Development Finance Notes

Development Finance Institution:

development Finance institutions (DFIs) are specialized financial institutions that provide
long-term financing to private sector projects in developing countries. These institutions
play a crucial role in catalysing investment for development by providing funding for
projects that may not be able to access traditional sources of financing. DFIs are typically
owned by governments or international organizations and operate on a not-for-profit basis,
with the primary objective of promoting economic development and poverty reduction in
their respective countries or regions.

Development finance is the efforts of local communities to support, encourage and catalyze
expansion through public and private investment in physical development, redevelopment
and/or business and industry. It is the act of contributing to a project or deal that causes
that project or deal to materialize in a manner that benefits the long-term health of the
community.

Development finance requires programs and solutions to challenges that the local business,
industry, real estate and environment creates. As examples, we need unique financing
approaches to address environmentally contaminated land and specific solutions to
unlocking capital access in underserved markets and industries. Each of the problems that
we seek to solve in development require unique and targeted solutions.

There are dozens of terms within the development finance industry including debt, equity,
loans, bonds, credits, liabilities, remediation, guarantees, collateral, credit enhancement,
venture/seed capital, angels, short-term, long-term, incentives, and gap financing.

Ultimately, development finance aims to establish proactive approaches that leverage

public resources to solve the needs of business, industry, developers and investors.
History:

Development Financial Institutions (DFIs) were established with the Government support
for underwriting their losses as also the commitment for making available low-cost
resources for lending at a lower rate of interest than that demanded by the market for risky
projects. In the initial years of development, it worked well. Process of infrastructure
building and industrialization got accelerated. The financial system was improved
considerably as per the needs of projects.

Appraisal system of long- term projects had also been strengthened due to improvement
in availability of information and skills. Thus, the DFIs improved their appetite for risk
associated with such projects. “The intermediaries like banks and bond markets became

sophisticated in risk management techniques and wanted a piece of the pie in the long-
term project financing. These intermediaries also had certain distinct advantages over the
traditional DFIs such as low cost of funds and benefit of diversification of loan portfolios”.

The government support to DFI was also declining due to fiscal reasons or building the
market more competitive and efficient. Fiscal imperatives and market dynamics have
forced the government to undertake reappraisal of its policies and strategy with regard to
the role of DFIs in Indian system. However, it is important to note that our country has
not achieved its development goals even then due to unavoidable circumstances like
economic reforms we have started the restructuring process of DFIs after 1991
Definitions of DFIs:

Diamond William (1957) defines development institutions as “an institution to promote

and finance enterprises in the private sector”. According to Boskey Shirley, “The
development banks are, institutions, public/private, which have one of their principal
functions, as the making of medium and long term investment in the industrial projects”.
According to Nyhart and Janssens development banks are ‘those institutions, which
provide general medium term and long-term financial assistance to a developing economy”

The World Development Report (1989) defines, “financial intermediaries are those,
which emphasize the provision of capital (loans and equity) for development. It may
specialize in particular sectors, for example, industry, agriculture or housing”.

Hook (1976), also suggests, that the development banks have two functions to perform
i.e. banking and development.” As a banker, the development banks are expected to
finance those projects, which are “Bankable”. A project is bankable if it is in the nature of
self-financing.

Elaborating self-financing projects, Kane J.A. says that “a project is self- financing,
if it is able to generate enough income within a specified period of time to (i) cover the
cost of operations, (once the plants begin the operations), (ii) repay the principal and
interest charges thereon and (iii) lease a residual-profits enough to remain in the
operations.”

It is a specialized mode of extending development finance and it is generally called a

development financial institution (DFI) or development bank. A DFI is defined as “an
institution promoted or assisted by the government to provide development finance to
sectors of the economy. The institution distinguishes itself by a judicious balance as
between commercial norms of operation, as adopted by any private financial institution,
and developmental obligations; it emphasizes the “project approach”.
A development bank is expected to upgrade the managerial and the other operational
prerequisites of the assisted projects. Its insurance against default is the integrity,
competence and resourcefulness of the management, the commercial and technical
viability of the project and above all the speed of implementation and efficiency of
operations of the assisted projects. Its relationship with its clients is of a continuing nature
and of being a “partner” in the project than that of a mere “financier”.

These definitions outlined the pervasive nature of the development banks. There are
different types of promoters for DFIs. Some DFIs are found to be the government
sponsored, others are privately owned, and still others are in both hands. These DFIs are
engaged in providing different types of services. Promotional and entrepreneurial services
are the main theme of these DFIs. These services carry a commitment towards faster
growth and fulfilment of the aspirations of the economy.

Thus, the DFIs are necessary for long-term finance and other assistance for activities or
sectors of the economy. In emerging sectors risks may be higher than that of the ordinary
financial system and they are unable to bear the risks involved.

They have also been playing effective role in stimulating equity and debt markets by-

(i) selling their own stocks and bonds;

(ii) helping the assisted enterprises float or place their securities and

(iii) selling from their own portfolio of investments.

