Development Finance Institution to Fund Infrastructure

• 24 Aug 2019

The government has proposed to set up a development financial institution (DFI) to solve the infrastructure financing needs of the country.

• The establishment of such an institution is considered as a positive step as banks do not have the long-term funds to finance such projects.
• Banks cannot afford to lend for such projects because that would shrink their lending capacity as the funds get locked up in such projects for that time period.
• Why India needs DFIs to Fund Infrastructure?
  
  • To boost economic growth which would increase capital flows and energise capital markets.
  • To improve long term finances.
  • To provide credit enhancement for infrastructure and housing projects
  • As India does not have a development bank, DFI would fulfil the need for us to have an institutional mechanism.
  • Debt flow towards infrastructure projects would be improved.
• The RBI had also specified in 2017 that specialised banks could cater to the wholesale and long-term financing needs of the growing economy and possibly fill the gap in long-term financing.

Thus, it would be wise to revive the concept of DFI if the government wishes to keep societal, cultural, regional, rural and environmental concerns intact.

• What is 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

Source: TH