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Essay # 1. Introduction to Development Banks:
The economic development of any country depends upon the existence of a well-organised financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in turn promote the well-being and standard of living of the people of a country.
The design of financial system is depend on country’s system like structure of economy, social, political, technical and cultural system. But generally there are two financial system design identified with prominent polar designs. The first bank in India, called The General Bank of India was established in the year 1786.
The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks.
Allahabad Bank which was established in 1865 was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head-quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
Development bank is commonly applied to investment banks for the financing of private projects which deserve to be promoted on general economic grounds. Their salient task is usually to provide medium- and long-term funds. Complementary consultative functions are occasionally performed as well while other bank transactions, especially of a short-term nature, and debit businesses were, as a rule, not considered.
The growth of development banking is now a world-wide phenomenon. Development banking has become a well-recognised branch of finance. Germany also did not lag behind in this race. In 1853, they established an institution namely, ‘Darmatadter Bank’. This bank was entirely based on the model of French Credit Mobilier and it took a keen interest in providing the capital requisite for the creation and extension of business undertaking.
After the First World War the problem of industrial financing became all the more acute throughout the world. Never was such a great demand for long dated capital for industries and never was felt a more imperative need for organising special machinery to supply that capital.
In England, long-term financial needs of industrial enterprises were met by the other wings of British Capital Market viz. Issue houses, Company Promoters and the Underwriters. With the passage of time USA and other countries in the European Continent became keener to set up new and up- to-date agencies for industrial finance in the form of mortgage banks.
Development banking means different to different people, in different places, and at different times. This only goes to show that development banking has evolved since it was first conceptualised as an ‘instrument of development’. However, in its original form and in its broadest definition, it is a type of financial intermediation to help the country reach a higher and sustainable level of development. Development banking can also be defined as a form of financial intermediation that provides financing to high priority investment projects in a developing economy.
Both definitions imply that the purpose of development banking is to bring the country to a higher level of development. Development banking started during the time of industrial expansion in countries now considered to be more developed. More than a hundred years ago, the United States is already industrialised, and even earlier, Great Britain and a number of Central European countries developed their own industrial base.
Essay # 2. Importance of Development Banks:
Among the institutions whose role in the development of the less developed regions is well recognised but inadequately emphasized are the development banks. Playing multiple roles, these institutions have helped promote, nurture, support and monitor a range of activities, though their most important function has been as drivers of industrial development.
Essay # 3. Development Banks in India:
Almost 80 percent of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The RBI has given licenses to new private sector banks as part of the liberalisation process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.
Beginning in 1955, several financial institutions i.e. Development Finance Institutions (DFIs) were established to provide funds to the large medium and small industry in India. The DFIs provide finance for the establishment of new industrial projects as well as for expansion, diversification, and modernisation of existing industrial enterprises. In 1997-98, the Industrial Development Bank of India (IDBI) and the Industrial Credit and Investment Corporation of India (ICICI), the two largest DFIs.
(i) National Industrial Development Corporation:
National Industrial Development Corporation Limited is one of the foremost of the public sector undertakings India. It was set up as a financial institution which was a part of the Ministry of Commerce and industry under the Government of India. NIDC is at present among the well-known organisations of global standard. The National Industrial Development Corporation Limited also renders services to global organisations such as UNICEF, World Bank, USAID, and etc.
(ii) Industrial Finance Corporation of India:
It is an Indian government owned development bank to cater to the long-term finance needs of the industrial sector. It was the first Development Financial Institution established by the Indian government after independence. Until the establishment of ICICI in 1956, IFCI remained solely responsible for implementation of the government’s industrial policy initiatives. Its contribution to the modernisation of Indian Industry, export promotion, import substitution, entrepreneurship development, pollution control, energy conservation and generation of both direct and indirect employment is noteworthy.
The main objective of IFCI is to provide medium and long term financial assistance to large scale industrial undertakings, particularly when ordinary bank accommodation does not suit the undertaking or finance cannot be profitably raised by the concerned by the issue of shares.
(iii) Industrial Investment Bank of India:
The Industrial Investment Bank of India is a 100 percent government of India-owned financial investment institution. It was established in 1971 by resolution of the Parliament of India u/s 617 of the Companies Act. Industrial Investment Bank of India Ltd. provides financial products and services.
It engages in a variety of fund based and non-fund based activities, including project finance; short duration, non-project, asset-backed financing in the form of underwriting/direct subscription; deferred payment guarantees; and working capital/other short-term loans to companies in India and internationally. The company was founded in 1985 and is headquartered in Kolkata, India. Industrial Investment Bank of India Ltd. is in liquidation.
(iv) The Industrial Development Bank of India:
IDBI was established in 1964 under an Act of Parliament for providing credit and other facilities for the development of industry. It acts as the principal financial institution for coordinating the activities of institutions engaged in the finance, promotion, or development of industry.
The Government of India’s shareholding in IDBI amounts to 72 percent, and the rest of the shares are owned by the general public. IDBI has offered specialised schemes for energy conservation viz. Equipment Finance for Energy Conservation and Energy Audit Subsidy Scheme.
IDBI is governed by a Board of Directors and its operation is carried out under the supervision of the Chairman and Managing Director assisted by four Executive Directors and one Adviser. IDBI’s organisation structure is driven by its business objectives of offering the best services to the major industry groups. At the same time it is so organised to have industry specialists in important industrial sub-sectors as well.
(v) Industrial Reconstruction Bank of India:
The Industrial Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick industrial companies, was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI Act, 1984. With a view to converting the institution into a full-fledged development financial institution, IRBI was incorporated under the Companies Act 1956, as Industrial Investment Bank of India Ltd. (IIBI) in March 1997.