In this way, “a development bank is intended to provide a necessary capital, enterprise,

managerial and technical know-how as these are inadequate in developing an economy like
India. They also assist in building up the financial and socio-economic infrastructure,
favourable to quick economic development. The emphasis on its various activities has
shifted from one country to another according to its peculiar needs and circumstances. In
some countries the stress has been on finance; in some others, on promotion; yet in others
on technical skill and advice; and again, elsewhere on economic planning itself.”
Types of DFIs:

There are several types of DFIs, each with a unique mandate and approach to financing.
Some of the most common types of DFIs include:

1) Multilateral Development banks (MDBs): These are institutions such as the

World Bank and the African Development Bank that are owned by multiple
governments and provide financing for development projects across multiple
countries.
For Examples: Asian Development Bank (ADB), the African Development Bank
(ABD), and the European Bank for Reconstruction and Development (EBRD),
International Monetary Fund (IMF), International Finance Corporation (IFC) etc.

2) National Development Banks (NDBs): These are institutions owned by

national governments that provide financing for development projects within their
respective countries.
For Examples:
1. Term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending
long- term finance to different industrial sectors
2. Refinancing institutions (NABARD, SIDBI, NHB) extending refinance to
banking as well as non-banking intermediaries for finance to agriculture, SSIs
and housing sectors,

3) Export-Import Banks (EXIM Banks): These are institutions that provide

financing for international trade, typically by providing loans or guarantees to
exporters and importers.
For Example: Sector-specific/specialised institutions (EXIM Bank, TFCI Ltd.,
REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.), and
 4) Private Sector DFIs: These are institutions that are owned by private investors
and provide financing to private sector projects in developing countries.
For Examples: Investment institutions (LIC, UTI, GIC, IFCI Venture Capital
Funds Ltd., ICICI Venture Funds Management Co. Ltd.). State/regional level
institutions are a distinct group and comprise various SFCs, SIDCs and NEDFi Ltd.

How DFIs operate

DFIs typically operate by providing long-term financing to projects that are deemed to
have a positive impact on economic development and poverty reduction. This financing
can take the form of loans, equity investments, guarantees, or a combination of these
instruments. DFIs also often provide technical assistance to help ensure the success of the
projects they finance.

The Role of DFIs in Catalyzing Investment for Development as Follows:

Development Finance Institutions (DFIs) are specialized financial institutions that aim to
promote economic development in emerging markets and developing countries by
providing long-term financing for public and private sector projects. DFIs play a crucial
role in catalyzing investment for development by providing financing, technical assistance,
and risk-mitigation tools to private sector investors, governments, and other development
partners. In this section, we will discuss the various ways in which DFIs can catalyze
investment for development.

1. Providing Long-Term Financing: One of the primary roles of DFIs is to

provide long-term financing for projects that are too risky or lack access to
traditional sources of financing. DFIs typically provide loans, equity, or guarantees
to private sector investors, governments, and other development partners to
finance projects in sectors such as infrastructure, energy, agriculture, and
healthcare. By providing long-term financing, DFIs can help to bridge the financing
 gap in emerging markets and developing countries and encourage private sector
investment in these regions.

2. Offering Technical Assistance: In addition to financing, DFIs also provide

technical assistance to help develop the capacity of local institutions and promote
the adoption of best practices. Technical assistance can include training and capacity
building for local partners, support for regulatory and legal reforms, and assistance
with project preparation and implementation. By offering technical assistance, DFIs
can help to create an enabling environment for investment in emerging markets and
developing countries.

3. Mitigating Risks: DFIs also play a critical role in mitigating risks for private
sector investors in emerging markets and developing countries. DFIs can provide
guarantees, insurance, and other risk-mitigation tools to help reduce the risks
associated with investing in these regions. For example, a DFI may provide political
risk insurance to protect an investor against the risk of expropriation or political
instability. By mitigating risks, DFIs can help to encourage private sector
investment in emerging markets and developing countries.

4. Mobilizing Private Sector Investment: DFIs can also play a role in mobilizing
private sector investment by leveraging their own funds to attract additional
financing from other sources. For example, a DFI may provide a loan or guarantee
that helps to attract additional financing from commercial banks or institutional
investors. By mobilizing private sector investment, DFIs can help to scale up
investment in emerging markets and developing countries.

5. Fostering Partnerships: Finally, DFIs can foster partnerships between public

and private sector actors to promote sustainable development. DFIs can facilitate
partnerships between governments, private sector investors, and civil society
organizations to promote economic growth, job creation, and social development.
 By fostering partnerships, DFIs can help to create a more inclusive and sustainable
development agenda.

Summary Points:

1. It is supposed to identify the gaps in efficacy of institutions and markets and act as a

‘gap-filler’.

2. It makes up for the failure of financial markets and institutions to provide certain
kinds of finance to economic agents who are really interested in improving the
working of the economy.
3. It targets economic activities or agents, which are rationed out of market. It
motivates the agent to take risky business with venture finance.
4. It helps the funds seekers by providing concessional funds at a lower rate of return.
Social return of DFIs is quite high. Keeping these facts in mind, the central banking
system also supports development financial institutions.
5. It is specialized in nature and involves long term finance. It is exclusively meant for
infrastructure and industry, finance for agriculture and small and medium
enterprises (SME) development and financial products for certain sections of the
people who need funds for development perspectives.

