IDBI Privatisation Sparks Concerns: The Role of Development Financial Institutions in National Planning and Development Goals

The Government of India’s move to privatise IDBI Bank, a key Development Financial Institution (DFI), has led to growing resistance from banking employees, civil society groups and development economists. Critics argue that privatising IDBI could undermine India's developmental planning and industrial growth strategy. Demonstrations and campaigns have intensified, with protesters calling for the rollback of the privatisation process.

What is a Development Financial Institution?
Development Financial Institutions are specialised entities that provide long-term capital for sectors critical to national development, such as infrastructure, manufacturing, and green energy. Unlike commercial banks, DFIs prioritise development goals over short-term profitability. They also play a key role in mitigating market failures and supporting projects that may not attract private investment due to their risk profile or long gestation periods.

IDBI’s Unique Legacy as a DFI
Established in 1964, IDBI was initially a subsidiary of the Reserve Bank of India and played a pivotal role in India’s industrial development. It financed key sectors including steel, infrastructure, and heavy machinery, and supported several Public Sector Undertakings (PSUs). IDBI also helped establish institutions such as the Securities and Exchange Board of India (SEBI), National Stock Exchange (NSE), and Small Industries Development Bank of India (SIDBI), thus influencing the financial architecture of the country.

Prof. Venkatesh Athreya, noted economist, remarked, “IDBI was originally designed for long-term, low interest rate lending — a deliberate policy to promote development. Converting it into a commercial bank undermined that function.”

Prof. Athreya further explained that development banking requires specialised expertise, which is distinct from commercial lending. “Development finance includes an implicit subsidy to support national infrastructure and strategic industries. Once privatised, institutions like IDBI shift from nation-building to profit-maximisation,” he said.

Global Examples of DFIs
DFIs have played significant roles in economic development across various countries. IGermany’s development finance architecture includes KfW Development Bank and Deutsche Investitions- und Entwicklungsgesellschaft (DEG), both publicly owned. While KfW funds public sector projects, DEG supports private enterprises in developing countries. Their public ownership ensures alignment with national development goals and long-term strategic interests.

The Netherlands' FMO (Dutch Development Bank) relies on public ownership to fulfill its development mandate. With the Dutch government holding a 51% stake, FMO leverages public funding to undertake high-risk investments in developing countries, supporting projects that may not attract private capital. This structure enables FMO to align its operations with national development goals and international commitments.  In UK, the British Business Bank helps improve finance access for small businesses, while Scandinavian DFIs such as Swedfund and Norfund fund socially and environmentally responsible projects.

Japan’s Japan Bank for International Cooperation (JBIC) supports global economic partnerships and infrastructure. In the United States, the US International Development Finance Corporation (DFC) invests in strategic international projects that align with national interests.

These DFIs are largely state-owned or function with significant government oversight, ensuring alignment with national development priorities. According to the association of European Development Finance Institutions (EDFI), public DFIs mobilise billions in capital annually and are critical to achieving Sustainable Development Goals (SDGs).

Impact of Privatisation on Development Planning
Privatising DFIs undermines the state’s ability to direct capital toward critical sectors. Prof. Athreya noted that neoliberal reforms(the new economic policies introduced in 1991) in India since the 1990s have led to the systematic weakening of development banking. “What they did was to destroy the development financing part of the banking system. The move to privatise IDBI continues that trend,” he said.

He added that handing over DFIs to private — and potentially foreign — hands limits national control over resource allocation. “If IDBI goes into foreign capital hands, the Government of India will have very little control over how it operates. These entities are often driven by short-term profitability and speculative activities rather than long-term national goals.”

A report by Eurodad highlights that private sector-led DFIs are less transparent, and their investment decisions may not prioritise national development goals. The loss of a government-run DFI like IDBI could also limit the availability of counter-cyclical lending during economic slowdowns, which public DFIs are uniquely positioned to provide.

Consequences for India’s Development Goals
Experts argue that the privatisation of IDBI risks disrupting the institutional mechanisms needed to finance infrastructure, manufacturing, and green energy — sectors crucial for inclusive growth. “India is still at a stage where many enterprises need a development banking approach, especially where they are interested in long-term projects,” said Prof. Athreya.

While proponents claim privatisation brings efficiency, critics counter that efficiency cannot replace the developmental role of DFIs. “You are handing over public assets. The profits go to private hands, but the state loses control over how resources are spent,” he warned.

The ongoing push to privatise IDBI Bank has sparked a larger debate on the future of India’s development finance. As global examples show, state-owned DFIs play a crucial role in aligning financial services with national development objectives. Observers believe that weakening or privatising such institutions could pose challenges to India’s long-term economic and social goals. The outcome of this privatisation move could set a precedent for the future of other development institutions in the country.