Development Banks Final

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DEVELOPMENT BANKS

DEVELOPMENT BANKS

INTRODUCTION

Development banking is different from simply banking.

Loans are made not to those who have accumulated wealth

in the past but to those who show promise to become

wealthy in the future.

Normal banking looks for safety in assets accumulated from

the past; in development banking, possible accumulation of

assets in the future is the true collateral. Thus, while in

normal banking, the collateral is real and tangible, in

development banking, the collateral is a dream;

Normal banks can afford to be myopic; development banks

should take the long view. For development banks, it is the

trend line and not the current surplus that is important.

As one development banker blithely explained: "When I see

any risk, I take my money and run away." But that is not

development banking; development banks take risks that

ordinary banks will not.

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MBA LECTURER


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DEVELOPMENT BANKS

MEANING

Development banks are the institutions engaged in the promotion and

development of industry, agriculture and other key sectors.

National or regional financial institution designed to provide medium- and

long-term capital for productive investment. Such investment is usuallyaccompanied by technical assistance.

Some development banks are government-owned, while others are private.

Many have been established under the auspices of the World Bank.

Among the largest are the Inter-American Development Bank, the Asian

Development Bank, and the African Development Bank.

DEFINITION

A.G. Kheradjou: "A development bank is like a living organism that reacts to the

social-economic environment and its success depends on reacting most aptly to

that environment".

D.M. Mithani: "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 in the form of loans, underwriting, investment and

guarantee operations and development in general and industrial area.

SAMRITI GOEL

MBA LECTURER
http://encyclopedia2.thefreedictionary.com/World+Bankhttp://encyclopedia2.thefreedictionary.com/World+Bank


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A development bank's policies or programs center on the following priorities:

Economic growth

Human development

Environmental protection

Private sector development

Regional cooperation

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DEVELOPMENT BANKS

Features of a development bank

A development bank has the following features or characteristics:

1) A development bank does not accept deposits from the public like

commercial banks and other financial institutions who entirely depend upon

saving mobilization.

2) It is a specialized financial institution which provides medium term and

long-term lending facilities.

3) It is a multipurpose financial institution. Besides providing financial help it

undertakes promotional activities also. It helps an enterprises from

planning to operational level.

4) It provides financial assistance to both private as well as public sector

institutions.

5) The role of a development bank is of gap filler, when assistance from other

sources is not sufficient then this channel helps. It does not compete with

normal channels of finance.

6) Development banks primarily aim to accelerate the rate of growth. It helps

industrialization specific and economic development in general.

7) The objective of these banks is to serve public interest rather than earning

profits.

8) Development banks react to the socio-economic needs of development.

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DEVELOPMENT BANKS

OBJECTIVES OF DEVELOPMENT BANKS

1. Lay Foundations for Industrialization

To lay a solid foundation for growth, establishment of certain key industries such

as cement, engineering, machine making, chemicals, etc. is essential. Private

entrepreneurs were not forthcoming to invest in these vital' areas due to risk

involved and Long gestation period in those industries. The governments of under

developed countries set up development institutions to fill the vacuum.

2. Meet Capital Needs

Owing to the low level of income of the people there were no sufficient surpluses

for capitalization. There was a need for institutions which could meet this gap

between demand and supply for capital.

3. Need for Promotional Activities

Besides capital needs, underdeveloped countries suffered from lack of expertise,

managerial and technical know-how. Developmental banks could take up the job

of joint sectors and provide managerial resources and skills and transform them

into approved fields.

4. Help Small and Medium Sectors'

There was a need to mitigate sufferings of small and medium size industries.

Despite the important role played by these sectors they experience scarcity of

capital owing to the apathy of investors to invest their savings because of their

credit worthiness and profitability. There was a need for special institutions to

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help these sectors in playing vital role in the industrialization of developing and

under developed countries.

FUNCTIONS OF DEVELOPMENT BANKS

Development banks have been started with the motive of increasing the pace

of industrialization. In order to help all round industrialization development banks

were made multipurpose institutions. Besides financing they were assigned

promotional work also. Some important functions of these institutions are

discussed as follows:

1. Financial Gap Fillers

Development banks do not provide medium-term and long-term loans only but they

help industrial enterprises in many other ways too. These banks subscribe to the

bonds and debentures of the companies, underwrite to their shares and debentures

and, guarantee the loans raised from foreign and domestic sources. They also help

'undertakings to acquire machinery from with in and outside the country.

2. Undertake Entrepreneurial Role

Developing countries lack entrepreneurs who can take up the job of setting up new

projects. It may be due to lack of expertise and managerial ability. Development

banks were assigned the job of entrepreneurial gap filling. They undertake the task

of discovering investment projects, promotion of industrial enterprises, provide

technical and managerial assistance, undertaking economic and technical

research, conducting surveys, feasibility studies etc. The promotional role of

development bank is very significant for increasing the pace of industrialization.

