NEED FOR DFIs

● Commercial banks do not typically lend for longer periods, as required for
infrastructure projects.
● Development Financial Institutions (DFIs) are set up to provide long-term credit
contributing to capital formation for sustained growth.

EVOLUTION OF DFIs
● The first DFI in India – 1948 – Industrial Finance Corporation of India (IFCI)
● Followed by setting up of State Financial Corporations (SFCs) at the State level.
● Industrial Credit and Investment Corporation of India (ICICI Ltd.) – 1955
● Life Insurance Corporation of India (LIC) – 1956
● Refinance Corporation for Industries Ltd. (later taken over by IDBI) – 1958
● Agriculture Refinance Corporation (precursor of ARDC and NABARD) – 1963,
● UTI and IDBI – 1964
● Rural Electrification Corporation Ltd. – in 1969-70
● Industrial Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) – 1971
● GIC – 1972
● National Bank for Financing Infrastructure and Development(NaBFID) – 2021
● Most of DFIs extend direct finance, some extend indirect finance and are mainly
refinancing institutions, viz., SIDBI, NABARD and NHB - which also have a regulatory
and supervisory role.

GAPS IN POST INDEPENDENCE FINANCIAL SYSTEM

● The following gaps were filled by DFIs:
● Commercial banks traditionally confined themselves to financing working capital
requirements.
● Investors were not interested in investing in the capital market due to several
malpractices
● The following gaps were filled by DFIs:
● The managing agency houses, which had served as supplementary to the capital
market, showed their apathy to investments, in risky ventures.
● Limited number of issue houses and underwriting firms sponsoring the issue of
bonds and other securities.
CLASSIFICATION OF DFIs

ROLE OF DFIs IN INDIAN ECONOMY

● The DFIs for industrial development extended term loan for:
● Setting up new units
● Expansion
● Modernisation
● Rehabilitation of existing units.
● Tenor of the financial assistance was usually up to 10 years, with suitable initial
moratorium periods.
● Various expert committees have recommended measures to transform the DFIs into
Universal Bank.
● With the RBI’s policy in this regard crystallizing, ICICI transformed itself into a bank.
● The ICICI Ltd and the IDBI merged into ICICI Bank Ltd and IDBI Bank in April, 2002
and October, 2004, respectively.
INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
● It was on developed on July 1, 1948, following enactment of the Industrial Finance
Corporation Act, 1948.
● It was the first Development Financial Institution of India set up to propel economic
growth, through development of infrastructure and industry.
● The name of the company was changed to ‘IFCI Limited’, with effect from October
1999.
● The authorised share capital of the IFCI was only Rs. 10 crores at the initial stage,
and in terms of the Industrial Finance Corporation (Amendment) Act 1986, the
authorised capital of IFCI was increased to Rs. 250 crores.
● The activities of IFCI can be broadly divided into:
○ financing activities
○ promotional activities.
○ Financing Activities of IFCI:
Project financing is the core business of IFCI.
● The main objective behind the incorporation of IFCI was to fund green-field projects.
Financing Activities of IFCI:
● Financial services: IFCI provided tailor-made assistance, to meet specific needs of
corporates, through specifically designed schemes.
● Corporate advisory services: IFCI provided advisory services in the areas of projects,
infrastructure, corporate finance, investment banking, and corporate restructuring.
Promotional Activities of IFCI:
● IFCI was instrumental in the establishment of a number of reputed financial
institutions.
● It founded and developed institutions such as, the Management Development
Institute (MDI), the Investment and Credit Rating Agency (ICRA), the Tourism
Finance Corporation of India (TFCI) and the Rashtriya Gramin Vikas Nidhi (RGVN).
○ Currently, IFCI has the following subsidiaries
○ – Stock Holding Corporation of India Ltd,
○ – IFCI Venture Capital Fund Ltd
○ – IFCI Factors Ltd, IFCI Infrastructure Development Ltd
○ – IFCI Financial Services Ltd
 ○ – Management Development Institute
○ – Institute of Leadership Development.

ICICI
INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI):
● Established in the year 1955, at the initiative of the World Bank, the Government of
India and representatives of Indian industry.
● The principal objective – create a DFI, for providing medium-term and long-term
project financing to Indian businesses.
 ● Until the late 1980s, the ICICI primarily focused its activities on project finance,
providing long-term funds to a variety of industrial projects.
● After liberalisation, it transformed its business to that of a diversified financial
services provider
● ICICI Bank was incorporated in 1994, as a part of the ICICI group.
● In 1999, ICICI became the first Indian company and the first bank or financial
institution from non-Japan Asia, to be listed on the New York Stock Exchange.
● In March 2002, ICICI was merged with the ICICI Bank, to create the first universal
bank in India.
● ICICI Ltd ceased to exist anymore as a Development Financial Institution.

