted.
 The main idea was to develop a corporate bonds market which has not been in a position to run. The
problem is that earlier the DFI’s asked for low interest – risk bearing loans for onward lending to points to
projects this is qualified for the statutory liquidity ratio (SLR) bonds and banks were asked to place their
funds. These arguments could not be reformed again. Even the government now borrows at higher rates of
interest. therefore, a demand for low interest funds is a near impossibility in these days of high interest
rates. Any institution must learn work with thin margins by improving operational efficiency.

6. Conclusion
 To explain the stakeholders motivation to seek DFI supporting and
have discussed factors that influence DFI involvement in
governance.
 DFI can be a major forces in the entrepreneurial transformation of
emerging economies. National development banks would most viable
decisions as it would not only reintroduced long term funding /
lending to the priority sectors. DFI activity in identifying and
supporting priority industrial sectors.
 Problems faced by DFI’s effective centralized internal control
parameters must be formulated in NBD also for the collaboration
with help them develop innovative lending schemes.