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MBA LECTURER


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DEVELOPMENT BANKS

3.Joint Finance

Another feature of development bank's operations is to take up joint financing

along with other financial institutions. There may be constraints of financial

resources which may force banks to associate with other institutions for taking up

the financing of some projects jointly. It may also not be possible to meet all the

requirements of a concern by one institution, So more than one institution may join

hands. Not only in large projects but also in medium-size projects it may be

desirable for a concern to have, for instance, the requirements of a foreign loan in

a particular currency, met by one institution and under writing of securities met by

another. In case of big projects where substantial financial assistance is needed,

more institutions may form a consortium to meet their needs. The members of the

consortium will undertake joint appraisal of projects and then decide the quantum

of assistance to be provided by each institution.

4. Refinance Facility

Development banks also extend refinance facility to the lending institutions. In this

scheme there is no direct lending to the enterprise. The lending institutions are

provided funds by development banks against loans extended' to industrial

concerns. In this way the institutions which provide funds to units are refinanced

by development banks.

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5. Credit Guarantee

The small scale sector is not getting proper financial facilities due to the element

of risk since these units do not have sufficient securities to offer for loans, lending

institutions are hesitant to extend them loans. To overcome this difficulty many

countries including India and Japan have devised credit guarantee scheme and

credit insurance scheme. In India, credit guarantee scheme was introduced in

1960 with the object of enlarging the supply of institutional credit to small

industrial units by granting a degree of protection to lending institutions against

possible losses in respect of such advances.

6. Underwriting of Securities

Development banks acquire securities of industrial units through either direct

subscribing or underwriting or both. The securities may also be acquired through

promotion work or by converting loans into equity shares or preference shares. So

development banks may build portfolios of industrial stocks and bonds. These

banks do not hold these securities on a permanent basis. They try to disinvest in

these securities in a systematic way which should not influence market prices of

these securities and also should not lose managerial control of the units.

Development banks have become world wide phenomena. Their

functions depend upon the requirements of the economy and the state of

development of the country. They have become well recognized segments of

financial market. They are playing an important role in the promotion of industries

in developing and underdeveloped countries.

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MBA LECTURER


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DEVELOPMENT BANKS

DEVELOPMENT BANKING IN INDIA

The foreign rulers in India did not take much interest in the industrial development

of the country. They were interested to take raw materials to England and bring

back finished goods to India. The government did not show any interest for

securing up institutions needed for industrial financing.

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 Bankhad undertaken a detailed study to find out the need

for specialized institutions.

It was in 1949 that the first development bank i.e. Industrial Finance

Corporation of India (IFCI) was established.

In 1951, Parliament passedState Financial Corporation Act. Under this

Act state governments could establish financial corporations for their

respective regions.

The IFCI and state financial corporations served only a limited purpose.

There was a need for dynamic institutions which could operate as true

development agencies.

The Industrial Credit and Investment Corporation of India (ICICI) were

established in 1955 as a Joint Stock Company. Though ICICI was

established in private sector but its pattern of shareholding and methods of

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Role of development banks in financial system

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 assistance required for infrastructural

facilities to Institutions or the economic persons who can take the development in

the following ways.

1. Providing Funds

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. 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.

2. Infrastructural Facilities

Economic development of a country is linked to the availability of infrastructural

facilities. There is a need for roads, water, sewerage, communication facilities,

electricity etc. Indian industry and agriculture is facing acute shortage of

electricity. All India" institutions are giving priority to invest funds in projects

generating electricity. Small entrepreneurs cannot spare funds for creating

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infrastructural facilities. To overcome this problem, institutions at state level are

developing industrial estates and provide sheds, having all facilities at easy

installments. 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 make available 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.

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.

5. Planned Development

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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 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 is 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

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backward areas by encouraging the setting up of units in those areas, Thus

financial institutions have helped in creating new and better job opportunities.

ALL INDIA DEVELPOMENTS BANKS

In India, various financial institutions were set up after independence only. The

Government of India has taken steps to set up institutions which assist varioussectors of the economy. At present the country has 12 institutions at the national

level and 46 at the state level. The All India Financial Institutions comprise All-

India Development Banks, namely:

Industrial Development Bank of India,

Industrial Finance Corporation of India Ltd.,

Industrial Credit and Investment Corporation of India Ltd.,

Small Industries Development Bank of India,

Industrial Reconstruction And Development Bank of India,

SCICI Ltd,

NABARD

There are three investment institutions:

Life Insurance Corporation of India Ltd.,

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Unit Trust of India and

General Insurance Corporation of India.

At state level there are 18 State Finance Corporations and 28 state industry

development corporations.

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MBA LECTURER

Development Banks Final

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