UNIT 11 TERM-LENDING FINANCIAL

INSTITBTTl[QNS ALL INDIA -

LEVEL

Structure
11.0 Objectives
11.1 Introduction
11.2 What is a Development Bank ?
11.3 Functions of Development Banks
11.4 Origin of Development Banks
11.5 Industrial Finance Corporation of India (IFCI) '

11.6 Industrial Credit and Investment Corporation of India (ICICI)

11:7 Industrial Development Bank of India (IDBl)
11.8 Other Development Banking Institutions
1 1 .B. I Industrial Reconstruction Bank of India (IRBI)
11.8.2 Small Industries Development Bank c ~ India
l (SIDBI)
11.9 Evaluation of Development Banks in India
1 1.10 Let Ua Sum Up
1 1.1 1 Key Words
11.12 Answers to Check Your Progress
1 1.13 Terminal Questions

11.0 OBJECTIVES
Alter studying this unit, you should be able to:
@ describe the meaning, functions and objectives of development banks
Q discuss the origin of development banks in India
Q explain the working of all India level development banks
@ assess the performance and prospects of developmcnt banks in India.

11.1 INTRODUCTION
In the previous unit you have been introduced to the role of non-bank financial
institutions in India in linking the savers and users of capital. In particular, you have
been exposed to the growth, working and.problems of various non-bank financial
institutions including Life Insurance Corporation of India, General Insurance
Corporation of India, Unit Trust of India and other non-bank financial institutions.
In this unit you will study the meaning, importance and evolution of development banks,
role, functions.and performance of various national level development banks in India.

11.2 WHAT IS A DEVELOPMENT BANK ?

Development banks are special financial institutions established for the supply of
three basic ingredients of development : 1) capital, 2) knowledge, and 3)
entrepreneurship to the industry. They have been set up during the post World War I1
period in both developed and underdeveloped countries. They are designed as a
catalyst for quickening industrial development. In an underdeveloped country, where
there is scarcity of capital and dearth of entrepreneurship, a set of banks which do not
restrict their activity t o the conventional function of providing term capital to the
entrepreneurs are needed.

These banks should also assume a promotipnal role by undertaking potential

industrial surveys, identifying growth projects, and providing technical, managerial
and other assistance to interested entrepreneurs right from the stage of project
uon-nmtklag P l s n d d I I U I ~ ~ ~ ~ I ~ A S formulation to the commissioning and operation of'lhe project. Thua. emerged the
in lndlr
concept of development banks.
According to William Diamond 'a di~vrlopt?rm[ hutik i.\ u lg-hrid in.vrirurion nS1ic-h
c.omhinw it1 i t w u the,fiinc.rion.sof aJ~t~unr-ta
cor/)orurion (mcl u c k ( ~ r ~ i ~ l o / ~ n ~ c ~ t ~ t
corporaiicrn.' A finance corporalion is an institution which is coricerned primarily
with long-term loancapital, while a development corporation is concerned primarily
with equity capital and with fostering and managing specific.companies as well as
providing financidl support.
Thus, development bank is a financial agency engaged in providing medium aad long-
term assistance to industrial undertakings in the form of loans. It guarantees loans in
addition to undertaking of underwriting, knd direct subscription t o shares and
debentures. It also provides technical knowhow and training to entrepreneurs.

11.3 FUNCTIONS OF DEVELOPMENT BANKS

The followink are the functions of development banks:
1) Sdnction of loans : The important function of the most of the development banks
is to provide long-term and medium term loans to industrial concerns. Certain
development banks grant loans in foreign currencies also.
2) Guarantee of loans : They also provide guarantees for loans raised by business
concerns from other solirces. They extend guarantees for deferred payments for .
purchase of capital goods from abroad.
3) Underwriting of industrial securities : Another important function of developme,nt
banks is to underwrite the issue of shares, bonds or debentures of industrial
concerns.
4) Investment in shares and debentures : In addition to underwriting, the
development banks also directly invest in industrial undertakings by subscribing
to their shares and debentures.
5 ) Merchant banking : In the recent past some development banks have estdblished
subsidiary companies, for undertaking various merchant banking activities.
6 ) Development functions : Special financial institutions not only act as term lending
institutions but also as development banks. They formulate projects, conduct
techno-economic surveys, provide training and consultancy to entrepreneurs, and
improve management of industrial units.

11.4 ORIGIN OF DEVELOPMENT BANKS

Although the term 'Development bank' was used for the first time after the Second I

World War, similar type of institutions were in existence in the early part of the 19th
Century in some countries. The first development bank, known as Societe Generale de
Belgique, was established in Belgium to finance commercial and industrial ventures. '
However, its activities did not acouse much interest. ln 1852 French Credit Mobiliser
was established. Later it became1 model for similar investment banks in ~ e r m a n ~ ,
Austria, Belgium, the Netherlandsf , Italy, Switzerland and Spain.
Thelpost-Depression period witnessed. the second phase of development banks dur,ing
which the need to catei for small-scale industries was recognised. Accordingly, special
financial institutions were forqed in several countries.
In India, the first step towards building up a structure of development finance
institutions was taken with the establishment of the ~ndustrialFinance Corporation of
India (IFCI) in 1948. The IFCI was established to provide medium and long-term
credit to units in the corporate sector and industrial co-operatives. A set of parallel, :
financial institutions, known as the State Financial Corporations (SFCs), were set up
a t the State level in 1951 to extend the benefits of long-term loans to medium and -
small sized industrial undertakings in the respective states. The Industrial Credit and
Investment Corporation of India (ICICI) was set up at all India level in 1955 as a
joint stock company with support from the Government of India, the World Bank,
the Commonwealth Development Finance Corporation and other foreign institutions'
. .
 to finance the foreign exchange components of industrial projects particularly in,
private sector.
State level institutions, namely the State Industiial Development Corporations
(SIDCs) were established in the 1960s mainly for pronioting.medium scale industrial
units. The State Small Industries Development Corporations were also established at
state level during sixties for catering to the requirements of small scale units..For co-
ordinating all the development banks at the national and the State levels, the
Government of lndia established an apex institution known As lndustrial
Development Bank of lndia (IDBI) in 1964. The Government of Ifidia in 1990
established Small Industries Development Bank of lndia (SIDBI) as an apex Bank to
meet the needs of small scale units exclusively.
Thus many development banks were set up in India both at the national and
state levels.
Let us now discuss the functions ahd working of the various national level
development banks in Indb (their state level counterparts are discussed in Unit 12).

