Development Finance Institution Commerce YouTube Lecture Handouts Part 1

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Development Finance Institution: Role, Features, Classification, Evolution|Commerce

  • DFI - a financial institution
    • that provides risk capital
    • for economic development projects
    • on a noncommercial basis.
    • also known as a development bank or
    • development finance company (DFC) ,
  • DFIs are often established and owned by governments or nonprofit organizations to finance projects that would otherwise not be able to get financing from commercial lenders.
  • DFIs often provide finance to the private sector for investments that promote development and to help companies to invest, especially in countries with various restrictions on the market.
  • Governments often use development banks to form part of their development aid or economic development initiatives.
  • As of November 2020, development banks and private finance had not reached the $ 100 billion USD per year investment of climate financing stipulated in the UN climate negotiations for 2020.
  • However, in the face of the COVID-19 pandemic՚s economic downturn, 450 development banks pledged to fund a “Green recovery” in developing countries.

Objectives of Development Banking

Illustration: Objectives of Development Banking
  • Community development banks which fund low-income areas
  • International financial institutions conducting development-oriented finance on a bilateral or multilateral basis
  • National development banks are government-owned financial institution that provides financing for economic development.
  • Multilateral development bank are development banks set up by a group of countries and often operate under international laws.
  • Micro-finance Institutions to aid small businessmen, poor families and remote areas lacking banking access.
  • A Revolving Loan Fund (RLF) is a source of money from which loans are made for multiple small business development projects. Revolving loan funds share many characteristics with microcredit, micro-enterprise, and village banking.
Illustration: Objectives of Development Banking

Industrial Finance Corporation of India (IFCI)

  • Industrial Finance Corporation of India (IFCI) is the first development bank in India. It started in 1948 as a statutory corporation to provide finance to medium and large-scale industries in India.
  • A development finance institution under the jurisdiction of Ministry of Finance, Government of India, is currently a company listed on BSE and NSE. IFCI has seven subsidiaries and one associate.
  • Until the establishment of ICICI in 1991, IFCI remained solely responsible for implementation of the government՚s industrial policy initiatives.
  • On 1 July 1993, it was reconstituted as a company to impart higher degree of operational flexibility. Because there was NPA increase and it was making loss then govt. privatized it. IFCI was allowed to access the capital markets directly.
  • It provides financial support for the diversified growth of Industries across the spectrum.
  • The financing activities cover various kinds of projects such as airports, roads, telecom, power, real estate, manufacturing, services sector and such other allied industries.
  • During its 70 years of existence, mega-projects like Adani Mundra Ports, GMR Goa International Airport, Salasar Highways, NRSS Transmission, Raichur Power Corporation, among others, were set up with the financial assistance of IFCI.
  • The company has played a pivotal role in setting up various market intermediaries of repute in several niche areas like stock exchanges, entrepreneurship development organisations, consultancy organisations, educational and skill development institutes across the length and breadth of the country.
  • The Government of India has placed a Venture Capital Fund of ₹ 200 crores for Scheduled Castes (SC) with IFCI with an aim to promote entrepreneurship among the Scheduled Castes (SC) and to provide concessional finance.
  • Further, the Government of India designated IFCI as a nodal agency for the “Scheme of Credit Enhancement Guarantee for Scheduled Caste (SC) Entrepreneurs” in March, 2015, with the objective of encouraging entrepreneurship in the lower strata of society.
  • Under the scheme, IFCI would provide guarantees to banks against loans to young and start-up entrepreneurs belonging to scheduled castes.

Manishika