Development Banks in India:

Development banks, also known as special industrial financial institutions, play a crucial role in accelerating the economic development of a country. Established after World War II in both developed and developing nations, these banks differ from commercial banks in that they do not mobilize savings but rather invest resources productively and efficiently.

Key Features of Development Banks:

• Financial Expertise: Development banks are expert financial bodies that perform dual functions: granting medium and long-term finances to private entrepreneurs and promoting the economic development of the country.
• Financing Sectors: These banks provide medium and long-term finances to both the industrial and agricultural sectors, as well as to both private and public sectors.
• Examples in India: Some prominent development banks in India include the Industrial Development Bank of India (IDBI), the Industrial Credit and Investment Corporation of India (ICICI), and the Export-Import (EXIM) Bank of India.

Understanding Development Banks in India: Development banks are financial institutions that provide long-term funds for capital-intensive investments over an extended period. They are also known as development finance institutions (DFI) or long-term lending institutions. These banks lend at low and stable interest rates to promote long-term investments with social benefits. Unlike commercial banks, development banks mobilize short to medium-term deposits and lend for similar periods to avoid maturity mismatches that could affect solvency and liquidity.

Development Banks

Unlike commercial banks, development banks do not accept deposits from the public. Therefore, they do not rely solely on savings mobilization.

Development banks are specialized institutions that provide medium and long-term credit lending facilities. Their primary objective is to serve the public interest rather than earn profits. They offer financial assistance to both public and private sector institutions.

Importance of Development Banks

• Development banks lay the foundation for industrial growth and development in the country.
• They meet long-term capital needs.
• They undertake promotional activities.
• They help small and medium sectors.

Objectives of Development Banks in India

• Promotion of self-employment projects
• Reviving sick units
• Improving the capital market in the country
• Generating more exports and promoting import substitution
• Promoting science and technology in new areas by extending risk capital
• Improving the management of large industries by providing them adequate training
• Encouraging modernization and improvement in the technology sector

Types of Development Banks in India

1. SIDBI (Small Industries Development Bank of India)

• Established in 1990 under an Act of Parliament
• Wholly-owned subsidiary of the Industrial Development Bank of India
• Headquartered in Lucknow
• Functions:
  • Initiating technical upgradation and modernization of existing units
  • Expanding channels for marketing small-scale industry products domestically and internationally
  • Promoting employment-generating industries, particularly in semi-urban areas
  • Curbing migration of people to urban areas

2. NABARD (National Bank for Agriculture & Rural Development)

• Established on 12th July 1982 under a special act by the parliament
• Headquartered in Bombay (Maharashtra)
• Functions:
  • Uplifting rural India by increasing credit flow for the promotion of agriculture and non-farm sectors
  • Apex bank of the country, taking care of cottage industry, small and village industries, and other rural credit institutions

Rural Establishments

Role:

• Undertake monitoring and evaluation of projects it has been refinancing.
• Refinance financial institutions that finance the rural sector.
• Regulate institutions that provide financial assistance to the rural economy.
• Provide training facilities to institutions assisting rural development.
• Regulate cooperative banks and Regional Rural Banks (RRBs) in India.

EXIM Bank

The Export-Import Bank of India (EXIM Bank) is a financial institution established under the Export-Import Bank of India Act of 1981. It is a public sector financial institution with the primary objective of financing Indian exports that generate foreign exchange for the country. EXIM Bank also extends term loans for foreign trade.

Functions:

• Finance imports and exports of goods and services in India and developing countries worldwide.
• Provide lease financing for exports and imports of machinery and equipment.
• Finance joint ventures in foreign countries.
• Undertake limited merchant banking operations, such as issuing shares, bonds, stocks, and debentures of Indian companies involved in international trade.
• Provide technical, financial, and administrative assistance to businesses engaged in export and import activities.

National Housing Bank

The National Housing Bank (NHB) is a state-owned bank and regulatory authority in India established under the National Housing Bank Act of 1987. It was created on July 8, 1988, and is headquartered in New Delhi.

NHB is responsible for regulating and refinancing social housing activities, including research. Owned by the Reserve Bank of India, it was established to promote private real estate acquisition. The institution aims to foster inclusive expansion with stability in the housing finance sector.

Functions:

• Regulate housing finance institutions, including banks, housing finance companies, and non-banking financial companies.
• Refinance housing loans provided by primary lending institutions.
• Promote the development of the housing finance market in India.
• Undertake research and studies on housing finance and related matters.
• Provide training and capacity building for personnel engaged in the housing finance sector.

IFCI (Industrial Finance Corporation of India)

The IFCI was the first specialized financial institution to provide term finance to large businesses in India. It was set up under the Industrial Finance Corporation Act (1948) on July 1, 1948.

Objectives of IFCI

The primary objective of the IFCI is to provide long and medium-term financial offerings to large-scale businesses. It especially offers its services when ordinary bank accommodation does not suit the undertaking or the finance cannot be raised in a profitable manner from the issue of shares.

Functions of IFCI

• Setting up a new industrial undertaking
• Expansion and/or diversification of existing industrial business
• Renovation and modernization of existing businesses
• Meeting the working capital needs of the industries, with some exceptions

IDBI (Industrial Development Bank of India)

The Industrial Development Bank of India, popularly known as IDBI, came into existence as a Development Institution under the IDBI Act of 1964. It is headquartered in Bombay, Maharashtra.

The IDBI is regarded as a public financial institution as per the Companies Act 1956. It continued as DPI till 2004 when it was converted into a banking organization. The Industrial Development Bank of India Act of 2003 was passed to convert the DPI into a bank.

Under the name of the Industrial Development Bank of India Ltd., a new company was incorporated as a government company under the Companies Act on September 27, 2004. Thus, w.e.f. October 1, 2004, it came to be known as IDBI Ltd. it works as a bank in terms of the Repeal Act.

The IDBI Bank Ltd. was finally merged with IDBI Ltd. and was known as IDBI.

Frequently Asked Questions (FAQs)

What is the meaning of development banks?

Development banks are financial institutions that provide medium and long-term funds for capital-intensive industries across India.

What is the difference between development banks and commercial banks?

Development banks do not accept deposits from the public, while commercial banks rely entirely on saving mobilization.

What are some of the development banks in India?

NABARD, IDBI, EXIM Bank, IFCI, and NHB are some examples of development banks in India.

What are the objectives of development banks?

The objectives of development banks include:

• Promotion of industrial growth
• Creation of employment opportunities
• Revival of sick units
• Improvement of the capital market

Which development banks cater to the industrial sector?

Several development banks in India cater to the industrial sector, including IDBI, IFCI, and ICICI. These banks provide financial assistance to industries for various purposes, such as setting up new projects, expanding existing ones, and modernizing machinery.