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Need for Setting Up of a New Development Bank

Published in 2020

Abstract: The development finance institutions (DFIs) like IFCI, IDBI and ICICI formed post-Independence contributed significantly towards India’s industrialization. However, with financial sector reforms since 1991, access to low cost funds for DFIs gradually stopped and the pioneering institutions like IDBI and ICICI had to transform themselves into commercial banks, while IFCI has been undergoing financial strain. Development banks world over, whether in developed or developing countries, were formed in response to failures of the markets to provide the financing necessary for entrepreneurial activity to boost new or existing companies and in the process promote industrialization and infrastructure development. When India’s development needs are enormous requiring huge financial resources, the closing down of the existing DFIs appears premature, especially in the context underdeveloped long-term bond market. Time has come to set up a nodal DFI to provide medium- and long-term credit to infrastructure and other long gestation projects, promote innovation and new technologies that are not supported by the banks and financial institutions as a gap-filling or market-creating mechanism. The innovative ways of raising resources may need to be explored by studying various approaches adopted by development banks across developed and developing countries. It is desirable to have periodic reviews of mandates assigned to DFIs and need to factor in changing priorities of the economy to ensure that they remain relevant.