DFI Full Form

What is the full form of DFI?

The Full form of DFI is "Development Finance Institution." They are financial organizations owned by the government and public institutions that provide sector-specific loans to various sectors (such as the industrial sector, agriculture, housing sector, infrastructure, and export finance) of large scale where banks are limited to avail loans. The first DFI i.e IFCI (Industrial Corporation of India) was launched in 1948.

This Story also Contains

1. What is the full form of DFI?
2. Development Finance Institution
3. Roles of DFIs
4. History of DFI
5. Activities of Development Finance Institution
6. Need for DFIs
7. Challenges of DFIs
8. Important Development Financial Institutions(DFIs)

Development Finance Institution

The Government of India and several privately held Charitable Institutions are the owners of the Development of Financial Institutions in India. Development Finance Companies or Development Banks are other names for DFIs. The money given to private businesses is mostly invested in nations where there are numerous market constraints. In contrast to the regularized loan returns offered by banks, these lendings frequently have various loan return conditions. Some development banks incorporate criteria for impact investment and socially conscious investing in their mandates. Governments frequently utilize development banks as part of their attempts for international aid or economic growth.

They provide two kinds of funding:

Medium (1-5 years), Large (>5 years)

Roles of DFIs

• For modest capital projects or in situations when their borrowers cannot obtain funding from commercial lenders existing in the stream, DFIs step in to fill the funding gap.

• The primary goal of DFI is to finance infrastructure projects in order to promote economic growth in the nation. Long-term technical and financial support is provided by them.

• DFIs offer credit enhancement for housing and infrastructure projects and aid in enhancing debt flow in infrastructure projects.

• Governments, insurance firms, pension funds, and sovereign funds are used by DFI to raise money.

• A DFI loan guarantees that the public does not hold any of the shares of the firm that is generating an IPO ( Initial Public Offer).

History of DFI

In contrast to the sector-agnostic lending that the DFIs participated in, India had concentrated on setting up specialized DFIs to seek long-term sector-specific loan flow. This includes previous efforts made twice to establish a specific DFI for financing infrastructure projects. The remaining specialized DFIs, on the other hand, largely stayed tiny and had little influence, while only the first three DFIs had exceptionally effective outcomes with a beneficial impact on industrial growth.

The following are the cases:

• As the nation's first DFI, the Industrial Finance Corporation of India was founded in 1948.

• Later, the Industrial Credit and Investment Corporation of India (ICICI), the first private sector DFI in India, was founded in 1955 as a result of a World Bank effort. It then merged with ICICI Bank in 2002. Together they made the first universal bank of India.

• In 1964, the Industrial Development Bank of India (IDBI) was formed under the Reserve Bank of India (RBI). Later in 1964, it was granted autonomy. In 2003, it was reformed as a Universal bank.

• Till about the mid-1990s, the DFIs were very effective in channelling finance for the industrialization of the country.

• The DFIs were quite successful in directing money for the nation's industrialization up until roughly the mid-1990s.

Activities of Development Finance Institution

DFIs had engaged in a number of financial operations including:

1. Climate funding - 450 development banks made a commitment to finance a "Green recovery" in poor nations in 2020, both during and after the Covid-19 (coronavirus disease 2019) pandemic.

2. Industrial Financing - The DFIs have funded a number of finance initiatives since their inception in an effort to promote industrialisation.

3. Agricultural Finance - DFIs offer loans in the agricultural sector with the aim of increasing the supply of raw materials, which has an indirect impact on several sectors.

4. Finance for housing and infrastructure - DFI loans money for big infrastructure projects to expand their market, particularly in other countries.

Need for DFIs

• Building infrastructure: Poor infrastructure results in high transaction values, which stifles the economy's capacity for growth. DFIs are therefore justified given that the ambitious National Infrastructure Pipeline is expected to require approximately 100 lakh crore in rupees funding from the Centre government.

• International precedent: In order to finance significant infrastructure and manufacturing projects, nations all over the world, regardless of the degree of development, have established development banks. For instance, the European Investment Bank (EIB) serves as Europe's DFI.

• Lack of funding for infrastructure: India has a long-term debt market for corporate and government bonds, but it is still out of reach for regular investors and unable to cover the significant financing requirements for infrastructure.

Challenges of DFIs

Strong rivals are always present in the financial environment, which presents the following difficulties for DFIs:

• .Risk associated with refinancing: As loans that have been refinanced after a project has started to operate become stable, DFI may think about creating a repricing option with acceptable rate incentives following execution. On the basis of concerns for asset quality, incentives could be carefully targeted to quit the underlying loan.

• Cost/maturity risk: Based on the Held to Maturity principle, resources may only be raised with a hefty average maturity to cover the commission period of the portfolio loan assets, and not over the long term. That would contribute to cost savings and provide average price and maturity more flexibility over time.

• Security package: DFIs will be granted security interests in all of the aided company's cash flows, as well as other lenders, and not just by a first charge over immovable property.

Important Development Financial Institutions(DFIs)

Several significant institutions that provide development financing include:

• The Industrial Finance Corporation of India (IFCI), the country's first development financial institution, was founded in 1948.

• In 1955, the World Bank launched ICICI, the Industrial Credit and Investment Corporation of India (ICICI) Limited. Later, this evolved into a financial organization that served as both a commercial bank and a development financial institute. It continues to be the sole DFI operating in the private sector.

• The Reserve Bank of India (RBI) founded the Industrial Development Bank of India (IDBI) in 1964, and autonomy was extended in 1976. In 2003, it became a Universal Bank. Maintaining a sufficient credit flow to diverse industries is the responsibility of IDBI.

• In 1989, the Small Industries Development Bank of India (SIDBI) was founded. The IDBI subsidiary was called SIDBI. SIDBI received autonomy in 1998.

• In January 1982, the Export-Import Bank (Exim Bank) was established. The Exim Bank was founded primarily to lend to and offer technical support to exporters.

• NABARD - In July 1982, the National Bank for Agriculture and Rural Development (NABARD) was established on the advice of the Shivaraman Committee. As a refinancing institution, NABARD operated. NABARD is the leading institution in the agricultural and rural sectors.

• NHB - The National Housing Bank (NHB) was established in 1988. To provide funding for housing initiatives, the National Housing Bank was founded.