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DEVELOPMENT BANKS

Module 3

History
In the field of industrial finance done through the banks called as developmental banks. The country like India which is and emerging as developed market and with emerging markets in place the first requirement being fund and its management. In the same time the western countries have developed their banking styles as they were developed countries. As they constantly refined their approach and started implementing by establishing of Socio General pour Favouriser Industrial National in Belgium in 1822.And the France established Credit Mobiliser France in 1852. In 1920 Japan established Industrial Bank of Japan. To cater financial needs of industries.

In post war era in 1944 Industrial bank of Canada was established by Canada. The Finance corporation for industry Ltd (FCI) and the industrial and commercial Finance corporation Ltd (ICFC) was established by England in 1945. In the year 1966, which was considered as modern era United Kingdom Government set up the Industrial Reorganization Corporation (IRC) At last Indian which one of the developing country found necessity of such organization, So the first development bank of Indian was established in 1948 it was called as Industrial Financial Corporation of India.

MEANING
Development institutions. banks are specialized financial

They provide medium and long-term finance to the industrial and agricultural sector.
They provide finance to both private and public sector. Development banks are multipurpose financial institutions. They do term lending, investment in securities and other activities. They even promote saving and investment habit in the public.

DEFINITION
In general 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. As per banking "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, importexport, housing and allied activities

Development Banks in India

SIICs

Role of development banks in the Indian economy.


Capital Formation Support to the Capital Market Rupee Loans & Foreign Currency Loans Subscription to Debentures and Guarantees Assistance to Backward Areas Promotion of New Entrepreneurs Impact on Corporate Culture

Important Development Banks in India


1. The Industrial Finance Corporation of India.(IFCI) 2. The Industrial Credit and Investment Corporation of India. (ICICI) 3. The State Financial Corporations. (SFCs) 4. The Industrial Development Bank of India. (IDBI) 5. The Small Industries Development Bank of India.(SIDBI) 6. The Industrial Reconstruction Bank of India.(IRBI) 7. The State Industrial Development Corporations.(SIDC) 8. The Unit Trust of India. (UTI) 9. The Life Insurance Corporation of India.(LIC) 10. The Export and Import Bank of India. ( EIBI)
All these banks are being operated at national, state and local levels. They have been providing all types of financial assistance to business units in the form of loans, underwriting, investment and guarantee operations. They have also undertaken promotional activities. They are thus multi-purpose financial institutions. They have done commendable service for the development of industries in our country.

Features of development banks


1. it is a specialized financial institution. 2. It provides medium and long term financial to business units. 3. Unlike commercial banks, it does not accept deposit from the public. 4. It is not just a term lending institution. It is a multi purpose financial institution. 5. It is essentially a development oriented banks. It motive is to serve public interest rather than profit making. 6. Its primary objective is to promote economic development by promoting investment and entrepreneurial activity in an developing economy. 7. It provides the financial assistance to private sector but also the public sector undertaking. 8. It aims to promoting the savings and investment habit in the society fill the gap what other banks arent doing but not to compete with other banks.

Objective of development banks


1. Rapid industrialization. 2. Provide additional employment opportunity 3. Development of entrepreneurial skills 4. Rural development 5. Financing projects of great importance to the economy. 6. Providing finance to medium and large industries. 7. Achieving balance regional development 8. Promotion of exports and import substitution. 9. Monitoring silk industry units 10. Providing technical know how.

1. Industrial Finance Corporation of India Ltd (IFCI)


Industrial Finance Corporation of India was the first All India Development Bank to be set up in the country in the year 1948. The main objective was to providing medium and longterm credit to industry. Its role was that of a gap filler as it was not expected to compete with the prevailing channels / Banking sector . It was only meant to supplement their efforts not to compete. With effect from July 1, 1993, IFCI has been converted into a public limited company and is now known as Industrial Finance Corporation of India Ltd.

The IFCI has set up Merchant Banking and Allied Services Department (MBAD) with head office in Delhi and a bureau in Mumbai. MBAD has taken up assignments for capital restructuring, merger and amalgamation, loan syndication with other financial institutions, and trusteeship assignments. It guides entrepreneurs in project formulation and raising resources for meeting project cost, etc.

