Crisis in development finance
- New Delhi Asian Institute of Development 2002
- 59 p.
Development financial institutions (DFIs) were once derigueur for any developing country. Long held to be part and parcel of any development strategy, their reputation had soared after the successes of Japan and South Korea's state-led growth. Specialised financial institutions, channelling savings into sectors that could trigger high economic growth, were supposed to be the catalyst that sparked rapid late industrialisation, Country after country set up these institutions, India being no exception. Even for those sceptical of directed credit, there was hardly any alternative. Developing countries had underdeveloped capital markets, both for equity and debt, and the long-term capital needs of companies could only be met by the term lending institutions. The policy was very simple-long-term funds at concessional rates were made available to the term lenders, who lent it out cheaply to the corporate sector in an effort to boost rapid capital formation. In India, as in other countries, the strategy was contingent upon a system of financial repression, with administered interest rates, a financial sector divided into watertight compartments, directed credit, and pre-emption of bank resources by the government. Development financial institutions were set up not only by the central government, but by every state government. Different categories of DFIS came into being - for agriculture, for small-scale industries, for the power sector, for housing and for exports.