The DFIs were set up in India on the following rationale:

1. Improving Rates of Savings and Investment: In the initial years the rate of
capital formation was low. At the time of independence, the savings rate was
around 5 percent of national income. India had a fairly diversified industrial base
for a developing country, with a number of well-established industrial houses at the
time of independence. So necessary guarantee was expected from the DFIs
otherwise entrepreneurs and promoters would have not been able to generate
resources from the market.
2. Infancy Stage of Capital Market: The capital market was at infancy stage and
industries had to depend on their own profits and banks for financing for further
development programmes. That is why these funds institutions, investment
institutions, other trusts, etc. have been declared as DFIs in terms of public financial
institutions (PFI) under Section IV-A of Companies Act, 1956

3. Risk Averse Commercial Bank: Commercial banks were not interested in

venture financing as they are quite risky one. DFIs are specialised financial
institutions and well equipped in risky ventures

4. Arrangement of Loan in Foreign Currency: Earlier, DFIs had access to lines

of credit in foreign currencies from various multilateral and bilateral agencies at
low rates of interest mainly for project financing. The Central Government had
assumed all foreign currency risks due to fluctuation in the exchange rates.

5. Specialized Credit Support System: DFIs could sanction and disburse credit
at fixed/assured rates spread over their borrowing rates till the early 1990.
Moreover, under the existing industrial licensing policy system obtaining a license
itself was taken as license to get credit from DFIs, without the investor going
through the elaborate procedures normally associated with projected appraisal for
credit sanction based on commercial judgment and viability.

6. Arrangement of Priority Sector Financing: DFIs did not have competition in

deploying their funds to public companies. However, some commercial banks had
started providing term capital as priorities for investments in various sectors in the
economy were given, along with targets set in successive plans.

7. Project Evaluation and Funding: Some DFIs had also conducted economic
potential surveys of regions or states and provided considerable support to a
number of development projects. When project costs were high and could not be
 financed by one DFI, they formed loan consortia with commercial banks whereby
DFIs could provide large sized loans thereby reducing the incidence of risks.

8. Coordinating Financing Agencies: The DFIs were expected to work as

conduits between the government/other financing agencies and the ultimate
borrowers for an assured margin. They also acquired skills and expertise to study
the viability and technical efficiency of projects which was called as the directly
productive activities.

Understanding Social Costs: The Impact of Externalities on Society

In today's interconnected world, it is essential to understand the concept of social costs
and externalities and their profound impact on society. Social costs refer to the additional
expenses borne by society as a whole, beyond the private costs incurred by individuals or
firms. These costs arise when the actions of one party impose negative effects on others,
who have no control or say in the matter. Externalities, on the other hand, are the
unintended consequences of economic activities that affect third parties, either positively
or negatively. By delving into the realm of social costs and externalities, we can gain a
deeper understanding of how our actions can shape the well-being of our communities and
the environment.

Examples of Social Costs and Externalities

To better grasp the concept of social costs and externalities, let's consider a few examples.
Take air pollution, for instance. When factories emit harmful pollutants into the air,
it not only affects the health of nearby residents but also contributes to climate change,
impacting the global population. The healthcare costs, environmental degradation, and
reduced quality of life experienced by those affected are all social costs resulting from the
negative externality of air pollution.

Another example is traffic congestion. When a significant number of vehicles

occupy the roads during peak hours, it leads to increased travel time, accidents, and
decreased productivity. These social costs affect not only individual commuters but also
businesses, as delayed shipments and decreased efficiency take a toll on the economy.

Tips for addressing Social costs and Externalities

Recognizing the existence of social costs and externalities is the first step towards finding
effective solutions. Here are a few tips to consider when tackling these issues:

A) Internalize the costs: Encourage individuals and firms to account for the social costs
of their actions. By internalizing these costs, through mechanisms such as taxes or
emissions trading schemes, the negative externalities can be reduced or eliminated.

B) Promote sustainable practices: Encourage the adoption of sustainable practices

that minimize negative externalities. For instance, supporting renewable energy sources
instead of fossil fuels can help reduce air pollution and mitigate climate change.

C) Encourage collaboration: Collaboration between stakeholders is crucial in

addressing social costs and externalities. Governments, businesses, communities, and
individuals must work together to find innovative solutions that balance economic growth
with social and environmental well-being.

Case Studies: Successful Efforts in Addressing Externalities

Several case studies highlight successful efforts to address social costs and externalities.
One such example is Denmark's experience with wind energy. By implementing
policies that incentivize renewable energy production, Denmark has significantly reduced
its reliance on fossil fuels while simultaneously creating jobs and reducing greenhouse gas
emissions.
Another noteworthy case study is the introduction of congestion pricing in cities
like London and Singapore. By charging vehicles for entering certain congested areas
during peak hours, these cities have successfully reduced traffic congestion, improved air
quality, and promoted the use of public transportation.

