Tags: - GS Paper - 3
- Mobilization of Resources
- Industrial Policy
- Planning
This article is based on “Why DFIs have regained relevance today” which was published in The Hindu Business line on 22/06/2021. It talks about the role of Development financial institutions in infrastructure building.
Development financial institutions provide long-term credit for capital-intensive investments spread over a long period and low yielding rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.
They act as critical intermediaries for channelling long-term finance required for infrastructure and realising higher economic growth.
In India, after the 1991 reforms, major DFIs were converted into commercial banks. However, after these there were few institutions in the country which could take care of industrial or infrastructure development.
Therefore, in order to plug the infrastructure deficit, the government has taken a positive step by making a proposal to re-establish the DFIs in India.
DFI: Background & Present Status
- Development banks are different from commercial banks, which mobilize short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch.
- In India, the first DFI was operationalized in 1948 with the setting up of the Industrial Finance Corporation (IFC).
- DFIs in India like Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI) and IFCI did play a significant role in aiding industrial development in the past with the best of the resources made available to them.
- However, after 1991 reforms, the concessional funding they were getting from Reserve Bank of India (RBI) and the government was no longer available in the subsequent years.
- As a consequence, IDBI and ICICI had to convert themselves into universal banks.
- While these DFIs disappeared, a new set of institutions like IDFC (1997), IIFCL (2006) and more recently, National Investment and Infrastructure Fund (NIIF) (2015) emerged to focus on funding infrastructure.
- In budget 2021, with the initial capital base of ₹20,000 crore as committed by the government, the new DFI, assuming a leverage of around 7 times, can lend up to ₹1.4 trillion.
Need for DFI
- Infrastructure Building: Inadequate and inefficient infrastructure leads to high transaction costs, which in turn stunts an economy’s growth potential.
- Therefore, DFIs makes sense as the Centre government envisages mobilizing nearly ₹100 lakh crore for the ambitious National Infrastructure Pipeline.
- International Precedent: Irrespective of the level of development, countries across the world have set up development banks to finance key infrastructure and manufacturing projects.
- For instance, the European Investment Bank (EIB) acts like a DFI for Europe.
- Lack of Finance for Infrastructure: Although India has a long-term debt market for the government securities and corporate bonds cut, it is still out of reach of retail investors and unable to meet the large infrastructure financing needs.
- Economic Crisis Triggered By Covid-19 Pandemic: The Covid-19 pandemic has exacerbated inequality, the poverty gap, unemployment, and the economy’s slowing down.
- Thus, infrastructure building through DFIs can help in quick economic recovery.
Way Forward
- Mobilizing Capital For DFI: To lend for the long term, DFI requires correspondingly long-term sources of finance.
- In this context, the government may allow equity investment by institutions having a long term horizon like insurance companies, pension funds to augment the capital.
- Further, DFI can be adequately capitalized by the sovereign-backed funds, alternative routes such as capital gains/tax-free bond issues, external borrowings, and loans from multilateral agencies.
- Administration of DFI: The ownership and organisation structure are critical and require greater clarity as this would have bearing on the functioning, flexibility, governance of the institution and its long-term sustainability.
- Functionality of DFI: It is critical to hire experts with a good understanding of infrastructure, policies, financing and risk management to work with the institution by offering market-driven lending packages.
- Reaching Out Retail Investors: The government needs to set up institutions and network platforms to reach retail investors and incentivise and structure the bonds/instruments so that they are attracted to invest long-term in those instruments.
- Periodic Review of DFI: Periodic reviews are necessary to ensure that the DFI remains relevant by taking into account changing priorities of the economy and making consequential adjustments in the role.
Conclusion
For a developing country like India, it is desirable that the new DFI remains viable and sustainable to be able to cater to the long-term development financing requirements.
Drishti Mains Question
Development Financial Institutions (DFIs) are critical intermediaries for channelling long-term finance required for infrastructure and realising higher economic growth. Discuss.
