What is Development Finance Institution?

 Development Finance Institution (DFI) :-

A DFI also known as a development bank or development finance company is a financial institution that provides risk capital for economic development project on non-commercial basis.

Difference between DFI & Commercial Banks :-

DFIS Commercial Bank
  • Provide long term capital to productive sectors like infrastructure.
  • Provide financial assistance or lends to government to undertake infrastructure projects with long gestation period & huge capital.
  • Have a broad develop outlook.
  • Provide sector specific loan.
  • A multipurpose financial institution concerned with providing all types of financial assistance medium as well as long to the government for development projects.
  • Source their capital fund government guarantee.
  • Provide short term loans for business or providing finance for consumers.
  • Provide financial assistance to business for short term duration.
  • Have a narrow develop outlook.
  • No such criteria in commercial bank.
  • Commercial Bank is basically a retail unit dealing with individuals & corporates.
  • Commercial Banks do banking business with the aim of earning profit.
  • Source their capital fund public deposit.

Need for India to have DFIS :-

  • To solve the infrastructure financial needs of the country since banks don’t have the long term funds to finance such projects.
  • In india there is no DFIS to fund long term infrastructure project , establishments of DFIS will enhance debt flow towards such projects.
  • DFIS could cater to the wholesale & long term financial needs of the growing economy.
  • As per RBI’s discussion paper on wholesale & long term finance banks in 2017 there is a decline in the long term assets relative to total assets on the banks balance sheet.
  • Provide concessional funds at a lower rate of interest.
  • Social return of DFIS is quite high.
  • Specialised in nature cater the need of long term finance & quicken the economical development.

Issues involved / disadvantages:-

  • In emerging sector risk may be higher than the ordinary financial system & they are unable to bear the risk.
  • Problem in mobilisation of resources.
  • Removal of concessional rate regime.
  • Problem of competitive interest rate.   

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