Financing Development: The Crucial Role of Financial and Non-Financial Institutions

India’s development story is not just one of policy blueprints and five-year plans. It is also the story of institutions – financial and non-financial – that have quietly channelled resources, credit, and support to millions of farmers, entrepreneurs, and marginalized communities. From a specialized bank helping a steel plant get off the ground in the 1960s to a self-help group of rural women pooling their savings in a village in Andhra Pradesh today, development finance in India works across vastly different scales and through vastly different actors. Understanding who those actors are, and how they work, is central to understanding India’s economic and social progress.

What are development financial institutions? 🔗

Development Financial Institutions (DFIs) are government-promoted financial entities designed to provide long-term funding to sectors that commercial banks typically overlook – infrastructure, agriculture, small industries, and export. Unlike conventional banks, which focus on short-term, low-risk lending and profit maximization, DFIs are mission-driven organizations willing to finance projects that may take years to generate returns but are essential for national economic development. They emerged in India following the disruptions of the Great Depression and World War II, when there was a global push for dedicated institutions to fund national reconstruction and sectoral development.

Specialized Development Financial Institutions such as IDBI, NABARD, NHB, and SIDBI were set up to meet the long-term financing requirements of industry and agriculture, often with majority ownership of the Reserve Bank of India. Their mandate goes beyond simple lending – they coordinate, promote, and support entire sectors of the economy through financial assistance, technical guidance, policy advocacy, and institution-building.

IDBI: the architect of India’s industrial base 🔗

The Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary of the Reserve Bank of India, with the explicit goal of providing financial support to the industrial sector. In 1976, the Government of India took over its ownership and made it the principal financial institution for coordinating the activities of institutions engaged in financing, promoting, and developing industry in India. For four decades, IDBI served as the apex development bank for Indian industry, and its influence on the country’s industrial architecture is difficult to overstate.

IDBI provided financial assistance in both rupee and foreign currencies – covering new projects, expansions, modernization, and diversification. It also offered refinancing facilities to State-level financial institutions and banks, and underwrote shares and bonds of industrial concerns. Beyond direct lending, IDBI’s functions included market research, surveys, planning and floating new projects for industrial development, and providing foreign exchange services. Some of India’s most important financial and regulatory institutions – including the Securities and Exchange Board of India (SEBI), the National Stock Exchange (NSE), the Small Industries Development Bank of India (SIDBI), and the Export-Import Bank – were set up with direct support from IDBI.

IDBI also played a meaningful social role by directing resources toward backward areas and small-scale industries, helping foster balanced regional development and reducing industrial concentration in already developed zones. In 2004, it transitioned into a commercial bank, but its legacy as a development finance institution shaped the very scaffolding of India’s modern economy.

NABARD: banking on rural India 🔗

While IDBI focused on industry, the National Bank for Agriculture and Rural Development (NABARD) was created to address the pressing credit needs of India’s vast rural population. Established on 12 July 1982 under the NABARD Act of 1981 – based on the recommendations of the Sivaraman Committee – NABARD came into existence by transferring the agricultural credit functions of the RBI and the refinance functions of the Agricultural Refinance and Development Corporation into a single focused institution. It is today fully owned by the Government of India and functions under the Ministry of Finance.

NABARD operates as the apex supervisory body for Regional Rural Banks (RRBs), State Cooperative Banks, and District Central Cooperative Banks. Its core function is refinancing – providing funds to banks and financial institutions that in turn lend to farmers, rural entrepreneurs, and small industries. It provides credit and financial assistance for agriculture and rural infrastructure, finances innovation, helps farmers adopt modern technology and climate-resilient agriculture, and facilitates policy development for rural banking.

The SHG-Bank Linkage Programme 🔗

Perhaps NABARD’s most celebrated contribution is the Self-Help Group-Bank Linkage Programme (SHG-BLP), launched in 1992. What started as a pilot project with around 500 groups has since become the world’s largest microfinance program, covering nearly 100 million households. The program links informal savings groups – mostly composed of rural women – to the formal banking system, enabling access to credit without traditional collateral requirements. As of March 2024, over 17.75 crore households are covered under this programme, with more than 83% of the groups being exclusively women’s groups. This initiative has significantly reduced dependence on exploitative moneylenders and brought millions of rural women into the financial mainstream.

Rural Infrastructure Development Fund 🔗

NABARD also manages the Rural Infrastructure Development Fund (RIDF), established in 1995-96 to provide infrastructure financing across rural India. Initially designed to fund state government projects, it later expanded to include Panchayati Raj institutions, NGOs, and SHGs. Through RIDF, NABARD has financed rural roads, irrigation systems, market yards, and renewable energy installations, building the physical infrastructure on which rural livelihoods depend.

Beyond these flagship initiatives, NABARD supports skill development, rural entrepreneurship in crafts and small industries, Farmer Producer Organizations (FPOs), watershed development programs, and tribal development initiatives such as its Wadi project for orchard-based farming. It has partnered with approximately 4,000 organizations across India and consistently ranks among the country’s top 50 taxpayers, ploughing back virtually all profits into development spending.

Commercial banks: the mainstream financial backbone 🔗

Commercial banks form the operational backbone of India’s financial system. The nationalization of 14 major commercial banks in 1969 was a watershed moment – it redirected banking from serving primarily urban and industrial interests toward the broader population. Today, commercial banks provide short- and medium-term credit to agriculture, trade, industry, and individuals. Through the Lead Bank Scheme and the Priority Sector Lending framework, they are mandated to direct a minimum share of their credit to agriculture, micro and small enterprises, and other underserved segments.

