DEVELOPMENT BANKING IN INDIA

INTRODUCTION:
 The concept of Development Banks is of recent
origin.
 These banks were mostly set up after World War II
in both developed and underdeveloped countries.
 The role of development banks is more pronounced
in developing countries where governments have
taken upon themselves the task of accelerating the
pace of economic development.
 Development banks do not mobilise savings like
other banks but invest the resources in productive
manner.
DEFINITION OF A DEVELOPMENT BANK
 Development banks are the institutions engaged
in promotion and development of industry,
agriculture and other key sectors.
 According to 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
promotional activities economic development in
general and industrial development in particular.
FEATURES OF A DEVELOPMENT BANK
 A development bank does not accept deposits
from the public like commercial banks and
other financial institutions who entirely depend
upon saving mobilisation.
 It is a specialised financial institution which
provides medium term and long term lending
facilities.
 It is a multipurpose financial institution. It
helps enterprise from planning to operational
level.
 It provides financial assistance to both private
as well as public sector institutions.
 The role of a development bank is of gap filler.

 It helps industrialisation in specific and

economic development in general.
 The objective of these banks is to serve public
interest rather than earning profits.
 Development banks react to the socio-
economic needs of development.
DEVELOPMENT BANKING IN INDIA
 The foreign rulers in India did not take much
interest in the industrial development of the
country.
 The Government did not show any interest for
setting 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 1948, the first development bank that
Industrial Finance Corporation of India (IFCI)
was established.
 IFCI was assigned the role of a gap-filler and it
was not expected to compete with existing
channels of industrial finance.
 In 1951, Parliament passed State Financial
Corporation Act.
 Under this Act state governments could
establish financial corporations for their
respective regions. At present there are 28
State Financial Corporations (SFC’s) in India.
 National Industrial Development Corporation
(NIDC) was established in 1954. It restricted itself
to be financial agency for modernisation and
rehabilitation of cotton and jute textile industries.
 The Industrial Credit and Investment Corporation
of India Ltd. (ICICI) was established in 1955 as a
Joint Stock Company.
 ICICI was supported by Govt. of India, World Bank,
Common wealth development finance corporation
and other foreign institutions.
 It provides term loans and take an active part in
underwriting of and direct investments in the
shares of industrial units.
 Refinance Corporation for Industry Ltd. (RCI) was
set up in 1958 by Reserve Bank of India, LIC and
Commercial Banks.
 The purpose of RCI was to provide refinance to
commercial banks and SFC’s against term loans
granted by them to industrial concerns in private
sector.
 In 1964, Industrial Development Bank of India
(IDBI) was set up as an apex institution in the area
of industrial finance.
 RCI was merged with IDBI.
 IDBI was a wholly owned subsidiary of RBI and
was expected to co-ordinate the activities of the
institutions engaged in financing, promoting or
developing industry.
State Industrial Development Corporations
(SIDC’s) were established in the sixties to
promote medium scale industrial units.
 At present there are 28 SIDC’s in the country.

