The emergence of Development Finance Institutions (DFIs) in India was primarily due to the need for providing long-term finance to support industrial development and infrastructure projects in the country. Here are some reasons why DFIs emerged in India:
- Lack of long-term finance: Prior to the establishment of DFIs in India, there was a lack of long-term finance to support industrial and infrastructure projects. Banks mainly provided short-term finance, which was inadequate for the long gestation periods of such projects.
- Filling the gap in capital market
- The need for development banks in India was felt very strongly immediately after the attainment of independence.
- This need was felt to fill the gaps in the capital markets for providing the needs of long-term industrial finance.
- The existing financial arrangements were incapable of coping with the escalating financial requirements for upcoming enterprises.
- Infrastructure development: India needed significant investment in infrastructure projects such as power, roads, and ports to support economic growth. DFIs emerged to provide long-term finance and support these infrastructure projects.
- Commercial bank abstaining from supplying long term funds
- At the time of independence, the country had a network of strong and developed commercial banks.
- However, these institutions, working on the British banking model, confined themselves to short-term financing activity.
- These banks abstained from supplying long-term financial assistance.
- Industrial development: DFIs were established to provide long-term finance to support industrial development in India, which was critical for promoting economic growth and creating employment opportunities.
- Limitations of managing agency house
- The managing agency houses had served as important adjuncts to the capital market.
- However, they were not able to cope up with the requirements of the planned industrial development.
- It was primarily due to their apathy to investment in risky ventures. • Moreover, they were only interested in financing the concerns in which they had some kind of interest.
- Promotion of entrepreneurship: DFIs also played a significant role in promoting entrepreneurship in India by providing finance and support to small and medium-sized enterprises (SMEs).
- Regional development: DFIs emerged to support the development of less-developed regions in India by providing finance and support to local entrepreneurs and projects.
- Malpractices regarding use of funds
- • There were several malpractices prevailing in the commercial banks at the time of independence.
- • The most important were the misuse of funds, excess speculation and manipulations, the high cost of promotions and financial and marginal managerial concentration that had emerged.
- • These were often detrimental to the interests of the investing public
- Dearth of issue house and underwriting firms which sponsor security issues With the evolution of development banking underwriting and issue activities in the countries has accelerated.
- Increase in demand for long-term capital: Funding for industrial projects
- It was felt necessary to set up financial institutions to ensure an adequate flow of assistance to industrial projects.
- The first step towards building up such institution was with the establishment in 1948 of the Industrial Finance Corporation of India (IFCI). It was set up with a view to providing medium and long-term credit to units in the corporate sector and industrial co-operatives.
Some of the earliest DFIs established in India include the Industrial Finance Corporation of India (IFCI) in 1948, the Industrial Development Bank of India (IDBI) in 1964, and the National Bank for Agriculture and Rural Development (NABARD) in 1982. These institutions played a crucial role in supporting economic growth and development in India, and today, there are several DFIs in the country that continue to support key sectors and projects.
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