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Essay on Development Banks

Essay # 1. Importance and Functions of Development Banks:

Development banks are the financial intermediaries which cater to the capital requirements of industries. A development bank is not merely a lending institution. It has to ensure effective and proper utilisation of the financial help which it renders to industrial units.

It can formulate its lending policy in such a manner so as to promote balanced regional development of industries by creation of income and employment in the relatively backward regions of the country.

Functions of a Development Bank:

Within the framework of the traditional lending activities, a development bank can promote industrial development of the country in the following ways:

(i) Optimising the use of scarce resources;

(ii) Achieving a socially desirable product mix;

(iii) Promoting industrialisation in the hitherto backward regions through dispersal of industries;

(iv) Providing technological know-how and expert guidance to the entrepreneurs; and

(v) Promoting the growth of small new and technician- entrepreneurs in the country.

(vi) Preventive concentration of economic power by influencing pattern of ownership of the means of production.

In brief, a development bank performs a variety of functions for promoting the industrial development of the country.

Essay # 2. Role of Development Banking:

(1) Development banks extend credit facilities to industries in two forms:

(a) Loans, and

(b) Underwriting and direct subscription.

Loans are extended both in the form of rupee and foreign currency loans.

Loans constitute about three-fourths of the total assistance provided to industries. Development banks also assist industries by underwriting of new issues, subscription to share capital and debentures, rediscounting of bills and refinancing industrial loans granted by eligible financial institutions.

(2) The share of development bank in financing industrial investment is well over 35 per cent. The total disbursement of assistance amounted to Rs. 31,850 crores in 1994-95.

(3) The development banks have granted loans to both consumer goods and capital goods industries. More than 25 per cent of assistance sanctioned by these banks has gone to the machine manufacturing industry. Textiles and food manufacturing accounted for an assistance of about 18 per cent and 17 per cent respectively in 1994-95.

(4) Although the development banks have extended financial assistance of industries in both public and private sectors but the major thrust to their activities has been financing the capital needs of the private sector. About two-thirds of the total assistance disbursed by these banks has gone to the private sector.

(5) The development banks have given assistance for the establishment of new projects, expansion of the existing projects, modernisation, diversification, etc. A large portion of the total assistance has, however, been provided for the establishment of new projects.

Essay # 3. Growth and Constituent of Development Banks:

In response to the varied and growing needs of the industry, the Government took the initiative to set up development banks immediately after Independence, Today, there are 60 development banks, the important among these are as follows:

1. The Industrial Finance Corporation of India (IFCI) established in 1948.

2. The State Financial Corporations (SFCs), which came into effect in 1952.

3. The National Small Industries Corporation Ltd. (NSIC) established in 1955.

4. The industrial Credit and investment Corporation of India, Ltd. (ICICI) established in 1955.

5. The Industrial Development Bank of India (IDBI) established in 1964.

6. The Industrial Investment Bank of India (IIBI) established in 1971.

In addition to these institutions, the Unit Trust of India, the Life Insurance Corporation of India, the General Insurance Corporation of India also meets the financial requirements of the industry.

Essay # 4. Weaknesses of the Development Banks:

Notwithstanding the significant role played by these development banks in the country’s industrial development, these banks suffer from certain shortcomings which are as follows:

1. The IFCI and the ICICI have promoted the concentration of the economic power by assisting the development of large and medium-large projects.

2. The SFCs have given assistance mostly to medium and small-medium projects, requiring a fairly large investment by way or promoters’ capital.

3. The development banks did not go for intensive technological survey of the borrowing industries which has led to a very high rate of default.

4. Backward regions have been neglected by the financial institutions. As a result, the regional imbalances have further increased.

5. Due to lack of proper co-ordination between different institutions there has been over-financing in the case of some industries.

6. Most of the financial institutions have shown undue interest in the direct market purchase of shares than providing underwriting facilities to the companies.

7. The development banks have not shown adequate interest in the promotion of few entrepreneurial classes.

8. The rate of interest charged by the development banks is very high. High cost of credit has retarded the growth of small enterprises.