Check.Your Progress A
1) Which of the following statements are True and which are False?
i) Development banks help in accelerating industrial growth.
ii) Development banks provide medium and short-term financial assistance to
industry.
iii) Industrial undertakings raising loans from sources other than the
devcloprnent banks can avail of the facility of guarantee of the loan.mby
these development banks.
iv) Development banks can directly subscribe to the shares and debentures of
industrial units.
V) Industrial Development Bank of India was the first developmen; bank in
India.
2) Filkin the Blanks :
i) Societe Generale de Belgigue was the ............development bank in the
world.
ii) Development banks extend guarantees for ............ payments for purchase of
capital goods from ............
iii) Development banks I)rovide three basic components of development of
industry. They are ................
. ,.....,.......,,.and ................

11.5 INDUSTRIAL FINANCE CORPORATION

OF INDIA (IFCI)
Industrial Finance Corporation of India (IFCI) is the first development Bink
established in India. It was established in July, 1948 through a Special Act of t&e
Parliament for providing long-term financia1 assistance to large and medium scale
undertakings.
Objectives
The primary object of the formation of this Corporation was to make medibm'and
long-term credit facilities easily available t o the industrial concerns especially in the
areas, where normal bankin4 facilities are inappropriate or 'recourse to capital issue
method is impracticable. It provides financial assistance to those companies or Co-
operative societies that have been registered in the country and a n concerned with
mahufacturing, mining, shipping, hotel etc. It does not provide finance to small scale
industj e s Blid unregistered companies.
1 I

Sourcer dt Funds .- I

Its auth+d capital is Rs. 250 crore. As on 31st March, 1990, its paid-up capital was
Rs. 106 crore. lndustrial Development Bank of India owns 50% of its paid-up capital -
and the balance by scheduled banls, coop~rativebanks, Insurance Corporations,
Investment Trusts, etc. In addition, it borrows from market through bonds, gets loans
from Central Government and obtains foreign credits.
Non-Banklng Financial Insl[tutlons
in India
~ a n a ~ e r n eand
n t Organisation
Industrial Finance Corporation of IndiaN(lFCl) is managed by a Board of I)irectors,
which consists of partly elected and partly nominated directors. The Central
Government appoints the whole-time Chairman of the Board i n collsultation with the
Industrial Development Bank of India (IDBI). The Board consists of the following:
One Chairman - appointed by the Central Gover.nment
Two Directors - nominated by the Central Government
One Director - nominated by the Reserve Bank of India
Three Directors - nominated by Industrial Development Bank of India
Two Directors. - elected by Insurance Concerns, Investment Trusts, etc.
Two Directors - elected by Co-operative Banks.

Functions
Following are the important functions of Industrial Finance Corporation of India:
I ) Granting loans and adyances to industrial concerns and subscribing to debentures
floated by them which are repayable within 25 years.
2) Guaranteeing the loans raised by industrial concerns in the open market or from
scheduled banks and cooperative banks.
3) Underwriting the issue of shares, debentures and bonds by industrial concerns.
But it is required to dispose of these securities within 7 years.
4) Granting loans to industrial concerns.
5) Guaranteeing loans in foreign currency raised by industrial concerns from any
bank or institution in a foreign country. However, prior approval of the Central
Government is required for this purpose.
6) Acting as an agent for the Central Government and for the World Bank with
regard to loans sanctioned by them to industrial concerns in India.
7) Guaranteeing credit purchase of capital goods from foreign manufacturers. With
the approval of the Central Government, the IFCI can guarantee the loans raised
in foreign currency from foreign institutions.
8) Subscribing directly to the shares issued by industrial concerns.
9) Providing assistance under the soft loan scheme to selected illdustries such as
cement, cotton textiles, jute, engineering, etc., to expedite modernisation,
replacement and renovation of their plant and machinery.
10) The IFCI has been undertaking various promotional activities financed out of its
benevolent Reserve Fund and allocations of Interest Differential Funds received
from the Government. The corporation has been emphasising the development of
backward areas and the helping and the developing of small and medium scale
industrial entrepreneurs. It has been providing them with the needed guidance for
the establishment and management of these units,
Performance
Industrial Finance Corporation of India had completed 42 years by June, 1990.
During this period it acted as a pioneer in the provision of industrial t'lnancc.
It sanctioned financial assistance to various enterprises of national importance. The
assistance sanctioned by the corporation since 1970-71 till recently can be observed
from Table 11.1
During the 42 years of its existence, the corporation had sanctioned a net total
financial assistance of Rs. 6,570 crore and disbursed Rs. 4,295 crore. In the recent
past, the sanctions and disbursements of the corporation increased substantially.
During 1988-89 itself it sanctioned Rs.1,005 crore. This itself shows the increasing
importance of the Corporation in the provision of industrial finance in India.
The assistance given by the Corporation in the early years of its establishment mainly
- confined t o traditional industries like sugar, textiles, jute, etc. But subsequently, in
pursuance of the national priorities and objectives, it has extended considerable
assistance in recent years to non-traditional industries like basic metals, fertilisers,
chemicals and a wide range of engineering industries. During 1988-89, the maximum
assistance was sanctioned to the fertiliser industry (Rs. 238 crore) folIowed by the
basic metals (Rs. 161 crore), cement (Rs. 144 crore), electrical machinery (Rs. 134
crore), food products (Rs. 133 crore) and textile industries (Rs. 126 crore). These six
industries together accounted for almost half of the total sanctions. . -, .