Commercial banks have also been central to expanding financial inclusion through landmark government programs. The Pradhan Mantri Jan-Dhan Yojana (PMJDY), launched in 2014 with the goal of ensuring every Indian household has a bank account, was primarily implemented through the commercial banking network. They also participate in disbursing Kisan Credit Cards, which NABARD played a key role in conceptualizing in 1998-99 to provide flexible and timely credit to farmers, reducing their reliance on informal lending sources. By March 2023, approximately 7.5 crore active Kisan Credit Cards were in operation with a total credit limit of ₹8.95 lakh crore.

Cooperative societies: credit at the community level 🔗

Cooperative banks and societies are among the oldest financial institutions in India, with their foundations laid by the Cooperative Credit Societies Act of 1904. They operate on the principles of cooperation, self-help, and mutual benefit – owned and governed by their members on a one-member, one-vote basis. Their structure is uniquely suited to serve populations that formal commercial banks often miss: small farmers, rural artisans, weavers, and low-income households.

By reaching out to the unbanked and underbanked sections of society, cooperative banks play a crucial role in promoting financial inclusion, offering easy access to credit at competitive interest rates, and encouraging saving habits through deposit accounts tailored to rural needs. At the grassroots level, Primary Agricultural Credit Societies (PACS) operate at the village level, providing short-term loans directly to farmers. State Cooperative Agriculture and Rural Development Banks supply longer-term credit for land improvement, irrigation, and farm mechanization.

India’s cooperative network has over 200 million members and deep penetration in villages, giving it an unmatched last-mile presence that neither commercial banks nor DFIs can easily replicate. However, cooperative banks also face persistent challenges including governance deficits, political interference, and limited digital infrastructure – issues that ongoing regulatory reforms by the RBI and NABARD are working to address.

NGOs: filling the gaps the financial system cannot 🔗

Non-governmental organizations (NGOs) represent a different but equally critical type of institution in the development ecosystem. They operate independently of government, often with greater flexibility, community trust, and grassroots presence. Unlike government agencies, NGOs can innovate and tailor interventions to local needs, working across sectors including health, education, environmental conservation, women’s empowerment, and rural livelihoods.

In India, NGOs also function as a watchdog – conducting social audits, advocacy campaigns, and public accountability measures. Organizations like the Self Employed Women’s Association (SEWA) have demonstrated how civil society initiatives can influence public policy on labor rights and social security. SEWA has empowered thousands of women by providing them with opportunities to become financially independent through collective organization, microfinance, and capacity building. The M.S. Swaminathan Research Foundation focuses on climate-resilient agriculture, helping farming communities adapt to environmental change.

NGOs have also been instrumental in the SHG movement itself. The NGO sector has played a prominent role as Self Help Group Promoting Institutions (SHPIs), organizing, nurturing, and enabling credit linkage of SHGs with banks. In fact, the SHG model was first pioneered by an NGO – MYRADA (Mysore Resettlement and Development Agency) – in the early 1980s, before NABARD scaled it nationally. This collaboration between non-financial actors and formal financial institutions has been one of the most productive partnerships in India’s development history.

Self Help Groups: grassroots development in action 🔗

Self Help Groups (SHGs) are small, voluntary associations – typically of 10 to 20 members, predominantly women – who pool savings, lend internally, and access external credit through bank linkages. They are simultaneously financial and social institutions: SHGs can be used as platforms to introduce social, economic, and political change, facilitating government plans to achieve sustainable development goals such as poverty reduction, zero hunger, gender equality, and inclusive economic growth.

The developmental impact of SHGs operates at multiple levels. Financially, they bring members into the formal credit system and help them build savings and entrepreneurial ventures – from tailoring units and dairies to handicrafts and agro-processing. Socially, SHGs with high levels of social capital have been seen to take collective action to demand public goods and engage in health, nutrition, and governance-related initiatives. Members also show greater participation in local decision-making, including Gram Sabha proceedings.

The National Rural Livelihoods Mission (NRLM), launched in 2011, aims to reduce rural poverty by promoting SHGs and connecting them with banks and financial institutions. State-specific models have added further depth: Kerala’s Kudumbashree program, launched in 1998, is one of the largest women’s empowerment initiatives in the country. Today, India has over 83 lakh SHGs spread across 28 states and 7 union territories, reflecting the extraordinary scale of this grassroots movement.

The bigger picture: a layered development ecosystem 🔗

India’s development finance ecosystem works because it is layered. At the top, apex institutions like IDBI and NABARD provide policy direction, refinancing, and technical support. In the middle, commercial banks and cooperative societies operationalize credit delivery at scale. At the base, NGOs and SHGs carry development into the most remote communities, translating financial access into real social change. Each layer depends on and reinforces the others.

The distinction between “financial” and “non-financial” institutions is, in practice, porous. NABARD is a financial institution that also runs skills programs, watershed development, and tribal livelihoods initiatives. NGOs promote SHGs that are then linked to banks. Cooperative societies build financial discipline and community trust that enable further credit access. What makes India’s model distinctive is this deliberate integration – where formal finance, community organization, and advocacy work together toward the shared goal of inclusive development.

What do you think? As India continues to digitize its financial systems, do formal institutions like NABARD and commercial banks risk becoming less relevant at the grassroots level – or can they adapt to keep pace with the needs of SHGs and rural communities? And given that non-financial institutions like NGOs often reach where banks cannot, should their role in development finance receive greater official recognition and funding?

References

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