Role of Development Financial Institutions

The role of Development Financial Institutions (DFIs) is to provide long-term financing and other forms of support for developmental projects that contribute to economic growth and social welfare. Some of the key roles of DFIs include:

1. Bridging the financing gap: DFIs play a critical role in providing long-term financing for projects that may be considered too risky or may not have access to funding from traditional banks or capital markets. This can include infrastructure projects, small and medium-sized enterprises, and other developmental projects.
2. Mobilizing private sector investment: DFIs are often able to leverage their financing and technical assistance to mobilize private sector investment, particularly in sectors that may not be attractive to commercial banks.
3. Managing risk: DFIs specialize in managing risk associated with developmental projects, which may include political risks, currency risks, and project-specific risks. This enables them to provide financing that is aligned with the risk profile of the project and the borrower.
4. Providing technical assistance: DFIs often provide technical assistance to borrowers, such as helping them prepare business plans and conducting feasibility studies. This helps to build the capacity of the borrower and increase the likelihood of project success.
5. Supporting policy and regulatory frameworks: DFIs support the development of policy and regulatory frameworks that promote economic growth and social welfare, including environmental and social standards. This helps to create an enabling environment for developmental projects to thrive.
6. Promoting sustainable development: DFIs promote sustainable development by investing in projects that have a positive social and environmental impact, while also generating financial returns. This helps to ensure that developmental projects are aligned with long-term economic and social objectives.
7. Financial Sector Development :
   • Financial sector development is to promote and sustain productive activities in various economic sectors by providing needed financial products and services.
   • For the financial system to perform this function adequately and effectively, individual institutional efficiency alone would not be sufficient.
   • There should also be a conducive policy environment, political stability, political will and entrepreneurship.
   • In addition, financial institutions should have adequate autonomy to bring in initiative and innovations.
8. Development Goals :
   • • To promote the development of industry, agriculture and trade as well as capital market.
   • • Development in this sense implies steady improvement of living standards achieved through increases in income, improvement in social conditions and protection of the natural environment.
   • • Economic growth is fundamental to development
9. Need to Activate Capital Market
   • • The development banks encourage, strengthen and promote healthy growth of the capital market and lead to the growth of private sector activities.
   • •Growth in the capital market is expected to mobilize private savings into industrial securities.
   • • It was expected that the mere support of the financial institutions to the equity issues would act as an indicator that such industrial ventures were support worthy in view of the thorough investment appraisal by the institutions that is involved before the institutions extending their underwriting support.
10. Dispersal of Assistance
    • Sometimes, it is pointed out that institutional assistance flows largely to states which are already industrially well developed.
    • Apparently this may be true but one should not try to draw wrong conclusions from the trends in institutional assistance.
    • It is true that industrially more developed states, particularly Maharashtra, Gujarat and Tamil Nadu continue to receive major chunk of assistance extended by the institutions.
    • In this context, the basic operational objective of the all-India financial institutions needs to be taken into account before drawing any conclusions about their inter-state distributional pattern of assistance. The institutions, no doubt, accord priority to the major socio-economic objective and to more even distribution of assistance particularly in favour of the relatively less developed regions, but they consider that overall viability of assisted projects based on economic, financial and technical considerations. These are accorded due importance.
    • It may be noted that flow of institutional assistance depends essentially on the level of entrepreneurial activity in different states. The location related decisions of industrial units are largely outside the purview of financial assistance
11. Development of Backward Areas
    • Industrial dispersal coupled with development of relatively less developed areas has been the integral policy of the national development plans.
    • These have got influence in framing the lending policies of the financial institutions.
    • However, specific incentive framework designed exclusively for the development of identified backward areas was adopted by the institutions only since the beginning of 1970s.
12. Removing Industrial Sickness
    • There is a fallacious assumption that finance would be the panacea for industrial sickness in the country. The nursing of sick units is necessary in the country. It is in the interests of sustaining production and employment.
    • This apart, in the process, the development financial institutions have helped created additional capacities in a large number of industries.
    • Again, there will also be a spurt of new industries, new services, innovative products and large turnover, higher sales, higher profits.
13. Component-wise Assistance
    • Of the aggregate assistance sanctioned by AFIs, rupee loans formed 63.7%, followed by foreign currency loans 11.5%.
    • Assistance sanctioned by way of underwriting direct subscription and guarantee accounted for 19.2% and 5.9% respectively.
14. Sector-wise Assistance
    • There is a growing emphasis on private enterprise. The development banks offer assistance to the private sector to promote efficient use of resources.
    • Thereby, development bank help them in accelerating the process of economic development.
    • The development bank’s role is to help private enterprises undertake financially viable projects.
    • It also have significant economic merit and catalyze the flow of domestic and external resources of such projects.
15. Assistance to Small Scale Industries
    • Small-scale industries are provided finance and extension service support by development banks such as SFCs, NSICs, SSIDCs, KVIC, NABARD and SIDBI.
    • While other agencies are serving the small-scale enterprises at the grass root level, NABARD has its focus on rural areas through linkage with the banking system.
    • SIDBI has been set up as a principal financial institution for promotion and financing of the small scale sector.
16. New Growth Paths
    • In recent years, the very character and complexion of development banks are undergoing change.
    • One such is the change in the composition of business and assets of development banks.
17. New Growth Paths
    • Of late there is a greater emphasis on non-project assistance. Non-project finance is in the form of equipment finance, leasing, asset credit and bridge loans against public or rights issue of shares and debentures.
    • These kinds of non-project finance are now on the increase.
    • Of late, development banks have become more selective and cautious in respect of project finance.
    • In fact, non-project finance is less risky. There is assured repayment, for shorter duration with higher rates of return and thus more profitable.
18. Catalytic Agent
    • In four and half decades, the new species of development banking has emerged as a powerful instrument of economic development in several developing countries including India.
    • The concept of development banking and the areas of activities that are rightly said to be belonging to development banks have proved to be ever growing.

Overall, DFIs play a crucial role in promoting economic development and addressing market failures that hinder the growth of emerging economies. Their ability to provide patient capital, manage risk, and mobilize private sector investment make them an essential tool for achieving sustainable development objectives.

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