There is a little controversy o n the of Industrial Finance Cofporation of

India. If we see the growth of capital, financial assistance sanctioned. and disbursed
 Term-Lmdlnt Financial l I I ~ l i l I I l l o ~ ~
Table 11.1 :,Assistance Sanctioned and Disbursed by IFCI - A l l lndir Level
( R p . i n crorcsj
Year Sanctions Growth rate % Disbursements Growth rate 0/1
1970-7 1 32.3 17.4
1971-72 28.7 (-1 11.1 23.3 33.9 - j

-
1972-73 45.7 59.2 28.0 20.2
1973-74 41.9 (-) 8.3 31.9 13.9
1974-75 29.2 (-) 30.3 37.0 16.0
1975-76 51.3 75.7 34.7 (-) 6.2
1976-77 76,6 , 49.3 54.9 58.2
1977-78 1 13.4 48.0 57.5 4.7
1978-79 138.5 22.1 73.5 27.8
1979-80 137.9 (-) 0.4 91.0 23.8
1980-8 1 206.6 49.8 108.9 19.7
1981-82 218.1 5.6 169.4 55.6
1982-83 230.2 5.5 196.1 15.8
1983-84 321.9 39.8 224.5 14.5
1984-85 415.4 29.0 272.9 21.6
1985-86 499.2 20.2 403.9 48.0
1986-87 798.0 59.9 451.6 , 11.8
1987-88 1025.1
- 28.5 660.0 46.1
1988-89 1095.6 85.9 1005.3 52.3
Cumulative
upto March
1989 6569.8 4295.3 -
Source : IDBI, Report on Development Banking in I'ndia, 1988-89, p. 22.

and also its profits, its performance is impressive. But we get a different picture when
we go deep into its operations. Many criticised the working of the corporation on the
following grounds.
I ) Despite the fact that the assistance to the backward regions h~ shown a
remarkable increase in recent years, a sizeable portion of this assistance has been
confined'to the backward projects of developed stqes. It is difficult to justify
financial assistance to underdeveloped 'areas in developed states like Maharashtra,
Gujarat, etc., on par with the ones'located in backward states like Assam, Orissa,
Kerala, Rajasthan, Madhya Pradesh, etc.
2) Another criticism on the working of the Corporation is that it offered fiqancial
assistance to big concerns which could easily raise resources from the capital
market.
3) It is failing in exercising its control over defaulting borrowers.

11.6 INDUSTRIAL CREDIT A N D INVESTMENT

CORPORATION OF INDIA (ICICI)

'
Industrial Credit and lnvestment Corporation of India (ICICI) was the secorld all-
India level financial institution to be established in India. It was established in
January 1952. Unlike other development banks in India, this is a privately owned and
operated corporation. The World Bank played a crucial role in the establishment of
this 'Srparation.
Objectives
The following are the objectives of the corporation.
I) To provide financial resources to industrial concerns for their promotion,
development and modernisation.
2) To encourag:: ,nflow and participation of foreign capital in the private sector
units.
3) To encour,age private ownership in industrial hvestnlent and to increase the scope,
of investment market. ,
~ 23
 Resources
The authorised capital of lClC1 is Rs. 200 crore. The issued capitai of lCICl as o n
March 31, 1990 was Rs.91.56 crore. Borrowings constitute a major sourct: for ICICI.
Its borrowings included those from the Government of India, the world Ballk, the
Development Loan Fund (now merged with the Agency for International
Development), ereditanstaltfur-Wiede~auau(an agency of the Government ot
Federal Republic of Germany), the British Government and Industrial Developmel It
Bank of India.
Management
Ownership and management of ICICI is vested in the hands of a Board of Directom
consisting 12 directors. The Chairman and a managing director will be appointed by
Government of India after consulting Industrial Development Bank of India.

Types of Assistance
The following are the vari6us types of financial assistance available from ICICI.
1) It provides loans repayable over a period of 15 years.
2) . It provides finance through equity participation, .
3) It sponsors and underwrites new issues of shares and other securities.
4) It makes funds available for investment by revolving investment as quickly as
possible. .
5) I t guarantees loans from private investment sources.
6) It provides loans i n foreign currency to import capital equipment.
7) It furnishes managerial, technical and administrative services to the industry.
8) It undertakes promotional activities with a view to fostering growth in the
backward areas.
Performance
ICICI is the only Corporation which specialises in securing assistance for industrial
securities from abroad. It is helping in a significant way for setting up of industrial
units in private sector. During the last 35 years its financial assistance to the private
corporate sector was substantial. As shown in Table 11.2, the cumulative financial
assistance sanctioned by the Corporation upto March 3 1, 1989 amounted to Rs. 9,313

