Categories: Banking Content

Lending procedures and Role of development banks

A development bank is a “bank” established for “financing development”. They provide medium and long-term finance to the industrial and agricultural sectors. This article explains the Lending procedures and Role of development banks, and some points also highlight. They provide finance to both the private and public sectors. Also, 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.

Here are the explain the Lending procedures and Role of development banks.

As per banking subject, “Development banks are financial institutions established to lend (loan) finance (money) on the subsidized interest rate. Such lending is sanctioned to promote and develop important sectors like agriculture, industry, import-export, housing, and allied activities”.

Features of development banks:

A development bank has the following features or characteristics:

  • A development bank does not accept deposits from the public like commercial banks and other financial institutions who entirely depend upon saving mobilization.
  • It is a specialized financial institution that provides medium-term and long- term lending facilities.
  • It is a multipurpose financial institution. Besides providing financial help it undertakes promotional activities also. It helps enterprises from planning to the operational level.
  • The objective of these banks is to serve the public interest rather than earning profits.
  • Development banks react to the socio-economic needs of development.
  • It provides financial assistance to both private as well as public sector institutions.
  • The role of a development bank is of gap filler. When assistance from other sources is not sufficient then this channel helps. It does not compete with normal channels of finance.

Objectives of Development Banks:

A development bank has the following objectives;

  • Lay Foundations for Industrialization.
  • Meet Capital Needs.
  • Need for Promotional Activities, and.
  • Help Small and Medium Sectors.

Functions of Development Banks:

A development bank has the following functions;

  • Financial Gap Fillers.
  • Undertake Entrepreneurial Role.
  • Commercial Banking Business.
  • Joint Finance.
  • Refinance Facility.
  • Credit Guarantee, and.
  • Underwriting of Securities.

Lending Procedures of Development Banks:

Development banks follow a procedure for evaluating a proposal for a project. The basic objective is to check whether the applicant fulfills various conditions prescribed by the lending institution and the project is viable. The acceptance of a wrong proposal will result in the wastage of scarce resources.

We also study their Role, but first Development banks have the following Lending Procedures;

  1. Project Appraisal and Eligibility of the Applicant.
  2. Technical Appraisal.
  3. Economic Viability.
  4. Assessing Commercial Aspects.
  5. Financial Feasibility.
  6. Managerial Competence.
  7. National Contribution.
  8. Balancing of Various Factors.
  9. Loan Sanction.
  10. Loan Disbursement, and.
  11. Follow up.

Now, explain each one;

Project Appraisal and Eligibility of Applicant:

Every financial institution serves a particular area of activity or there are certain limits prescribed beyond which they cannot go. Before processing the application, it is important to find out whether the applicant is eligible under the norms of the institution or not.

The second aspect which is looked into is to determine whether the enterprise has fulfilled various conditions prescribed by the government. In case some license is required from the government. It should have been taken or assurance is received from the licensing authority.

After satisfying these preliminary issues the project is appraised by a team of technical financial and economic officers of the institutions from various discussions with the promoters and clarifications sought on various points.

The bank institution considers financial assistance in the light of;

  • Guidelines for assistance to industries issued by the government or others concerned from time to time.
  • Guidelines issued by the bank, and.
  • Policy decisions of the Board of Directors of the bank.
Technical Appraisal:

A technical appraisal involves the study of:

  • Feasibility and suitability of technical process in Indian conditions.
  • Location, of the project about the availability of raw materials, power: water. labor, fuel, transport, communication facilities and the market for finished products.
  • The scale of operations and its suitability for the planned project.
  • The technical soundness of the projects.
  • Sources of purchasing plant and machinery and the reputation of suppliers, etc.
  • Arrangement for the disposal of factory effluent and use of bye products, if any.
  • The estimated cost of the project and probable selling price of the product, and.
  • The programmer for completing the project.
Economic Viability:

The economic appraisal will consider the national and industrial priorities of the project export potential of the product employment potential, the study of the market.

