DEVELOPMENT FINANCIAL INSTITUTIONS, 2021 By- ADITYA KOHLI

Abstract

The Central government has taken a gentle step to develop the infrastructure of India. Through a bill of “the National bank for financing infrastructure and development bill 2021, in Lok Sabha.” We have to find out that whether these institutions are a bank or not? This bill repeats thereto that thing which has been started in earlier 1948, in India. Initially, these Specialized institutions would sole ownership of the government. Accumulating a board that would oversee these institutions, and all this would be without the intervention of the government. 

Introduction

Whenever we talk about the development of a country. The most important thing that we have to observe in-country is the infrastructure of that country. Here, the meaning of infrastructure of any country has road network, rail network, and overall industry setup is how much develop. Therefore, developing the infrastructure in-country is the primary goal of every government. Because the better the developed infrastructure of that country, the better will be the economy. It is impossible to measure the development of any infrastructure in a short time because they cannot develop in one or two years, whether road or railway, they need a long time for development. For this, it is needful that we long term financing along with long term planning. Which will be completed by these development finance institutions (DFI).

Scope

If we are talking about the DFI, so how can forget we to mention their scope. Let us explain the scope to our dear readers. First of all, Development Financial Institutions are a kind of bank to store lots of money for long term projects. In the current circumstances, this money should be used to control the Covid-19 virus rather than development, as health is more valuable than infrastructure development. Also, there is an opportunity for India that most of the companies want to establish their manufacturing sector in India due to virus infection, and India has to attract these companies. Also, India has a chance to become a global manufacturing hub and come in as a very big employer. For which we need to improve India’s financial system so that the trust of investors remains in India.

What are Development Finance Institutions (DFI)?

On 1 February 2021, the budget for the financial year 2021 was introduced by the Honorable Indian Finance Minister Nirmala Sitharaman. She said in her speech that the government is planning to set up a special institute for a long period, which will work to finance long-term development projects. Further, she introduces National Bank for Financing Infrastructure and Development Bill, 2021 in Parliament.

Now, let’s talk about what is [1]DFI? DFI is also a kind of bank, similarly to a commercial bank, but the only difference is that this bank provides financial support to long term infrastructure development projects. Also, the [2]NaBID bill, which has been passed in Lok Sabha, would be known as the Development Finance institution. The most significant thing is that these specialized financial institutions are set up for the sole purpose of financing long term infrastructure projects. Because the construction of any long-term project requires long-term financing, and the DFI will be the facilitator for this. With this, the progress of long-term projects will be shooting ahead and encouraged which is a main objective of the government.

In order to make rapid growth in the industry sector, loans will be given by DFI at a low and stable interest rate. Here, the meaning of stable rate of interest, suppose in present time the interest rate is 6 per cent and after one and two years it becomes ten to twelve per cent which is not a permissible rate of interest. Therefore, another approach to establish DFI’s is to provide cheap and stable loans. Further, we would like to inform you that DFI banks will provide financial support only to the public sector, no to the private sector.

Objectives of Development Finance Institutions.

  • Industrial Growth: DFI will accelerate the growth of industries with its financial assistance.
  • Employment generation: When [3]DFI is set up, it will require people to run such a large organization, which will accelerate the growth in the field of employment.
  • Development of Backwards areas: Developing areas that are already backward or not developed, such as villages and towns.
  • Import Substitution: Expanding exports and reducing imports which will be successful when India increases its production or manufacturing capacity.
  • Technological improvements: Improving technology in India and ensuring a fast network connection (like 5G service) to connect India with other countries.
  • Improving Regional Imbalance: For, example the northern part of India is much less developed than other parts of India and is called regional imbalance. Thus, we need to fix this problem.

Therefore, these are some of the important objectives of [4]DFI and when this institute is established, we hope that it will achieve its objectives.

Is this a New type of Bank?

Readers, let us know for your information the Development Finance Institutions are not banks. Because since the independence of India, this type of institutions started being established by the government. Thus, the first development finance institution was established after the independence was the Industrial Finance Corporation of India (IFCI) in 1948. After that, in 1952, the State Financial Corporation was also established. The work of these institutions was to financing small and medium-sized industries. The renowned bank ‘Industrial Credit and Investment Corporation of India’ were established in 1955, which you all know as ICICI Bank.

Now, you may be thinking that this is a commercial bank, so how can it be called DFI? Let us answer this question. Originally currently, ICICI is a commercial bank in India, but when ICICI was established in 1955, it was established as a development finance institution. Then in 1991, all development finance institutions were closed or converted into commercial banks, such as [5]ICICI and [6]IDBI banks. This had happened after the first report of the Narasimha Committee. Hence, these Development finance institutions are not regular commercial bank.

Why DFI was closed after the first report of the Narasimha Committee?

As we noted above all the DFI was closed, or converted in a commercial bank after the first report of Narasimha. This committee was constituted for the study of the financial system and suggest improvements. According to the report, for the time being, these institutions should be stopped because there are lots of problems in non-performing assets ([7]NPAs) due to DFI’s. After this, an effort made to reopen these institutions, but this could not happen, so currently, the BJP government is going to start it again.

Composition of Board in DFI.

This present, the government has sanctioned Rs 2000 crore as equity capital for these institutions, and after every short time, the government will add Rs 5000 crore to these institutions. Along with this will constitute a professional board for function and run to these institutions. Besides, the professional board will be set up to function these institutions, and all this will be without the intervention of the government.

This board will be comprised of a person of imminence who is a specialist in the industry sector. Under this, there will two types of directors, official directors and non-official directors or independent directors. The official directors or independent directors shall not belong to any company or banks. The sole purpose of appointing an official director or independent director is to oversee the work of a company or bank, and the government stated that these types of directors would be 50 per cent. In addition, the initial ownership of DFI will be fully owned by the government. Also, the initial ownership of DFI will be fully owned by the government and over time, the government will bring its ownership up to 26 per cent.

Conclusion

Finally, we can conclude that the development finance institution is necessary to develop the infrastructure of India. Because to financing the long-term projects, we need these DFI. Instead of DFI, the commercial bank also gives the loan, where the public money is involved, and due to that, this bank has its limitations, and due to that reason, the commercial bank could not finance long term project. Here we would need these Special financial institutions for funding the long-term infrastructure projects in India. Therefore, it is a good step taken by the BJP government to boost and optimize India’s infrastructure.  

BIBLIOGRAPHY 

https://byjus.com/free-ias-prep/development-finance-institutions/  https://byjus.com/free-ias-prep/development-finance-institutions/

https://www.hindustantimes.com/photos/news/photos-finance-minister-nirmala-sitharaman-presents-budget-2021-101612169620459.html  https://www.hindustantimes.com/photos/news/photos-finance-minister-nirmala-sitharaman-presents-budget-2021-101612169620459.html

https://www.merriam-webster.com/thesaurus/development  https://www.merriam-webster.com/thesaurus/development

https://www.dict.cc/englisch-deutsch/interest.html  https://www.dict.cc/englisch-deutsch/interest.html

https://www.merriam-webster.com/dictionary/cent  https://www.merriam-webster.com/dictionary/cent

[1] Development Finance Institutions.

[2] National Bank for Financing Infrastructure and Development Bill, 2021.

[3] Supra (2), upper

[4] Supra (2), upper

[5]Industrial Credit and Investment Corporation of India

[6]Industrial Development Bank of India

[7] Non-Performing Assets

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