Development Banks

Introduction

Unlike normal banks, development banks are seen as special financial institutions whose primary concern is to provide all sorts of financial, medium as well as long term, help/assistance to businesses. These banks were originally set up after World War II in developed and underdeveloped/developing countries. The roles of development banks have become more pronounced in countries that are developed, with the government taking it upon itself to look after the acceleration of the economic growth of the country. What differentiates a development bank from a normal bank is the immobilisation of savings. Rather, the savings are invested in something productive. 

Features of Development Banks 

• Development banks do not depend on mobilized savings, and so unlike all other financial institutions and commercial banks, they do not accept any form of deposits from the public

• Development banks are lending institutions whose function is to provide medium and long term financial facilities to businesses

• Development banks lend their assistance to both private as well as public sectors

• These banks do not work to earn profit but rather to serve the public

• Even though one of the functions of a development bank is to lend, its primary objective is to promote and work towards the country’s economic development, it does so by encouraging new and small entrepreneurs and promoting investment activities in an economy

• Development banks act as a gap filler for the other financial institutes

Development Bank in India

The first Development Bank Industrial Finance Corporation of India was established in 1948. IFCI, or Industrial Finance Corporation of India, was given the role of filling up other financial institutes’ insufficiencies. It was not expected of an IFCI to act as a competitor for the existing financial organizations. The next establishment was ICICI (Industrial Credit and Investment Corporation of India) in 1955. In 1964, IDBI was established as a subsidiary of RBI. IDBIs or Industrial Development Bank of India was expected to look after the institutions that promoted finance and developing industries. 

Functions of development banks

• Gap fillers

Development banks are multitasking financial institutes since they provide not only medium and long term funds but also help other industrial organizations in many different ways. They buy shares and debentures of a company, underwrite them, and ensure they are provided with loans from domestic and foreign sources. They also help the industrial enterprises get undertakings for acquiring machinery from within as well as outside the country. 

• Entrepreneurial Role

Countries that are still developing do not have entrepreneurs who are willing to or capable of taking the job of setting up new projects because of the lack of experience and ability to manage projects. This is where development banks step in. They were assigned the task of filling up this entrepreneurial gap. Their role includes finding new investment projects, promoting industries, providing technical assistance, undertaking research that is technical and economic, conducting surveys, etc. Development banks play a significant role in accelerating industrialisation by promoting industries.    

• Lending Funds

One of the main objectives of a development bank is to provide medium and long term funds to industries. Commercial banks are used to fulfill the working capital needs of a business, but in developing countries, this traditional role of commercial banks has not helped the industries previously. 

• Foreign Trade  

Development banks allow companies an overseas buyer credit. This lets them buy Indian capital goods. 

• Guarantee of Credit 

Small sectors don’t enjoy proper financial help because of the lack of securities they can offer for loans. This results in hesitation from the side of lenders to lend them funds. Countries develop schemes like credit guarantees and insurance schemes to deal with this.

Types of Development banks in India

• Industrial Development Bank of India (IDBI)

• National Housing Bank (NHB)

• Small Industries Development Bank of India (SDBI)

• Export-Import Bank of India (EXIM)

• National Bank for Agriculture and Rural Development (NABARD)

• Industrial Finance Corporation of India (IFCI) 

Objectives of Development Banks

• One of their primary objectives is to promote industrial growth

• Since many backward areas are overlooked, development banks develop such neglected areas

• Development banks also create many employment opportunities by employing people themselves, starting new projects, and financing existing ones

• Because they provide finance and assist entrepreneurs, they promote self-employment projects with funds

Conclusion

Development banks are special financial institutions that provide medium and long term funds for investment in a company’s capital. Development banks are not the same as commercial banks since they do not depend on mobilized savings. Their main aim is to promote industrial growth and serve the public rather than profit. Their financial assistance is provided to the private and public sectors. Since many backward areas are overlooked, development banks develop such neglected areas. Countries that are still developing do not have entrepreneurs who are willing to or capable of taking the job of setting up new projects because of the lack of experience and ability to manage projects. Development banks were assigned the task of filling up this entrepreneurial gap.