Development

Banking in India
(Assignment for Management of Financial Institutions)

Submitted to: - Submitted by: -

Dr. Dhiraj Sharma Akshay Sharma

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Concept of development banking
In the field of industrial finance, the concept of development bank is of recent origin. In a

country like India, the emergence of development banking is a post-independence

phenomenon.

In the Western countries, however, development banking had a long period of evolution. The

origin of development banking may be traced to the establishment of ‘Society General Pour

Favoriser I’ lndustrie Nationale’ in Belgium in 1822. But the notable institution was the ‘Credit

Mobiliser’ of France, established in 1852, which acted as industrial financier.

In 1920, Japan established the Industrial Bank of Japan to cater to the financial needs of her

industrial development. In the post-war era, the Industrial Development Bank of Canada

(1944), the Finance Corporation for Industry Ltd. (FCI) and the Industrial and Commercial

Finance Corporation Ltd. (ICFC) of England (1945), etc., were established as modern

development banks to provide term loans to industry. In 1966, the U.K. Government set up the

Industrial Reorganisation Corporation (IRC).

In India, the first development bank called the Industrial Finance Corporation of India was

established in 1948.

Definition

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.

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Features of Development Banks:

Following are the main characteristic features of a development bank:

1. It is a specialised financial institution.

2. It provides medium- and long-term finance to business units.

3. Unlike commercial banks, it does not accept deposits from the public.

4. It is not just a term-lending institution. It is a multi-purpose financial institution.

5. It is essentially a development-oriented bank. Its primary object is to promote economic

development by promoting investment and entrepreneurial activity in a developing economy.

It encourages new and small entrepreneurs and seeks balanced regional growth.

6. It provides financial assistance not only to the private sector but also to the public sector

undertakings.

7. It aims at promoting the saving and investment habit in the community.

8. It does not compete with the normal channels of finance, i.e., finance already made available

by the banks and other conventional financial institutions. Its major role is of a gap-filler, i.e.,

to fill up the deficiencies of the existing financial facilities.

9. Its motive is to serve public interest rather than to make profits. It works in the general

interest of the nation.

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Types of development banks in India

1. Industrial Finance Corporation of India- (IFCI) This bank works on all India level.

It was established in 1948. It is a non-banking public sector bank. This manages seven

numbers of subsidiaries and one associate under its fold. The financial activities of this

bank are various projects like airports, roads, telecom, power, real estate, manufacturing,

the services sector, and other industries.

2. Industrial Development Bank of India- (IDBI) This banking centre was established in

1964. It is owned by the Indian government. It gives credit and other financial help for

the development of industries.

3. Industrial Reconstruction Bank of India- (IRBI) This bank was established in 1985.

It not only provides financial help but also helps to revive the sick industries in both

private and public sectors. It also helps the managerial and technical help to sick

industries.

4. National Small Industries Corporation- (NSIC)– NSIC bank was established in 1955.

Its headquarters is in Delhi. It provides a wide range of services. Its main work is to

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 supply machines and types of equipment to small-scale industries for commercial

purposes.

5. Industrial Investment Bank of India- (IIBI)– This banking centre was established in

1971. It is a 100% government-owned bank. Its work is to encourage and promote the

participation of private capital, in India and foreign.

6. National Bank for Agriculture and Rural Development- (NABARD)- This bank was

established in 1982. It provides loan for agriculture purposes.

7. Small Industries Development Bank of India- (SIDBI) This bank was established in

1990. Its head-quarter is in Lucknow. It is a subsidiary of IDBI. It helps micro, small and

medium business people. This took over the responsibility of taking care of small-scale

industries, which were under IDBI.

8. Export-Import Bank of India- (EXIM)- It is a main export finance institution in India.

This bank was established in 1981. It takes care of the promotion of trade from abroad.

It is a semi-government agency.

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In spite of its Importance in the country’s economy, to SSI units. It also refinances banks and

financial institutions that provide seed capital, equipment finance, etc., to SSI units.

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 Functions of Development Banks in India

1. To Promote and Develop Small-Scale Industries (SSI).

2. To Finance the Development of Housing Sector.

3. To Develop the Large-Scale Industries (LSI).

4. To help in Agricultural and Rural Development.

5. To enhance the Foreign Trade of India.

6. To help to Review (Cure) Sick Industrial Units.

7. To Encourage Development of Indian Entrepreneurs.

8. To Promote Economic Activities in Backward Regions.

9. To Assist in the Growth of Capital Markets.

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.

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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.

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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.

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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.

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