Friday, November 20, 2009

Unit - 4



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 banks and financial institutions that perform this function; one of them is the development bank. Development banks are unique financial institutions that perform the special task of fostering the development of a nation, generally not undertaken by the other banks.

Meaning of Development Banks

Specialized and hybrid financial institutions that are engaged in the provision of financial and other assistance for the purpose of undertaking long-term developmental activities in certain identified sectors of the economy such as small-scale sector, exports promotion, industrial development, agricultural development, etc. are known as ‘development sector’.

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.


In India, development banks have developed a distinctive culture and thus they stand distinct      from all other financial institutions. The technique of role-playing can be adopted for various purposes and the nature of the technique would differ for different purposes.  The main focus      here is on role clarity, effectiveness and improved fit between the institution and the role.  By sharing common role problems, development banks may develop alternating solutions which    result in better performance.


Financial sector development is not an end itself. It is to promote and sustain productive activities  in various economic sectors by providing needed financial products and services. For the financial system to perform this function adequately and effectively, individual institutional efficiency alone             would not suffice. There should also be a conducive policy environment, political stability, political will and entrepreneurship.  In addition, financial institutions should have adequate economy to bring in initiative and innovations to growth.



The overriding objective of the development bank is to promote the development of industry, agriculture, trade as well as capital market. Development in this sense implies a steady improvement of living standards achieved through increases in income, improvement in social conditions and protection of the natural environment. Economic growth is fundamental to development.


The development banks have been in the forefront in strengthening the capital market with a view to give a much needed impetus to the growth of private sector activities. All the development banks established in the country since independence are expected to encourage and promote healthy growth of the capital market with a view to mobilising private savings into industrial securities. The respective charter of IFCI, IDBI, ICICI, SFCs/SIDCs, LIC and UTI enjoin on them supporting issues of industrial securities through underwriting and/or direct subscription.



There are a number of fiscal concessions for investment in backward areas which are important for attracting investment in the earlier neglected areas. The financial institutions offer concessions in terms of lower interest rates, longer moratorium period, easier repayment schedule and more favourable treatment in regard to promoter’s distribution and debt-equity norms.


          The financial institutions have helped create additional capacities in a large number of industries. Again, there will also be a spurt of new industries, new services, innovative products and large turnover, higher sales, higher profits. In this sense, the role of development banks is not only catalytic but also unique and significant.


 The bank’s assistance may be considered for projects to establish, expand, diversify and modernise productive facilities in various sectors, including energy, manufacturing, transportation, forestry, fisheries, mining, tourism, health and agriculture. The project should produce or provide essential goods or services and serve national development objectives. Projects to produce non-essential or luxury consumer goods may be eligible provided the products are primarily for export. The Banks prefer projects which use domestic raw materials, create jobs, employ modern management techniques and technology and those which are export-oriented or lead to efficient import substitution, induce foreign investment and provide wider dispersal of ownership.



   Small scale industries are provided finance and extension on service support by development banks such as SFCs, NSICs, SSIDCs, KVIC, NABARD & SIDBI. While other agencies are serving the small scale enterprises at the grass root level, NABARD has its focus on rural areas through linkages with the banking system. SIDBI has been set up as a principal financial institution for promotion and financing of the small scale sector.


    DFIs also took several steps to reposition themselves and reorient their operations in the competitive environment by offering innovative products and diversifying their activities into new areas of  business (such as investment banking, stock broking, custodial services etc.) so as to harness the synergies and to reduce the risk arising out of narrow specialisation. DFIs were reasonably successful in diversifying into some non-traditional products, especially fee and commission based business.

Development banks seeking new growth paths should not be deviated from their responsibility of promoting projects and encouraging new generation entrepreneurs. More importantly, worthwhile projects should be allowed to flounder for want of finance.


        The vision of Development Banks is the socio-economic growth. Economic growth can reduce poverty by generating employment and income, labour intensive growth can reduce it even faster. Promoting sustainable economic growth relies on the successful pursuit of the other pillars of  Development Banks strategy: Social development and good governance.

These challenges have made economic development even more daunting. To be more effective and responsive, Development Banks have to change their directions, approaches and commitment.

Functions of Development Banks

Catalysts: Development banks act as catalysts for quickening the pace of industrial development of the country in order to help alleviate endemic problems of poverty and unemployment.

1)     Entrepreneurial cult: Development banks help promote the development of entrepreneurial cult by facilitating such activities as identification of growth projects, preparation of feasibility reports and provision of technical, managerial and other assistance to interested entrepreneurs right from the stage of project formulation to the commissioning and operation of the project.

2)     Socio-economic objectives: Development banks assists in the realization of the socio economic objectives of the country so as to ensure equitable distribution of income and wealth contributing to the promotion of social justice, self-reliance, prevention of concentration of economic power and regional balanced growth.

