Development Banks in India Meaning, Nature, Objectives, Factors, Functions

Table of Contents:-

Meaning of Development Banks 

NBFCs perform a diversified range of functions and offer various financial services to individuals, and corporate and institutional clients. They cover a wide range of institutions from highly specified institutions such as development banks in India or insurance companies to simple institutions like mutual savings society.

Specialized and hybrid financial institutions that are engaged in providing financial and other assistance to undertake long-term developmental activities in certain identified sectors of the economy such as small-scale sector, export promotion, industrial development, agricultural development etc, are known as ‘development banks’.

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

Nature of Development Banks in India

The following are the important nature of development banks:

1) They provide medium and long-term lending facilities.

2) They do not provide medium and long-term loans alone and help industrial enterprises in many other ways.

3) Development banks do not accept deposits from the public like commercial banks and other financial institutions (except IDBI or ICICI, etc.).

4) They undertake other promotional activities like assisting an enterprise from the planning to the operational level.

5) They also extend financial assistance for working capital needs.

6) They offer financial assistance to both private as well as public sector institutions.

7) They subscribe to the bonds and debentures of companies. Underwriting shares and debentures and guaranteeing the loans, raised from foreign and domestic sources, are among the other core areas of work.

8) They contribute to the socio-economic needs of development.

9) They also undertake the entrepreneurial role of ascertaining investment projects; providing technical and managerial assistance; undertaking economic and technical research, and conducting surveys and feasibility studies.

10) They aim to accelerate the rate of growth and help in industrialisation and economic development in general.

Objectives of Development Banks in India

The objectives of development banks are given as follows

1) To accelerate the growth of the economy.

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

3) To serve in development in various sectors, vis industry, agriculture and international trade.

4) To promote the development of rural areas to finance housing, small-wale industries, infrastructure, and social utilities.

5) To allocate resources to high-priority areas.

6) To develop entrepreneurial skills.

In addition, they are given a unique role in:

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

2) Coordinating the working of institutions engaged in financing, and promoting developing industries, agriculture, or trade.

3) Planning, promoting, and developing industries to fill the gaps in the industrial sector.

Factors Responsible for the Growth of Development Banks in India

Many factors are responsible for the emergence and the growth of development banks the world over and in India, in particular. They are:

1) Long-term Assistance: Another factor that caused the growth of development banks in India and the world over was the need for long-term assistance to business undertakings in the form of loans, underwriting and investment.

2) Fostering Industrial Growth: An important factor responsible for the growth of development banks was the requirement of institutional machinery for fostering industrial growth in the country, especially after World War II. This caused the need to supply the basic ingredients of development, capital, knowledge and entrepreneurship for the country’s rapid industrial growth.

3) Promotional Services: The need for the provision of financial assistance and rendering of promotional services such as the development of infrastructure and social utilities also prompted the development in the realm of development banking.

4) Balanced Development: The need for promoting balanced and viable development by assuming the promotional role of discovering project ideas, undertaking feasibility studies, providing technical, financial and managerial assistance for the implementation of projects etc, also enhanced the growth of development banks.

5) Economic Policies: The growth of development banks was also driven by the need to assist in implementing economic policies formulated by the government.

6) Infrastructure Building: A strong reason for the phenomenal growth of the development banks was the need to build up the infrastructure required for accelerated industrial development and economic growth.

7) Other Factors: In addition to the above-mentioned factors, the following factors also contributed to the growth of development banks.

  1. Scientific and technological innovations led to the need for venture capital funds.
  2. Need for assisting with reconstruction, modernization and development of war-shattered industries.

Functions of Development Banks

The functions of development banks are given as follows:

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

2) 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 sectors, export promotion import substitution, etc.

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

4) Financial Functions: Development banks carry out financial functions such as granting loans to industrial enterprises, subscribing to the shares and debentures of 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, bonds, shares and debentures. They also provide technical, managerial and other services to entrepreneurs to widen their entrepreneurial base.

5) Socio-economic Objectives: Development basks assist in the realization of the socio-economic objectives of the country 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.

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

Scope of Development Banks in India

The scope of Development Banks covers:

1) State-Level Institutions: At the state level, there are 18 State Financial Corporations (SFCs) and 28 State Industrial Development Corporations (SIDCS).

2) Investment Institutions: The investment institutions are the Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC).

3) National-Level Institutions: The national-level institutions, known as All India Financial Institutions (AlFIs), comprise two All India Development Banks (AIDBs), also known as term-lending institutions, three refinance institutions, two investment institutions and one specialised financial institution. The term lending institutions are Export-Import Bank of India (EXIM Bank), Industrial Finance Corporation of India Limited (IFCI), and Tourism Finance Corporation of India Limited (TFCI).

4) Refinance Institutions: The refinance institutions are the National Bank for Agriculture and Rural Development (NABARD), the Small Industries Development Bank of India (SIDBI), and the National Housing Bank (NHB). These institutions extend refinance to banks as well as non-banking financial intermediaries for lending to small-scale industries, agriculture, and housing finance companies.

5) Specialised Financial Institutions: The Specialised Financial Institutions comprise IDFC, PFC, REC and IDBI.

Evolution and Distinct Features of Development Banks in India

Development banks in India came into existence in the post-independence era. Before Independence, only commercial banks existed, providing the business community with short-term working capital finance. The need for institutions that could offer medium to long-term finance to the industry became evident.

The first development bank established in India in 1948 was the Industrial Finance Corporation of India. Its objective was to “make medium and long-term credit more readily available to industrial concerns in India, especially in cases where normal banking accommodation was improper or recourse to the capital issue method was impracticable.”

Development banking varies from commercial banking in several ways. Commercial banking primarily focuses on short-term lending for financing the working capital requirements of a concern. In contrast, development banking is concerned with lending funds for medium – to long-term purposes and financing investments in the company’s fixed assets. Commercial banking is security-oriented, while development banking is project-oriented. Development banks also collaborate with commercial banks to finance large-scale projects. Recently, development banks have been permitted to grant short-term working capital finance to corporations, expanding into various other financial activities and services.


Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top