DEVELOPMENT BANK

Introduction:

Development banks are special industrial financing institutions. These banks are mostly set up after World War II in both developed and underdeveloped countries. Development banks do not mobilize savings like other banks but invest the resources in a productive manner. These banks make significant contribution to industrial development.

Meaning:

Development Banks are the institutions engaged in the promotion and development of industry, agriculture and other key sectors. A development bank is an institution which takes up the job of developing industrial enterprises from its inception to completion.

Definition:

D.M.Mithani states that, “A development bank may be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term ) to business units. 

William Diamond and Shirley Bosky consider industrial finance and development corporations as ‘development banks’ Fundamentally a development bank is a term lending institution.

Development bank is essentially a multi-purpose financial institution with a broad development outlook. A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities — economic development in general, and industrial development, in particular.

In short, a development bank is a development- oriented bank.

Features:

·          It is a specialized financial institution which provides medium term and long- term lending facilities.

·   It is multipurpose financial institution because besides providing financial help,it undertakes promotional activities also.

·         Development banks provide financial assistance to both public and private institutions.

·        The role of a development bank is of gap filler.

·        Development banks accelerate the rate of growth through helping in industrialization in specific and economic development in general.

·        The objective of development bank is to serve  the public interest rather than earning profits.

·         Development banks react to socio-economic needs of development. 

Need of development banks:

• ·         Lay foundations for industrialization.
• ·         Meet capital needs.
• ·         Need for promotional activities.
• ·         Help small and medium sectors.

Functions of development banks:

There are so many functions which are perform by the development bank.They can be explain with the help of the following table

Now let's discuss each important function of development banks one by one.

1. Small Scale Industries (SSI)

Development banks play an important role in the promotion and development of the small-scale sector. Government of India (GOI) started Small industries Development Bank of India (SIDBI) to provide medium and long-term loans to Small Scale Industries (SSI) units. SIDBI provides direct project finance, and equipment finance to SSI units. It also refinances banks and financial institutions that provide seed capital, equipment finance, etc., to SSI units.

2. Development of Housing Sector

Development banks provide finance for the development of the housing sector. GOI started the National Housing Bank (NHB) in 1988.

NHB promotes the housing sector in the following ways:

·       It promotes and develops housing and financial institutions.

·       It refinances banks and financial institutions that provide credit to the housing sector.

3. Large Scale Industries (LSI)

Development banks promote and develop large-scale industries (LSI). Development financial institutions like IDBI, IFCI, etc., provide medium and long-term finance to the corporate sector. They provide merchant banking services, such as preparing project reports, doing feasibility studies, advising on location of a project, and so on.

4. Agriculture and Rural Development

Development banks like National Bank for Agriculture & Rural Development (NABARD) helps in the development of agriculture. NABARD started in 1982 to provide refinance to banks, which provide credit to the agriculture sector and also for rural development activities. It coordinates the working of all financial institutions that provide credit to agriculture and rural development. It also provides training to agricultural banks and helps to conduct agricultural research.

5. Enhance Foreign Trade

Development banks help to promote foreign trade. Government of India started Export-Import Bank of India (EXIM Bank) in 1982 to provide medium and long-term loans to exporters and importers from India. It provides Overseas Buyers Credit to buy Indian capital goods. It also encourages abroad banks to provide finance to the buyers in their country to buy capital goods from India.

6. Review of Sick Units

Development banks help to revive (cure) sick-units. Government of India (GOI) started Industrial investment Bank of India (IIBI) to help sick units.

IIBI is the main credit and reconstruction institution for revival of sick units. It facilitates modernization, restructuring and diversification of sick-units by providing credit and other services.

7. Entrepreneurship Development

Many development banks facilitate entrepreneurship development. NABARD, State Industrial Development Banks and State Finance Corporations provide training to entrepreneurs in developing leadership and business management skills. They conduct seminars and workshops for the benefit of entrepreneurs.

8. Regional Development

Development banks facilitate rural and regional development. They provide finance for starting companies in backward areas. They also help the companies in project management in such less-developed areas.

9. Contribution to Capital Markets

Development banks contribute the growth of capital markets. They invest in equity shares and debentures of various companies listed in India. They also invest in mutual funds and facilitate the growth of capital markets in India.

v   Role of development banks in financial sector

Financial institutions provide means and mechanism of transferring resources from those who have an excess of income over expenditure to those who can make productive use of the same. The commercial banks and investment institutions mobilize savings of people and channel them into productive uses. Financial institutions provide all type of assistant required infrastructural facilities Institutions e p economic persons who can take the development in the following ways. The underdeveloped countries have low levels of capital formation. Due to low incomes, people are not able to save sufficient funds which are needed for sensing up new units and also for expansion diversification and modernization of existing units. The persons who have the capability of starting a business but does not have requisite help approach   to financial institutions for help. These institutions help large number of persons for taking up some industrial activity. The addition of new industrial units and increasing the activities of existing units will certainly help in accelerating the pace of economic development. Financial institutions have large inventible funds which are used for productive purposes

