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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