PRESENTATION BY:DR. VIVEK SHARMA

Development Financial Institutions

INTRODUCTION

The economic development of any country depends on the extent to which its financial system efficiently and effectively mobilizes and allocates resources. There are a number of a banks and financial institution that perform this function; one of them is the development bank. They undertake to foster the development of a nation, generally not undertaken by other banks.

Development Banks

Development banks are financial agencies that provide medium-and long-term financial assistance and act as catalytic agents in promoting balanced development of the country. They are engaged in promotion and development of industry, agriculture, and other key sectors. They also provide development services that can aid in the accelerated growth of an economy.

Objectives

• To serve an agent of development in various sectors, viz. industry, agriculture, and international trade

• To accelerate the growth of the country• To allocate resource to high priority areas • To foster rapid industrialization, particularly in

the private sector, so as to provide employment opportunities as well as higher production

• To develop entrepreneurial skills • To promote the development of rural areas • To finance housing, small scale industries,

infrastructure, and social utilities

Special Role

• planning, promoting, and developing industries to fill the gaps in industrial sector

• coordinating the working of institutions engaged in financing, promotion or developing industries, agriculture, or trade

• rending promotional services such as discovering project ideas, undertaking feasibility studies, and providing technical, financial, and managerial assistance for the implementation of projects.

Evolution of Development Financial Institutions

Concept developed during World War-IIMany countries of Europe were in the stage of

industrial development and special financial institutions were set up to foster industrial growth.

In the US, DFIs came into existence for special purposes such as economic rehabilitation and filling gaps in international financing pattern.

No only developed countries but several underdeveloped countries but several underdeveloped countries in Asia, Africa, and Latin America established special financial institutions to hasten the pace of industrialization and growth.

e.g.-The International Bank for Reconstruction and Development (IBRD) now known as World Bank and International Monetary Fund (IMF)

Major Objectives of World Bank and IMF

World Bank -To promote world development and platform the task of transfer of enormous financial and technical resources form the developed to developing nations.

IMF - To perform a special function of providing financial assistance to private sector projects in developing countries.

Reasons of Evolution of Development Financial Institutions in India

• Need felt for DFIs immediately after India attained independence

• The country needed a strong capital goods sector to support and accelerate the pace of industrialization.

• The existing industries required long-term funds for their reconstruction, modernization, expansion and diversification programs while the new industries required enormous investment for setting up gigantic projects in the capital goods sector.

• However, there were gaps in the banking system and capital markets which needed to be filled to meet this enormous requirement of funds.

DFIs in India Contd….

Commercial banks had traditionally confined themselves to financing working capital requirements of trade and industry and abstained from supplying long-term finance.

The managing agency houses, which had served as important adjuncts to the capital market, showed their apathy to investment in risky ventures.

DFIs in India Contd….

• Several malpractices, such as misuse of funds, excess speculation, and manipulations were unearthed. Owing to this, the investors were not interested in investing in the capital market.

• There were a limited number of issues houses and underwriting firms that sponsor security issues.

Hence, to fill up these gaps special financial institutions were devised which would provide the necessary financial resources and know-how so as to foster the industrial growth of the country.

Organizational Structure

Organizational StructureAll Financial Institutions

1)All India Financial Institutionsa)All India Development BanksIFCI (1948)ICICI (1955)IDBI (1964)SIDBI (1990)Industrial Investment Bank of India – IIBI (1997)b)Specialized Financial InstitutionsEXIM Bank (1982)IFCI Venture Capital Fund- IVCF(1988), ICICI Venture (1988)Tourism Finance Corporation of India-TFCI (1989)Infrastructure Development Finance Co. Ltd.- IDFC(1997)

 

Organizational Structure Contd….

c)Investment Institutions • UTI (1964)• LIC (1956)• GIC & Subsidiaries (1972)d)Refinance Institutions• NABARD (1982)• NHB (1980)2)State Level Institutions • SFCs• SIDCs3)Other Institutions • ECGC(1957)• DICGC(1962)

Changing Role of DFIs

Pre 1991FIs functioning was Highly RegulatedConsortium lending and services offered at uniform

priceTo bear the risk of long term lending concessions

were allowed by the RBI & Central Govt.Post 1991Deregulated interest ratesIssue of Equity and Debt capital for financing their

needsTax exempt status withdrawn form many DFIs

Changing Role of DFIs Contd….

Medium & Long term Loans by Commercial Banks and NBFCs while DFIs extending short term/working capital finance- This has led to stiff competition between DFI & Banks

Commercial Banks having edge over DFIs as regard to:Branch network, infrastructure, client base and

flexibility in operations resulting into the benefit of economies of scale and backed by low cost deposits which DFIs can’t.

The increasing NPAs in DFIs a matter of worry. As a result focus of DFIs shifted form the purpose with which they were set up.

Changing Role of DFIs Contd….

Strategic alliance with foreign players of DFIs Investment in technology and infrastructureDFI offer commercial banking, consumer

finance, investor and custodial services, broking, venture capital finance, infrastructure financing, registrar and transfer services and e-commerce.

DFIs converted themselves into universal bankse.g. ICICI.

Universal Banking

Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window.

Definition

"In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the Corporate Governance of firms that rely on the banks for funding or as insurance underwriters".

Contd….

In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, they can also deposit and borrow. It includes not only services related to savings and loans but also investments.

However, in practice the term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries.

Advantages of Universal Banking

1) Economies of Scale2) Profitable Diversions3) Resource Utilization4) Easy Marketing on the Foundation of a

Brand Name5) One-stop shopping.6) Investor Friendly Activities

Disadvantages of Universal Banking

1) Grey Area of Universal Bank 2) No Expertise in Long term Lending3) NPA Problem Remained Intact