 The State Small Industries Development

Corporations (SSIDC’s) were also set up to
cater to the needs of industry at state level.
 These corporations manage industrial estates,
supply raw materials, run common service
facilities and supply machinery on hire-
purchase basis.
 The Unit Trust of India (UTI) established in
1964, Life Insurance Corporation of India
(1956) and General Insurance Corporation of
India (GIC) set up in 1973 also finance
industries activities at all India level.
 Industrial Reconstruction Corporation of India
Ltd. (IRCI) was set up in 1971 for the
rehabilitation of sick units.
 In 1982 the Export-Import Bank of India (EXIM
Bank) was established to provide financial
assistance to exporters and importers.
 National Bank for Agriculture and Rural
Development (NABARD) was set up in 1982 for
short term, medium term and long-term
financing of agriculture and allied activities.
 Film Finance Corporation, Tea Plantation
Finance Scheme, Shipping Development Fund,
Newspaper Finance Corporation, Handloom
Finance Corporation, Housing Development
Finance Corporation also provide financial and
other facilities in various areas.
OBJECTIVES OF DEVELOPMENT BANKS
The major objectives of Development banks are
as follows:
1) The major objective of development banks is
to quicken the industrial development in the
country. The industrial development will help
in alleviating the problems of poverty and
unemployment in the country.
2) Another objective of development banks is
economic growth with almost simultaneous
and just distribution of its benefits. In an
economy like ours, where the resources are
 scarce, this requires not only the investment of
all available investible resources but their
qualitative composition and geographical
distribution.
 Development banks have to adapt their
lending and investment strategies and
activities to the realisation of national
objectives. They have to decide about the
various trade offs between the likely benefits
and the costs involved and must involve a
delicate blend of objectives.
 The development banks have to translate the
social objectives of the country into action. They
have to define their objectives within the territory
of their statute in such a manner so as to serve
these social objectives. Today the priority areas in
the country are:
a) Projects in the backward areas.
b) Projects in the small scale sector.
c) Projects promotes by new and technical
entrepreneurs.
d) Projects producing goods of mass consumption.
e) Projects in the nature of export promoting and
import substituting industrial units.
 In addition to the long term objectives, the
development banks have to work with some
short term objectives also. They have to adjust
their lending strategies to the changing
circumstances so as not to create inflationary
conditions or not to create idle capacity in
certain sectors where demand is slack or
where critical raw materials or utilities are not
easily available or not to create a situation of
shortages of certain commodities at some
future dates.
 Development banks should also help in
 optimising the resources. The mere creation of
finance without a corresponding creation of goods
and services within a reasonable time would be
inflationary.
 A development bank cannot be merely a lending
agency. It has to take into account certain factors
so that it may command all the maximum benefit
of the nation.
 These banks should also support promotional
activities in the country.
 These banks can assume the responsibility for
developing infrastructure and social utilities in the
country.
 These should help in developing the key
sectors like agriculture, industry and trade.
 These banks should organise consultancy
services for the benefit of potential
entrepreneurs and training programmes for
new entrepreneurs with a view to widening the
entrepreneurial base.
FUNCTIONS OF DEVELOPMENT BANKS
In order to achieve the above mentioned
objectives the development banks perform a
variety of functions which are discussed as
follows:
 The development banks help in setting up
basic and key industries in the initial stages of
development. The basic industries like coal,
iron and steel, aluminium, cement etc. further
help in the development of other industries
 These banks provide medium and long term
 financial assistance at comparatively cheap
rates to the industries in response to the
emerging requirements of industrial and
economic growth.
 Along with providing financial assistance, the
development banks have been continuously
enlarging the scope of their operations. These
operations include identification of industrial
opportunities, identification and training of
entrepreneurs, provision of techo-economic
consultancy facilities, industrial research and
other promotional activities.
 Development banks provide facilities of
refinancing to commercial banks and several other
state level institutions.
 These banks accommodate the industrial units by
directly subscribing or underwriting their securities
so that market prices of these securities are not
unduly fluctuating.
 The development banks assist the small scale
industries by providing a credit guarantee in their
taking credit facility from different financial credit
institutions. They also help small industries in the
procurement of raw materials and marketing their
products. They also operate hire purchase schemes
for the purchase of machinery and equipment.
 In our country, after independence, balanced
regional growth became a goal of economic policy.
The development banks have been encouraging
the flow of assistance to industrially backward
areas by offering concessional interest rates and
liberal financing norms such as lower promoter’s
contribution, higher debt-equity ratio etc.
 Some of these banks have also started inviting
public investment through the sale of their bonds
or debentures or through mutual fund scheme.
Through such activities, these banks mobilise
considerable amount of community savings and
make the public at large to participate in the
industrial and development activities of the nation.
 The development banks take a number of
measures to identify and train the potential
entrepreneurs. The basic objective of these
promotional activities is to provide the
entrepreneurs a package of services such as
preparation of feasibility studies and project
reports, providing technical and management
services for sorting out operational problems etc.
They also sponsor appropriate entrepreneur
development programmes from time to time. They