Table 11.2 : Assistance Sanctioned and Disbursed by ICICI

(Rs. in crores)
I
i

Year Sanctions Growth Rate % Disbursements Growth Rate %

1
, 1970-71 43.9 - 28.9
1971-72 39.7 9.6 30.3 4.8
1972-73 49.4 24.4 , 39.7 31.0
1973-7.4 61.1 23.7 43.5 9.6
1974-75 62.9 2.9 45.4 4.4
1975-76 78.6 25.0 61.1 34.6
1976-77 98.7 25.0 67.3 10.1
I
1977-78 108.3 9.7 91.6 36.1
1978-79 182.8 68.8 109.2 19.2
1979-80 204.3 11.8 135.8 24.4
1980-8 1 . 314.1 53.7 185.3 36.5'
198 1-82 302.4 (-) 3.7 264.7 42.8
1982-83 392.1 29.7 282.2 6.6
1983-84 507.6 29.5 334.2 18.4 .
1984-85 620.7 22.3 392.7 17.5
1985-86 708.2 14.1 482.2 22.8
1986-87 11 18.3 57.9 695.5 44,2
1987-88 1283.3 . 14.8 77'1.2 10.9
1988-89 2056.1 60.2 1085.6 40.8 .
Cumulative
upto March ,

1989 9313.3 - 6445.0 -

-
I
Source : 10~1,
Report o n Development Banking in India, 1988-89, p. 28.
 crore and disbursements to Rs. 6,445 crore. In the recent past, the corporation Ttwn.LenJing Flnsntlal inrlnullom
-All indl9 Level
increased its assistance. It sanctiolled Rs. 2,056 crore and disbursed
RS. 1,085 crore during 1988-89 itself.

Of the total sanctions of Rs. 2,056 crore during 1988-89, rupee loans amounted to
RS.1,400 crore followed by Rs. 539 crore in foreign currency loans, Rs. 19 crore for
underwriting and direct subscription and Rs. 7.9 crore for guarantees.

1
L
The major recipients of the financial assistance from the corporation are the non-
traditional industries, such as chemicals, petro-chemicals, heavy engineering and
metal products. While coming to the state-wise assistance, Maharashtra, Gujarat,
Utiar Pradesh, Tamil Nadu and Andhra Pradesh received substantial assistance from
this institution. However, in the recent past, the assistance to underdeveloped states
! like Orissa, Mimachal Pradesh, etc., increased substantially.
1

I During the year 1988-89, new projects continued to receive rnaaimum assistance. But
assistance to expansion/diversification schemes recorded the highest growth. While
coming to the sector-wise analysis, the private sector received maximum assistance
(84%) followed by joint sector (li.9%), cooperative sector (2.3%) and public sector
I (0.9%)
ICICI had been playing a very important role in providing financial assistance to the
industrial units particularly in private sector. Its pioneering work as the underwriting
institution in this country has been widely acclaimed. The provision of foreign
currency loans is another area where the corporation has distinguished itself.

Despite the above achievements, the 'working of the corporation has been criticised
due to the following reasons :
1) The ICICI has been concentrating in providing financial assistance to a few
industries like chemicals, textiles, cement, fertilisers, etc.
2) It is not working towards effectively balanced regional development of the country
as per national priorities. For instance, of the cumulative financial assistance
i, sanctioned upto the end of March, 1989, 23.4% went to Maharashtra followed by
Gujarat (14.8%), Uttar Pradesh (9.8%), Tamil Nadu (8.7%), and Andhra Pradesh
(8.1%). It means that around 65% of the total assistance sanctioned (Rs.7,923
crore) by the Corporation since its inception went to these five developed States.
3), It has been assisting only larger units in private sector contrary to the policy of
the Government.

Check Your Progress B

i 1) Fill in the blanks :
i) Main objective of creation of IFCI was to provide ..............and ..............
/ term financial assistance.
ii) The IFCI acts as agent for the loans sanctioned by the ..............government
and the ............................
iii) The authorised capital of ICICl is Rs. ..............crore.
2 ) State whether the following statements are True or False.
I
i) ICICl is the only corporation that specialises in securing financial assistance.
for industrial securities from abroad.
ii) The World Bank p l a y d a cl.ucial role in the establishment of IFCI.
iii) The financial assistance provided in the initial years of the establishment of
IClCI mainly confined to traditional industries like sugar, jute, etc.
iv) I F a I has financed to promotional activities from its Reserve Fund and
Interest Differential Funds.
v) IFCI has been providing soft loans for modernisation, replacement and
renovation of plant and machinery.
I
i 11.7 INDUSTRIAL DEVELOPMENT BANK OF INDIA
I (IDBI)
industrial Development Bank of Iridin had come into existe~lcein .luly 1964 b) an Act
of Parliament. This ~ a n k ' w a sa wholly owned subsidiary of the Reserve Bank ot'
India. Since 16th February. 1976. it has been delinked from the RBI and, made iin
autoliomoiis corporatiom. This was done mainly to enlarge its rolc as an apex
 financial institution t o achieve effective coordination among all the financial
institutions in the country.

