Development Financial Institutions (DFIs) have played a very important and strategic role in India’s economic development, especially during the planned development era. In a developing economy like India, commercial banks were traditionally focused on short-term lending and were not fully equipped to provide long-term finance for industry, infrastructure, and large projects. To fill this gap, DFIs were established with the objective of promoting industrialisation, balanced regional development, and economic growth.
Concept and Need for Development Financial Institutions
DFIs are specialised financial institutions created to provide medium- and long-term finance to sectors that are critical for economic development but involve high risk, long gestation periods, and large capital requirements. In the early years after Independence, India followed a planned and mixed economy model, where the government played a dominant role in building industrial capacity. DFIs were therefore designed not only to finance projects but also to guide, promote, and support industrial and economic development.
The need for DFIs arose because:
- Commercial banks mainly provided short-term working capital
- Capital markets were underdeveloped
- Large infrastructure and industrial projects required patient, long-term capital
Major Development Financial Institutions in India
India established several DFIs to meet the diverse needs of the economy. Some of the most important institutions included Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs), National Bank for Agriculture and Rural Development (NABARD), and Small Industries Development Bank of India (SIDBI). Each institution had a specific mandate, but collectively they worked towards economic and industrial development.
Role in Industrial Development
One of the most significant roles of DFIs has been in promoting industrial growth. DFIs provided long-term loans, underwriting of shares and debentures, and guarantees to industrial units, especially in capital-intensive sectors such as steel, power, cement, and heavy engineering.
DFIs also supported the establishment of new industries and helped modernise existing ones. By offering finance at reasonable terms and providing technical and managerial support, DFIs contributed to the creation of a strong industrial base in the country.
Promotion of Infrastructure Development
Infrastructure projects such as power generation, roads, ports, telecommunications, and irrigation involve huge investment and long gestation periods, making them unattractive for normal commercial lending. DFIs played a crucial role in financing such projects, which are essential for overall economic growth.
By supporting infrastructure, DFIs indirectly boosted productivity across sectors and helped improve the investment climate in the economy.
Support to Small and Medium Enterprises (SMEs and MSMEs)
DFIs have been instrumental in promoting small-scale and medium enterprises, which are vital for employment generation and inclusive growth. Institutions like SIDBI and SFCs provided financial assistance, refinancing facilities, and advisory services to MSMEs.
Through targeted lending and refinancing, DFIs helped small enterprises overcome problems related to lack of collateral, limited access to capital, and high borrowing costs.
Balanced Regional Development
A major objective of DFIs was to promote balanced regional development by encouraging industries to set up units in backward and underdeveloped regions. DFIs offered concessional finance, subsidies, and special incentives for projects located in such areas.
This helped reduce regional disparities and promoted inclusive and equitable growth.
Promotion of Capital Markets
DFIs also played a significant role in the development of India’s capital markets. By underwriting public issues, subscribing to shares and debentures, and acting as market stabilisers, DFIs encouraged companies to raise funds from the market.
Their participation enhanced investor confidence and helped strengthen the equity and debt markets during the early stages of market development.
Developmental and Advisory Role
Beyond financing, DFIs performed a developmental role by providing project appraisal, feasibility studies, technical guidance, and managerial support. They helped entrepreneurs identify viable projects and improve operational efficiency.
DFIs also acted as catalysts for innovation and entrepreneurship, especially during the initial stages of industrialisation.
Role in Financial Stability and Counter-Cyclical Support
During periods of economic slowdown, DFIs acted as counter-cyclical institutions, increasing credit flow when private investment weakened. This helped stabilise investment and support economic recovery.
Their long-term approach enabled them to absorb risks that private lenders were unwilling to take.
Changing Role and Relevance in the Post-Reform Period
With financial sector reforms and the development of capital markets after the 1990s, the traditional role of DFIs declined. Many DFIs were converted into commercial banks or restructured. However, the renewed focus on infrastructure financing has once again highlighted the importance of DFIs in supporting long-term development needs.