Assessing Commercial Aspects:

The examination of commercial aspects relates to the arrangements for the purchase of raw materials and the sale of finished products. If the concern has some arrangement for sale then the position of the party should assess.

Financial Feasibility:

The financial feasibility of a new and an existing concern will be assessed differently. The assessment for a new concern will involve;

  • The needs for fixed assets, working capital, and preliminary expenses will estimate to find out its needs.
  • The financing plans will be studied about capital structure, promoters’ contribution, debt-equity ratio.
  • Projected cash flow statements both during the construction and operation periods, and.
  • Projected profitability and the like dividend shortly.
Managerial Competence:

The success of concern depends upon the competence of management. Proper application of various policies will determine the success of an enterprise.

Also, a lending institution would see the background, qualifications, business experience promoters and other persons associated with management.

National Contribution:

Besides commercial profitability, the national contribution .of the project is also taken into account. The role of the project in the national economy and its benefits to society in the form of good quality products, reasonable prices, employment generation, helpful in social infrastructure, etc. should be assessed. Development banks aim at the overall welfare of society.

Balancing of Various Factors:

Various factors should be balanced against each other. The circumstances of the individual project will help in weighing various factors. Some factors may be strong as their in-depth analysis should be avoided.

In case a project is profitable, there will be no need to assess cash flow. Weaknesses located in certain areas may be offset by the good points in the other.

Also, experienced management and sound economic outlook may compensate for some weaknesses in financial positions. The responsibility of lending the bank lies in balancing judiciously different considerations for arriving at a consensus.

Loan Sanction:

After the appraisal report on the project prepares by the bank’s officers, it places before the advisory committee consisting of experts drawn from various fields of the particular industry. If the advisory committee satisfies a tile proposal then it recommends the case to the Managing Director or Board of Directors along with its report. When the assistance sanctions hen a letter to this effect issues to the pay giving details of conditions.

Loan Disbursement:

The loan disburses after the execution of the loan agreement. The execution of documents of security or guarantee etc. should precede the disbursement of the loan. In case some property pledges to the bank then the title deeds of such property are properly scrutinized. The fulfillment of various conditions proceeding to disbursement will determine the time of paying the money to the party.

Follow up:

The job of a lending bank does note by disbursing the assistance. It has first to see whether the construction .of the project is as per schedule decided earlier. In case some delay is taking place in executing the plans then the reasons for it should be determined. Later during operations, the result should be properly followed. It should be seen whether the revenue earned by the concern will be sufficient to meet its obligations or not so a proper follow up by the bank will enable it to follow the progress of the unit.

Lending procedures and Role of development banks, Cheques administration hand #Pixabay.

Role of development banks:

Financial institutions provide means and mechanisms of transferring resources from those who have an excess of income over expenditure to those who can make productive use of the same.

Also, commercial banks and investment institutions mobilize savings of people and channel them into productive uses. Financial institutions provide all types of assistant required infrastructural facilities Institutions e p economic persons who can take the development in the following ways.

After Lending procedures the Development banks have the following role;

  1. Providing Funds.
  2. Infrastructural Facilities.
  3. Promotional Activities.
  4. Development of Backward Areas.
  5. Planned Development.
  6. Accelerating Industrialization, and.
  7. Employment Generation.

Now, explain each one;

Providing Funds:

Underdeveloped countries have low levels of capital formation. Due to low incomes, people are not able to save sufficient funds which are needed for sensing up new units and also for expansion diversification and modernization of existing units.

The persons who have the capability of starting a business but does not have requisite help approach to financial institutions for help. These institutions help a large number of persons for taking up some industrial activity.

The addition of new industrial units and increasing the activities of existing units will certainly help in accelerating the pace of economic development. Financial institutions have large inventible funds which are used for productive purposes.

Infrastructural Facilities:

The economic development of a country links to the availability of infrastructural facilities. There is a need for roads, water, sewage, communication facilities, electricity, etc. Financial institutions prepare their investment policies by keeping national priorities in major and the institutions invest in those aims is which can help in increasing the development of the country.