Objectives
The principal objective of setting up the IDBI was to make a coordinated effort to
achieve maximum industrial growth. The overall activities of the Bank may be
classified into three broad categories namely, coordination, financing and promotion.
The objectives of the bank are summarised below :
1) To serve as an apex institution for term finance for industry.
2) To coordinate working of institutions engaged in financing, promoting or '
developing industries and to assist the development of these institutions.
3) To provide term finance to industry. 1
4) To plan, promote and develop industries to fill gaps in the industrial structure of
the count~y.
5) To provide technical and administrative assistance for promotion and expansion
of industry.
6) To undertake market and investment research and surveys as also technical and
economic studies in connection with the development of industry.
7) To act as lender of last resort to finance projects that are in conforxnity with
national priorities.
Resources
As o n March, 1989 its authorised capital was Rs. 1,000 crore, while its paid-up capital
stood at Rs. 540 crore. Its reserves as on date accounted fcfr Rs. 608 crore. Besides
securing loans from RBI, Central Government, foreign sources, it also secured funds
from internal capital market.
Management and Organisation
The management of the IDBI is vested in a Board of Directors consisting of 22
directors including a full-iime Chairman-cum-Managing Director appointed by the
Central Government. The other Board members comprise a representative of the
Reserve Bank of India, two officials of the Central Government, 5 representatives of
financial institutions, 6 representatives of public sector'banks and SFCs, 2 employees
of financial institutions, and 5 persons with special knowledge and professional
experience, nominated by the Government of India.
The Board has constituted an Executive Committee consisting of ten directors .
including the Chairman and Managing Director. The Board of Directors deal with the
overall policy matters and the Executive Committee deals with proposals for the
sanction of financial assistance and other matters.
The central office ofthe bank is located in Bombay. It has five regional offices at
Calcutta, Delhi, Madras, Bombay, and Ahmedabad. Besides these regional offices,
the IDBI has eleven branches at Bangalore, Bhopal, Bhubaneswar, Chandigarh,
Cochin, Hyderabad, ~ a i b u rJammu,, Kanpur, Patna and Simla.
\i
Functions
The following are the functions of IDBI:
1) Direct financing : It provides direct financial assistance to industrial concerns by
giving them long-term loans and advances.
2) Guaranteeing of loans : It guarantees loan? raised by industrial concerns in the ,

open market or from banks or other financial institutions.

3) Acceptance and discounting of bills : It accepts, discounts and rediscounts bills of
exchange, promissory notes, hundis, etc., of industrial concerns.
4) Direct subscriptions and underwriting : It subscribes to shares, bonds, and
debentures issued by industrial concerns. It also underwrites such issues.
5) ~ e f i n a n c i :n It~ provides refinancing facilities to scheduled banks arid other
financial institutions. Its refinances include: I) loans between 3 to 25 years
granted by IFCI, SFCs o r any other financial institution, 2) loans between 3 to 10
years'granted by a scheduled or a cooperative bank to any industrial concern,
3) export loans between 6 months to 10 yearagiven by a scheduled bank or a co-
operative bank or any other financial institution.
6) Promotional activities : It provides and arranges technical and managerial
assistance for an industrial concern (or person) for promotion, management or
expansion of any industry. It is also entrusted with the responsibility of planning,
 promoting and devel~pingindustries with a vicw to filling gaps in the industrial
structure.
7) Other functions : It undertakes research and surveys in thc l'iclds of marketing
and ir~vestment.It may establish subsidiaries to carry out its functions and
undertake any business which the Cent~.alGovernment may ask it to undertake.
I
pedormance
The Industrial Development Bank of India is the leading development bank of India.
Its progress. if judged by its operations, has really been spectacular all through but
more so during recent yea'rs. Let us now discuss the various activities of the bank
under the following headings.
The total Financial assistance sanctioned and disbursed by fhe bank since its inception
can be observed From Table.ll.3. It can be seen from the table that the IDBl's
cumulative assistance upto thc end of March. 1989 reached to Rs.34,400 crore. During
the same period the bank disbursed Rs. 25,112 crore. The assistance sanctioned and
disbursed for the latest three years is significant. During 1988-89 it sanctioned
Rs. 7,117 crore and disbursed Rs. 4,746 crore.
Industry-wise analysis of financial assistance saqctioned by IDBl reveals that the
services industry received major (17%) share in cumulative assistance
sanctioned upto March, 1989 followed by Textiles ( I 2.8$:), electricity generation
(10.69:). miscellaneous chemicals (6.6%), fertilisers (6.6%)).and food products (5.5'3i).

Table 11.3 : Assistance Sanctioned and Disbursed

([is, in crores)

Year Sanctions Cirowth rate 9;) Disbursements Growth rate %

1964-65 28.6 - 20.7 -
1970-71 69.6 - 57.6 --
197 1-72 148.9 1 13.9 80.1 39.1
1972-73 96.6 (-) 35.1 81.7 2.0
1973-74 167.0 72.9 137.0 67.7
1974-75 253.7 51.9 203.1' 48.2
1975-76 304.6 20.1 223.5 10.0
1976-77 539.6 77.1 341.4 52.8
1977-78 679.5 25.9 4 10.3 20.2
1978-79 724.8 , 6.7 618.1 50.6
1979-80 1131.9 56.2 752.9 21.8
1980-81 1291.2 14.1 1014.1 34.7
1981-82 1549.8 20.0 1217.9 20.1
1982-83 1800.2 16.2 1498.5 23.0
1983-84 2303.4 27.9 1774.3 18.4
1984-85 3342.0 45.1 2073.7 16.9
1985-86 3517.2 5.2 2783.9 34.2
1986-87 4427.0 25.9 3205.9 15.2
1987-88 479 1.3 8.2 3613.6 12.7
1988-89 71 17.6 48.6 4745.8 - 31.3
Cumulative
upto
March 1989 34400.4 - 25 112.2 -
-
Source : IDBI, Report on Development Banking in India, 1988-89, P. 17.
A few developed States contillued to receive major portion of the assistance
sanctioned by the Bank. During 1989-90 Maharashtra (Rs. 737 crore), Gujarat
(Rs. 845 crore), Tamil Nadu (Rs. 722 crore), Uttar Pradesh (Rs. 784 crore), Andhra
Pradesh (Rs. 552 crore) and Rajasthan (Rs. 523 crore) received 60% of the total
assistance sanctioned by IDBI. In fact, out of Rs. 32,942 crore cumulative assistance
sanctioned, 61% went to these states only. However, in the recen past, the bank
extended its assistance substantially to backward areas. ,
Assistance sanctioned to private sector projects accounted for three-fourths of the
cumulative sanctions as at the end of March, 1989. Public enterprises,
-.
on the other
. - - -
 hand, received Rs. 5,797 crore followed by joint sectqr Rs. 1.895 crore and co-
operative sector Rs. 675 crore.