Functions of the IFCI


1) Granting loans or advances both in rupees and foreign currencies repayable within 25 years, 2) Guaranteeing rupee loans floated in the open market by industrial concerns, 3) Underwriting of shares and debentures of the industrial concerns. 4) Guaranteeing: (a) deferred payments in respect of imports of machinery. (b) foreign currency loans raised from foreign institutions, (c) rupee loans raised from scheduled banks or state cooperative banks by industrial concerns.

Other functions
In the beginning, the IFCI was expected to extend financial assistance only to industrial concerns in the private and cooperative sectors. Now both public sector and joint sector projects are also eligible for financial assistance from the IFCI. Financial assistance is available from the IFCI for new industrial projects as well as for expansion, renovation modernization Diversification of the existing company, This may include the purchase of plant and machinery, construction of factory building and purchase of land for the factory. Normally the IFCI does not provide finance for the repayment of existing liabilities and also Its funds are not available for raising working capital which includes the purchase of raw material.

Financial Resources of IFCI


The paid-up capital of the IFCI was initially Rs. 5 crores & it had been increased several times and as on March 31, 2000 stood at Rs. 1,046 crores. As on March 31, 2000 its reserves stood at Rs. 907 crores. Apart from the paid-up capital and reserves, the major financial resources of the IFCI are issue of bonds and debentures, borrowing from the government the Reserve Bank of India and the Industrial Development Bank of India, and foreign loans

Lending operation of IFCI


The IFCI had started its lending operations on a modest scale in 1948, Over the years with greater accent on industrialization, they have grown both in scope and size. While in 1970-71, assistance sanctioned was of Rs. 32.2 crores, in 1999 - 2000, it touched the level of Rs. 2, 376 crores, at the end of March 2000 stood at Rs. 49,621 crores. Although IFCI provides assistance to all the private sector, the cooperative sector and the public sector it is the private sector that is the main recipient of its assistance. For instance, in 1997-98, the private sector accounted for as much as 97.5 per cent of assistance sanctioned followed by joint sector as 2.2 per cent & 0.3 per cent Public and cooperative sectors.

Financial assistance of IFCI


Sl Items no 1 1970-71 1980-81 1990-91 2000-01 2000-02 2002-02

Loan sanctions 32

210

2430

800

1770

2030

Loan disbursed 17

110

11570

1090

2160

1780

IFCI promotional Schemes 1. Interest subsidy for women entrepreneurs.


2. Consultancy free subsidy schemes for providing marketing assistance to small scale units. 3. Encouraging the modernization of tiny small scale and ancillary units 4. Control pollution in the small and medium scale units.

Recent trends in IFCI


1. Converted into a public limited company by company act 1956 from July 1993. 2. Now it would be able to improve its working and rehabilitate. 3. Raised Rs.600 cr in public 4. The govt. of India also subscribed Rs.600 cr for 20 years convertible bonds. 5. The loan disbursement and sanction of loan has gone down from 1090 cr to 800 cr.

Appraisal of IFCIs Performance


Looking at the growth of the IFCIs capital financial assistance sanctioned and disbursed and steadily rising profits, its performance seems to be quite impressive. However, an in-depth study reveals certain flaws in its functioning and these have invited criticisms from different quarters. The important criticisms are as follows: (i) As pointed out by the Mahalanobis Committee long ago, the IFCIs lending operations have encouraged concentration of wealth and capital. Even now it is alleged that it pursues a discriminatory policy to the disadvantage of medium and small-sized industrial units,

(ii) For a considerable period of time, the IFCI did little to remove regional imbalances. It is difficult to justify why in the past industrial concerns in Maharashtra got as much assistance as the ones located in five backward States of Assam , Orissa, Kerala, Rajasthan and Madhya Pradesh taken together. However, lately IFCI has provided considerable assistance to units established in backward areas.
(iii) In sanctioning assistance the IFCI has not always upheld the national priorities as stated in various plan documents. (iv) It has quite often offered assistance to undertakings which could easily raise resources from the capital market.

