B Com Exam > B Com Notes > Financial Markets and Institutions > Development Finance Institutions - Financial Regulators in India, Financial Markets and Institutions
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Development Finance Institutions
The Need of DFIs
Classification of DFIs
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All India DFIs |
Special DFIs |
Investment Institutions |
Refinance Institutions |
State Level DFIs |
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IFCI
IDBI SIDBI ICICI ICICI ceased to be a DFI and converted into a Bank on 30 March 2002. IDBI was converted into a Bank on 11 October 2004. |
EXIM Bank
IFCI Venture Capitalist Fund Tourism Finance Corporation of India. IDFC. |
LIC
Union Trust of India. General Insurance Corporation. |
National Housing Board.
NABARD. |
State Financial Corporation.
State Industrial Development Corporations. |
All India Development Finance Institutions
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IFCI |
ICICI |
IDBI |
SIDBI |
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IFCI was the first DFI to be setup in 1948. |
It was setup in January 1995. |
The IDBI was initially set up as a Subsidiary of the RBI. In February 1976, IDBI was made fully autonomous. |
SIDBI was setup as a subsidiary of IDBI in 1989. |
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With Effect from 1 July 1993, IFCI has been converted into Public Limited Company. |
With effect from April 2002, ICICI has been converted into a Bank. |
The IDBI was designated as apex organisation in the field of Development Financing. However, it was converted in a bank wef Oct 2004. |
The SIDBI was designated as apex organisation in the field of Small Scale Finance.
The Union Budget of 1998-99 proposed the delinking of SIDBI from IDBI. |
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The key function of IFCI was; granting long-term loans(25 years and above); Guaranteeing rupee loans floated in open markets by industries; Underwriting of shares and debentures; Providing guarantees for industries. |
The key functions of ICICI were; to provide long term or medium term loans or equity participation; Guaranteeing loans from other private sources; providing consultancy services to industry. |
The key functions of IDBI were; it provides refinance against loans granted to industries; it subscribed to the share capital and bond issues of other DFIs; it also acted as the coordinator of DFIs at all India level. |
The key function of SIDBI was; to provide assistance to small scale units; initiating steps for technological up gradation and modernization of SSIs; expanding the marketing channel for the Small Scale Industries product; promotion of employment creating SSIs. |
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IFCI was a public sector DFI. |
The ICICI differed from IFCI and IDBI with respect to ownership, management and lending operation. ICICI was a Private sector DFI. |
It was a Public sector DFI. |
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Investment Institutions
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UTI |
LIC |
GIC |
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The UTI was setup on Nov 1963 after Parliament passed the UTI Act. |
LIC was setup in 1956 after the insurance business was nationalised. |
The GIC was formed by the central government in 1971. |
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The objective of UTI was to channel the savings of people into equities and corporate debts. The flagship scheme of the UTI was called Unit Scheme 64. |
The objective of LIC is to provide assistance in the form of term loans; subscription of shares and debentures;resource support to financial institutions and Life insurance coverages. |
The GIC had four subsidiaries; National Insurance Co; New India Assurance; Oriental Insurance; and United India Insurance. |
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In 2002, the Union Cabinet had decided to split UTI into UTI 1 and UTI 2 as a result of the prolonged crisis in UTI. |
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The General Insurance Nationalisation Amendment Act, 2002, has delinked the GIC from its four subsidiaries. |
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FAQs on Development Finance Institutions - Financial Regulators in India, Financial Markets and Institutions - Financial Markets and Institutions - B Com
| 1. What are Development Finance Institutions (DFIs) and what role do they play in India's financial markets? |  |
Ans. Development Finance Institutions (DFIs) are specialized financial institutions that provide long-term financial support to promote economic development in a country. In India, DFIs play a crucial role in channeling funds towards infrastructure projects, small and medium enterprises (SMEs), and other priority sectors. They provide financial assistance in the form of loans, equity investments, guarantees, and technical assistance to help these sectors grow and contribute to the overall development of the economy.
| 2. Are Financial Regulators in India responsible for overseeing the operations of Development Finance Institutions? | |
Ans. Yes, Financial Regulators in India, such as the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), are responsible for overseeing the operations of Development Finance Institutions. They regulate and supervise DFIs to ensure compliance with relevant regulations, maintain financial stability, and protect the interests of investors and borrowers. These regulators monitor the governance, risk management, capital adequacy, and lending practices of DFIs to maintain a healthy financial system.
| 3. How do Development Finance Institutions contribute to the development of financial markets in India? | |
Ans. Development Finance Institutions contribute to the development of financial markets in India in several ways. Firstly, they provide long-term financing options, which are often scarce in conventional banking systems, to support infrastructure projects and other development initiatives. This helps in bridging the funding gap and catalyzing investments in these sectors. Secondly, DFIs play a vital role in promoting financial inclusion by extending credit to small businesses and micro-enterprises, which may not have access to traditional banking services. Lastly, DFIs also act as catalysts for the growth of other financial institutions by providing refinancing facilities and credit enhancement mechanisms.
| 4. What are the key functions of Financial Regulators in India regarding the regulation of Development Finance Institutions? | |
Ans. The key functions of Financial Regulators in India regarding the regulation of Development Finance Institutions include:
1. Licensing and Supervision: Regulators issue licenses to DFIs and conduct regular inspections to ensure compliance with regulatory norms, including capital adequacy requirements, asset quality, risk management, and corporate governance.
2. Policy Formulation: Regulators formulate policies and guidelines to govern the functioning of DFIs, taking into account the changing economic and financial landscape. They also review and update these policies periodically to adapt to emerging challenges.
3. Investor Protection: Regulators safeguard the interests of investors by enforcing transparency and disclosure norms, ensuring fair practices, and resolving disputes. They also monitor the financial health and stability of DFIs to prevent any systemic risks.
4. Market Development: Regulators play a crucial role in promoting the development of financial markets by enabling a conducive regulatory environment for DFIs. They encourage innovation, competition, and market integrity while ensuring financial stability.
5. Collaboration and Coordination: Regulators collaborate with other regulatory bodies, such as the Ministry of Finance and the National Housing Bank, to ensure effective oversight and coordination in regulating DFIs. They also engage in international forums to share best practices and learn from global experiences.
| 5. What are the challenges faced by Development Finance Institutions and how do Financial Regulators address them? | |
Ans. Development Finance Institutions face several challenges, including funding constraints, asset-liability management, governance issues, and managing credit risks in priority sectors. Financial Regulators address these challenges by:
1. Prudential Regulations: Regulators impose prudential regulations, including capital adequacy requirements and risk management guidelines, to ensure the financial soundness and stability of DFIs. This helps in managing credit risks and maintaining the overall health of the financial system.
2. Capacity Building: Regulators focus on capacity building initiatives for DFIs, including training programs and skill development, to enhance their operational efficiency and risk management capabilities. This helps DFIs in effectively managing their asset-liability mismatches and other governance challenges.
3. Refinancing Facilities: Regulators provide refinancing facilities to DFIs through specialized institutions like the National Bank for Agriculture and Rural Development (NABARD) and the Small Industries Development Bank of India (SIDBI). This enables DFIs to meet their funding requirements and support priority sectors.
4. Regulatory Flexibility: Regulators adopt a flexible approach towards DFIs, considering their unique developmental objectives and operating models. They provide regulatory concessions, exemptions, or relaxations when necessary, while ensuring that prudential norms and investor protection measures are not compromised.
5. Monitoring and Supervision: Regulators closely monitor the operations of DFIs through regular inspections, off-site surveillance, and periodic reporting. This helps in identifying potential risks and taking timely corrective actions to mitigate them.
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