Development Banks
• These banks are specialized financial institutions which perform the twin
functions of providing medium and long-term finance to private entrepreneurs
and of performing various promotional roles conducive to economic
development.
• As the name clearly suggests, they are development-oriented banks. As banks,
they provide finance. But they are unlike ordinary commercial banks in three
ways:-
1. They do not seek or accept deposits from the public as
ordinary banks do.
2. They specialize in providing medium-and long- term
finance, whereas commercial banks have specialized
in the provision of short-term finance.
3. They are not mere purveyors of long-term finance like
any ordinary term- lending institution.
• As development banks (with emphasis on the word
‘development’) their chief distinguishing role is the promotion-
of economic development by way of promoting investment and
enterprise (the two most scarce inputs in LDCs) in their chosen
(or allotted) spheres, whether manufacturing, agriculture, or
some other.
• This promotional role may take a variety of forms, like provision
of risk capital, underwriting of new issues, arranging for foreign
(exchange) loans, identification of investment projects,
preparation and evaluation of project reports, provision of
technical advice, market information about both domestic and
export markets, and management services.
• How much of these services a development bank is in a
position to render depends upon the technical expertise it has
been able to build up, the competence of its staff and their
experience. The Indian development banks have as yet not
developed so much as to be able to provide a whole gamut of
development services. But their contribution in the channeling
of finance has been sizeable and large-scale industry in the
private sector has been the main beneficiary.
The financial assistance to industry is given in the following
four main forms:
I. Term loans and advances,
II. Subscription to shares and debentures,
III. Underwriting of new issues, and
IV. Guarantees for term loans and deferred
payments.
The first two forms place funds directly in the hands of companies as
subscriptions to shares and debentures are subscriptions to new issues. The
last two forms facilitate the raising of funds from other sources. For
attracting risk capital into the industry, such underwriting of shares by
development banks is at least as important as the direct subscription to
these shares.
Guarantees from development banks assure creditors (banks and others)
that their credit to industry whether in the form of loans or deferred
payments is secured. For development banks, it only involves ‘contingent
liabilities,’ that is liabilities which become payable only when the underlying
agreements are not fulfilled. Therefore, such liabilities do not lock up funds
of development banks, but are instrumental in attracting funds from other
sources.
• The development banks in India are a post-
independence phenomenon (except the land
development banks). Their structure is indicated in
Figure 8.1. Some of them are for promoting industrial
development; some for the development of agriculture;
and one for foreign trade. Some are all-India institutions;
others are state or lower level institutions.
At present, at the all-India level, there are five industrial development
banks, one agricultural development bank and one export-import bank.
The development banks for the industry are the
• Industrial Development Bank of India (IDBI), the
• Industrial Finance Corporation of India (IFCI), the
• Industrial Credit and Investment Corporation of India (ICICI), and
• Industrial Reconstruction Corporation of India (IRCI) for large industries
and the National Small Industries Development Bank of India (SIDBI)
for small-scale industries.
• For agriculture, it is the National Bank for Agriculture and Rural
Development (NABARD).
The National Industrial Development Corporation (NIDC), which was set
up by the Government of India in 1954 for the promotion and
development of industries, had also provided some finance till 1963. But
since then it has been acting as only a consulting agency.
The “state level industrial development banks are the State Financial
Corporation’s (SFCs), the State Industrial Development Corporation
(SIDCs) and the State Industrial Investment Corporations (SIICs). For
promoting agricultural development, there are main district-level banks,
called land development banks. The present article is devoted to a
discussion of these several development banks.
Objectives of Development Banks
• to promote industrial growth,
• to develop backward areas,
• to create more employment opportunities,
• to generate more exports and encourage import substitution,
• to encourage modernization and improvement in technology,
• to promote more self employment projects,
• to revive sick units,
• to improve the management of large industries by providing training,
• to remove regional disparities or regional imbalance,
• to promote science and technology in new areas by providing risk capital,
• to improve capital market in the country.
Development Banks in India
• Working capital requirements are provided by commercial
banks, indigenous bankers, co-operative banks, money lenders,
etc. The money market provides short-term funds which mean
working capital requirements.
• The long term requirements of business concerns are provided
by industrial banks, and the various long term lending
institutions which are created by government. In India these
long term lending institutions are collectively referred as
development banks. They are:
[Link] Finance Corporation of India (IFCI), 1948
[Link] Credit and Investment Corporation of India (ICICI), 1955
[Link] Development of Bank of India (IDBI), 1964
[Link] Finance Corporation (SFC), 1951
[Link] Industries Development Bank of India (SIDBI), 1990
[Link] Import Bank (EXIM)
[Link] Industries Development Corporation (SIDCO)
[Link] Bank for Agriculture and Rural Development (NABARD).
COMMERCIAL BANKS DEVELOPMENT BANKS
Provide short term loans. Provide long term loans.
Accept deposits from commercial banks, Central
Accept deposits from the public.
and State governments.
Provide refinancing tacilities to commercial
Direct finance to customers.
banks.
Play an important role in hire purchase, lease
Plays an important role in the money market.
finance, housing loan.
Public sector banks have their share capital
contributed by the government while private Central and Statement governments contribute
sector banks have share capital contributed by capital.
the public.
Promote savings among the public and help
They promote economic growth of the country.
commercial activities.
Industrial Finance Corporation of India (IFCI)
• Established in 1948
• Medium & Long term credits to industrial units
• 50% of the share capital of the IFCI is held by the IDBI, and the remaining is held
with commercial banks, co-operative banks, insurance companies, investment
trust.
• The IFCI in 1993 was converted into a Public Limited Company under the Indian
Companies Act, 1956. It has been given the status of a limited company with the
name IFCI Ltd.
• 13 member Board of Directors: -
• Chairman
• 4 directors are nominated by the IDBI
• 4 directors are nominated by scheduled banks
• 2 directors by Co-operative banks
• 2 director by other financial institutions
• 1 director by govt of India