Externalities has positive and negative effect,

For Example, an introduction of bike-sharing systems in cities has positive
externalities. Not only do these systems provide a convenient and eco-friendly
transportation option, but they also contribute to reduced traffic congestion, air pollution,
and improved public health.
- The extraction of natural resources, such as oil drilling, often leads to negative
externalities. In addition to the environmental damage caused by spills and pollution,
local communities may suffer from health issues, displacement, and economic instability
once the resources are depleted.
- In 2008, British Columbia implemented a carbon tax aimed at reducing
greenhouse gas emissions. The tax levies a fee on fossil fuels based on their carbon content,
thereby internalizing the environmental costs associated with their use. This approach has
resulted in a significant reduction in emissions while also providing revenue for the
government, which has been used to fund tax cuts and investments in clean energy
projects.

Examples of Externalities in Various Industries

1. Automobile Industry: The automobile industry is a prime example of how

externalities can greatly impact society. One significant externality associated with this
industry is air pollution. As cars burn fossil fuels, they release harmful emissions into the
atmosphere, contributing to air pollution and climate change. These external costs are not
accounted for in the price of the vehicle or fuel, but they have severe consequences for
public health and the environment. Additionally, traffic congestion caused by a high
number of vehicles on the road is another externality that affects everyone's daily lives.

2. Agricultural Industry: The agricultural industry also exhibits externalities,

particularly in relation to the use of pesticides and fertilizers. While these chemicals are
used to increase crop yields and protect against pests, they can have detrimental effects on
the environment and human health. Runoff from farms can contaminate water sources,
leading to water pollution and the destruction of aquatic ecosystems. Furthermore, the
excessive use of fertilizers contributes to the phenomenon of eutrophication, causing the
growth of harmful algal blooms that harm marine life.
3. Energy Sector: The energy sector, including both fossil fuel and renewable energy
sources, has its fair share of externalities. When it comes to fossil fuels, the extraction and
burning of coal, oil, and gas result in greenhouse gas emissions, contributing to climate
change. The societal costs associated with climate change, such as extreme weather events
and rising sea levels, are externalities that are not factored into the price of fossil fuels.
Similarly, while renewable energy sources like solar and wind power have lower carbon
emissions, they can still have visual and noise pollution impacts on local communities.

4. Healthcare Industry: In the healthcare industry, externalities arise in the form of

infectious diseases. When individuals choose not to get vaccinated, they not only put
themselves at risk but also jeopardize the health of others. This negative externality can
lead to outbreaks of preventable diseases, putting a strain on healthcare systems and
endangering vulnerable populations. The costs associated with treating these diseases and
preventing their spread are borne by society as a whole.

5. Technology Industry: The rapid growth of the technology industry has brought
about various externalities, including both positive and negative impacts. On the positive
side, advancements in technology have facilitated communication, increased productivity,
and improved access to information. However, negative externalities such as privacy
breaches, cybercrime, and social isolation have also emerged. These external costs can
have profound effects on individuals' well-being and society as a whole, highlighting the
need for ethical considerations and regulations.

6. Manufacturing Industry: The manufacturing industry is associated with several

externalities, particularly in terms of pollution and waste generation. Industrial processes
often release harmful pollutants into the air, water, and soil, leading to environmental
degradation and negative health effects. Additionally, the disposal of waste products, such
as plastics, can contribute to the global waste crisis and harm ecosystems. The costs of
pollution control and waste management are often passed on to society rather than being
internalized by the manufacturers.
Long-Term Strategies for Financial Stability

To achieving development financial stability is a multifaceted endeavour that requires a

blend of foresight, discipline, and adaptability. In the context of reducing burn rate
(Burn rate is a financial metric that measures how quickly a company uses its
cash reserves), it is imperative to not only manage current expenses but also to lay down
a robust framework for long-term financial health. This involves a strategic approach to
resource allocation, where every expenditure is scrutinized for its potential return on
investment and its necessity in the grand scheme of organizational goals.

From the perspective of a long-term projects, this might mean prioritizing product
development and customer acquisition over less critical activities. For established
infrastructure or long-term project, it could involve a thorough audit of operational
efficiencies and the elimination of redundant processes. Diverse viewpoints from
stakeholders—ranging from the meticulous accountant to the visionary officers like CEOs
—contribute to a comprehensive strategy that balances immediate needs with future
aspirations of the project work.

The Key Prioritising Expenditure Here are some key strategies for Prioritizing
Expenditures:

1. Return on Investment (ROI) Analysis: Before committing funds, calculate the

potential ROI for each expenditure.

For example, if a new piece of machinery could increase production efficiency by 20%,
the investment could pay for itself within a year.

2. Cost-Benefit analysis: Weigh the immediate costs against the long-term benefits. A
software upgrade might be expensive upfront, but if it reduces downtime and maintenance
costs, it could be a wise investment.
3. Zero-Based Budgeting: Start from zero for each new budget period and justify every
expense. This method can prevent unnecessary expenditures from creeping into the
budget.

4. Flexible Budgeting: Allow for adjustments as circumstances change. If a marketing

campaign is performing exceptionally well, it might make sense to allocate more funds to
it mid-quarter.

5. Preventive Maintenance: Regular maintenance can prevent costly breakdowns and

emergencies. For instance, a small investment in routine Heating, ventilation, and air
conditioning (HVAC) maintenance can prevent a massive expenditure if the system were
to fail.

6. Employee Training: Investing in your workforce can lead to increased productivity

and reduced turnover. An example is a tech company offering coding workshops to its
employees, which in turn fosters innovation.

