Development Financial Institutions

Dhruv Ajmera (4) Antriksh Bajaj (5)

Suveer Malhotra (28)

Kushal Mansukhani (30)

Vikramaditya Muralidharan (37)

Sharan Sanil (43)

Contents
Sr. no. 1 2 Sub - Topic
Development Financial Institutions Emergence of financial institutions in India Operating environment of DFIs: before and after Financial Sector Reforms Regulatory, Supervisory and Related Issues Facilities Provided by DFIs Sources and funds in DFI Commercial Banks and DFIs Changing the Role of DFIs

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DFI (Introduction)

DFI is a generic term used to refer to a range of alternative financial institutions including micro finance, community development financial institutions and revolving loan funds. They play a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to private sector investments. They insure investment in areas where otherwise, the market fails to invest sufficiently. they also promote medium and small scale industries. These can be classified into All India Institutions (National level) and State level Institutions.

National Level Institutions

Development banks that provide institutional credit to not only large and medium enterprises but also help promoting and developing SSI units, also known as AIDBs (All India Development Banks). Some are mentioned below: -

IDBI (Industrial Development Bank of India) IFCI Ltd (Industrial Finance Corporation Of India Ltd) SIDBI (Small Industries Development Bank of India) IIBI Ltd (Industrial Investment Bank Of India)

The institutions which serve the financial needs of commerce and trade in the ares of venture capital, credit rating and leasing, etc are called Specialized Financial Institutions (SFIs). Types of such are as follows: -

IVCF Ltd. (IFCI Venture Capital Funds) ICICI venture funds Ltd. TFCI Ltd. (Tourism Finance Corporation of India)

Financial Intermediaries who cater to the needs of small savers and investors. They deploy their assets largely in marketable securities are called Investment Institutions. Types of such are as follows: -

LIC (life Insurance Corporation of India) Unit Trust of India (UTI) GIC (General Insurance Corporation of India)

State Level Institutions

These act as supplements to the financial assist provided by all indian institutions. they act as catalyst for promotion of investment and industrial development. These involves the following: -

SFCs (State Finance Corporations)

e.g. Andhra Pradesh State Financial Corporation (APSFC) and Rajasthan Finance Corporation (RFC). SIDCs (State Industrial Development Corporations)

e.g. Goa Industrial Development Corporation (GIDC) and Maharashtra Industrial Development Corporation (MIDC).

Emergence of Financial Institutions in India

The government initiated a series of institutions to provide term finance to industry, trade and agriculture. these institutions were called Development Banks or Term-lending Financial Institution hence the term Institutional Banking. DFIs evolved gradually 1948 onwards largely government owned, with the principle objective of providing long term finance for fixed assets and services. The growth of DFIs can be studied accordingly: -

Phase 1 - Institutionalization (1948 - 55) Phase 2 - Expansion (1955 - 64) Phase 3 - Consolidation and Innovation (1964 - 76) Phase 4 - Stability and Growth (1976 - 84) Phase 5 - Diversification and Change (1984 - 92) Phase 6 - Reorientation (1992 onwards)

Operating environment of DFIs

BEFORE

Low cost funds were made available to DFIs to avoid pressure.

Access to long term operation funds from RBI. Access to Cheap funds from multilateral and bilateral agencies.

AFTER

For deployment of funds they faced competition as banking system focused mainly on working capital finance. supply of low cost funds was withdrawn. This forced DFIs to raise funds from the market at a higher rate. They faced competition in the areas of Term finance from banks offering at lower rates.

Regulatory Framework of DFIs

RBI started monitoring the activities of selected large size institutions. Eg : IDBI, IFCI, ICICI, UTI, LIC etc. Financial Institutions Information System (FIIS) was introduced. A Quasi Autonomous Banking Supervisory Board was set-up by Narasimham Committee under RBI to regulate NBFCs, Banks and FIs. Janakiraman Committee - Enquired into the security transactions of banks and FIs, this brought out several serious irregularities in these security transactions. Since 1992, RBI started issuing regulatory instructions to the FIs. In 1994, RBI extended prudential norms relating to income recognition, asset classification etc.

In 1995, after setting up of the board for financial supervision, RIB started periodical inspections of these DFIs.

Facilities provided by DFIs

Underwriting of Equity capital, preference capital, debentures and bonds. Soft loans schemes Risk capital Assistance Seed capital Assistance

Rupee term loans etc

Project Financing Foreign currency term loans Equipment financing etc.

Sources and use of funds in DFIs

Balance Sheet of IDBI

Sources Of Funds
The major sources of funds that can be termed
traditional (low cost) sources are Long term funds from RBI, cheap funds from multilateral/bilateral agencies and issue of bonds.

The major sources presently though are market

borrowings by issuance of bonds and Foreign line of credit (commercial).

Sources of Funds The pattern of sources and deployment of funds may be classified as follows:

Internal Sources Increase in capital , Interest on Investments , Repayment of past borrowings.

External Sources Bonds & Debentures , Foreign Currency Loans /Grants , Short term borrowings.

Deployment of Funds Fresh Disbursements New loans and advances , New Investments , Loans to existing borrowers. Repayment of Past Borrowings Redemption of Bonds/ Debentures issued in the past , Repayment of Rupee and Foreign Currency interest payments

Commercial Banks and DFIs Concepts

Harmonization Of Role Of Banks And DFIs The Main Areas Of Operations of DFIs and banks presently and how universilazation will change that role in future The Area of conflict arising between banks and DFIs The likely Gains From Universilazation Requirement Of Cost Considerations in universalization.

Changing Role Of Development Financial Institutions

The functions and the roles of DFIs over the years has changed. With deregulation and commercial banks financing the medium and long term capital needs of the corporate sector and the DFIs have started extending short term capital, this has intensified the competition. With Globalization and entry of many players entering with strategic alliances with firms, the finance sector is offering a wide range of new products.