The role of lDIt1 in Nation Development

As an apex bank, the 1DB1 has been playing a very important role in the nation
building activities. Its contribution is noteworthy particularly from the following:
I) Creation of more emplloyrhent opportunities : The Bank has given a big impetus
to creation of employment opportunities in the country. As a result of the
assistance given by it to the enterprises, about 84.7 lakh jobs were created so far
since its inception.
2) Assista~lceto weaker units : It is specially helpful to industrial concerns which, for
one reason or another, find it difficult to raise finance through normal channels.
3) Development of small-scale units : The Bank took special interest, for the
development of small-scale sector in India until the establishment of small
Industry Development Bank of India in 1990. It played crucial role in the
establishment of this apex level institution for solvil~gthe problems of small-scale
sector.
4) Assistance to 11ew entrepreneurs : Inaddition to the grant of finance on libcral
terms, it has done a lot to discover and encourage new entrepreneurial talent in
the country. It provided a wide variety of services to the new entrepreneurs in
addition to training facilities.
5) Sponsering of technical consultancy organisations : The bank has sponsored eight
Technical Consultancy Organisations (TCOs) in different parts of the country.
The TCGscater to the needs of new and small entrepreneurs in areas such as
project identification, project formulation, market surveys and various reports.
They also provide technical and managerial assistance. The TCOs are also
making efforts to identif'y new entrepreneurs and provide training facilities to
them.
6) Development of backward regions : The bank has channelled a substantial
portion of its funds to industries established in backward regions. It is taking
active role in correcting regional imbalances in the industrial development of the
country.
7) Soft loan scheme : The Bank provided soft loans to industrial units in selected
industries, namely Cotton textiles, Jute, Cement, Sugar and Engineering. Under
the soft loan scheme the IDBI sanctions loans to industrial units of these
industries to bring about the much neglected modernisation, replacement and
renovation of plant and machinery.
8) Coordination between term lending institutions : It has brought about effective
cooperation among the term-finance institutions in the country. The proposals
for finance put up by industrial concerns are now jointly appraised, processed and
financed. As a result, there is no overlapping of activities, risks are diversified,
and financing is in tune with the national priorities.

Criticism
IDBI achieved tremendous growth in loan sanctions, d i s b u I ~ m e n t sassistance
, to
small sector, assistance to backward areas during the period between 1964-65 and
1988-89. However, if we look at the things closely, we notice certain gaps-in the
activities of IDBI.
1) Fall in disbursements : There was a steady growth in the loans sanctioned by
IDBl in the 1980s. As against this, there was a declining trend in disbursements
duriag the same pe&od. For instance sanctions as a percekage of total was 56.0%
in 1980-81 which increased to 62.4% by 1984-85 as against a decline from 44% t o
37.5% in the case of disbursements during the same period.
2) Inadequate care on the development o f backward areas : IDBl is criticised for its
lenience towards backward areas of developed states than the backward,states
themselves. FO; instance, of its'total a ~ ~ i s t a n 46.8%
ce was shared by b u r
developed states, Maharashtra (l,3.5%), Gujarat (12.2%) Uttar Pradesh (I 1.0%)
and Tamil Nadu (10.1%) by March, 1989. As against this, nine backward states
received 2.4% only. Further, none of the backward states could get more than 1%
in respect of percentage of total assistance of IDBI.'
3) Urban culture : Si,nce its head office, regional offices and branch offices are at
28 metropolitan cities and State Capitals, it developed elitist and urban culture.
 4) Delay in disposal of applications : It is said that IDBI takes unduly long time-in
appraising and processing the applications for financial assistance received from
industrial concerns.
5 ) No links with outside agencies : It has not made adequate efforts to establish close
links with the outside agencies like Asian Development Bank, World Bank and
other such International agencies.

11.8 OTHER DEVELOPMENT BANKING

INSTITUTIONS
Besides IFCI, ICICI and IDBI, there are some other development banking
institutions at national level. They are Industrial Reconstruction Bank of India and
Small Industries Development Bank of India. Now let us discuss about these two
institutions in detail.

11.8.1 Industrial Reconstruction Bank of India (IRBI)

'The Industrial Reconstruction Bank of India (IRBI) was established as a statutory
corporation on 20th March, 1985 to take over the operations of the Industrial
Reconstruction Corporation of India (IRCI). Its main objective is to function as the
principal credit and reconstruction agency for the revival of sick industries. Another
important objective is to bring coordination among various agencies working for the
revival of such units. Its management is vested in the hands of Board of Directors
with one Chairman and Managing Director and 12 directors. All of them are
appointed by Government of India. Its authorised capital was Rs. 200 crore, while its
paid up capital was Rs. 98 crore as on Jurk 1988. It has the privilege to receive interest
free loans from Central Government to the tune of Rs. 80 crore every year. It can also
raise foreign loans guaranteed by Government of India.
The following are the functions of IRBI :
1) It can take over the management of sick industrial units, lease them out, sell them
as running concerns or prepare schemes for reconstruction by scaling down the
8 .

