In this essay we will discuss about the Development Banks of India. After reading this essay you will learn about:- 1. Meaning of Development Banks 2. Functions of Development Banks 3. Importance 4. Appraisal.
Meaning of Development Banks:
Development banks are those financial institutions which provide term finance, promote entrepreneurship, enhance organisational effectiveness and upgrade know-how and do-how. They provide either loan or equity capital or both, as also advisory, promotional and entrepreneurial services.
Thus development banks administer a blend of financial and developmental services. Boskey defines a development bank as “a financial intermediary supplying medium and long-term funds to bankable economic development projects and providing related services”.
Functions of Development Banks:
Development banks have certain distinct characteristics which distinguish them from commercial banks and other financial institutions.
First, unlike commercial banks, they do not accept deposits from the public.
Second, they provide medium and long-term finance, whereas commercial banks provide long term finance.
Third, they do not perform ordinary banking functions but perform promotional, developmental and innovative functions.
Fourth, they are motivated by social profit, while commercial banks are motivated by commercial profit.
We enumerate some of the functions of development banks below:
1. They provide risk capital.
2. They grant medium and long-term loans or advances.
3. They subscribe to the issue of stocks, shares, bonds and debentures of industrial concerns.
4. They underwrite the issue of stocks, shares, bonds and debentures of industrial concerns.
5. They guarantee loans raised from within and outside the country.
6. They guarantee deferred payment of loans in connection with the purchase of capital goods or machinery within and outside the country.
7. They develop capital market by trying to broaden ownership and by other devices.
8. They provide assistance for setting up new industrial projects.
9. They provide assistance for the expansion of existing units.
10. They provide assistance for modification, renovation and modernisation of existing plants and machinery.
11. They arrange for general industrial surveys and feasibility studies for specific projects.
12. They formulate specific proposals for new enterprises.
13. They assist in finding technical and entrepreneurial partners for local clients or for foreign investors.
14. They provide consultancy assistance in respect of technical know-how and market information to new entrepreneurs.
15. They provide necessary guidance, training and other facilities like project identification, project formulation, project implementation, etc. to new entrepreneurs.
16. They sponsor programmes for the upgradation of managerial skills and professionalism of management.
17. They help in the dispersal of industries and development of backward areas.
Importance of Development Banks:
Development banks have unique importance in the development process of a country. In fact, they are a catalyst agent for development. We enumerate their role as active engines of growth.
1. Engines of Development:
Development banks are engines of development. By providing expertise, arranging for feasibility studies and finance, they act as active agents of growth.
2. Spirit of Development Finance:
The importance of development banks lies in spreading the spirit of development finance whereby entrepreneurs learn to invest in real fixed assets.
3. Creation and Promotion of Enterprise:
Development banks are the instruments for the creation, promotion and spread of enterprise and initiative.
4. Promotion of Balanced Regional Development:
Development banks are important in that they help in decentralisation and diversification by financing small, medium and large entrepreneurs in backward regions of the country. They are thus the promoters of balanced regional development.
5. Increasing Productivity of Investment:
They help increase productivity of investment by bringing professionalism in management and providing consultancy and extension services to the tiny, small and new entrepreneurs.
6. Upgradation of Skills:
By providing appropriate training and upgradation of managerial skills, they help in skill formation among small entrepreneurs.
7. Upgradation of Technology:
With their technical, advisory and R&D departments, development banks give advice and training in new technology and also help in the upgradation of indigenous technology.
8. Research:
Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.
9. Gap-Filling:
They help in filling gaps in the industrial structure of the economy by providing and developing industries.
10. Coordination:
To avoid haphazard growth of financial institutions, development banks coordinate the working of other financial term lending institutions engaged in financing, promoting and developing industries.
11. Institution Building:
Development banks are the instruments of institution building. They assist in the creation and promotion of term lending institutions. For instance, the Risk Capital and Technology Finance Corporation has been sponsored by the IFCI.
12. Assist in Purveying Foreign Capital:
It is development banks which acquire foreign capital and allocate it to varied industrial sectors in keeping with national priorities. They get finance from the World Bank, IDA, etc. and allocate it to different industrial projects.
Appraisal of the Development Banks of India:
The study of various development banks in India reveals that they have been playing a crucial role in setting, promoting and developing industrial units in the small, medium and large scale sectors of the Indian economy.
They have helped in the dispersal of industries in backward regions / areas. They have been providing necessary know-how, technical, expertise, machinery and equipment for the modernisation of industrial units. In fact, they have been acting as catalytic agents of industrial growth in India.
Despite these achievements, they suffer from certain weaknesses.
First, the main sources of funds of development banks are borrowings from the Government of India, RBI, banks and other financial institutions and foreign sources. But they do not raise funds from the public. They do not sell their shares, bonds or debentures in the market.
These borrowings by development banks have encouraged high debt-equity ratios and since they borrow at low rate of interest, it has led to high capital intensity in industry because the latter is able to procure term loans at low rates in turn.
Second, the majority of financial assistance is provided by development banks in the form of term loans to industrial units. This has led to large defaults on loans by companies which have become weak units.
Third, the development banks do not encourage lending on the basis of loans/debentures of industrial units. They have, therefore, failed to develop a corporate bond market.
Fourth, these development banks have provided more financial assistance to the private sector than to the public, joint and cooperative sectors. They also provide soft loans to them at concessional rates at the cost of public exchequer with the result that the State’s revenue from them is insufficient. It has led to highly capital- intensive technology and has failed to absorb the growing labour force of the country thereby leading to more unemployment.
Fifth, they have not been successful in achieving balanced regional development of industries. More assistance has flowed to the already developed States and to backward areas of these States.
Sixth, their role as promotional agencies has been weak.
Seventh, there are unnecessary delays in sanctioning and disbursing assistance due to red-tapism.
Eighth, their over-dues to industries have been mounting and the problem of industrial sickness is on the increase.
Ninth, they have failed to develop adequate human resources with the result that their personnel lack in proper managerial, administrative and technical skills which are essential for the rapid growth of industries.