“PROMOTIONAL ROLE OF BANKS”

A Final Draft submitted in partial fulfillment of the course Banking Law, 8th SEMESTER
during the Academic Year 2019-2020

SUBMITTED BY:

Aatish Kumar

Roll No. - 1603

B.B.A LL.B

SUBMITTED TO:

Dr. Ajay Kumar Jha

FACULTY OF Banking Law

March, 2020

CHANAKYA NATIONAL LAW UNIVERSITY, NAYAYA NAGAR, MEETHAPUR,

PATNA-800001
AIMS AND OBJECTIVE

The main objective of the research is to have an analytical study of the

Promotional Role of Banks.

RESEARCH METHODOLOGY

The research work has been done by adopting doctrinal methodology.

TABLE OF CONTENTS

1. INTRODUCTION

2. PROMOTIONAL OBJECTIVES

3. THE DEVELOPMENT RATIONALE OF BANKS

4. PROMOTIONAL FUNCTION OF RBI

5. CONCLUSION
 1. INTRODUCTION
Once the banking system has attained a critical threshold of development, the monetary,
prudential, and promotional policies of a central bank tend to be concurrent rather than
sequential. Since the major instruments of central banking can function both as instruments of
credit control and of development, there is no necessary one-to-one relationship between
instruments and targets. The promotional role of a central bank derives from a combination of
factors. First, developing countries are prone to financial market failures that can be corrected
only by the central bank. Second, the externalities of financial intermediation cannot be
generated by the unaided efforts of the private sector. Finally, the central bank has a unique
public policy role as a macroeconomic think tank for technocratic research, information, and
advice to the public and private sectors and for training of financial manpower. A stable and
liberal monetary system and climate are essential prerequisites for the promotional role of a
central bank. Their maintenance is, however, a continuing task given the oligopolistic
tendencies of most financial systems. A central bank's expertise, status, and influence rather
than its formal powers define its promotional role, which is not merely one of passively
adapting its techniques to suit the changing economic structure but of actively modifying the
financial structure itself to promote development. There are many promotional techniques,
such as guarantees and insurance mechanisms, preferential interest and rediscount rates and
facilities, differential reserve requirements, credit deposit ratio targets, participation in
development finance institutions, open market operations, and allocation of central bank
profits and credit. Central bank profits or credit are not substitutes for genuine savings of the
public for financing development. The central bank is best viewed as a catalyst and innovator,
a Platonic guardian and curator of the financial system rather than a perennial participant in
development of finance institutions.1

1
https://dailytools.in/BankingKnowledge/RBIDevelopmentalPromotionalFunctions
 2. PROMOTIONAL OBJECTIVES

Some of the promotional objectives of the banks are as following:-

 Small Scale Industries (SSI):

Development banks play an important role in the promotion and development of the small-scale
sector. The government of India (GOI) started the 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.

 Development of Housing Sector:

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:

 It promotes and develops housing and financial institutions.
 It refinances banks and financial institutions that provide credit to the housing sector.

 Large Scale Industries (LSI):

The development bank promotes and develops large-scale industries (LSI). 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 the location of a project, and so on.

 Agriculture and Rural Development:

Development banks like the National Bank for Agriculture & Rural Development (NABARD)
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.
  Enhance Foreign Trade:
Development banks help to promote foreign trade. The government of India started the 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. Also,
encourages abroad banks to provide finance to the buyers in their country to buy capital goods
from India.

 Review of Sick Units:

Development banks help to revive (cure) sick-units. The government of India (GOI) started the
Industrial Investment Bank of India (IIBI) to help sick units. IIBI is the main credit and
reconstruction institution for a revival of sick units. It facilitates modernization, restructuring,
and diversification of sick-units by providing credit and other services.

 Entrepreneurship Development:
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.

 Regional Development:
The development bank facilitates rural and regional development. They provide finance for
starting companies in backward areas. Also, they help companies in project management in such
less-developed areas.

 Contribution to Capital Markets:

The development bank contributes to the growth of capital markets. They invest in equity shares
and debentures of various companies listed in India. Also, invest in mutual funds and facilitate
the growth of capital markets in India.2

2
http://www.economicsdiscussion.net/reserve-bank/5-major-regulatory-and-promotional-roles-of-the-r-b-i/12930
 3. THE DEVELOPMENT RATIONALE OF BANKS