2. Infrastructural Facilities

Economic development of a country is linked to the availability of infrastructural facilities. There is a need for roads, water, sewage, communication facilities, electricity etc. Financial institutions prepare their investment policies by keeping national priorities in major and the institutions invest in those aim is which can help in increasing the development of the country. Indian industry and agriculture is facing acute shortage of electricity. All India  institutions are giving priority to invest funds in projects generating electricity. These investments will certainly increase the availability of electricity. Small entrepreneurs cannot spare funds for creating infrastructural facilities. To overcome this problem, institutions at state level are developing industrial estates and provide sheds, having all facilities at easy instalments. So financial institutions are helping in the creation of all those facilities which are essential for the development of a country

3. Promotional Activities

An entrepreneur faces many problems while setting up a new unit. One has to undertake a feasibility report, prepare project report, complete registration formalities, seek approval from various agencies etc. All these things require time, money and energy. Some people are not able to undertake this exercise or some do not even take initiative. Financial institutions are the expense and manpower resources for undertaking the exercise of starting a new unit. So these institutions take up this work on behalf of entrepreneurs. Some units may be set up jointly with some financial institutions and in that case the formalities are completed collectively. Some units may not have come up had they not received promotional help from financial institutions. The promotional role of financial institutions is helpful in increasing the development of a country.

4. Development of Backward Areas

Some areas remain neglected because facilities needed for setting up new units are not available here. The entrepreneurs set up new units at those places which are already developed. It causes imbalance in economic development of some areas. In order to help the development of backward areas, financial institutions provide special assistance to entrepreneurs for setting up new units in these areas. IDBI, IFCI, ICICI give priority in giving assistance to units set up in backward areas and even charge lower interest rates on lending. Such efforts certainly encourage entrepreneurs to set up new units in backward areas. The industrial units in these areas improve basic amenities and create employment opportunities. These measures will certainly help in increasing the economic development of backward areas.

5. Planned Development

Financial institutions help in planned development of the economy. Different institutions earmark their spheres of activities so that every business activity is helped. Some institutions like SIDBI, SFCI’s especially help small scale sector while IFCI and SIDC’s finance large scale sector or extend loans above a certain limit. Some institutions help different segments like foreign trade, tourism etc. In this way financial institutions devise their roles and help the development in their own way. Financial institutions also follow the development priorities set by central and state governments. They give preference to those industrial activities which have been specified in industrial policy statements and in five year plans. Financial institutions help in the overall development of the country

6. Accelerating Industrialization

Economic development of a country is linked to the level of industrialization there. The setting up of more industrial units will generate direct and indirect employment, make available goods and services in the country and help in increasing the standard of living. Financial institutions provide requisite financial, managerial, technical help for setting up new units. In some areas private entrepreneurs do not want to risk their funds or gestation period His long but the industries are needed for the development of the area. Financial institutions provide sufficient funds for their development. Since 1947, financial institutions have played a key role in accelerating the pace of industrialization. The country has progressed in almost all areas of economic development.

7. Employment Generation

Financial institutions have helped both direct and indirect employment generation. They have employed many persons to man their offices. Besides office staff, institutions need the services of experts which help them in finalizing lending proposals. These institutions help in creating employment by financing new and existing industrial units. They also help in creating employment opportunities in backward areas by encouraging the setting up of units in those areas, thus financial institutions have helped in creating new and better job opportunities.

Development banks in India

The foreign rulers in India did not take much interest in the industrial development of the country. The recommendation for setting up industrial financing institutions was made in 1931 by Central Banking Enquiry Committee but no concrete steps were taken. In 1949, Reserve Bank had undertaken a detailed study to find out the need for specialized institutions. It was in 1948, that the first development bank i.e. Industrial Finance Corporation of India (IFCI) was established. To cater the needs of the small and medium enterprises, in 1951, Parliament passed State Financial Corporation Act. Under this Act, state governments could establish financial corporation’s for their respective regions. After this, National Industrial Development Corporation (NIDC) was established which could not serve the ambitious role assigned to it  and restricted itself to modernization and rehabilitation of cotton and jute textile industry In 1955, The Industrial Credit and Investment Corporation of India Ltd.(ICICI) was established as a joint stock company. It provides term loans and takes an active part in the underwriting of and direct investments in the share of industrial units. Then in 1958, Refinance Corporation for Industry (RCI) was set up by the Reserve Bank of India. In 1964, IDBI was set up as an apex institution in the area of industrial finance, RCI was merged with IDBI. IDBI was a wholly owned subsidiary of RBI and was expected to co-ordinate the activities of the institutions engaged in financing, promoting, or developing industry.