liabilities.
2) ~tcan also assist and promote industrial development by granting loans and
advances and also by subscription and underwriting of shares and debentures.
3) Its range of activities also includes services like provision of infrastructure
facilities, consultancy, managerial and merchant banking activities.
Performance
It sanctioned Rs. 208.7 crore during 1988-89 as against its disbursements of Rs. 116.5
tcrore. As shown in Table 11.4, till June, 1988 it assisted 535 units with Rs. 522 crore.
,If we take industry-wise, cotton textiles (14.8%) received a major share of funds,
followed by paper and paper products (6.1%) and Steel (5.6%). West Bengal (Rs. 219
crore) stood first in receiving financial assistance disbursed from IRBI, followed by
Maharashtra (Rs. 55 crore) and Gujarat (Rs, 50 crore) by June, 1988.
-
By June 1988, of the total 535 units assisted by IRBI, production of 257 units
accounted for Rs. 6,362 crore and sales Rs. 6,450 crore. Thus, it has rendered a lot in
remaining the sick units.

. - able 11.4 Loan Sanctions and Disbursements of IRBI

(Rs. in crores)
J,

year Sanctions Disbursements

?

I986-87 148.9 94.6

1983-88 186.5 101.9
i988-89 208.8 116.5
Cumulative Total
till 31.3.1989 912.2 624.1
Source : IDBI, Report on Development Banking in India, 1988-89.
 Inspite of its coqtributions, IRBI is also being criticised because of the following
reasons :
i) It was alleged that the assistance is given only to a set of selected industries like
engineering and textiles. Nearly two-thirds of IRBl's assistance was taken away
by these industries.
ii) There was a wide gap between sanctions and disbursements. On average, only
55% of the loans sanctioned were being disbursed.
iii) It is considering only a fraction of the total applications. Hence many
applications are pending unsettled.

11.8.2 Small Industries Development Bank of lndia (SIDBI)

Small Industries Development Bank of lndia (SIDBI) was set up as a wholly-owned
:..bsidiary of lDBl under the Small Industries Development Bank of lndia Act, 1990.
It is the principal financial institution Tor promotion, financing and development oT
small-scale industries. It is also expected LO co-ordinate the ]'unctions of existing
institutions engaged in similar activities. SlDBl commenced its operations on April 2.
1990 and has takenover from IDBI the responsibility of administering the Small
lndustries Development Fund and the National Equity Fund.

11.9 EVALUATION OF DEVELOPMENT BANKS IN

INDIA
All lndia financial institutions (AlFls) viz., IDBI, 1FC1, lCIC1, LIC, GIC and UTI
have made rapid progress in their operations in recent years. Over the years, AlFls
have emeried as major catalysts Tor channelising development finance to industry and
related sectors. New and innovative schemes have been devised.

The data relating to sanctions and disbursements made by all financial institutions in
lndia is presented in Table 1 1.5. It can be seen from the table that the aggregate
sanctions and disbursements oT loans by development banks had witnessed a steaay +

increase over the years. During the period 1948-64, aggregate assistance sanctioned by
them was to the order of' Rs. 458 crore. Assistance sanctioned increased from Rs. 118
crore in 1964-65 to Ks. 177 crore during 1969-70. Particularly there was a s'pectacular
growth in their sanctions and d~sburscnientsdurrng the 1980s. Thus, loans sanctioned
had touched Rs. 13.722 crore during 1988-89. Their cumulative sanctions till March
1989 accounted for Rs. 59,104 crore. Same trend is noticed in respect of their
disbursements also. Thus, their disbursements which stood at Rs. 91 crorr in 1964-65,
shot up to Rs. 8,375 crore during 1988-89. Their cu~nulativcdisbursements till March.
1989 were to the order ol' Rs. 42.1 12 crore.

Table 11.5 : Assistance Sanctioned and Disbursed by AlFIs

(Rs. in crores)

Year Sanctions Growth Rate % Disbursements Growth Rate R

1980-8 1 2293.5 .- 1599.6 -
1981-82 2367.1 3.2 1826.2 14.2
1982-83 2907.2 22.8 2 152.2 17.9
1983-84 372 1.4 28.0 . 2687.3 24.9
1984-85 503 1.9 35.2 3 180.1 18.3
1985-86 5942.9 18.1 4552.9 43.2
1986-87 7237.6 21.8 5204.0 . 14.3
1987-88 8579.3 18.5 6233.5- 19.8
1988-89 13722.8 60.0 8375.3 34.4
Cumulative
upto March
1989 59103.8 - 421 12.5 -
Source : IDBI, Report on Development Banking in. India, 1988-89 p. 1 I .
 critical .Appraisal Tcrm-Lrndlng Flnanclal Institutions
-All lndls Levri
1 financial institutions suffer from the following weaknesses :
~ 1 India
1) Procedural delays : Due to complicated procedures involved from the stage of
application till the final stage of disbursement of loans, inordinate delays are
taking place. Cost of the projects are tilting away by the time the loan received.
As a result, the beneficiary units are drastically affected.
2) Urban and elite culti~re: Since ail the offices (head offices, regional offices and
branch offices) of all development banks are located at metropolitan cities and state
capitals, their staff have no access to rural and backward areas.*They had no
opportunity to understand the problems of those areas. On the other hand, they
develop some sort of urban and elite culture, w h ~ c hdefeats the very purpose for
which they are started in a country like India. .
3) Bias towards developed states : Almost all development banks extended assict, a dnce

to forward states like Maharashtra, Gujarat, Tanlil Nadu and West Bengal
instead of assisting backward states like Assarn, Orissa, Meghalaya, Arunachal
Pradesh, Tripura, Mizoram, S i k k i n ~and Nagaland. This is perhaps due to
absence of infrastructural facilities. But it is to be noted that as long as financial
assistance is not provided for industrial units, there is very little scope to develop
infrastructural facilities.
4) Overdues : Overdues of developnlent banks are increasing day by day and they
have reached an alarming stage. Of the amounts given as loans, nearly one-third
are standing as overdues inspite of several legal measures.
5) Paucity of funds : Yet another problem of development banks is paucity of funds.
Obligations are many but resources are limited. Further, Governments are unable
to extend their helping hand due t o obvious reasons. As a result of growing
inflation and increasing industrial activity, their limited resources could not meet
the growing demands.
6) Coordination : In spite of IDBI's efforts, they lack coordination in
the course of their activities with each other. As a result, duplication of work,
contradictions in procedures, etc., are taking place.

