Development Bank : Introduction,Features,Objectives & Functions
Introduction
Development banks are unique types of financial institutions. They finance the industrial and agricultural sectors on a medium and long term basis. They engage in term lending, securities investment, and other activities. They even encourage the public to develop a habit of saving and investing.
The Narasingham committees only help with promotion and refinancing. Specialized development financial institutions (DFIs) with majority ownership by the Reserve Bank, such as the IDBI, NABARD, NHB, and SIDBI, were established to meet the long-term financing needs of industry and agriculture.
Definition of Development Bank
There is no precise definition of development bank. William Diamond and Shirley Bosky consider industrial finance and development corporations as ‘development banks’ Fundamentally a development bank is a term lending institution.
A development bank is a multi-purpose financial institution with a long-term development outlook. As a result, a development bank can be defined as a financial institution that provides all types of financial assistance (short- and long-term) to business units in the form of loans, underwriting, investment and guarantee operations, and promotional activities — economic development in general and industrial development in particular.
In short, a development bank is a development- oriented bank.
Features of Development Bank
The following are the most important characteristics of a development bank
- Provide development finance.
- It is a specialized financial institution.
- It provides medium and long term finance to business units.
- Help in Balance Development
- It is more than just a short-term lending institution. It is a financial institution with multiple functions.
- It is fundamentally a development bank. Its primary goal is to promote economic development in developing economies by encouraging investment and entrepreneurial activity. It promotes new and small businesses and seeks balanced regional growth.
- It provides financial assistance to both private and public sector enterprises.
- Its goal is to encourage people in the community to save and invest.
- It does not compete with traditional financial channels, such as loans provided by banks and other traditional financial institutions. Its primary function is that of a gap-filler, filling in the gaps in existing financial facilities.
- Its goal is to serve the public good rather than make money. It works in the nation’s best interests.
Objectives of Development Bank
The main Objectives of Development banks:
- To promote industrial growth.
- To develop backward areas.
- To create more employment opportunity.
- To encourage modernization and improvement in technology.
- To promote more self- employment projects.
- To revive sick Units.
- To improve the management of large industries by providing training..
- To remove regional disparities or regional imbalance.
- To promote science and technology in new areas by providing risk capital.
- To improve capital market in the country.
Function of Development Bank
The following are the most important functions of a development bank
- To promote and develop small-scale industries (SSI) in India.
- To finance the development of the housing sector in India.
- To facilitate the development of large-scale industries (LSI) in India.
- To help the development of agricultural sector and rural India.
- To enhance the foreign trade of India.
- To help to review (cure) sick industrial units.
- To encourage the development of Indian entrepreneurs.
- To promote economic activities in backward regions of the country.
- To contribute in the growth of capital markets.
-Small Scale Industries (SSI)
Development banks play an important role in promoting and developing the small-scale sector. Small Industries Development Bank of India (SIDBI) was established by the Government of India (GOI) to provide medium and long-term loans to Small Scale Industries (SSI) units. SIDBI provides SSI units with direct project financing as well as equipment financing. It also refinances banks and financial institutions that provide SSI units with seed capital, equipment financing, and so on.
-Development of Housing Sector
Development banks lend money to help the housing industry grow. In 1988, the Government of India established the National Housing Bank (NHB).
1.The National Housing Board promotes the housing sector in the following ways:
2.It encourages and supports the growth of housing and financial institutions.
It refinances banks and financial institutions that lend to the housing industry.
-Large Scale Industries (LSI)
Large-scale industries are promoted and developed by development banks (LSI). The corporate sector receives medium and long-term financing from development financial institutions such as IDBI, IFCI, and others. They offer merchant banking services such as project reports, feasibility studies, and project location advice, among other things.
-Agriculture and Rural Development
Agriculture development is aided by development banks such as the National Bank for Agriculture and Rural Development (NABARD). NABARD was established in 1982 to provide refinancing to banks that provide credit to the agriculture and rural development sectors. It brings together all of the financial institutions that lend to agriculture and rural development. It also provides agricultural banks with training and assists with agricultural research.
-Enhance Foreign Trade
International trade is aided by development banks. The Export-Import Bank of India (EXIM Bank) was established in 1982 by the Indian government to provide medium and long-term loans to Indian exporters and importers. It offers Overseas Buyers Credit to foreign buyers who want to buy capital goods in India. It also encourages foreign banks to lend to buyers in their home countries who wish to purchase capital goods from India.
-Review of Sick Units
Development banks assist in the resuscitation (cure) of sick units. To assist sick units, the Indian government established the Industrial Investment Bank of India (IIBI).
The International Institute for Business and Industry (IIBI) is the primary lending and reconstruction institution for sick units. By providing credit and other services, it helps sick-units modernize, restructure, and diversify their operations.
-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
Rural and regional development can be aided by development banks. They provide funding for new businesses in underserved areas. They also assist businesses in project management in underdeveloped areas.
-Contribution to Capital Markets
Capital market development is aided by development banks. They invest in various Indian companies’ equity shares and debentures. They also invest in mutual funds and support the development of India’s capital markets.