Development Finance Institution to Fund Infrastructure
- 24 Aug 2019
- 4 min read
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:
- 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