(v) The IFCI has failed to exercise necessary control over the defaulting borrowers. The borrowing concerns have not in some cases used the loans for the purposes for which they were sanctioned, and yet IFCI has not initiated any action against them.

The performance of IFCI has been extremely unsatisfactory during recent years. The Capital Adequacy Ratio (CAR) fell to 8.80 per cent in 1999-2000 against the minimum stipulated limit of 9 per cent. The ratio of nonperforming assets (NPAs) to net assets in 1999-2000 was as high as 20.70 per cent. As a result, profitability has been affected very adversely.

Industrial Development Bank of India (IDBI)


Prior to the establishment of the Industrial Development Bank of India (IDBI), the country had a number of special industrial financing institutions. Though in terms of range and magnitude they could not adequately meet the demands of the industry even then also the existing industrial financing institutions had done commendable work in the field of industrial finance. But, there was a major lag in the system: 1. No apex organisation to coordinate the functions of various industrial financing institutions. 2. No Dynamic leadership 3. No widely diffused and diversified and viable process of industrialization.

It was under these circumstances that IDBI was set up in July 1964. The IDBI was initially set up as a wholly owned subsidiary of the Reserve Bank of India. In February 1976 the IDBI was made an autonomous institution and its ownership passed on from the Reserve Bank of India to the Government of India. The IDBI has rightly been designated as the apex organisation in the field of development banking.
It not only has organizational links with other development banks but it also renders some such services to them which only an apex organisation is expected to perform.

In the first place, it provides refinance against loans granted to industrial concerns by other development banks like the IFCI, the SFCs and so on and rediscounts their machinery bills. Secondly, it subscribes to the share capital and bond issues of the IFCI, the ICICI, the SFCs and the IIBI. Apart from these linkages, the IDBI plays the role of a coordinator at all-India level.

Main functions of IDBI


1. Planning, promotion and developing industries with the view to full fill the gaps in the industrial structure by conceiving, preparing and floating new projects. 2. Providing technical and administrative assistance for promotion, Management and expansion of industries. 3. Providing financing facilities to IFCI, SFCs and other financial institution approved by government. 4. Coordinating the activities of financial institutions for the promotion and development of industries. 5. Purchasing or underwriting shares and debentures of industrial concern. 6. Guaranteeing deferred payment due from industrial concern and for loans raised by them. 7. Undertaking market and investment research, surveys and techno economic studies helpful to the development of industries.

Financial Resources of IDBI The operations of the IDBI have grown over the years and so have its resources.
The main sources of its funds are share capital, reserves, bonds and debentures issues, deposits from companies and Certificates of Deposits, and borrowings from the Reserve Bank of India and Government of India. The total resources of IDBI amounted to Rs. 72,169 crores in 1999-2000. Of this, the share of bonds and debentures was Rs. 43,976 crores (60.1 per cent). Other sources (inclusive of deposits from companies and Certificates of Deposits) was the second most important source accounting for Rs. 10,096 crores (21.4 per cent) of total resources. The share of reserves and reserve funds was Rs. 8,558 crores (12.8 per cent) while borrowings from the RBI and government stood at Rs. 3,106 crores (6.3 per cent).

COMPOSITION OF FINANCIAL ASSISTANCE.


1. Direct Financial Assistance to Industrial Enterprises:

The policy framework of the IDBI in respect of direct financing has been decided by its apex position. The IDBI provides direct financial assistance to industrial concerns in the form of loans, underwriting and direct subscription to shares and debentures and guarantees. It generally avoids competing with other special industrial financing institutions. It, in fact, acts as the lender of the last resort

2. Indirect Financial Assistance to Industries:

(a) (b) (c) (d)

Financial assistance is routed through some other financial institutions including the State Financial Corporations, State Industrial Development Corporations and Commercial Banks The IDBIs indirect assistance can be broadly classified into four categories Refinance of industrial loans Rediscounting of bills Subscription to shares and bonds of financial institutions, and Seed capital assistance.

3. Assistance to Backward Areas: The IDBI has initiated certain financial and nonfinancial measures to encourage industries in backward areas Financial measures

(a) direct financial assistance in the form of loans at concessional rates, longer initial grace period, etc., (b) concessional refinance assistance to projects in backward areas and (c) special concessions to projects in North-Eastern area under the bill rediscounting scheme Non-financial measures (A) Aim at helping potential entrepreneurs in identifying and formulating viable projects, technical assistance etc.

