Faced with stiff competition from the capital markets and the scheduled commercial banks, Development Finance Institutions (DFIs) are witnessing a decline in disbursements during the current year.According to an analysis of the performance of DFIs by Icra, total disbursements by the five institutions — IDBI, IFCI, SIDBI, IIBI and IDFC — during first four months (April-July) of the current year declined by 22 per cent. In case of IDBI the decline was 23 per cent. SIDBI, which mostly caters to small scale sector, saw disbursements declining by 45 per cent.The only institution which has done well on the disbursement front was IDFC, which is engaged in infrastructure financing. The IDFC registered a three-fold increase in disbursement. But for the IDFC, the overall decline in disbursement, which is a reflection of decreased demand for funds, would have been much steep.The number of DFIs will also be coming down in the near-term with the likely merger of IFCI and IIBI with the IDBI.The relative dilution of the role of DFIs in providing long-term finance, said the Icra analysis, is due to increased widening and deepening of the capital markets and stiff competition from banks. The DFIs are also facing an increasingly difficult environment in their core business of project financing.Following lifting of certain trade barriers, the analysis said, industry as a whole has been exposed to increased international competition after years of protectionism. The uneconomical scale of some projects, mainly in sectors such as steel and textiles, has been contributing to the poor financial performance of those DFIs which have greater exposure to these sectors.The DFIs have also been facing a resource crunch following drying up of subsidised sources of funds and restrictions on deposit-taking. On the other hand, the banks have commenced project lending, with additional advantage of low-cost funds.The assistance disbursed by DFIs towards project financing has been declining and the trend, pointed out the analysis, was likely to continue in future. With corporates being able to raise financial resources for industrial projects directly from the capital market in a cost-effective manner, there is a danger of DFIs ending up financing riskier projects, the analysis warned.The DFIs, in a bid to diversify their loan books, have started venturing into working capital finance. They are also lending to small and medium enterprises (SMEs) sector. However, in these segments they face stiff competition from banks.According to the Icra analysis, there is unlikely to be any significant growth in income-generating capacity of the DFIs because of the increased competition in project financing and difficulties in positioning themselves in non-project financing businesses. Also, it added, the possible transition to a universal bank is not likely to have a substantial positive impact in the short-term.
