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Specialized Financial Institutions in India

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Development banks are specialized industrial financial institution. Ø These banks are mostly set up after World War II in both developed and both underdeveloped countries. Ø Developed banks do not mobilize savings like other banks but invest the resources in a productive manner. Ø These banks make significant contribution to industrial development.


Development Banks are the institutions engaged in the promotions and development of industrial,agricultural and other key sectors. Ø A development bank is a financial institution which takes up the job of developing industrial enterprises from its beginning to completion. DEFINITION In general sense, “Development banks are those financial institutions whose prime goal (motive) is to finance the primary (basic) needs of the society. Such funding results in the growth and development of social and economic sectors of the nation. However, needs of the society vary from region to region due to differences seen in its communal structure, economy and other aspects.” D.M. Mithani states that, “ A development bank may be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long term ) to business unit.” As per banking subject ( mainly in Indian context), “Development banks are financial institutions established to lend (loan) finance (money) on subsidized interest rate. Such lending is sanctioned to promote and develop important sectors like agriculture, industry, import-export and allied activities.”


It is a specialzed financial institution which provide medium term and long- term lending facilities. Ø It is a multipurpose financial institution as,it undertakes promotional activities also. Ø Development bank provides financial assistance to both public and private institution. Ø The role of a development bank is that of gap filler. Ø Development bank accelerates the rate of growth by helping in industrialization in specific and economic development in general. Ø The objectives of development banks is to serve the public interest rather than earning profits. Ø Development banks react to socio-economic needs of development. Ø Development bank is essentially a multi-purpose financial institution with a broad development outlook . THE CONCEPT OF A DEVELOPMENT BANK

In the field of industrial finance, the concept of development bank is of recent origin. In a country like India, the emergence of development banking is a post independence phenomenon. In the western countries however, development banking had a long period of evolution. The origin of development banking may be traced to the establishment of ‘Society General Pour Favoriser I’ lndustrie Nationale’ in Belgium in 1822. But the notable institution was the ‘Credit Mobiliser’ of France, established in 1852, which acted as industrial financier. In 1920, Japan established the Industrial Bank of Japan to cater to the financial needs of her industrial development. In the post-war era, the Industrial Development Bank of Canada (1944), the Finance Corporation for Industry Ltd. (FCI) and the Industrial and Commercial Finance Corporation Ltd. (ICFC) of England (1945), etc., were established as modern development banks to provide term loans to industry. In 1966, the U.K. Government set up the Industrial Reorganisation Corporation (IRC). In India, the first development bank called the Industrial Finance Corporation of India was established in 1948. Development bank constitutes an important institutional machinery intended to help in accelerating the pace of economy development of a country. They have been established in both developed and underdeveloped countries of the world. Especially in underdeveloped countries they have become very popular as an effective instrument of quick economic development. It istherefore of great interest to study the theory and practice of development banking. Need for development banks Ø Lay foundations for industrialization. Ø Help small and medium sectors. Ø Need for promotional activities. Meet capital needs.

Development Banks in India Development banks in India are classified into following four groups: 1. Industrial Development Banks : It includes,Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI). 2. Agricultural Development Banks : It includes, for example, National Bank for Agriculture & Rural Development (NABARD). 3. Export-Import Development Banks : It includes, for example, Export-Import Bank of India (EXIM Bank). 4. Housing Development Banks : It includes, for example, National Housing Bank (NHB).

Functions of Development Banks

  1. 1. To promote and develop small-scale industries in India : Development banks play an important role in the promotion and development of the small scale sector. Government of India started 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.
  2. 2. To finance the development of the housing sector in India : 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: a)It promotes and develops housing and financial institutions. b)It refinances banks and financial institutions that provide credit to the housing sector.
  3. 3. To facilitate the development of large scale industries in India : Development banks promote and develop large-scale industries. 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 location of a project, and so on.
  4. 4. To help the development of agricultural sector and rural India : Development banks like National Bank for Agriculture & Rural Development 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.
  5. 5. To enhance the foreign trade of India : Development banks help to promote foreign trade. 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. It also encourages abroad banks to provide finance to the buyers in their country to buy capital goods from India.
  6. 6. To help to cure sick industrial units : Development banks help to revive cure sick-units. Government of India started Industrial investment Bank of India (IIBI) to help sick units. IIBI is the main credit and reconstruction institution for revival of sick units. It facilitates modernization, restructuring and diversification of sick-units by providing credit and other services.

  7. 7. To encourage the development of Indian entrepreneurs : 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.
  8. 8. To promote economic activities in backward regions of the country : Development banks facilitate rural and regional development. They provide finance for starting companies in backward areas. They also help the companies in project management in such less-developed areas.
  9. 9. To contribute in the growth of capital markets : Development banks contribute 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.


  1. 1. Rapid industrial growth : Industrial sector is the dynamic sector of the Indian economy. This sector contributes to the generation of employment and income in the country. Funds are provided by the development banks to start a new business venture, expansion and diversification of the business in new sector etc .
  2. 2. Encouraging entrepreneurs : Industrialisation helps in curbing economic and social problems thereby making economies progress. Emerging entrepreneurs are encouraged to give shape to their ideas. Development bank helps those entrepreneurs by providing funds for commencing new business.
  3. 3. Balanced regional development : There has been always an issue related to regional disparities . Development bank helps in curbing these regional disparities by providing funds to the entrepreneurs at low rate of interest if the organisation is planned in the backward areas. This would lead to the development of all areas thereby making balanced regional development.
  4. 4. Filling gaps : It is not possible for the commercial banks to fulfill all financial needsof all the customers. Absence of organised capital market, absence of adequate facilities for financing industries arise the problem of slow development of industrialisation. Such development banks can fulfill the credit gap. They provide long- term funds for industries where gestation period may be longer.
  5. 5. Help medium and small sector : The large scale was, to some extent able to fulfill it need. There was a need to mitigate suffering of small and medium size industries which form a sizeable sector of the industrial economy .
  6. 6. Helps government : Government formulates financial policies with the help of development banks. They also help in implementing these policies.

For example, NABARD bank is set up as an apex development bank for extending support to the rural areas. It helps the government in matters relating to the rural development, offers training and research facilities for banks working in the field of rural development, and acts as a regulator for co-operative banks and RRB’s.

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