DEVELOPMENT BANKS IN INDIA Meaning of Development Banks

DEVELOPMENT BANKS IN INDIA � Meaning of Development Banks Development banks are specialized financial institutions. They provide medium and long term finance to the industrial and agricultural sector. They provide finance to both private and public sector. Development banks are multipurpose financial institutions. They do term lending, investment in securities and other activities. They even promote saving and investment habit in the public.

Development Banks are those financial institutions that provide funds and financial assistance to new and upcoming business enterprises. Development bank helps in According to Willian Diamond, "development bank is a financial institution to promote and finance enterprises in private sector. " Development banks like IDBI, SIDBI, and IFCI etc. were set up to meet long term and short term capital requirements of the industry. Development banks coordinate the activities of those institutions, engaged in financing, promoting and developing industries. They help in accelerating industrial and economic growth. The following are the objectives of development banks: 1. Rapid Industrial growth: Industrial sector is the dynamic sector of the Indian economy. This sector contributes to the generation of employment and income in the country. Funds are provided by the development banks to start a new business venture, expansion and diversification of the business in new sector etc. These funds are utilised to achieve several objectives that leads to accelerate industries and economic growth. Development banking supports the programmes of industrialisation of the country, by promoting entrepreneurial activities.

2. Encouraging entrepreneurs: Industrialisation helps in curbing economic and social problems thereby making economies progress. Emerging entrepreneurs are encouraged to give shape to their ideas. Development bank helps those entrepreneurs by providing funds for commencing new business. 3. Balanced regional development: There has been always an issue related to regional disparities. Development bank helps in curbing these regional disparities by providing funds to the entrepreneurs at low rate of interest if the organisation is planned in the backward areas. This would lead to the development of all areas thereby making balanced regional development.

4. Filling gaps: It is not possible for the commercial banks to fulfill all financial needs of all the customers. Absence of organised capital market, absence of adequate facilities for financing industries arise the problem of slow development of industrialisation. Such development banks can fulfill the credit gap. They provide long term funds for industries where gestation period may be longer. 5. Helps government: Government formulates financial policies with the help of development banks. They also help in implementing these policies. For example, NABARD bank is set up as an apex development bank for extending support to the rural areas. It helps the government in matters relating to the rural development, offers training and research facilities for banks working in the field of rural development, and acts as a regulator for co operative banks and RRB's.

Development Banks in India Development banking was started after the World War II. It provided finance to reconstruct the buildings and industries which were destroyed in the war. � � � � In India, development banking was started immediately after independence. The arrangement of development banks in India is depicted below. Development banks in India are classified into following four groups: Industrial Development Banks : It includes, for example, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI). Agricultural Development Banks : It includes, for example, National Bank for Agriculture & Rural Development (NABARD). Export-Import Development Banks : It includes, for example, Export Import Bank of India (EXIM Bank). Housing Development Banks : It includes, for example, National Housing Bank (NHB)

Industrial Development Bank of India (IDBI) � The Industrial Development Bank of India (IDBI) was established on 1 July 1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of institutions engaged in financing, promoting and developing industry in the country. Although Government shareholding in the Bank came down below 100% following IDBI’s public issue in July 1995, the former continues to be the major shareholder (current shareholding: 75%). IDBI provides financial assistance, both in rupee and foreign currencies, for green field projects as also for expansion, modernisation and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provides indirect financial assistance by way of refinancing of loans extended by State level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms.

Its functions include: Direct loans (rupee as well as foreign currency) to industrial undertakings as defined in the Act to finance their new projects, expansion, modernisation etc. Soft loans for various purposes including modernisation and under equipment finance scheme Underwriting and direct subscription to shares/debentures of the industrial companies. Sanction of foreign currency loans for import of equipment or capita. L goods. Short term working capital loans to the corporates for meeting their working capital requirements.

Small Industries Development Bank of India (SIDBI) � Small Industries Development Bank of India (SIDBI) was established as wholly owned subsidiary of Industrial Development Bank of India (IDBI) under the small Industries Development of India Act 1989. It is the principal institution for promotion, financing and development of industries in the small scale sector. It also coordinates the functions of institutions engaged in similar activities. For this purpose, SIDBI has taken over the responsibility of administrating Small Industries Development Fund and National Equity Fund from IDBI. � Capital. SIDBI started its operations from April 1990 with an initial authorised capital of Rs. 250 crore, which could be increased to Rs. 1000 crore. It also took over the outstanding portfolio of IDBI relating to small scale sector held under Small Industries Development Fund as on March 31, 1990 worth over Rs. 4000 crore.