IIBI offered a wide range of products and services, including term assistance for project finance, short duration non-project asset-backed financing, working capital/other short-term loans to companies, equity subscription, asset credit, equipment finance and investments in capital market and money market instruments.
(vi) Unit Trust of India:
Unit Trust of India is financial organisation in India, which was created by the UTI Act passed by the Parliament in 1963(30th Dec 1963). For more than two decades it remained the sole vehicle for investment in the capital market by the Indian citizens. In mid-1980s public sector banks were allowed to open mutual funds.
UTI Mutual Fund is promoted by the four of the largest Public Sector Financial Institutions as sponsors, viz., State Bank of India, Life Insurance Corporation of India, Bank of Baroda and Punjab National Bank with each of them presently holding 18.5 percent stake in the paid up capital of UTI AMC. T Rowe Price Group Inc. (TRP Group) through its wholly owned subsidiary T Rowe Price International Ltd. (TRP) has acquired a 26 percent stake in UTI Asset Management Company Limited.
(vii) Export-Import Bank of India:
Export-Import Bank of India is the premier export finance institution in India, established in 1982 under the Export-Import Bank of India Act 1981. Since its inception, Exim Bank of India has been both a catalyst and a key player in the promotion of cross border trade and investment. It is managed by a Board of Directors, which has representatives from the Government, Reserve Bank of India, Export Credit Guarantee Corporation of India, a financial institution, public sector banks, and the business community.
It has been one of the prime institutions that encourage project exports from India. The bank offers wide-ranging services for enhancing the prospect of Indian project exports. Exim Bank’s Overseas Investment Finance program gives a variety of facilities for Indian reserves and acquirements overseas.
(viii) National Bank for Agriculture and Rural Development:
It is an apex development bank in India having headquarters based in Mumbai (Maharashtra) and other branches are all over the country. The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD), set up by the Reserve Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman, conceived and recommended the establishment of the National Bank for Agriculture and Rural Development (NABARD).
It was established on 12 July 1982 by a special act by the parliament and its main focus was to uplift rural India by increasing the credit flow for elevation of agriculture & rural non-farm sector and completed its 25 years on 12 July 2007. NABARD is the apex institution in the country which looks after the development of the cottage industry, small industry and village industry, and other rural industries. It also reaches out to allied economies and supports and promotes integrated development.
(ix) Land Development Banks:
A land development bank is a special kind of bank in India, and is of quasi-commercial type that provides services such as accepting deposits, making business loans, and offering basic investment products. The main objective of the LDB is to promote the development of land, agriculture and increase the agricultural production. The LDB provides long-term finance to members directly through its branches. The history of land development bank is quite old. The first LDB was started at Jhang in Punjab in 1920.
Even though the first LDB was started in Punjab, the real progress began when the land development bank was established in Chennai in 1929. The loans granted by land development bank are repayable within 20 to 30 years. Normally, loans are granted up to 50 percent of the value of the land or up to 30 times the revenue. Loans are granted only after a thorough verification of security title-deeds as well as the necessity for the loan.
(x) Small Industries Development Bank of India:
Small Industries Development Corporations is state-owned companies or agencies in the states of India which were established at various times under the policy of Government of India for the promotion of small sale industries.
(xi) State Financial Corporation:
In order to provide medium and long term credit to industrial undertakings, which fall outside the normal activities of Commercial Banks, a Central Industrial Finance Corporation was set up under the Industrial Finance Corporation Act, 1948.
The State Governments wished that similar Corporations should also be set up in the States to supplement the work of the Industrial Finance Corporation. The intention is that the State Corporations will confine their activities to financing medium and small scale industrial and will, as far as possible, consider only such cases as are outside the scope of the Industrial Finance Corporation.
The State Finance Corporations are the integral part of institutional finance structure in the country. SEC promotes small and medium industries of the states. Besides, SFCs are helpful in ensuring balanced regional development, higher investment, more employment generation and broad ownership of industries.
At present there are 18 state finance corporations (out of which 17 SFCs were established under SFC Act 1951). Tamil Nadu Industrial Investment Corporation Ltd. established under Company Act, 1949, is also working as state finance corporation.
(xii) State Industrial Development Corporation:
It is the industrial and investment promotion agency for the promotion and development of medium and large scale units in the State. As the Nodal Agency for foreign and domestic investments, SIDC provides support for investors, besides processing various incentive schemes and facilitating interaction between the government and the industrial sector. It assists in identifying the infrastructure needs of the State, structuring projects to bridge the gaps and spearheading a balanced growth of the core competencies of the State.
(xiii) Industrial Credit and Investment Corporation of India:
The Industrial Credit and Investment Corporation of India Limited incorporated at the initiative of the World Bank, the Government of India and representatives of Indian industry, with the objective of creating a development financial institution for providing medium-term and long-term project financing to Indian businesses.
ICICI Bank was established by the Industrial Credit and Investment Corporation of India an Indian financial institution, as a wholly owned subsidiary in 1955. The parent company was formed in 1955 as a joint-venture of the World Bank, India’s public-sector banks and public-sector insurance companies to provide project financing to Indian industry.
It offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialised subsidiaries in the areas of investment, life, non-life insurance, venture capital and asset management.
Essay # 4. Conclusion to Development Banks:
Development banks are specialised financial institutions. They provide medium and long-term finance to the industrial and agricultural sector. They are those financial institutions engaged in the promotion and development of industry, agriculture and other key sectors.
The number of development banks has increased rapidly since the 1950s; they have been encouraged by the International Bank for Reconstruction and Development and its affiliates. Development banks may be publicly or privately owned and operated, although governments frequently make substantial contributions to the capital of private banks.
The form and cost of financing offered by development banks depend on their cost of obtaining capital and their need to show a profit and pay dividends. The development banks are better placed to provide funds for development to countries that lack the credit ratings to access capital from the financial markets.