Total assistance sanctioned by IDBI in 1999-2000 was Rs. 28,308 crores. Of this, the share of direct assistance was Rs. 26,350 crores (93.1 per cent), refinance of industrial loans Rs. 242 crores (0.9 per cent), and bills finance Rs. 723 crores (2.6 per cent). The share of rupee loans in direct assistance of Rs. 26,350 crores sanctioned by IDBI in 1999-2000 was Rs. 8,914 crores (i.e., as high as 34 per cent).
The cumulative assistance sanctioned by IDBI till the end of March 2000 aggregated Rs. 2,16,401 crores. Considering the underdeveloped nature of the capital market and the difficulties which a large number of industrial firms encounter in raising funds from the market, this quantum of assistance is not small.

Industry-wise analysis of IDBIs financial assistance reveals that core and other manufacturing sectors accounted for bulk of the assistance sanctioned and disbursed.

Core sector includes industries such as iron and steel, oil exploration and refining, cement and fertilizer. Other major industries that received large sanctions are: chemicals and chemical products, textiles, electronic and electrical products, food manufacturing and artificial fibers.
Financial assistance provided over the years
Sl no Items 1 2 Loan sanctioned Loan Disbursed 1970-71 1980-81 1990-91 2000-01 2002-03 70 58 1280 1010 6250 4460 22420 17470 2890 3920

Promotional Functions of the IDBI


IDBI performs certain promotional functions as well. These include Provision of training in project evaluation and development of entrepreneurship. A special scheme has been initiated for no industries districts. Under this scheme, IDBI has done surveys to study the industrial potential of no industry districts. The programme is to arrange training for potential entrepreneurs in these districts besides giving financial, technical and administrative assistance to selected projects. It also runs a Technical Consultancy Organisation (TCO). TCO has also made considerable progress in training new entrepreneurs. Besides doing feasibility studies, project appraisals, industrial and market potential surveys, etc.,

The IDBI is also supporting a number of inter institutional groups which provide a forum for discussions on industrial development programmes. Soft loans for modernization Concessional financing for the industries in the notified back ward areas and no industries districts Textile modernization fund scheme. Refinancing against loan up to Rs.200000 granted to technical entrepreneur by SFC Under technical up gradation scheme assistance for selected capital goods industries.

Critical Appraisal
The IDBI was set up three and a half decades ago to function as an apex institution in the field of development finance. Judged by its assistance measured in quantitative terms, the performance of the IDBI looks quite impressive. Over the years not only the amount but also the range and pattern of assistance have grown. This is a significant contribution when we view it in the light of the fact that capital market in the country is still not very much developed. However, without undermining the importance of the contributions made by the IDBI, it must be stated that it has failed to develop itself as a true development bank. First, Its accent on providing loans and treating underwriting of shares and debentures of industrial concerns as a secondary activity is not very appropriate.
.

Secondly, in spite of all its pretensions in providing assistance to projects in backward areas and also to the smallscale sector, the largest beneficiaries of the assistance provided by the IDBI are big industrial concerns. Thus, the distributional consequences of its working are in all probability not very healthy
Finally, the IDBI has mainly concentrated on providing financial assistance. The promotional and consultancy work has not been assigned the same importance as financial assistance. Thus there is need for a change in the approach of the IDBI towards industrial development. The financial performance of IDBI in recent years has also raised many eyebrows as its profitability has been declining. Moreover, the ratio of its non-performing assets to net assets rose to as high 13.40 per cent in 1999-2000. These are warning signals for IDBI.

Recommendation done by Narasimham Committee


1. That all banks and Development Financial Institutions should compete in the market for funds and in providing credit facilities to corporate. 2. A pre conditions for bringing about such competition was to establish a level playing field B/w DF institutions. 3. At present IDBI has been performing two function 1. Direct function 2. Indirect function 4. It proposed that the IDBI should give up its direct financing function and perform only proportional, apex and refinancing role.