INSTITUTIONS SET UP BY ICICI

● ICICI started a Merchant Banking Division in 1973, for advising its clients on raising
finances in suitable forms and on restructuring of financial structures, in existing
companies.
● It also advised clients on amalgamation proposals.
● In 1982, the ICICI offered to provide counselling for industrial investments in India, to
Non-Resident Indians.
● Venture Funds Co. Ltd, for the promotion of green field projects and risk capital
investment
● ICICI Brokerage Services Ltd in March 1995, which is a 100% subsidiary of I-SEC.
● ICICI Credit Corporation in 1997 which offered a comprehensive range of products
and services to retail customers.
● Credit Rating Information Services of India Ltd. (CRISIL), set up in association with
Unit Trust of India (UTI), to provide credit rating services to the corporate sector.
● Technology Development and Information Company of India Ltd. (TDICI), promoted
to finance the transfer and upgradation of technology.
IDBI
● Industrial Development Bank of India (IDBI) was set up to accelerate the industrial
development in the country.
● It was established in 1964 as a wholly owned subsidiary of RBI.
● The ownership of IDBI was transferred to Central Government on February 16, 1976,
changing its organizational structure to that of a state-owned autonomous
corporation.
● The IDBI Act was amended 1994, to permit public ownership up to 49%.
 ● In 1995, it raised more than Rs. 2,000 crores through its IPO, reducing the stake of
the government to 72%.
● June 2000: a part of the equity shareholding of the government was converted into
preference share capital, which was redeemed in March 2001, reducing government
stake to 58%.
● Financial Resources:
● Share Capital: IDBI was formed with an authorised capital of Rs. 50 crore, which
was increased later.
● Borrowings: IDBI was authorised to raise its resources through borrowings from
GoI, RBI and other FIs.

OPERATIONS OF IDBI
Direct Assistance:
Schemes:
1. Project Finance Assistance
2. Soft Loan Scheme
3. Technical Development Fund Scheme
4. Rehabilitation Assistance to Sick Units

Indirect Assistance:
Schemes:
1. Refinance Assistance for Industrial Loans
2. Rediscounting of Bills
3. Seed Capital Assistance
October 1, 2004: IDBI was converted into a banking company – IDBI Ltd.
IDBI Ltd. merged its subsidiaries – IDBI Bank, IDBI Home Finance Ltd., IDBI Gilts,
the erstwhile United Western Bank Ltd., with itself over a period of time.

SIDBI
● The Small Industries Development Bank of India (SIDBI) was set up in 1990, under
an act of parliament, the Small Industries Development Bank of India Act, 1989.
 ● SIDBI commenced its operations on April 2, 1990, as a subsidiary of IDBI, by taking
over the outstanding portfolio and activities of IDBI, pertaining to the small-scale
sector.
● SIDBI helps MSMEs, in acquiring the funds they require to grow, market, develop
and commercialise their technologies and innovative products.
● Presently, the Government and 22 financial institutions hold shares in SIDBI. Largest
three:
○ GoI
○ SBI
○ LIC
SIDBI roles:
(a) financing
(b) promotion
(c) development and
(d) coordination for orderly growth of the MSME sector.

Financing facilities by SIDBI:

● Direct Finance
● Indirect Finance
● Micro Finance
● Refinance to Banks, NBFCs, and SFBs
● Assistance to NBFCs
● Assistance to Small Finance Banks (SFBs)
● Micro-Lending Development: Objective of creating an institution and provide
micro-financial services to the people who are economically weak.
● Responsible Finance Initiatives: To promote cooperation and the right lending
practices.
● Beyond Microfinance: Helps the entrepreneurs to graduate from microfinance to a
larger ticket size loan, at affordable rates.
Start-ups Lifecycle along with SIDBI’s Interventions: Helps provide funds to start-ups
and ventures in the field of business.
 ● Fund of Funds for Start-ups: Aims to support the growth and development of
enterprises which are innovation-driven.
● 3. Aspire Fund: Focuses on providing financial backing to start-ups which are in the
initial stages of setting up manufacturing and services.
● 4. India Aspiration Fund: Set up to promote equity and equity-based investments in
start-ups and the MSME sector.