FAQs
Development financial institution (DFI), also known as a Development bank, is a financial institution that provides risk capital for economic development projects on a non-commercial basis.
What are the four types of CDFI? ›
Four types of institutions are included in the definition of a CDFI: CD banks, CD credit unions, CD loan funds (most of which are nonprofit), and CD venture capital funds.
Who are the largest CDFI lenders? ›
Top 5 Total Assets ($) by CDFI: Year End 2021
- The Lending Corporation.
- Self-Help.
- Prestamos CDFI.
- Sunrise Banks, NA.
- The Change Company CDFI, LLC.
We provide impact-focused investment
First, we look at whether the businesses in which we invest can make a positive economic, environmental or social impact. Second, we look at how commercially sustainable and successful a business can be. These two measures of success, impact and financial return, go hand in hand.
What are the 3 types of financial institutions? ›
Banks, Thrifts, and Credit Unions - What's the Difference? There are three major types of depository institutions in the United States. They are commercial banks, thrifts (which include savings and loan associations and savings banks) and credit unions.
Why is development finance important? ›
Development finance is often granted to experienced builders and developers so that they can raise the capital to turn their building ideas into a commercial reality. Specialist development finance lenders will take the future value of the property into consideration when agreeing a loan.
What is the difference between a bank and a CDFI? ›
What distinguishes CDFI banks from other financial institutions is their community devel- opment mission and the requirement that at least 60 percent of their financing activities be targeted to one or more low- and moderate- income (LMI) populations or underserved communities.
How do CDFIs make money? ›
CDFIs are private-sector organizations that attract capital from private and public sources. Private sector funds come from many sources: corporations, individuals, religious institutions, and private foundations.
What are the benefits of CDFI? ›
Advantages of Becoming a CDFI
Certified CDFIs are eligible for a variety of government programs and incentives, such as grants, loans, and tax breaks. These programs can provide your institution with a significant source of funding to support your mission of serving the underserved in your community.
Can a bank own a CDFI? ›
CDFIs can be banks, credit unions, loan funds, microloan funds, or venture capital providers. CDFIs are helping families finance their first homes, supporting community residents starting businesses, and investing in local health centers, schools, or community centers.
CDFIs compete for federal support based on their business plan, market analysis, and performance goals. To receive financial assistance, CDFIs must provide matching private and non-federal funds to obtain CDFI Fund support.
Who is the biggest lender in the US? ›
Who funds BII? ›
British International Investment, (formerly CDC Group plc, Commonwealth Development Corporation, and Colonial Development Corporation) is the development finance institution of the UK government. The Foreign, Commonwealth and Development Office is responsible for the organisation, and is the sole shareholder.
Who is at risk for BII? ›
It's clear that women who've had breast implants with a textured surface have a greater risk of developing BIA-ALCL compared to women who have only ever had implants with a smooth surface.
Who owns BII? ›
BII is a Public Limited Company and is wholly owned on behalf of the UK government by the Department for International Development (DFID). Its mandate is to support the growth of businesses and jobs creation across Africa and South Asia.
What is an example of institution development? ›
Institutional development means those public and/or private facilities having a primarily public-serving function, including, but not limited to, government offices, police and fire stations, libraries, activity centers, schools, health care facilities, educational and religious training centers, and water-oriented ...
What does development mean in financial? ›
Fundamentally, financial sector development is about overcoming “costs” incurred in the financial system. This process of reducing the costs of acquiring information, enforcing contracts, and making transactions resulted in the emergence of financial contracts, markets, and intermediaries.
Is the World Bank a development finance institution? ›
Historically, the development financing has primarily come from public institutions, which are owned and operated by government shareholders. It can also come from multilateral institutions, like the World Bank. They receive funding from multiple member governments and use it across projects in developing countries.
Is IFC a development finance institution? ›
IFC - a member of the World Bank Group - is the largest global development institution focused exclusively on the private sector in developing countries. We leverage the power of the private sector and share expertise to transform ideas into investments for green growth, inclusive jobs and impactful projects.
