The move to convert DFI's into universal banks or NBFC was a premature.

1. WHAT ARE DEVELOPEMENT
FINANCIAL INSTITUTION?
➤ DFI’S ARE SPECIALIZED INSTITUTIONS SET UP
PRIMARILY TO PROVIDE LONG-TERM
DEVELOPMENT/PROJECT FINANCE ESPECIALLY IN THE
DEVELOPING COUNTRIES.
➤ THE FIRST DFI WAS THE INDUSTRIAL FINANCE
CORPORATION OF INDIA (IFCI) SET UP IN 1948.
➤ IDBI,NABARD,EXIMBANK,SIDBI AND NHB ARE OTHER
MAJOR DFI’S. ICICI AND IDBI WERE WERE DFI’S UNTIL
THEY WERE CONVERTED INTO COMMERCIAL BANKS.
➤ ALONG WITH LONG TERM FINANCIAL SUPPORT THEY
ALSO PROVIDE TECHNICAL ASSISSTANCE LIKE
PROJECT REPORT,VIABILITY STUDY AND
CONSULTANCY SERVICES
➤ THE SOURCES OF FINANCE FOR THE DFI’S WERE
PREDOMINANTLY THE BOND MARKET, EQUITY
MARKET AND EXTERNAL COMMERCIAL BORROWING

2. EVOLUTION OF DFI IN INDIA
IN INDIA, THE FIRST DFI WAS OPERATIONALISED IN 1948 WITH THE SETTING UP OF THE INDUSTRIAL FINANCE
CORPORATION (IFCI). AFTER THE PASSAGE OF STATE FINANCIAL CORPORATIONS (SFCS) ACT, 1951, STATE LEVEL
SMALL AND MEDIUM-SIZED FINANCIAL CORPORATIONS WERE ESTABLISHED. IT WAS SUCCEEDED BY THE
ESTABLISHMENT OF INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI). 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. IN 1958, REFINANCE CORPORATION FOR INDUSTRY, WHICH WAS TAKEN OVER BY
THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) WAS ESTABLISHED. IN 1963, AGRICULTURE REFINANCE
CORPORATION WAS ESTABLISHED.
THE MAJOR DEVELOPMENT IN THE INSTITUTION BUILDING WAS THE ESTABLISHMENT OF IDBI AS AN APEX TERM-
LENDING INSTITUTION, AND THAT OF THE UNIT TRUST OF INDIA (UTI), AS SUBSIDIARIES OF THE RESERVE BANK OF
INDIA (RBI) IN 1964. SIMILARLY, IN 1960S, STATE INDUSTRIAL DEVELOPMENT CORPORATIONS (SIDCS) WERE
DEVELOPED IN THE STATES. THE FOLLOWING ARE SOME OF THE 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)

3. CLASSIFICATION OF DFI’S IN INDIA

4. C. RANGARAJAN’S THOUGHTS
ON DFI’S
➤ CHAKRAVARTHI RANGARAJAN WAS THE
GOVERNOR OF RBI WHEN THE CONCEPT OF
DFI’S WERE JUNKED AND REPLACED BY
UNIVERSAL BANKS.
➤ THE ASSUMPTION OF THIS MOVE WAS THAT
THESE NEWLY INSTITUTED BANKS WOULD BE
ABLE TO MEET THE SHORT AND LONG TERM
CREDIT NEEDED TO FUND FOR LARGE INFRA
PROJECTS.
➤ HE ACCEPTS THE FACT THAT THIS WAS A
PREMATURE MOVE , HOWEVER THE
REINTRODUCTION OF THESE INTITUTES WOULD
FACILITATE LONG TERM CREDIT AND ALSO
PROVIDE JOBS AND ECONOMIC GROWTH.
➤ FOR CHANNELING THE FUNDS BY THE
GOVERNMENT A SEPERATE INSTITUTE IS
REQUIRED AND THEREFORE SOME
GOVERNMENTAL INTERFERENCE IS DESIRABLE
➤ A SEPERATE REGULATORY BODY NEEDS TO BE
INSTITUTED TO MONITOR DFI’S AS THEY WERE
NONE DURING THE TIME DFI’S WERE
FUNCTIONAL.

5. ROLE OF DFI IN INDIA
➤ CAPITAL FORMATION
➤ SUPPORT TO THE CAPITAL
MARKET
➤ SUBSCRIPTION TO DEBENTURES
AND GUARANTEES
➤ ASSISTANCE TO BACKWARD
AREAS
➤ PROMOTION OF NEW
ENTREPRENEURS