Also, the Indian industry and agriculture are facing an acute shortage of electricity. All India institutions are giving priority to invest funds in projects generating electricity. These investments will certainly increase the availability of electricity. Small entrepreneurs cannot spare funds for creating infrastructural facilities.

To overcome this problem, institutions at the state level are developing industrial estates and provide sheds, having all facilities at easy installments. So financial institutions are helping in the creation of all those facilities which are essential for the development of a country.

Promotional Activities:

An entrepreneur faces many problems while setting up a new unit. One has to undertake a feasibility report, prepare project reports, complete registration formalities, seek approval from various agencies, etc. All these things require time, money and energy.

Some people are not able to undertake this exercise or some do not even take initiative. Financial institutions are the expense and manpower resources for undertaking the exercise of starting a new unit. So these institutions take up this work on behalf of entrepreneurs.

Some units may be set up jointly with some financial institutions and in that case, the formalities are completed collectively. Also, some units may not have come up had they not received promotional help from financial institutions. As well as, the promotional role of financial institutions helps increase the development of a country.

Development of Backward Areas:

Some areas remain neglected because facilities needed for setting up new units are not available here. The entrepreneurs set up new units at those places which are already developed. It causes an imbalance in the economic development of some areas.

Also, to help the development of backward areas, financial institutions provide special assistance to entrepreneurs for setting up new units in these areas. IDBI, IFCI, ICICI give priority in assisting units set up in backward areas and even charge lower interest rates on lending.

Such efforts certainly encourage entrepreneurs to set up new units in backward areas. The industrial units in these areas improve basic amenities and create employment opportunities. These measures will certainly help in increasing the economic development of backward areas.

Planned Development:

Financial institutions help in the planned development of the economy. Different institutions earmark their spheres of activities so that every business activity helps. Some institutions like SIDBI, SFCI’s especially help small scale sector while IFCI and SIDC’s finance large scale sector or extend loans above a certain limit.

Some institutions help different segments like foreign trade, tourism, etc. In this way, financial institutions devise their roles and help the development in their way. Financial institutions also follow the development priorities set by central and state governments.

They give preference to those industrial activities which have been specified in industrial policy statements and five-year plans. Financial institutions help in the overall development of the country.

Accelerating Industrialization:

The economic development of a country links to the level of industrialization there. The setting up of more industrial units will generate direct and indirect employment, make available goods and services in the country and help in increasing the standard of living.

Also, Financial institutions provide requisite financial, managerial, technical help for setting up new units. In some areas, private entrepreneurs do not want to risk their funds or gestation period His long but the industries are needed for the development of the area.

Financial institutions provide sufficient funds for their development. Since 1947, financial institutions have played a key role in accelerating the pace of industrialization. The country has progressed in almost all areas of economic development.

Employment Generation:

Financial institutions have helped both direct and indirect employment generation. They have employed many persons to man their offices. Besides office staff, institutions need the services of experts which help them in finalizing lending proposals. These institutions help in creating employment by financing new and existing industrial units.

Also, they help in creating employment opportunities in backward areas by encouraging the setting up of units in those areas, Thus financial institutions have helped in creating new and better job opportunities.

Reference:

  1. https://www.mbaknol.com/business-finance/lending-procedures-of-development-banks/
  2. https://www.mbaknol.com/business-finance/role-of-development-banks-in-financial-sector/
  3. Other information collecting from the internet.
Nageshwar Das

Nageshwar Das, BBA graduation with Finance and Marketing specialization, and CEO, Web Developer, & Admin in www.ilearnlot.com.

Share
Published by
Nageshwar Das

Recent Posts

Best Jobs Ideas for Students and prepare the Future

Jobs Ideas for Students: Why they need a Job? Many students are like to study… Read More

7 days ago

Do You want to start a YouTube Channel to make money by AdSense?

YouTube Channel: Do you want to be a YouTuber and make money? So, this article… Read More

2 weeks ago

Cryptocurrency: Meaning, Definition, Types, Advantages, and Disadvantages

Cryptocurrency is a digital coin that not authorizes by the government but still, people use… Read More

3 weeks ago