Development Financial Institutions (DFIs) play a crucial role in providing long-term financing to various sectors of the economy, such as infrastructure, manufacturing, and agriculture. In India, DFIs have played a significant role in the development of the country’s economy, particularly during the period of planned economic development. In this answer, we will discuss the evolution of DFIs in India and their contribution to the country’s economic growth.
The origins of DFIs in India can be traced back to the establishment of the Industrial Finance Corporation of India (IFCI) in 1948. The IFCI was set up as a statutory corporation under the Industrial Finance Corporation Act, 1948, with the objective of providing long-term finance to industrial projects. The IFCI was followed by the establishment of several other DFIs in the subsequent years, such as the Industrial Development Bank of India (IDBI) in 1964, the National Bank for Agriculture and Rural Development (NABARD) in 1982, and the Small Industries Development Bank of India (SIDBI) in 1990.
During the period of planned economic development in India, DFIs played a significant role in providing long-term financing to various sectors of the economy. The DFIs provided financing for large-scale industrial projects, infrastructure development, and agriculture and rural development. The DFIs also played a crucial role in promoting entrepreneurship and fostering the growth of small and medium enterprises (SMEs) in the country.
However, in the 1990s, India embarked on a process of economic liberalization, which led to a significant transformation in the country’s financial system. As a result, the role and relevance of DFIs came under scrutiny, and the government initiated a process of restructuring and consolidation of the DFIs.
The first major step in this direction was the conversion of IDBI into a commercial bank in 2004. IDBI was transformed into IDBI Bank with the objective of making it a full-service commercial bank, capable of providing a wide range of banking services to its customers. The conversion of IDBI into a bank was followed by the merger of several other DFIs with commercial banks, such as the merger of the Industrial Credit and Investment Corporation of India (ICICI) with the ICICI Bank in 2002 and the merger of the Infrastructure Development Finance Company (IDFC) with the IDFC First Bank in 2018.
The restructuring and consolidation of DFIs have led to a significant transformation in the financial sector of India. The banking sector has become more diversified and competitive, with the entry of new players and the expansion of the existing players. The transformation has also led to a significant expansion of the reach of financial services in the country, particularly in the rural and semi-urban areas.
In conclusion, the evolution of DFIs in India has been a significant factor in the country’s economic growth and development. The DFIs played a crucial role in providing long-term financing to various sectors of the economy during the period of planned economic development. However, with the transformation of the financial sector of India, the role and relevance of DFIs have undergone significant changes. The restructuring and consolidation of DFIs have led to a more diversified and competitive financial sector, capable of providing a wide range of services to its customers.