Development Financial Institutions

Development Finance Institutions (DFIs) are specialized financial institutions set up to provide long-term financing or other financial support to sectors that are crucial for economic development but may not be well-served by conventional banks due to high risk or long gestation period. DFIs often have state support or mandates and focus on infrastructure, industry, agriculture, small businesses, exports, housing, etc. They are also called “development banks” in many contexts.

Historical Context

In the first few decades after India’s independence, the government established several DFIs to drive investment:

• IFCI (Industrial Finance Corporation of India) – set up in 1948 as the first DFI to support industrial expansion.
• State Financial Corporations (SFCs) – set up in various states (under a 1951 Act) to aid small/medium industries at state level.
• ICICI – formed in 1955 with World Bank support as a private sector DFI for industry (this later evolved into ICICI Bank).
• IDBI (Industrial Development Bank of India) – established in 1964 by RBI (later transferred to GOI) to be the apex DFI for industry; it refinanced and coordinated other institutions.
• IRCIs and others: Institutions like IRBI (which became IFCI), and sectoral ones.
• NABARD (National Bank for Agriculture and Rural Development) – 1982, focused on agriculture/rural sector (refinancing rural credit institutions and funding rural projects).
• EXIM Bank (Export-Import Bank of India) – 1982, to promote foreign trade by providing finance and facilitating import-export transactions.
• NHB (National Housing Bank) – 1988, as an apex institution for housing finance, regulating housing finance companies and providing refinance for housing loans.
• SIDBI (Small Industries Development Bank of India) – 1990, to focus on small industries/MSMEs, carved out of IDBI.

These DFIs were government-owned (or supported) and got funding through government grants, bonds, credit lines from RBI or multilateral agencies, etc., because raising long-term capital from market was tough in a controlled economy.

Evolution in Liberalization Era

Post-1991, India’s financial sector opened up:

• Many DFIs started losing their low-cost funding advantage (RBI stopped giving direct credit lines; they had to borrow from markets at market rates).
• Commercial banks grew stronger and also started doing some long-term lending.

As a result, some DFIs couldn’t sustain.

• ICICI took the radical step of reverse merging with its own promoted bank in 2002 to become ICICI Bank, thus transforming from a DFI to a universal bank.
• IDBI also was converted to a commercial bank in 2004 (though initially government-owned; later it was reclassified as private sector).
• IFCI struggled and lost relevance, functioning more like a non-banking finance company (NBFC) now.

Some DFIs remained as specialized institutions: NABARD, EXIM, NHB, SIDBI continued in their niches. They are often collectively referred to as All-India Financial Institutions (AIFIs) and regulated by RBI (though ownership lies with GOI or other institutions, e.g., RBI owned NHB and NABARD initially but transferred ownership to GOI in 2018-19).

Current Major DFIs / AIFIs:

• NABARD: Provides refinance to banks for agriculture loans, supports rural development projects, supervises rural cooperative banks and RRBs, and funds initiatives like rural infrastructure development (has a RIDF fund).
• SIDBI: Focuses on MSME sector. It refinances banks and NBFCs for loans to small industries, and directly lends to MSMEs, and runs programs for entrepreneurship development.
• EXIM Bank: Offers export credits, import finance, overseas investment finance, and guarantees. It often extends lines of credit to other countries to buy Indian goods (thus promoting exports).
• NHB: Regulates housing finance companies, and provides refinance to banks/HFCs for home loans, especially priority sector housing. (After 2019, NHB is fully owned by the Government; earlier RBI held stake.)
• IIFCL (India Infrastructure Finance Company Ltd): Established 2006, a government company that provides long-term finance to infrastructure PPP projects (e.g., highways, power plants) often as take-out financing or refinancing.
• NaBFID (National Bank for Financing Infrastructure and Development): New DFI (2021) – Recognizing the infrastructure financing gap, the government created NaBFID by statute as a mega-DFI with the initial backing of ₹20,000 crore. Its mandate is to fund infrastructure projects across sectors (transport, energy, etc.) and catalyze private investment in infrastructure. NaBFID enjoys certain government guarantees and tax exemptions to raise funds and has started sanctioning loans to big projects.

Additionally, State-level DFIs like SFCs and SIDCs (State Industrial Development Corporations) exist, but many are weak or defunct now due to state fiscal issues.

Differences from Banks

DFIs do not take retail deposits (NABARD, SIDBI, EXIM, etc., raise money via bonds or from government/RBI). They usually have a specific sector focus and expertise. They might offer softer terms or longer tenures than commercial banks can. They also may provide technical assistance or advisory support for projects (EXIM does for exporters, NABARD for agri projects).

Recent Developments

The establishment of NaBFID signals India’s push for infrastructure development. It’s expected to coordinate with commercial banks (perhaps by taking some long-term loan components off their books) and with foreign institutions to fund the National Infrastructure Pipeline. Also, there’s talk of sector-specific DFIs (e.g., a climate-focused DFI or revamping SFCs for state-level MSMEs).