Development Banks 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 important functions of development banks in India.
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; The Development Banks and their topics Features, Functions, and Objectives below are.
Following are the main characteristics or features 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 discuss as follows:
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.
Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to a 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.
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 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, the 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.
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, as learn about 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 the 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.
The main objectives of the development banks are:
Now let’s discuss each important function of development banks one by one.
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 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:
The 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.
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.
Development banks help to promote foreign trade. The government of India started the 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.
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.
The development bank facilitates rural and regional development. They provide finance for starting companies in backward areas. Also, they help companies in project management in such less-developed areas.
The development bank contributes to the growth of capital markets. They invest in equity shares and debentures of various companies listed in India. Also, invest in mutual funds and facilitate the growth of capital markets in India.
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