Development Bank is essentially a multi-purpose Financial Institution with a broad development outlook. This article explains about Development Banks and with their topics – Features, Functions, and Objectives. The Concept of Development Banks Study as – Features of Development Banks, Functions of Development Banks, and Objectives of Development Banks! The important functions of development banks in India.
Learn, Explain each topic of Development Banks: Features, Functions, and Objectives!
A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities-economic development in general, and industrial development, in particular. In short, a development bank is a development-oriented bank.
Features of Development Banks:
Following are the main characteristic features of development banks:
- It is a specialized financial institution, provides medium and long-term finance to business units.
- Unlike commercial banks, it does not accept deposits from the public, It is not just a term-lending institution. It’s a multi-purpose financial institution.
- It is essentially a development-oriented bank. Its primary objective is to promote economic development by promoting investment and entrepreneurial activity in a developing economy. It encourages new and small entrepreneurs and seeks balanced regional growth.
- They provide financial assistance not only to the private sector but also to the public sector undertakings, It aims at promoting the saving and investment habit in the community.
- It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial facilities.
- Its motive is to serve the public interest rather than to make profits. It works in the general interest of the nation.
Functions of Development Banks:
Development banks have been started with the motive of increasing the pace of industrialization. The traditional financial institutions could not take up this challenge because of their limitations. To help all round industrialization development banks were made multipurpose institutions. Besides financing, they were assigned promotional work also.
Some important functions of these institutions are discussed as follows:
Financial Gap Fillers:
Development banks do not provide medium-term and long-term loans only but they help industrial enterprises in many other ways too.
These banks subscribe to the bonds and debentures of the companies, underwrite their shares and debentures and, guarantee the loans raised from foreign and domestic sources. They also help undertakings to acquire machinery from within and outside the country.
Undertake Entrepreneurial Role:
Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to lack of expertise and managerial ability. Development banks were assigned the job of entrepreneurial gap filling.
They undertake the task of discovering investment projects, promotion of industrial enterprises, provide technical and managerial assistance, undertaking economic and technical research, conducting surveys, feasibility studies, etc. The promotional role of the development bank is very significant for increasing the pace of industrialization.
Commercial Banking Business:
Development banks normally provide medium and long-term funds to industrial enterprises. The working capital needs of the units are met by commercial banks. In developing countries, commercial banks have not been able to take up this job properly. Their traditional approach in dealing with lending proposals and assistance on securities has not helped the industry.
Development banks extend financial assistance for meeting working capital needs to their loan if they fail to arrange such funds from other sources. So far as taking up of other functions of banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no uniform practice in development banks.
Another feature of the development bank’s operations is to take up joint financing along with other financial institutions. There may be constraints of financial resources and legal problems (prescribing maximum limits of lending) which may force banks to associate with other institutions for taking up the financing of some projects jointly.
It may also not be possible to meet all the requirements of concern by one institution, So more than one institution may join hands. Not only in large projects but also in medium-sized projects it may be desirable for a concern to have, for instance, the requirements of a foreign loan in a particular currency, met by one institution and under the writing of securities met by another.
Development banks also extend the refinance facility to the lending institutions. In this scheme, there is no direct lending to the enterprise. The lending institutions are provided funds by development banks against loans extended’ to industrial concerns.
In this way, the institutions which provide funds to units are refinanced by development banks. In India, Industrial Development Bank of India (IDBI) provides reliance against term loans granted to industrial concerns by state financial corporations. commercial banks and state co-operative banks.
The small scale sector is not getting proper financial facilities due to the clement of risk since these units do not have sufficient securities to offer for loans, lending institutions are hesitant to extend the loans. To overcome this difficulty many countries including India and Japan have devised the credit guarantee scheme and credit insurance scheme.
- In India, credit guarantee scheme was introduced in 1960 with the object of enlarging the supply of institutional credit to small industrial units by granting a degree of protection to lending institutions against possible losses in respect of such advances.
- In Japan, besides credit guarantee, insurance is also provided. These schemes help small-scale concerns to avail loan facilities without hesitation.
Underwriting of Securities:
Development banks acquire securities of industrial units through either direct subscribing or underwriting or both. The securities may also be acquired through promotion work or by converting loans into equity shares or preference shares. So development banks may build portfolios of industrial stocks and bonds.
These banks do not hold these securities permanently. They try to disinvest in these securities in a systematic way which should not influence market prices of these securities and also should not lose managerial control of the units. Development banks have become worldwide phenomena.
Their functions depend upon the requirements of the economy and the state of development of the country. They have become well-recognized segments of the financial market. They are playing an important role in the promotion of industries in developing and underdeveloped countries.
Objectives of Development Banks:
The main objectives of the development banks are:
- They promote industrial growth.
- To develop backward areas.
- To create more employment opportunities.
- The generate more exports and encourage import substitution.
- To encourage modernization and improvement in technology.
- To promote more self-employment projects.
- The 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, and.
- To improve the capital market in the country.
The Few important functions of development banks in India are as follows:
- They promote and develop small-scale industries (SSI) in India.
- To finance the development of the housing sector in India.
- To facilitate the development of large-scale industries (LSI) in India.
- They help in the development of the agricultural sector and rural India.
- To enhance the foreign trade of India.
- They help to review (cure) sick industrial units.
- To encourage the development of Indian entrepreneurs.
- To promote economic activities in backward regions of the country.
- They contribute to the growth of capital markets.
Now let’s discuss each important function of development banks one by one.
Small Scale Industries (SSI):
Development banks play an important role in the promotion and development of the small-scale sector. The government of India (GOI) started the 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.
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.
Large Scale Industries (LSI):
Development bank promotes and develops 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 the location of a project, and so on.
Agriculture and Rural Development:
Development banks like the 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.
Enhance Foreign Trade:
Development banks help to promote foreign trade. The 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. Also, encourages abroad banks to provide finance to the buyers in their country to buy capital goods from India.
Review of Sick Units:
Development banks help to revive (cure) sick-units. The government of India (GOI) started the Industrial Investment Bank of India (IIBI) to help sick units. IIBI is the main credit and reconstruction institution for a revival of sick units. It facilitates modernization, restructuring, and diversification of sick-units by providing credit and other services.
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.
Development bank facilitates rural and regional development. They provide finance for starting companies in backward areas. They also help companies in project management in such less-developed areas.
Contribution to Capital Markets:
Development bank contributes to 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.