7. Sustainability Initiatives: Long-term savings can often be found in sustainability. A

company might install solar panels to reduce energy costs over time.

For Example- In recent government of India started solar project for cost of emission
and provide suitability of carbon reduction

8. Outsourcing: For non-core activities, outsourcing can be more cost-effective than

maintaining in-house capabilities. A small business might outsource its accounting to save
on the costs of a full-time accountant.

By considering these strategies and applying them judiciously, the DFIs can navigate
through financial uncertainties and emerge more resilient. Strategic budgeting is not just
about surviving the present; it's about thriving in the future with the forward-looking
approach.

Here are some in-depth strategies that are helpful for long-term financial
stability:
1. Diversification of Revenue Streams: Relying on a single source of income is risky.
DFIs used to explore various channels, such as introducing new products, expanding to
different markets, or offering complementary services. For example, a software
company might diversify by offering consulting services or developing new apps for
different industries. Like there is new infra project as per the need of the society with social
cost and benefit for the country.

2. Cost-Benefit Analysis for Major Expenditures: Before making significant

investments, a detailed cost-benefit analysis can help in making informed decisions. This
could mean choosing to lease equipment instead of purchasing it outright if the long-term
benefits do not justify the cost. How benefit the project on the ground and future need.

3. Building a Financial Reserve: Setting aside a portion of profits as a reserve can

provide a cushion during economic downturns. A classic example is Apple Inc.,
which maintains a substantial cash reserve, allowing it flexibility in its operations and the
ability to invest in new opportunities without the need for external financing. Likewise-
we can learn from the recent phenomena of Covid-19 lockdown that cause globally

4. Debt Management: While leverage can aid growth, excessive debt can be crippling.
DFIs could have a clear plan for debt reduction that includes refinancing high-interest loans
and avoiding unnecessary borrowing that burden and pressure economics growth.

5. Investing in Human capital: Employees are the backbone of any organization.

Investing in training and development not only improves efficiency but also increases
employee retention. Like-Google's continuous investment in employee skill development
is a testament to the value of human capital. Likewise- project should also bring
employment and skill quality employment in the field.

6. Adopting Technology for Efficiency: Automation and technology can significantly

reduce operational costs. Like - Amazon's use of robotics in its warehouses is an example
of how technology can lead to faster operations and cost savings. Likewise- energy
resources and maintenance base infra can be developed.
7. Regular Financial Reviews: Frequent financial audits can help identify areas where
costs can be cut without compromising on quality or output. This proactive approach
ensures that the DFIs remains on track with its financial goals.

8. Risk Management: Identifying potential risks and having contingency plans in place
can prevent financial crises. This includes insurance policies, hedging against currency
fluctuations, and other protective measures. Lastly,

9. Sustainable Practices: Incorporating sustainability can lead to long-term cost savings.

For instance, adopting renewable energy sources can reduce utility bills over time.

Over all, long-term financial stability is not achieved overnight. It is the result of deliberate
planning, consistent execution, and the willingness to adapt to changing circumstances. By
considering the insights from various perspectives and implementing these strategies,
organizations can create a solid foundation for enduring financial health in vibrant manner.

Challenges faced by DFIs

Despite their many benefits, DFIs also face several challenges that can hinder their
effectiveness. Some of these challenges include:

1. Limited funding and Problems in Mobilisation of Resources: DFIs often

have limited funding, which can restrict their ability to finance projects at the scale
necessary to achieve significant impact. The DFIs have to mobilize funds from the
market but they suffered from structural inflexibility as they did not have good
network of branches all over the country. There are restrictions on the amount of
funds that could float in the market. Now interest rates are quite competitive and
these DFIs are not getting funds at competitive rates

2. Problem of Competitive Interest Rate: The DFIs have to also cut down their
lending rates to levels set by commercial banks and also provide access to their
funds as liberally as the banks without, a matching reduction in their own
 borrowing costs. The DFIs are not habitual of flexible interest rates and they are
losing their business from the corporate sector.

3. Removal of Concessional Rate Regime: DFIs’ access to borrowings from the

Central Government at a highly concessional rate of interest was withdrawn in a
phased manner, since the fiscal deficit which led to the external current account
deficit. Since 1991 banking sector reforms have changed the business environment
of DFIs.

4. Political interference and Discriminatory Government Support

System: DFIs may be subject to political interference, which can affect their ability
to operate independently and make decisions based on economic considerations.
Due to change in Government policy- there was an adverse impact on the
performance of DFIs. The NABARD, SIDBI and NHB continued to receive
governmental support even after the shift in the policy regime. Remaining DFIs are
not under the list of discriminatory government supported ports.

5. Flexible Mode of Fund Generation: DFIs access to short term sources of funds
is quite limited. It is notable that Term deposits, certificates of deposits, term
money borrowing inter-corporate deposits and commercial papers all put together
are equivalent to their Net Owned Fund. Thus, it is inflexible as well as expensive
for DFIs to generate fund in present scenario.