Objectives of SIDBI � In the setting up of SIDBI, the main purpose of the government was to ensure larger flow of assistance to the small scale units. To meet this objective, the immediate thrust of the SIDBI was on the following measures: � (i) initiating steps for technological upgradation and modernisation of existing units; � (ii) expanding the channels for marketing the products of the small scale sector; and � (iii) promotion of employment oriented industries, especially in semi urban areas to create more employ ment opportunities and thereby checking migration of population to urban areas.

functions of SIDBI � � SIDBI provides assistance to the small scale industries sector in the country through the existing banking and other financial institutions, such as, State Financial Corporations, State Industrial Development Corporations, commercial banks, cooperative banks and RRBs. etc. The major functions of SIDBI are given below: (i) It refinances loans and advances provided by the existing lending institutions to the small scale units. (ii) It discounts and rediscounts bills arising from sale of machinery to and manufactured by small scale industrial units. (iii) It extends seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital schemes. (iv) It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small scale units.

(v) It provides services like factoring, leasing, etc. to small units. � (vi) It extends financial support to State Small Industries Corporations for providing scarce raw materials to and marketing the products of the small scale units. � (vii) It provides financial support to National Small Industries Corporation for providing; leasing, hire pur chase and marketing help to the small scale units. �

Industrial Credit and Investment Corporation of India (ICICI) � � � The Industrial Credit and Investment Corporation of India was registered as a private limited company in 1955. It was set up as a private sector development bank to assist and promote private industrial concerns in the country. Broad objectives of the ICICI are: (a) to assist in the creation, expansion and modernisation of private concerns; (b) to encourage the participation of internal and external capital in the private concerns; (c) to encourage private ownership of industrial investment.

functions of the ICICI � � � (i) It provides long term and medium term loans in rupees and foreign currencies. (ii) It participates the equity capital of the industrial concerns. (iii) It underwrites new issues of shares and debentures. (iv) It guarantees loans raised by private concerns from other sources. (v) It provides technical, managerial and administrative assistance to industrial concerns.

� Capital Initially: The Corporation started with the authorised capital of Rs. 25 crore. At the end of June 1986, the authorised capital was Rs. 100 crore and the paid up capital was 49. 5 crore. Various sources of financial resources of the Corporation are Indian banks, insurance companies and foreign institutions, including the world Bank, and the public. The government and the IDBI have also provided loans to the Corporation. � Financial Assistance: The performance of the ICICI in the field of financial assistance provided to the industrial concerns has been quite satisfactory. Over the years, the assistance sanctioned by the Corporation has grown from Rs. 14. 8 crore in 1961 62 to Rs. 43. 0 crore in 1970 71 and Rs. 36229 crore in 2001 02. Similarly the amount disbursed has increased from Rs. 8. 6 crore in 1961 62 to Rs. 29. 8 crore in 1970 71 and to Rs. 25831 in 2001 02. Cumulatively, at the end of March 1996, the ICICI has sanctioned and disbursed financial assistance aggregating Rs. 66169 crore and Rs. 36591 crore respectively.

features of ICICI The important features of the functioning of the ICICI arc as given below: � (i) The financial assistance as provided by the ICICI includes rupee loans, foreign currency loans, guarantees, underwriting of shares and debentures, and direct subscription to shares and debentures. � (ii) Originally, the ICICI was established to provide financial assistance to industrial concerns in the private sector. But, recently, its scope has been widened by including industrial concerns in the public, joint and cooperative sectors. � (iii) ICICI has been providing special attention to financing riskier and non traditional industries, such as chemicals, petrochemicals, heavy engineering and metal products. These four categories of industries have accounted for more than half of the total assistance. �

(iv) Of late, the ICICI has also been providing assistance to the small scale industries and the projects in backward areas. � (v) Along with other financial institutions, the ICICI has actively participated in conducting surveys to examine industrial potential in various states. � (vi) In 1977, the ICICI promoted the Housing Development Finance Corporation Ltd. to grant term loans for the construction and purchase of residential houses. � (vii) Since 1983, the ICICI has been providing leasing assistance for computerisation, modernisation and replacement schemes; for energy conservate; for export orientation; for pollution controller balancing and expansion: etc. �

(viii) The ICICI has not contributed much to reduce regional disparities. About three fifth of the total assistance given by the ICICI has been received by the advanced states of Maharashtra, Gujrat and Tamil Nadu. � (ix) With effect from April 1, 1996, Shipping Credit and Investment company of India ltd, (SCICI) was merged with ICICI. � (x) The ICICI Ltd. was merged with ICICI Bank Ltd. effective from May 3, 2002. �

Industrial Finance Corporation of India Ltd. or IFCI Establishment The Industrial Finance Corporation of India was established on 1 st July, 1948 under the Industrial Finance Corporation Act, 1948 to provide financial assistance (medium and long term) to large scale industries all over the country. On 1 st July, 1997 the name of Industrial Finance Corporation of India was changed as 'Industrial Finance Corporation of India Limited'. � Objects The main object of Industrial Finance Corporation of India Limited is to provide financial assistance to large scale industrial units particularly at a time when the normal banking accommodation is inadequate and not forthcoming to assist these industrial units. Industrial enterprises, organized on the basis of proprietary or private limited company basis, cannot take loans from this corporation. Only the public limited companies are eligible to take loans from it. �

Functions � � � The main functions of Industrial Finance Corporation of India Limited are as follows: To grant medium and long term loans ranging between Rs. 30 lakhs to Rs. 2 crores to large sized industrial units which are repayable within a period of 25 years. To guarantee loans raised by the industrial units which are repayable within a period of 25 years. To underwrite the issue of stocks, shares, debentures or bonds b industrial units but must dispose of such securities within 7 years. To issue debentures. To accept public deposits up to Rs. 10 crores for a period of five years only.

To act as an agent for the Central Government and for the World Bank in respect of loans trial to sanctioned themby guarantee deferred payments by importers of capital goods, who are able to obtain this concession from foreign manufacturers. � Miscellaneous: (i) To provide technical guidance to industrial units as to finance (loans), (ii) To guarantee loans in foreign currency. (iii) To examine utility of loans granted to industrial units, (iv) Tofrom guarantee raised loans scheduled banks and State Co operative Banks. �

Management The Industrial Finance Corporation or India is managed by a board of directors consisting of 13 members in all, both nominated and elected. The head of the board of directors is called chairman appointed by the Central Government with the consultation of board of directors for a period of three years only. Besides this board of directors, there is also a central committee consisting of five members in all, including president.

Financial Resources � � � The main financial resources of Industrial Finance Corporation of India Ltd. are as follows: Share Capital: The authorized capital of the corporation is Rs. 1, 000 corers divided into 2 lakhs shares of Rs. 5, 000 each. Its paid up capital on 31 st March, 1997 was Rs. 352. 81 crores. Debentures: The corporation is also authorized to issue debentures and bonds. But their total amount should not exceed ten times of its paid up share capital plus reserve funds. Loans: The Corporation has the power to borrow funds (loans) from Industrial Development Bank of India. Foreign investment Institutions, Central Government and Reserve Bank of India. Public Deposits: The Corporation can accept public deposits for a maximum period of five years. Further, the amount of public deposits cannot exceed Rs. 10 crores. Reserve Fund: It is another sources of finance of the Corporation. Foreign Currency Loans: The Corporation can also accept loans in foreign currency with the prior approval of the central government, such as, loans from International Bank and other International Financial

Review of Progress (Operations) The Corporation is granting loans to large sized industrial units and industrial cooperative units. The amount of assistance varies from Rs. 30 lakhs to Rs. 2 crores for a period not exceeding 25 years. The assistance extended by the corporation has been to widely dispersed among all industries, such as, power generation, telecom services, textiles, hotels, petroleum refining, iron and steel, cement, ports, sugar etc. Further, the assistance to any one industry has not exceeded 15% of the total outstanding assistance. Besides providing financial assistance, the corporation is also providing underwriting services, technical guidance, modernization assistance etc.

Critical Evaluation � � � � � Although the Corporation has been an important source of long term finance to the large sized and medium sized industrial units of the country, yet it has been criticized on several grounds. The main points of criticism are as follows: Nepotism and favoritism in granting loans. Undue preference to well established large business concerns. Overlooking interests of small business and development of backward regions almost ignored. Granting loans to business unit not covered by Five year Plans. Very high interest rate. Delay in sanctioning loans. No participation in equity capital. Most of the loans sanctioned to those industrial units which are already organized and financially strong. Lays greater emphasis upon giving assistance to consumer goods industries as against basic and capital goods industries.

The corporation has failed in regional and territorial economic development. � The assistance is insignificant as compared to the requirements of the industrial unit and hence it has knocked at the doors of other financial institutions. � The recurring expenses of the corporation are quite high. � In spite of the above criticism, we must recognize that the corporation has done a good job. It has entered in new lines of business. Loans one concession rates are granted to industries situated in backward areas. �