also extend assistance to new technicians and
professional entrepreneurs who have necessary
ability to run and manage projects but lack the
necessary financial resources. These banks take
up a substantial portion of the equity of the new
projects.
 As all the development banks are directly or
indirectly managed and controlled by the
central or the state government, they perform
in general, all those functions which seek to
fulfill the goals of general economic
development of the country.
LENDING PROCEDURES OF DEVELOPMENT
BANKS (OPERATIONAL ACTIVITIES)
 Project Appraisal & Eligibility of Applicant
 Every financial institution serves a particular
area of activity or there are certain limits
prescribed beyond which they cannot go.
 The second aspect is to determine whether the
enterprise has fulfilled various conditions
prescribed by the Government
 Discussions are held with the promoters and
clarifications sought on various points.
 The bank/institution considers financial
institutions in the light of
i. Guidelines for assistance to industries issued by
the Government or others concerned from time to
time.
ii. Guidelines issued by the bank
iii. Policy decisions of the Board of Directors of the
bank.
Technical Appraisal
i. Feasibility and suitability of technical process in
Indian conditions.
ii. Location of the project
iii. The scale of operations and its suitability for
the planned project.
iv. The technical soundness of the projects
v. Sources of purchasing plant and machinery and
the reputation of suppliers etc.
vi. Arrangement for the disposal of factory
affluents and use of bye- products, if any
vii. The estimated cost of the project and probable
selling price of the product.
viii. The programme for completing the project.
ix. The sources of supplying various inputs and
marketing arrangements.
x. Details of any technical collaboration and its
practical aspects. The technical appraisal
determines the suitability of the project.
Economic Viability
The economic appraisal will consider the national
and industrial priorities of the project, export
potential of the product, employment potential,
study of market.
 Assessing Commercial Aspects
The examination of commercial aspects relates to
the arrangements for the purchase of raw
materials and sale of finished products.
Financial Feasibility
The assessment for a new concern will involve:
i. The needs for fixed assets, working capital and
preliminary expenses will be estimated to find out
its needs.
ii. The financing plans will be studied in relation to
capital structure, promoters contribution, debt
equity ratio.
iii. Projected cash flow statements both during the
construction and operation periods
iv. Projected profitability and the likely dividend in
near future.
Managerial Competence
A lending institution would see the background,
qualifications, business experience of
promoters and other associated with
management. The persons forming Board of
Directors should have adequate technical,
financial and business expertise.
 National Contribution
The role of the project in the national economy
and its benefits to the society in the form of
good quality products, reasonable prices,
employment generation, helpful in social
infrastructure etc should be assessed.
Balancing of Various Factors
The circumstances of the individual project will
help in weighing various factors. Weaknesses in
certain areas may be off set by the good points
in the other.
Loan Sanction
 If the Advisory Committee is satisfied by the proposal
then it recommends the case to the Managing Director
or Board of Directors alongwith its own report.
 When the assistance is sanctioned then a letter to this
effect is issued to the party giving details of conditions
on which its is granted. A loan agreement is also got
signed by the promoters or directors of the enterprise.
Loan Disbursement
 The execution of documents of security or guarantee
etc. should proceed the disbursement of loan. In case
some property is pledged to the bank then title deeds of
such property are also properly scrutinised.
 Follow up
 Proper follow up by the bank will enable it to
follow the progress of unit.
 It should be seen whether the revenue earned
by the concern will be sufficient to meet the
obligations or not.
PROMOTIONAL ROLE OF DEVELOPMENT BANKS
IN INDIA
 Surveys of Backward Areas
 Surveys studied the availability of resources,
demand potential and availability of infrastructure
facilities.
 In 1982, Government of India identified 83
districts in the country where no medium or large
scale industrial units existed
 IDBI jointly with IFCI and ICICI launched a
programme for identifying opportunities and the
needs for.
 Inter-Institutional Groups (IIG’s)
 With a view to provide a forum to the national
and state financial institutions, IDBI constituted
23 IIG’s in various states and union territories.
 These groups aimed to help accelerate the
process of industrial development in a state
with particular emphasis on less developed
areas.
 IDBI has been constantly reviewing the
functioning of these groups so as to evolve
suitable measures for making them effective.
 Establishing Technical Consultancy
Organisations (TCO’s)
 The consultancy services covered market
surveys, preparation of feasibility and project
reports, entrepreneurship development
programmes, diagnostic studies and
rehabilitation schemes for sick units etc.
 Financial Institutions set up 17 consultancy
organisations for providing consultancy at
nominal rates.
 TCO’s have been giving thrust to modernisation
of small and medium scale sectors also.
 Entrepreneurial Development Programme
(EDP’s)
 The main thrust of EDP’s has been to
institutionalise entrepreneurship activities,
generating, sharpening and sharing knowledge
through research documentation and
publication, developing a cadre of
professionals
 A major step in this area was setting up of
Entrepreneurship Development Institute of
India, Ahemdabad in 1983.
 Technological Improvements
 IDBI has been helping small and medium
sectors in developing and upgrading of their
technology so that they are able to match the
pace of development.
 These banks also encourage entrepreneurs to
adopt sophisticated technology with the help of
academic and research institutes and also to
encourage entrepreneurship among science
and technology graduates.
 Conclusion
Development banks have done a good job in
promoting industrial activities in various parts
of the country. Development banks in co-
operation with private sector can certainly help
in accelerating the pace of industrial
development.