6. Competitive Environment: As part of banking reforms, bank was given

considerable freedom to extend term loans, project finance etc. Earlier, it was
exclusive domain of DFIs. Thus, DFIs are facing stiff competition from bank in
disbursement of term capital.
7. Limited accountability: DFIs may lack the same level of accountability and
transparency as traditional financial institutions, which can make it difficult to assess
their impact and effectiveness.
8. Adverse Liquidity Position: The merger in the 1990s of many domestic firms
for improving competitiveness and introducing new technologies had also an
impact on DFIs adversely, since some of the older firms that could not compete
effectively could not stay in the market. Therefore, they could not repay their dues
on schedule, placing enormous pressure on the DFIs liquidity position

9. Stringent Prudential Norm: The severe strain on the financial position of the
DFIs increased when the institutions were brought under the purview of regulation
and supervision of the RBI. The regulation and supervision required the DFIs to
comply with internationally recognized stringent prudential norms relating to asset
classification, capital adequacy, provisioning and income recognition and standards
relating to risk management of their portfolios and market exposures.

In Spite of above problems, DFIs in general undertook a number of measures to

reposition and reorient their operations as warranted by the competitive
environment. Accordingly, a number of innovative non-traditional products and
services were offered, viz., investment banking, stock broking, custodial services,
technical advice, etc. with a view to reduce the risks by exploiting the economies
of scale. They also established management teams to handle finances, market
products, and reduce delays in decision-making, even though such initiatives
entailed additional costs.

Problems of Development Financial Institutions in India:

Due to the changed environment since 1991, the Development Financial
Institutions (DFIs) were forced to reorient their lending strategies and activities
towards realization of commercial viability and competitive efficiency. Some of the
major problems faced by DFIs in post reforms era are given below:
(i) Deregulated Market Environment: Before the 1991 DFIs were operating
in a protected market with the administered rate of interest on their loans, but after
1991, they have been forced to enter into the deregulated market environment.
Now Market related rate of interest is the operational base for the DFIs.

(ii) Crisis of Credibility:

The DFIs are facing the crisis of credibility in the wake of economic liberalisation,
globalization and changing business environment. The NPA of these DFIs is
increasing and is adversely affecting their profitability.

(iii) Growing Competition in Financial Market:

The free market economy during the 1990’s also witnessed the keen competition
for DFIs from the commercial banks, NBFCs and others. At present, the
commercial banks are financing both short- term and long-term finance to the
corporate sector so it has created a problem for the DFIs to increase and diversify
their client base.

(iv) Easy Access to Capital Market:

The liberalisation and globalization process started in the Indian economy has
revived the capital market and opened the door for the corporate sector to raise
their resources directly from the market. The corporate sector is not interested in
the financial assistance of DFIs.

(v) Competitive Interest Rates:

The DFIs have already entered into the capital market to raise their resources.
These resources are generally raised with the market rate of interest that is higher
than the previously administered rate of interest, so it results in an increase of their
cost of borrowings. The DFIs are also being forced to reduce their lending rates
due to competition.
(vi) Accountability to Stakeholders:
The increasing access of the DFIs to the Indian capital market has created a new
type of problem for them with which they were not acquainted earlier. Thus, the
management of most of the DFIs in this competitive economy is always on their
toes because of this increasing accountability from the public and more specifically
from their private shareholders. Now DFIs are required to be accountable to their
stakeholders for transparency and reporting.

(vii) Universal Banking System:

The concept of universal banking, which has been recommended by the Khan
Committee, has put the DFIs into a fix. Now the concept of development banking
is slowly going out of fashion. They have now converted into an NBFC or a
universal bank.

Development Financial Institutions have been assigned a crucial role in the

development of the country. They have played their role in the promotion of
industrial units and entrepreneurial environments. However, due to change in the
economic environment since 1991 continuous dilution has occurred in their
working.

New economic policy of the government since 1991 has made some of the
development financial institutions irrelevant in the present context of
development. Structural changes have been made in the role and objectives of some
of the development financial institutions. Even today some of the financial
institutions are still playing their role in a proper perspective.
DFI Index: (Link: https://www.publishwhatyoufund.org/dfi-index/ )
The first edition of the DFI Transparency Index was launched in January 2023. The
results are here. The next edition will be launched in summer 2025.

The DFI Transparency Index is a comparative measure of the transparency of the

world’s leading Development Finance Institutions (DFIs). It assesses sovereign
(public sector) and non-sovereign (private sector) operations of multilateral and
bilateral institutions, based on a robust methodology.

DFIs have been growing in scale and significance, and they play a crucial role in
economic development. In a context of mounting global crises, it is vital that DFIs
use their resources in the most impactful way possible. But a lack of transparency
limits our ability to ensure that DFIs are generating positive development results,
mobilising private finance, and managing environmental, social and governance
risks. Publish What You Fund launched the DFI Transparency Index to assess
current levels of transparency and to encourage and guide improvements. The first
edition acts as a baseline from which future progress can be assessed.

