Development Financial Institutions (DFIs) were established in India with the primary objective of supporting long-term economic development, especially in areas where commercial banks were either unwilling or unable to provide finance. In a developing economy like India, there was a strong need for institutions that could provide long-term capital, take higher risks and promote industrial and infrastructural growth.
Meaning and Role of Development Financial Institutions
Development Financial Institutions are specialised financial institutions set up mainly to provide medium- and long-term finance for industrial, agricultural, infrastructure and development-oriented projects. Unlike commercial banks, which largely focus on short- and medium-term lending, DFIs were created to meet the long-term financial needs of industries and large projects that require substantial capital and longer gestation periods.
DFIs also play a developmental role by promoting entrepreneurship, balanced regional development and technological advancement. They combine financial assistance with advisory and promotional support, which distinguishes them from normal banking institutions.
Providing Long-Term Finance for Industrial Development
One of the most important objectives of DFIs in India is to provide long-term finance to industries. Industrial projects such as setting up factories, power plants, transport infrastructure or heavy engineering units require large capital investment and long repayment periods. Commercial banks generally hesitate to finance such projects due to maturity mismatch and higher risk.
DFIs fill this gap by providing term loans, underwriting shares and debentures, and subscribing to bonds. By doing so, they support industrial growth, expansion and modernisation, which are essential for economic development.
Promoting Infrastructure Development
Infrastructure development is a key driver of economic growth, but it involves huge investments and long gestation periods. DFIs were created to finance sectors such as power, roads, ports, railways, telecommunications and urban infrastructure.
The objective here is not only to earn profits but also to create assets that contribute to national development. By supporting infrastructure projects, DFIs help improve productivity, reduce costs and attract private investment into the economy.
Supporting Small and Medium Enterprises (SMEs)
Another important objective of DFIs is to promote small and medium enterprises, which play a crucial role in employment generation and balanced economic growth. SMEs often face difficulties in accessing finance due to lack of collateral, limited credit history and higher perceived risk.
DFIs provide financial assistance, concessional loans and sometimes equity support to SMEs. They also offer technical and managerial guidance to improve the viability and sustainability of these enterprises.
Promoting Balanced Regional Development
India has wide regional disparities in terms of industrialisation and economic development. One of the key objectives of DFIs is to promote balanced regional development by encouraging industries to set up units in backward and underdeveloped regions.
DFIs offer special incentives such as lower interest rates, longer repayment periods and higher financial assistance for projects located in backward areas. This helps reduce regional inequalities, generate employment and promote inclusive growth.
Encouraging Entrepreneurship and New Industries
DFIs play a significant role in encouraging entrepreneurship, especially first-generation entrepreneurs. They provide not only finance but also guidance in project planning, feasibility studies and implementation.
By supporting new and innovative industries, DFIs help diversify the industrial base of the economy and promote technological advancement. This objective is particularly important in a developing economy where private risk capital may be limited.
Mobilising and Channelising Resources for Development
Another key objective of DFIs is to mobilise resources from domestic and international sources and channel them into productive investments. DFIs raise funds through bonds, government support, international borrowings and multilateral institutions.
These resources are then directed towards priority sectors and development-oriented projects. This helps in efficient allocation of capital and supports long-term economic planning.
Supporting Capital Market Development
DFIs contribute to the development of capital markets by underwriting and subscribing to shares and debentures of companies. This objective helps new and growing companies raise funds from the market and improves investor confidence.
By acting as institutional investors, DFIs provide stability to capital markets and encourage wider participation in equity and debt markets.
Providing Technical, Managerial and Advisory Support
Unlike commercial banks, DFIs aim not only to provide finance but also to ensure the success of projects. They offer technical, managerial and advisory support to borrowers, especially in project appraisal, implementation and monitoring.
This objective helps reduce project failures, improves efficiency and ensures that development funds are used effectively.
Promoting Priority and Socially Desirable Sectors
DFIs also focus on financing sectors that are socially important but may not be very attractive to private investors. These include agriculture, renewable energy, housing, education, health and environmental protection.
The objective is to achieve broader social and economic goals such as employment generation, sustainability and social welfare, rather than purely commercial profits.
Conclusion
The objectives of Development Financial Institutions in India are closely linked to the country’s economic and social development goals. By providing long-term finance, promoting entrepreneurship, supporting infrastructure and ensuring balanced regional development, DFIs have played a vital role in shaping India’s industrial and financial landscape. Although the role of DFIs has evolved over time with financial sector reforms, their objectives remain relevant in supporting sustainable and inclusive economic growth.