3)     Balanced Development: Development banks assist in the promotion of balanced regional and economic development. This is accomplished by assisting the development of priority areas such as small-scale sector, export promotion and import substitution, etc.

4)     Optimal utilization: Development banks allow for the optimal use of available resources of the country. They also cause development in the infrastructure such as transport, telecommunication, banking, etc.

5)     Financial functions: Development banks carry out financial functions such as granting loans to industrial enterprises, subscribing to the shares and debentures of the companies, guaranteeing the loans raised by them from other sources, guaranteeing deferred payments for the import of plant and equipment, and underwriting the issue of industrial stocks, shares bonds and debentures. They also provide technical, managerial and other services to entrepreneurs with a few to widening the entrepreneurial base.



  The main objectives of a development bank are to serve as an agent of development in various sectors, viz.,    industry, agriculture and international trade. Their first and foremost task is to accelerate the growth of the economy. Rapid industrialisation, particularly in the private sector, so as to provide additional employment opportunity as well as higher production. Development of backward areas. Thus mainly -

·        To take up rural development and agriculture.

·        To finance projects which are of great importance to the economy.

·        To finance housing and small scale industries.

·        Fostering entrepreneurship.

·        Promoting innovative practices.

·         Developing diversified economic activities in the country in the ever changing economic environment.

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

·         To accelerate the growth of economy.

·         To foster rapid industrialization, particularly in the private sector, so as to provide employment opportunities as well as higher production.

·         To allocate resources to high priority areas.

·         To develop entrepreneurial skills.

·         To promote the development of rural areas.

·         To finance housing, small scale industries, infrastructure and social utilities.


                                INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

The Industrial Development Bank of India was established under the Industrial Development Bank of India Act., 1964, as a wholly owned subsidiary of the Reserve Bank of India. The ownership of IDBI has since been transferred to Central Government from February 16, 1976. the main objective establishing IDBI was to set up an apex institution to co-ordinate the activities of other financial institutions and to act as a reservoir on which the other financial institutions can draw. IDBI provides direct financial assistance to industrial units also to bridge the gap between supply and demand of medium and long term finance.



The management of IDBI is vested with the BODs consisting of 22 members nominated by the Central Government. Representation is also given to the RBI, other financial institutions and employees in the BODs. The Board constitutes different committees in order to assist in its operations.


The IDBI was set up to achieve the following objectives:

1)     To co-ordinate, supplement and integrate the activities of other existing financial institution including commercial banks.

2)     To provide term-finance to industry.

3)     To provide direct financial assistance to industrial concerns.


1)     To co-ordinate the activities of other institutions providing term finance to industry and to act as an apex institution.

2)     To provide refinance to financial institutions granting medium and long term loans to industry.

3)     To provide refinance to scheduled banks or co-operative banks.

4)     To provide refinance for export credits granted by banks and financial institutions.

5)     To provide technical and administrative assistance for promotion, management and growth of industry.

6)     To undertake market surveys and techno-economic studies for the development of industry.

7)     To grant direct loans and advances to industrial concerns, IDBI is empowered to finance all types of industrial concerns engaged or proposed to be engaged in the manufacture, preservation or processing of goods, mining, hotel, industry, fishing, shipping, transport, generation or distribution of power, etc.

To render financial assistance to industrial concerns, IDBI operates various schemes of assistance. For example: Direct Assistance Scheme, Soft loans Scheme, Technical Development Fund Scheme, Refinance Industrial Loan Scheme, Bill Re-discounting Scheme, Seed Capital Assistance Scheme, Overseas Investment Finance Scheme, Development Assistance Fund, etc.



                           Story of creation - India’s largest private Sector Bank


On March 30, 2002, when ICICI and two of its subsidiaries merged with ICICI Bank it marked the beginning of a new era for the Bank and for  the financial sector in India – the era of universal banking. The era when players recognize the plurality of customer preferences and strive to fulfil them.


The merger has created the country’s largest private sector bank and the second largest bank in terms of assets, with a growth model that brings together complementary capabilities and provides opportunities hitherto unavailable as separate entities. The merger has combined two organisations with complementary strengths and products and similar processes and operating architecture. The merger has combined the large capital base of ICICI with the strong deposits raising capability of ICICI Bank, giving ICICI Bank improved ability to increase its market share in banking fees and commissions, while lowering the overall cost of funding through access to lower cost retail deposits. ICICI Bank would now be able to fully leverage the strong corporate relationships that ICICI has built, seamlessly providing the whole range of financial products and services to corporate clients. The merger has also resulted in the integration of the retail finance operations of ICICI, and its two merging subsidiaries, and ICICI Bank into one entity, creating an optimal structure for the retail business and allowing the full range of asset and liability products to be offered to all retail customers.


Similarly, IDBI merged its IDBI Bank on April 2, 2005. Further took over United Western Bank in its fold on October 3, 2006.


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