Key findings of the 2023 DFI Transparency Index include:

Overall, DFIs are not transparent enough. This is especially the case for non-
sovereign operations. DFIs are not providing evidence of impact, data regarding
mobilisation, or proof of accountability to communities. For many DFIs basic
information about their investments is not publicly available. But progress is being
made – use of and adherence to the standards laid out in the DFI Transparency Tool
are guiding the efforts of leading DFIs who have improved their disclosure over the
last two years. Many of the DFIs included in the Index have committed time and
resources to improve the transparency of their operations.
The International Finance Corporation (IFC) was ranked as the most transparent
non-sovereign DFI in the assessment, scoring 54.4 out of 100. The Asian
Development Bank (AsDB) was ranked as the most transparent DFI in the analysis
of sovereign operations, scoring 75.9 out of 100.

The DFI Transparency Index is based on three years of research and collaboration.
Our DFI Transparency Initiative highlighted that while DFIs have taken meaningful
steps to improve their transparency, there was still a great deal more that needed
to be done. We recognised the need for innovations that would encourage DFIs to
further improve their transparency and to provide them with guidance. So, we
launched the DFI Transparency Tool to provide granular guidance on the types of
information that DFI stakeholders value and should therefore be disclosed. We used
the Tool as the basis for analysis for the DFI Transparency Index.

DFIs Research
The DFI Transparency Index is built on three years of research and collaboration.
In November 2019, we launched the DFI Transparency Initiative, aimed at
increasing the transparency of development finance institutions (DFIs). We
engaged with relevant stakeholders, including DFIs, NGOs, civil society, the
private sector, think tanks and governments. We examined the current levels of
transparency among the world’s leading DFIs and advocated for specific and
achievable improvements.

A full list of the research outputs of the DFI Transparency Initiative is available here.
https://www.publishwhatyoufund.org/reports/development-finance-
institutions/
Objectives
The DFI Transparency Initiative was designed to better understand the
opportunities and barriers to increasing the transparency of DFIs. Greater
transparency can lay the foundation for more informed decision making, more
accountability and better allocation of resources, including information to assess
the development impact of and learnings from DFI investments.

Approach
With guidance from a multi-stakeholder project advisory board, we identified five
priority issues that formed the basis for the project’s work. For each priority area
we: Produced a landscape analysis of disclosure, based on a systematic review of
published data of approximately twenty bilateral and multilateral DFIs.

Conducted in-depth research, informed by a multi-stakeholder expert working

group. We sought areas of consensus and disagreement, identified good and
innovative practices, and looked for alternatives to full transparency where
necessary. Produced a working paper that presented the findings, arguments for
increased transparency, and recommendations. Delivered a webinar to present our
findings and gather feedback from stakeholders.

The five priority areas were:

1. Basic project information
2. Impact management
3. ESG and accountability to communities
4. Value of investment, mobilisation and structure of deal
5. Financial intermediaries
These formed the basis of our five work streams ( You can watch this videos)
Link https://www.publishwhatyoufund.org/dfi-index/research/
Glimpse: Following are DFIs Information:

1. Germany – KFW (1948): KfW is one of the world’s leading promotional

banks. KfW has been committed to improving economic, social and
environmental living conditions across the globe on behalf of the Federal
Republic of Germany and the federal states since 1948. To do this, it provided
funds totalling EUR 111.3 billion in 2023 alone. Of this amount, 33% was used
for climate and environmental protection. Its financing and promotional
services are aligned with the United Nations’ Agenda 2030 and contribute to
the achievement of the 17 Sustainable Development Goals (SDGs).

At its headquarters in Frankfurt am Main, at its two branches in Berlin and

Bonn, at its subsidiaries KfW IPEX-Bank, DEG and KfW Capital, it employs
8,391 members of staff (as of 2023). It is represented at around 80 locations
worldwide. As a bank committed to responsibility, KfW supports people,
countries and institutions who think ahead, driving our society towards the
future. This profile is what clearly sets KfW apart from other commercial
banks.

2. BII (United Kingdom) (1948): British International Investment (BII), is the

development finance institution of the United Kingdom. It was established in
1948 as the Colonial Development Corporation (CDC) and renamed the
Commonwealth Development Corporation in 1963. In 2021, the Foreign,
Commonwealth and Development Office (FCDO), renamed it British
International Investment, with the FCDO as its lone shareholder. BII joined the
Association of bilateral European Development Finance Institutions (EDFI) in
1992. Total asset size: $9.4bn
Project Link: https://www.bii.co.uk/en/our-impact/search-results/
 Website Link: https://www.bii.co.uk/en/

3. DEG Germany (1962): German Investment and Development Company

(DEG), is a subsidiary of the German Investment Corporation (KFW). It was
established in 1962. DEG finances long-term investments of private companies
in developing and emerging market countries. DEG is one of the world’s largest
private-sector development financiers, investing in nearly 80 countries. It
joined the Association of bilateral European Development Finance Institutions
(EDFI) in 1992.
Project Link: https://deginvest-investments.de/
Website: https://www.deginvest.de/index-2.html

4. IFU Denmark (1967) : The Investment Fund for Developing Countries (IFU),
is a development finance institution owned by the Danish Government. It was
established in 1967 as an independent government-owned fund offering
advisory and risk capital to companies with Danish interest wishing to do
business in emerging markets. IFU is fully owned by the Danish Government
and it joined the European Development Finance Institutions Association
(EDFI) in 1992.
Project Link: https://www.ifu.dk/en/investments/
Website: https://www.ifu.dk/en/frontpage/