Finance continues to be largely a non-substitutable growth catalyst. Finance facilitates as well

as strengthens the growth process.3 However, finance is not the sufficient condition for
growth. Though, finance and development are intimately interwoven, possess distinct identify
of their own and so there does not exist causal relationship between the two. The huge sums
involved in the large number of sick units in India bears proof of the fact that finance divorced
from a well-meaning project is bound to create such a situation. Therefore, it is felt that
development is a complex task and it depends upon several variables with finance being of
paramount importance In view of this DFI’s perform both the functions of finance and
development. B.K. Madan has underlined this point in the following words: “It is now
universally acknowledged that finance is only the first element of the assistance package
dispensed by DFI’s of which technical, managerial and commercial including marketing
know- how are increasingly important ingredients. More and more, the development bankers
administer a blend of financial and development services”4

4. PROMOTIONAL FUNCTIONS OF RBI

Some of the promotional functions of RBI are as follows:-

1. Promotion of Banking Habit

The Reserve Bank of India helps in mobilizing the savings of the people for investment. It
expanded banking system throughout the nation by setting up of various institutions like
UTI, IDBI, IRCI, NABARD etc. Thereby it promoted banking habit among the people.
2. Providing Refinance for Exports
The Reserve Bank of India is providing refinance for export promotion. The Export Credit and
Guarantee Corporation (ECGC) and Export Import Bank were established initially by the
Reserve Bank of India to finance the foreign trade of India. They finance foreign trade in the
form of insurance cover, long-term finance and foreign currency credit. However, they are now
functioning separately.

3
P.N. Misra, “Development Banks and Financing of New Entrepreneurship in India”, Prajnam, IX (Oct. - Dec. 1982), 283.
4
B. K. Madan “The Directions of the Professional and Technical Development Programme of DFI’s in Asia and the Pacific”,
MDI quarterly bulletin, I (Apr - June, 1978), 4.
3. Providing Credit to Agriculture
The Reserve Bank of India makes institutional arrangements for rural or agricultural finance. For
example, the bank has set up special agricultural credit cells. It has promoted regional rural
banks with the help of commercial banks. It has also promoted NABARD.
4. Providing Credit to Small Scale Industrial Unit
Commercial banks lend loans to small-scale industrial units as per the directives issued by the
Reserve Bank of India time to time. The Reserve Bank of India encourages commercial banks to
render guarantee services also to small-scale industrial sector. The Reserve Bank of India
considers advances given to small-scale sector as priority sector advances. It also directed
commercial banks to open specialized branches to provide adequate financial and technical
assistance to small-scale industrial branches.

5. Providing Indirect finance to Cooperative Sector

The RBI has directed NABARD to give loans to State Cooperative Banks, which in turn lend
loans to cooperative sector. Hence, the Reserve Bank of India provides indirect finance to
cooperative sector in India.

6. Exercising Control over Monetary and Banking system of the Country

The Reserve Bank of India is vested with enormous and extensive powers regarding supervision
and control over commercial banks, cooperative banks and also non-banking
institutions receiving deposits. The Banking Regulation Act prescribes extensive requirements as
minimum regarding the paid-up capital, reserves, cash reserves and liquid assets.
The operation of the bank, the management, amalgamation, reconstruction and liquidation etc.
are thoroughly supervised by the officials of the Reserve Bank of India. Every scheduled bank is
required to furnish to the Reserve Bank a weekly statement showing the principal items of its
liabilities and assets in India.
7. Making Industrial arrangement for Industrial Finance
The Reserve Bank of India makes institutional arrangement for industrial finance. For instance, it
has brought into existence several development banks such as the Industrial Finance Corporation
of India, the Industrial Development Bank of India, which provide long-term finance to
industries.5

5
https://accountlearning.com/7-important-promotional-functions-of-reserve-bank-of-india/
 5. CONCLUSIONS

The pace of development cannot be accelerated by providing financial assistance alone. There
are factors which inhibit industrialization of an underdeveloped country. It is essential to
make a correct diagnosis of those factors and plan things accordingly. The growth potential of
different areas, the availability of natural resources, demand conditions, infrastructure
facilities, etc. should be taken into account before deciding the pattern of industrialization of
various places. The task of identification of growth potentialities and preparation of feasibility
studies is not an easy task. It requires huge finances and technical expertise which is beyond
the competence of entrepreneurs of under-developed countries. It is in this area where
development banks can play crucial role. In addition to providing the traditional role of
providing financial assistance, development banks in India are undertaking promotional role
also. Some of the areas where these banks are participating are:

 Surveys of Backward Areas

 Inter-Institutional Groups (IIG’s)
 Establishing Technical Consultancy Organizations (TCO’s)
 Technological Improvements

Bibliography

Books

 Bhatt, V.V. "Some Aspects of Financial Policies and Central Banking in Developing
Countries," World Development, Vol. 2, Nos. 10-12, Oct-Dec 1974, pp. 1-14.
Websites

 http://www.rbi.gov.in/resources
 https://poseidon01.ssrn.com/
 https://economictimes.indiatimes.com/