Development Banks

Concepts:- 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.

Objectives of Development Banks:-

 They promote industrial growth.
 To develop backward areas.
 To create more employment opportunities.
 They generate more exports and encourage import substitution.
 To encourage modernization and improvement in technology.
 To promote more self-employment projects.
 They revive sick units.
 To improve the management of large industries by providing training.
 To remove regional disparities or regional imbalance.
 They promote science and technology in new areas by providing risk
capital.
 To improve the capital market in the country.

Functions of Development Banks:-

1) To Promote and Develop Small-Scale Industries (SSI).
2) To Finance the Development of Housing Sector.
3) To Develop the Large-Scale Industries (LSI).
4) To help in Agricultural and Rural Development.
5) To enhance the Foreign Trade of India.
6) To help to Review (Cure) Sick Industrial Units.
7) To Encourage Development of Indian Entrepreneurs.
8) To Promote Economic Activities in Backward Regions.
9) To Assist in the Growth of Capital Markets.
1) Small Scale Industries (SSI):- Development banks play an
important role in the promotion and development of the small-scale
sector. Government of India (GOI) started Small industries
Development Bank of India (SIDBI) to provide medium and long-term
loans to Small Scale Industries (SSI) units. SIDBI provides direct
project finance, and equipment finance to SSI units. It also refinances
banks and financial institutions that provide seed capital, equipment
finance, etc., to SSI units.

2) Development of Housing Sector:- Development banks provide

finance for the development of the housing sector. GOI started the
National Housing Bank (NHB) in 1988.
NHB promotes the housing sector in the following ways:
 It promotes and develops housing and financial institutions.
 It refinances banks and financial institutions that provide credit to the
housing sector.

3) Large Scale Industries (LSI):- Development banks promote and

develop large-scale industries (LSI). Development financial
institutions like IDBI, IFCI, etc., provide medium and long-term
finance to the corporate sector. They provide merchant banking
services, such as preparing project reports, doing feasibility studies,
advising on location of a project, and so on.

4) Agriculture and Rural Development:- Development banks

like National Bank for Agriculture & Rural Development (NABARD)
helps in the development of agriculture. NABARD started in 1982 to
provide refinance to banks, which provide credit to the agriculture
sector and also for rural development activities. It coordinates the
working of all financial institutions that provide credit to agriculture
and rural development. It also provides training to agricultural banks
and helps to conduct agricultural research.
5) Enhance Foreign Trade:- Development banks help to promote
foreign trade. Government of India started Export-Import Bank of
India (EXIM Bank) in 1982 to provide medium and long-term loans to
exporters and importers from India. It provides Overseas Buyers
Credit to buy Indian capital goods. It also encourages abroad banks
to provide finance to the buyers in their country to buy capital goods
from India.

6) Review of Sick Units:- Development banks help to revive (cure)

sick-units. Government of India (GOI) started Industrial investment
Bank of India (IIBI) to help sick units.
IIBI is the main credit and reconstruction institution for revival of sick
units. It facilitates modernization, restructuring and diversification of
sick-units by providing credit and other services.

7) Entrepreneurship Development:- Many development banks

facilitate entrepreneurship development. NABARD, State Industrial
Development Banks and State Finance Corporations provide training
to entrepreneurs in developing leadership and business management
skills. They conduct seminars and workshops for the benefit of
entrepreneurs.

8) Regional Development:- Development banks facilitate rural and

regional development. They provide finance for starting companies in
backward areas. They also help the companies in project
management in such less-developed areas.

9) Contribution to Capital Markets:- Development banks

contribute the growth of capital markets. They invest in equity shares
and debentures of various companies listed in India. They also invest
in mutual funds and facilitate the growth of capital markets in India.
Categories of Development Financial Institutions:-

National Development Banks:- National Development Banks include

IDBI, SIDBI, ICICI, etc.

Sector-Specific Financial Institutions:- Exim Bank, NABARD, NHB,

etc. are the part of Sector Specific Financial Institutions.

Investment Institutions:- Investment Institutions are LIC, GIC, UTI,

etc.

State-Level Institutions:- SFCs and SIDCs come under the category

of State Level Institutions.

 IFCI:- Industrial Finance Corporation of India(IFCI) is the first

Development Financial Institution of India. IFCI was established in
1948.
 IDBI:- Industrial Development Bank of India(IDBI) was established in
1964 under the Reserve Bank of India(RBI) and autonomy was
granted in 1976. It was made a Universal Bank in 2003. IDBI is
responsible for maintaining adequate credit flow to various sectors.
 ICICI:- Industrial Credit and Investment Corporation of India (ICICI)
Limited was an initiative of the World Bank and was established in the
year 1955. ICICI Bank, the subsidiary company of ICICI Limited was
established in 1994. In 2002, ICICI Limited got merged into ICICI
Bank Limited and became the first universal bank of India. This
became a Financial institution that performed dual function both of a
Commercial Bank as well as Development Financial Institute. It still
remains the only DFI in the private sector.
 NABARD:- On the recommendation of Shivraman Committee
National Bank for Agriculture and Rural Development(NABARD) was
set up in July, 1982. NABARD worked as a refinancing institution. In
 the area of agriculture and rural sectors NABARD acts as the topmost
institute.
 SIDCs:- The State Industrial Development Corporations (SIDCs) are
government enterprises controlled by the state that work to develop
and promote medium and big businesses. The state industrial
corporations engage in the development of financial support as well
as create industrial infrastructures such as industrial parks and
estates. They establish industrial ventures either in partnership with
private enterprises or on their own, along with setting up subsidiaries.
They offer loans to a variety of industrial units in the medium and big
sectors, with interest rates ranging from 13.5 percent to 17 percent,
depending on the loan amount.