5. FMO (Netherlands) (1970): The Dutch Entrepreneurial Development Bank

(FMO), is a Dutch development bank structured as a bilateral private sector
international financial institution. It was established in 1970. FMO manages
funds for the Ministries of Foreign Affairs and the Economic Affairs of the Dutch
Government to maximise the development impact of private sector investments
in developing countries. The Dutch Government holds a majority share of 51%.
The rest is shared between Large Dutch Banks (42%), Dutch Employers’
 Association, Dutch trade unions and individual investors. FMO joined the
European Development Finance Institutions Association (EDFI) in 1992.
Project Link: https://www.fmo.nl/world-map
Website: https://www.fmo.nl/

6. Proparco (France) (1977): The Promotion and Participation Company for

Economic Cooperation (Proparco), is a French development finance
institution. It was established in 1977 and ownership is split between the
majority shareholder, Agence Francaise de Developpement (AFD) (79.8%),
French Financial Institutions (8.2%), International Financial Organisations
(10%), French Companies (1.4%), and Investment Funds & Foundations
(0.6%). Proparco’s mandate is to foster private investment in emerging and
developing economies with the aim of supporting growth and sustainability. It
joined the European Development Finance Institutions Association (EDFI) in
1997. Project Link: https://www.proparco.fr/en/carte-des-projets
Website: https://www.proparco.fr/en

7. Swedfund (Sweden) (1979): Swedfund International AB (Swedfund), is a

Swedish development financier and development cooperation actor. Swedfund
contributes venture capital, start-up aid, and expertise for investments in low-
and middle-income countries. It was established in 1979, and joined EDFI in
1995. Swedfund is wholly owned by the Swedish state
Project link: https://www.swedfund.se/en/investments
Website link: https://www.swedfund.se/en

8. Finnfund (Finland) (1980): The Finnish Fund for Industrial Cooperation Ltd
(Finnfund), is Finland’s development finance institution that provides long-
term investment loans and risk capital to private projects in developing markets.
It was founded in 1980, and its ownership is split between the Finnish State with
 majority shares (95.7%), Finnvera (4.2%), and the Confederation of Finnish
Industries (EK) (0.1%). Finnfund is a member of the European Development
Finance Institutions Association (EDFI).
Project link: https://finnfund.fi/en/current-
investments/#/filter_continent/filter_country/filter_sum_of_investment/fi
lter_year/filter_industry/filter_venture/search/name
Website link: https://finnfund.fi/en/

9. Norfund (Norway) (1977): The Norwegian Investment Fund for Developing

Countries (Norfund), is the Norwegian development finance institution. It was
established by the Norwegian Parliament in 1997 and it is owned entirely by
the Norwegian Ministry of Foreign Affairs. Norfund joined the European
Development Finance Institutions Association (EDFI) in 2001.
Project Link: https://www.norfund.no/our-investments/all-investments/
Website Link: https://www.norfund.no/

10. BIO (Belgium) (2001): Belgian Investment Company for Developing

Countries (BIO) was formed in 2001 to fund development projects in emerging
countries. It began as a 50-50 joint venture between the Government of
Belgium and the Belgian Corporation for International Investment (SBI-BMI).
In 2014, the Belgian State acquired full shareholdership of BIO. BIO joined the
Association of bilateral European Development Finance Institutions (EDFI) in
2002. Project Link: https://www.bio-invest.be/en/investments
Website Link: https://www.bio-invest.be/

11. SIFEM (Switzerland) (2005): The Swiss Investment Fund for Emerging
Markets (SIFEM), is a Swiss development finance institution. SIFEM was
established in 2005, after taking over the investment portfolio of the State
Secretariat for Economic Affairs (SECO). SIFEM promotes long-term,
 sustainable and broad-based economic growth in developing and emerging
countries. It was restructured to its current form in 2011. It joined the
European Development Finance Institutions Association (EDFI) in 2005.
SIFEM is wholly owned by the Swiss Government.
Project Link: https://sifem.ch/our-investments/portfolio-overview/
Website Link: https://sifem.ch/

12. OeEB (Austria) (2008): The Development Bank of Austria (OeEB), is the
Austrian development finance institution and wholly-owned subsidiary of
Oesterreichische Kontrollbank AG (OeKB). It was established in 2008 with the
purpose of financing private investment projects in developing countries and
emerging markets. It joined the bilateral European Development Finance
Institutions Association (EDFI) in 2008.
Project Link: https://www.oe-eb.at/en/our-projects/projects-at-a-
glance.html
Website Link: https://www.oe-eb.at/en/

13. DFC (United States) (2019): The United States International Development
Finance Corporation (DFC) is the development bank of the United States. DFC
is an agency of the United States federal government and was established in 2019
following the merging of the Overseas Private Investment Corporation (OPIC)
with the Development Credit Authority (DCA) of United States Agency for
International Development (USAID).
Project Link: https://www.dfc.gov/what-we-do/active-projects
Website: https://www.dfc.gov/
Data Source:
1. https://www.publishwhatyoufund.org/dfi-index/2023/#non-sovereign
2. https://www.publishwhatyoufund.org/dfi-index/
3. https://www.publishwhatyoufund.org/dfi-index/research/