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Y These banks provide financial as well as the technical recommending disbanding of the DFI, and the existing
support to various sectors DFI were converted into commercial banks.
Y DFIs do not accept deposits from people 3. In the third phase after 1993-94, the prominence of
Y They raise funds by borrowing funds from governments development banking declined, as liberalization resulted
and by selling their bonds to the general public in the exit of some firms from development banking and
in a waning in the resources mobilized by other firms.
Y It also provides a guarantee to banks on behalf of
companies and subscriptions to shares, debentures, etc.
Categories of DFIs:
Y Underwriting enables firms to raise funds from the public. 1- National Development Banks such as IDBI, SIDBI, ICICI,
Underwriting a financial institution guarantees to IFCI, IRBI, and IDFC.
purchase a certain percentage of shares of a company
that is issuing IPO if it is not subscribed by the Public. 2- Sector-specific financial institutions such as TFCI, EXIM
Bank, NABARD, HDFC, and NHB.
Y They also provide technical assistance like Project
Report, Viability study, and consultancy services. 3- Investment Institutions such as LIC, GIC and UTI.
Y The role of the Development Finance Institution (DFI) is to 4- State-level institutions such as State Finance
take cognizance of the gaps in institutions and markets in Corporations and SIDCs.
the country's financial sector and to act as a gap filler.
Classification of DFIs:
History of DFIs in India: 1. Sector Specific Financial Institutions: They focus on
Y Development Financial Institutions provide long term particular sectors to provide finance for the project. For
credit for capital-intensive investments spread over a example, Export-Import Bank (EXIM Bank) was
established in January 1982 and is the apex institution
long period and low yielding rates of return such as
urban infrastructure, mining and heavy industry and in the area of foreign trade investment. National Bank
irrigation systems. for Agriculture and Rural Development (NABARD) was
established in July 1982. It is the apex institution in the
Y Development banks are different from commercial banks, area of agriculture and rural sectors. National Housing
which mobilize short to medium term deposits and lend Bank (NHB) was established in 1988. It is the apex
for similar maturities to avoid a maturity mismatch. institution in Housing Finance and so forth.
2. Investment Institutions: They focus on facilitating
DFIs have evolved in India in three business operations such as capital expenditure financing

below-mentioned phases: and equity offerings. For example, GIC, UTI and more.
1. The first phase began with Indian Independence to the
year 1964. In India, the first DFI was operationalized in Need for DFI (present scenario)
1948 with the setting up of the Industrial Finance Y India is today an attractive destination for foreign funds.
Corporation of India (IFCI). Subsequently, India's Debt and equity capital markets are increasingly
Industrial Credit and Investment Corporation (ICICI) was dynamic. Insurance companies, fund houses etc. are
set up with the World Bank's back in 1955. active in loan/bond buyout and/or refinance, particularly
for completed projects.
2. The second phase began from 1964 to the mid-1990s.
Industrial Development Bank of India (IDBI) was set up Y Financing activities: The DFIs extended term loan for
in 1964 under RBI to promote long term financing for setting up new units as also for expansion,
infrastructure projects and industry and was granted modernization and rehabilitation of existing units. There
autonomy in 1976. However, during the 1970-1980s, DFI are no set oral restrictions (except for the small negative
got discredited for mounting non-performing assets, list)
allegedly caused by politically motivated lending and Y NPA Crisis: The surge in NPAs in the banking sector, and
inadequate professionalism in assessing investment the need to augment financing of infrastructure for kick-
projects for economic, technical and financial viability. starting the growth cycle have led to a renewed policy
Due to these factors, Narsimhan Committee (1991) attention on setting up DFIs.

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