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Development Financial Institutions


The economic development of any country depends on the extent to which its financial system efficiently and effectively mobilizes and allocates resources. There are a number of a banks and financial institution that perform this function; one of them is the development bank. They undertake to foster the development of a nation, generally not undertaken by other banks.

Development Banks
Development banks are financial agencies that provide medium-and long-term financial assistance and act as catalytic agents in promoting balanced development of the country. They are engaged in promotion and development of industry, agriculture, and other key sectors. They also provide development services that can aid in the accelerated growth of an economy.

To serve an agent of development in various sectors, viz.

industry, agriculture, and international trade To accelerate the growth of the country To allocate resource to high priority areas To foster rapid industrialization, particularly in the private sector, so as to provide employment opportunities as well as higher production To develop entrepreneurial skills To promote the development of rural areas To finance housing, small scale industries, infrastructure, and social utilities

Special Role

planning, promoting, and developing industries to fill the gaps in industrial sector coordinating the working of institutions engaged in financing, promotion or developing industries, agriculture, or trade rending promotional services such as discovering project ideas, undertaking feasibility studies, and providing technical, financial, and managerial assistance for the implementation of projects.

Evolution of Development Financial Institutions

Concept developed during World War-II Many countries of Europe were in the stage of industrial

development and special financial institutions were set up to foster industrial growth. In the US, DFIs came into existence for special purposes such as economic rehabilitation and filling gaps in international financing pattern. No only developed countries but several underdeveloped countries but several underdeveloped countries in Asia, Africa, and Latin America established special financial institutions to hasten the pace of industrialization and growth. e.g.-The International Bank for Reconstruction and Development (IBRD) now known as World Bank and International Monetary Fund (IMF)

Major Objectives of World Bank and IMF

World Bank -To promote world development and

platform the task of transfer of enormous financial and technical resources form the developed to developing nations. IMF - To perform a special function of providing financial assistance to private sector projects in developing countries.

Reasons of Evolution of Development Financial Institutions in India

Need felt for DFIs immediately after India attained

independence The country needed a strong capital goods sector to support and accelerate the pace of industrialization. The existing industries required long-term funds for their reconstruction, modernization, expansion and diversification programs while the new industries required enormous investment for setting up gigantic projects in the capital goods sector. However, there were gaps in the banking system and capital markets which needed to be filled to meet this enormous requirement of funds.

DFIs in India


Commercial banks had traditionally confined

themselves to financing working capital requirements of trade and industry and abstained from supplying long-term finance. The managing agency houses, which had served as important adjuncts to the capital market, showed their apathy to investment in risky ventures.

DFIs in India


Several malpractices, such as misuse of funds,

excess speculation, and manipulations were unearthed. Owing to this, the investors were not interested in investing in the capital market. There were a limited number of issues houses and underwriting firms that sponsor security issues. Hence, to fill up these gaps special financial institutions were devised which would provide the necessary financial resources and know-how so as to foster the industrial growth of the country.

Organizational Structure
All Financial Institutions

All India Financial Institutions State Level Institutions

Other Institutions

All India Developm ent Banks IFCI (1948) ICICI (1955) IDBI (1964) SIDBI (1990) Industrial Investment Bank of India -IIBI (1997)

Specialized Financial Institutions EXIM Bank (1982) IFCI Venture Capital FundIVCF(1988), ICICI Venture (1988) Tourism Finance Corporation of India-TFCI (1989) Infrastructure Development Finance Co. Ltd.IDFC(1997)

Investme nt Institutio ns UTI (1964) LIC (1956) GIC & Subsidiaries (1972)

Refinance Institutio ns NABARD (1982) NHB (1980)


ECGC(1957) DICGC(1962)

Organizational Structure
All Financial Institutions
1)All India Financial Institutions a)All India Development Banks IFCI (1948) ICICI (1955) IDBI (1964) SIDBI (1990) Industrial Investment Bank of India IIBI (1997) b)Specialized Financial Institutions EXIM Bank (1982) IFCI Venture Capital Fund- IVCF(1988), ICICI Venture (1988) Tourism Finance Corporation of India-TFCI (1989) Infrastructure Development Finance Co. Ltd.IDFC(1997)

Organizational Structure
c)Investment Institutions UTI (1964) LIC (1956) GIC & Subsidiaries (1972) d)Refinance Institutions NABARD (1982) NHB (1980) 2)State Level Institutions SFCs SIDCs 3)Other Institutions ECGC(1957) DICGC(1962)


Changing Role of DFIs

Pre 1991 FIs functioning was Highly Regulated Consortium lending and services offered at uniform price To bear the risk of long term lending concessions were allowed by the RBI & Central Govt. Post 1991 Deregulated interest rates Issue of Equity and Debt capital for financing their needs Tax exempt status withdrawn form many DFIs

Changing Role of DFIs


Medium & Long term Loans by Commercial Banks and NBFCs while DFIs extending short term/working capital finance- This has led to stiff competition between DFI & Banks Commercial Banks having edge over DFIs as regard to: Branch network, infrastructure, client base and flexibility in operations resulting into the benefit of economies of scale and backed by low cost deposits which DFIs cant. The increasing NPAs in DFIs a matter of worry. As a result focus of DFIs shifted form the purpose with which they were set up.

Changing Role of DFIs


Strategic alliance with foreign players of DFIs Investment in technology and infrastructure DFI offer commercial banking, consumer finance,

investor and custodial services, broking, venture capital finance, infrastructure financing, registrar and transfer services and e-commerce. DFIs converted themselves into universal banks e.g. ICICI.

Universal Banking
Universal Banking is a multi-purpose and multi-

functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

"In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, they can also deposit and borrow. It includes not only services related to savings and loans but also investments. However, in practice the term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries.

Advantages of Universal Banking

1) Economies of Scale

2) Profitable Diversions
3) Resource Utilization 4) Easy Marketing on the Foundation of a Brand

Name 5) One-stop shopping. 6) Investor Friendly Activities

Disadvantages of Universal Banking

1) Grey Area of Universal Bank 2) No Expertise in Long term Lending

3) NPA Problem Remained Intact