6. ➤ DFI’S PROVIDED PREFERENTIAL ACCESS TO SOME
ENTREPRENEURS,BUSINESS HOUSES, SO THAT THE ALLOCATION OF
RESOURCES WAS SHAPED BY THE BORROWERS RATHER THAN THE
LENDERS.
➤ THE PROGRESSIVE WITHDRAWAL OF CONCESSIONAL FUNDS MADE
AVAILABLE BY GOVERNMENTS, WHICH IN TURN WAS AN INTEGRAL
PART OF DEREGULATION AND REFORM IN THE FINANCIAL SECTOR
ALMOST EVERYWHERE
➤ HOPED THAT THE EVOLUTION OF DOMESTIC CAPITAL MARKETS
WOULD ENABLE COMMERCIAL BANKS TO ENTER INTO LONG-TERM
LENDING. THIS DILUTION DID NOT HAPPEN EVERYWHERE
➤ DEVELOPMENT BANKS GOT DISCREDITED FOR MOUNTING NON-
PERFORMING ASSETS, ALLEGEDLY CAUSED BY POLITICALLY
MOTIVATED LENDING AND INADEQUATE PROFESSIONALISM IN
ASSESSING INVESTMENT PROJECTS FOR ECONOMIC, TECHNICAL
AND FINANCIAL VIABILITY.
➤ THE ASSUMPTION THAT ALONG WITH THE EQUITY MARKET EVEN THE
BOND MARKET WILL EXPAND IN PROVIDING ADDITIONAL FINANCE IN
INDIA HOWEVER THIS WAS’NT THE CASE.
REASONS FOR DISCONTINUIATION OF DFI’S IN INDIA

7. BENEFITS THE THE PROPOSED REVIVAL
➤ THE REINTRODUCTION WOULD BOOST THE ECONOMIC
GROWTH WHICH WOULD INCREASE CAPITAL FLOWS AND
ENERGIZE CAPITAL MARKETS.
➤ DFI WILL IMPROVE LONG-TERM FINANCES
➤ IMPROVE CREDIT ENHANCEMENT FOR INFRASTRUCTURE
AND HOUSING PROJECTS
➤ DEBT FLOW TOWARDS INFRA PROJECTS WOULD IMPROVE
➤ COMMERCIAL BANKS DO NOT HAVE THE CAPABILITY TO
ACCESS CREDIT RISK FOR LONG TERM INVESTMENT LENDING
COMPARED TO DFI’S AS THEY HAVE BEEN SOLELY ENGAGED
IN PROVIDING SHORT TERM WORKING CAPITAL.
➤ THE PERSISTENT PROBLEMS FACED BY THE COMMERCIAL
BANKS RELATED TO A MATURTY MISMATCH

8. THE ROAD AHEAD
➤ THE FINANCE MINISTER NIRMALA SITHARAMAN HAD ON AUGUST 10
INAUGURATED AN NIP ONLINE DASHBOARD WHICH PROVIDES DETAILS ON
INVESTMENT OPPORTUNITIES. THIS FEEDS FROM AN EARLIER REPORT OF A
HIGH-LEVEL TASK FORCE UNDER ECONOMIC AFFAIRS SECRETARY, RELEASED
BY HER ON APRIL 29, WHICH HAD DRAWN UP PROJECTS TOTALLING
INVESTMENTS OF RS 111 LAKH CRORE ACROSS ROADS, RAILWAYS, ENERGY
AND URBAN SECTORS OVER THE COMING FIVE YEARS 2020-25.
➤ NEED TO INCREASINGLY FOCUS ON INVESTMENTS IN SUSTAINABLE
INFRASTRUCTURE THAT TAKES INTO ACCOUNT LOW CARBON FOOTPRINTS AND
CLIMATE-RESILIENT TECHNOLOGY TO ENDORSE AND SUPPORT THE AMBITION
OF THE 2030 AGENDA AND THE PARIS AGREEMENT.
➤ THE ROLE DFIS CAN PLAY IN ADDRESSING THE MULTIPLE CHALLENGES OF
POVERTY AND INEQUALITY, THROUGH INVESTMENTS AND TECHNICAL SUPPORT
FOR SUSTAINABLE INFRASTRUCTURE AND HUMAN CAPITAL, ARE QUITE
EVIDENT. COORDINATED ACTION AND POLICY INTEROPERABILITY CAN TAKE
ADVANTAGES OF THE NEW OPPORTUNITIES PROVIDED BY THE GREATER
PENETRATION OF DATA, TECHNOLOGY, AND PRIVATE CAPITAL FLOWS TO
DEVELOPING COUNTRIES. IN THIS CONTEXT, THE SCOPE FOR SUCH
INSTITUTIONS TO SCALE UP THEIR DEVELOPMENT IMPACT OVER THE NEXT TWO
DECADES IS NOTEWORTHY.
➤ THE TIME HAS COME TO ESTABLISH A NATIONAL DEVELOPMENT BANK (NDB) IN
INDIA. SUCH A NEW INSTITUTION WOULD START WITH A CLEAN SLATE, WITHOUT
ANY BAGGAGE FROM THE PAST. IT MUST INCORPORATE LESSONS FROM OUR
PAST EXPERIENCE WITH DFIS TO ELIMINATE ERRORS OF OMISSION AND
COMMISSION-DEEPAK NAYYAR (PROFESSOR OF ECONOMICS , JNU ,NEW DELHI)