Check Your Progress C

I) State whether the following statements are True or False.
i) IDBI is the apex i~lstitutionof term finance in India.
ii) The paid-up capital of IDBI on March 1989 stood as Rs. 1,000 crore.
iii) The Board of Directors of IDBI deals with proposals for sanction of
financial assistance.
' iv) IDBI is also entrusted with the responsibility of planning, promoting and
developing industries with a view to filling gaps in the industrial structure.
v) IDBI is also entrusted with the responsibility of planning, promoting and
developing industries with a view to filling gaps in the industrial structure.
vi) IDBI has sponsored eight Technical Consultancy Organisations.
vii) IDBI is the principal agency for promoting small scale industry.
viii) Disbursement as a percentage of loan sanctioned has declined lately in case
of IDBI.
ix) IDSI's activities have hampered the growth of new entrepreneurial talent.
x) IDBI also undertakes surveys in the field of investment.

11.110 LET US SUM UP

Development banks are a special kind of institutions which are a combination of a
finance corporation a n d a development corporation. These development banks are
' established to supply three basic ingredients to industry : I ) capital, 2) knowledge and
I 3) entrepreneurship.

i Though origin o f development banking may be traced to the early 19th century, it
j came up in its modern form after the World War 11. The first development bank
I established in India was the Industrial Finance Corporation of India. It was
established in 1948, followed by State Financq Corporations. Subsequently ICICI,
IDBI, SIDC and S I D B I have been established.
[

The primary objective of IFCI is to provide medium and long-term credit to industrial
i units. In addition, it guarantee; the loans, underwrites the issue of sllares, debentures
i
 H 1 m ~ I a n 4 I Flnmdal
n~ lmthvllon~ and bonds and subscribes directly to the shares issued by industry. During its 42 years
In lndle
of existence the IFCI has sanctioned about Rs. 6,600 crore out of which Rs. 1,005
crore have been sanctioned only during 1988-89. Though the performance of IFCI has
been good, yet it is criticised for providing resources to big concerns, and primarily to
backward areas within advance states.
The ICICI was established in 1955 as privately owned and operated corporation. Its
two main aims, besides the normal aims of a development bank, are to encourage
foreign capital participated in the private sector and to encourage private investment
in industry. It provides the facilities of loans, underwriting, guaranteeing and equity'
participation. The non-traditional industries were the major beneficiaries o'f ICICI.
This Corporation has significantly contributed to the growth of private industrial
financial assistance to a few industries and geographical regions.

The IDBI was established in 1964 as a wholly owned subsidiary ofihe RBI. But it was
made autoQomous in 1976,and was asked to play the role of an apex financial
institution. It provides term finance, technical and administrative assistance, and co-
ordinate working of those institutions that 2re engaged in financing and promoting
industries. It also acts as a refinancing agency for scheduled banks and other financial
institutions. In terms of financial assistance sanctioned and disbursed, the
performance of ID01 has been quite impressive. However, developed states like ,
Maharashtra, Gujarat, Tamil Nadu, etc., received the major share of financial
assistance. About 75% of assistance went to private sector. However IDBI has
contributed significantly by helping weaker industrial units, devkloping small scale
units and channelising funds for the development of backward areas.
IRBI was established to help in the revival of sick industries in India. Though it ,
played a significant role in reviving sick units, it has been criticised for'giving
assistance to only a set of selected industries, slow working and the wide gap between
sanctions and disbursements. The SIDBI was established in 1990 to promote, finance
and develop small scale industries.

11.11 KEY WORDS

Authorised Capital : The amount of share capital in the memorandum of association
and the articles of association of a company as required by the Companies Act.
Development Bank : A financial agency engaged in providing medium and long-term
financial assistance to industrial undertakings in the form of loans.
Paid-up Capital : That part of the issued capit;l of a company that has been paid-up
by the shareliolders. I

11.12 ANSWERS TO CHECK YOUR PROGRESS

A 1) i)True ii) False iii) True iv) True v) False
2) i) earliest ii) deferred; abroad iii) capital, knowledge, entrepreneurship.
B 1) i) medium; long ii) Central; World Bank iii) 200
2) i) True ii) False iii) False iv) True v) True
C 1) i) True ii) .False iii) False iv) True v) True vi) True vii) False'viii) True ix) False
x) True

11.13 TERMINAL QUESTIONS

1) What do we mean by term lending? Discuss the role of special institutions that
have been established recently in India with a view to solve the problem of ierm
finance.
2) Critically examine the role of Industrial Development Bank of India as an apex
institution.
3) Review the objectives and achievements of the Industrial Credit and Invest'nient
Corporation of India.
 \
T ~ ~ . F iLn m d~d hankm
~ I ~ ~
4) Has Industrial Finance Corporation of India become irrelevant recently given thr - AR ID& Lnd
emergence of a number of specialised financial institutions in India? Discuss.
\\