EXIM BANK
 ● The Export-Import Bank of India (Exim Bank) was established in terms of the
Export-Import Bank Act, 1981, which was passed in September 1981 and it
commenced its operations in March, 1982.

NABARD
● Committee to Review Arrangements for Institutional Credit for Agriculture and Rural
Development (CRAFICARD), headed by Shri B Sivaraman recommended setting up
NABARD.
● National Bank for Agriculture and Rural Development was set up in July 1982, by an
Act of Parliament, to take over the functions of the Agricultural Refinance and
 Development Corporation and the refinancing functions of RBI, in relation to
cooperative banks and RRBs.
● NABARD’s functions – focused towards
● provision of refinancing to lending institutions in rural areas for agriculture and rural
development,
● promotion of institutional development
● evaluating, monitoring and inspecting the client banks for ensuring their sustained
growth.
● Institutional Development functions:
● NABARD provides policy, financial as well as technical support to rural credit
cooperatives, as a part of institutional development efforts.
● NABARD Initiated Project on Core Banking Solutions (CBS) in Co-operative credit
institutions.
● Credit functions:
● NABARD provides refinance support to State Cooperative Banks (StCBs) and
Regional Rural Banks (RRBs) for financing seasonal agricultural operations,
marketing and distribution of inputs necessary for agriculture and marketing of crops.
● NABARD is also implementing a scheme to provide long-term loans to state
governments to enable them to contribute to the share capital of the rural
cooperative credit institutions to augment their borrowing power.
● Promotional and developmental functions:
● Several important development initiatives are pursued by NABARD including climate
change programme initiatives, watershed development programmes, natural
resources management, integrated water management scheme.
● Supervisory Functions:
● NABARD conducts statutory inspection of the State Cooperative Banks, District
Central Cooperative Banks (DCCBs) and Regional Rural Banks, under Section 35 of
the Banking Regulation Act, 1949.
NHB
● The Committee of Secretaries considered the recommendation and set up the
High-Level Group under the Chairmanship of Dr. C. Rangarajan, the then Deputy
Governor, RBI, to examine the proposal and recommended setting up of the
National Housing Bank, as an autonomous housing finance institution.
● The decision to establish the National Housing Bank (NHB), as an apex level
institution for housing finance was announced in Union Budget for 1987-88.
● NHB was set up on July 9, 1988 under the National Housing Bank Act, 1987.
● RBI contributed the entire paid-up capital initially.
● In the year 2019, RBI had divested its share in the bank.
● NHB, now, is fully owned by GOI.
 ● The general superintendence, direction and management of the affairs and business
of NHB vest, under the Act, in a Board of Directors.
● In the year 2019, RBI had divested its share in the bank.
● NHB, now, is fully owned by GOI.
● The general superintendence, direction and management of the affairs and business
of NHB vest, under the Act, in a Board of Directors.

FINANCING ROLE
NHB supports housing finance sector, by extending refinance to different primary lenders in
respect of
(a) eligible housing loans extended by them to individual beneficiaries,
(b) for project loans extended by them to various implementing agencies.
SUPERVISORY & REGULATORY ROLE
● As per the recent developments, while the NHB will continue to function as a
supervisor of the Housing Finance Companies, RBI will be the regulator of these
institutions.
● RBI will oversee the functions of the NHB under the powers vested in it, under the
RBI Act.
NaBFID
● NaBFID is regulated and supervised as an All India Financial Institution (AIFI) by the
Reserve Bank under Sections 45L and 45N of the Reserve Bank of India Act, 1934.
● 5th AIFI after EXIM Bank, NABARD, NHB and SIDBI.
● The NaBFID Act 2021 is divided into Seven Chapters consisting of 48 Sections.
● It is established for the development of long-term non-recourse infrastructure
financing in India including development of the bonds and derivatives markets
necessary for infrastructure financing and to carry on the business of financing
infrastructure and for matters connected therewith or incidental thereto.
● Section 5 of the Act – authorised share capital – Rs. 1,00,000 crore divided into
10,000 crores of fully paid-up shares of Rs. 10 each.
● Central Government shall hold at least 26% per cent of the shares at all times.
 ● Chapter IV of the Act – functions and powers of the institution
●

Board of Directors & Management –

● 1 Chairperson
● 1 Managing director
● Not more than three Deputy Managing Directors
● 2 directors, to be nominated by the Central Government- who shall be the officials of
the Central Government
● Not exceeding 3 directors elected by the Shareholders
● Not exceeding 3 independent directors.