Module 3- Development Banks

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DEVELOPMENT BANKSModule 3


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History

In the field of industrial finance done through the bankscalled as developmental banks.

The country like India which is and emerging asdeveloped market and with emerging markets in place thefirst requirement being fund and its management.

In the same time the western countries have developedtheir banking styles as they were developed countries. As theyconstantly refined their approach and started implementingby establishing of Socio General pour Favouriser Industrial

National in Belgium in 1822.And the France establishedCredit Mobiliser France in 1852.

In 1920 Japan established Industrial Bank of Japan. Tocater financial needs of industries.


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In post war era in 1944 Industrial bank of Canada wasestablished by Canada.

The Finance corporation for industry Ltd (FCI) and theindustrial 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 IndustrialReorganization 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.


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MEANING

Development banks are specialized financial

institutions.

They provide medium and long-term finance to theindustrial and agricultural sector.

They provide finance to both private and public sector.

Development banks are multipurpose financialinstitutions. They do term lending, investment in securitiesand other activities.

They even promote saving and investment habit in thepublic.


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DEFINITION

In generalDevelopment 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 anddevelopment of social and economic sectors of the nation.

However, needs of the society vary from region to regiondue to differences seen in its communal structure,economy and other aspects.

As per banking

"Development banks are financial institutionsestablished to lend (loan) finance (money) on subsidizedinterest rate. Such lending is sanctioned to promote anddevelop important sectors like agriculture, industry, import-export, housing and allied activities


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Development Banks in India

SIICs


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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


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Important Development Banks in India1. 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 inthe form of loans, underwriting, investment and guarantee operations. Theyhave also undertaken promotional activities. They are thus multi-purposefinancial institutions. They have done commendable service for thedevelopment of industries in our country.


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Features of development banks1. 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 purposefinancial institution.

5. It is essentially a development oriented banks. It motive is toserve public interest rather than profit making.

6. Its primary objective is to promote economic development bypromoting investment and entrepreneurial activity in andeveloping economy.

7. It provides the financial assistance to private sector but also thepublic sector undertaking.

8. It aims to promoting the savings and investment habit in thesociety fill the gap what other banks arent doing but not tocompete with other banks.


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Objective of development banks

1. Rapid industrialization.

2. Provide additional employment opportunity

3. Development of entrepreneurial skills

4. Rural development5. 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.


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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 long-

term 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.


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The IFCI has set up Merchant Banking and Allied ServicesDepartment (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.


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Functions of the IFCI

1) Granting loans or advances both in rupees and foreigncurrencies repayable within 25 years,

2) Guaranteeing rupee loans floated in the open market byindustrial concerns,

3) Underwriting of shares and debentures of the industrialconcerns.

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 statecooperative banks by industrial concerns.


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Other functions In the beginning, the IFCI was expected to extend financial

assistance only to industrial concerns in the private andcooperative sectors. Now both public sector and joint sectorprojects are also eligible for financial assistance from the IFCI.

Financial assistance is available from the IFCI for newindustrial projects as well as for expansion, renovationmodernization

Diversification of the existing company, This may include thepurchase of plant and machinery, construction of factorybuilding and purchase of land for the factory.

Normally the IFCI does not provide finance for the repaymentof existing liabilities and also Its funds are not available forraising working capital which includes the purchase of rawmaterial.


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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, 2000stood 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 anddebentures, borrowing from the government the Reserve

Bank of India and the Industrial Development Bank of India,

and foreign loans


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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. 32.2crores, 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 privatesector that is the main recipient of its assistance.

For instance, in 1997-98, the private sector accounted for asmuch as 97.5 per cent of assistance sanctioned followed byjoint sector as 2.2 per cent & 0.3 per cent Public and co-operative sectors.


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Financial assistance of IFCISl

no

Items 1970-71 1980-81 1990-91 2000-01 2000-02 2002-02

1 Loan sanctions 32 210 2430 800 1770 2030

2 Loan disbursed 17 110 11570 1090 2160 1780


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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.


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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.


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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,


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(ii) For a considerable period of time, the IFCI did little to removeregional imbalances. It is difficult to justify why in the past industrialconcerns in Maharashtra got as much assistance as the oneslocated in five backward States of Assam , Orissa, Kerala, Rajasthanand Madhya Pradesh taken together. However, lately IFCI hasprovided considerable assistance to units established in backwardareas.

(iii) In sanctioning assistance the IFCI has not always upheld thenational priorities as stated in various plan documents.

(iv) It has quite often offered assistance to undertakings which couldeasily raise resources from the capital market.

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


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The performance of IFCI has been extremelyunsatisfactory during recent years. The Capital Adequacy

Ratio (CAR) fell to 8.80 per cent in 1999-2000 against theminimum stipulated limit of 9 per cent. The ratio of non-

performing 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.


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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.


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It was under these circumstances that IDBI was set up inJuly 1964. The IDBI was initially set up as a wholly owned

subsidiary of the Reserve Bank of India. In February 1976 theIDBI 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 otherdevelopment banks but it also renders some such services to

them which only an apex organisation is expected to perform.


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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.


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Main functions of IDBI

1. Planning, promotion and developing industries with the viewto full fill the gaps in the industrial structure by conceiving,preparing and floating new projects.

2. Providing technical and administrative assistance forpromotion, Management and expansion of industries.

3. Providing financing facilities to IFCI, SFCs and other financialinstitution approved by government.

4. Coordinating the activities of financial institutions for thepromotion and development of industries.

5. Purchasing or underwriting shares and debentures ofindustrial concern.

6. Guaranteeing deferred payment due from industrial concernand for loans raised by them.

7. Undertaking market and investment research, surveys andtechno economic studies helpful to the development ofindustries.


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Financial Resources of IDBI

The operations of the IDBI have grown over the years and sohave its resources.

The main sources of its funds are share capital, reserves,bonds and debentures issues, deposits from companies andCertificates of Deposits, and borrowings from the Reserve Bank ofIndia and Government of India.

The total resources of IDBI amounted to Rs. 72,169 crores in1999-2000. 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 sourceaccounting for Rs. 10,096 crores (21.4 per cent) of total resources.The share of reserves and reserve funds was Rs. 8,558 crores (12.8per cent) while borrowings from the RBI and government stood atRs. 3,106 crores (6.3 per cent).


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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 toindustrial 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


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2. Indirect Financial Assistance to Industries:

Financial assistance is routed through some other

financial institutions including the State FinancialCorporations, State Industrial Development

Corporations and Commercial Banks

The IDBIs indirect assistance can be broadly

classified into four categories

(a) Refinance of industrial loans

(b) Rediscounting of bills

(c) Subscription to shares and bonds of financialinstitutions, and

(d) Seed capital assistance.


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3. Assistance to Backward Areas:

The IDBI has initiated certain financial and nonfinancialmeasures 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 backwardareas and

(c) special concessions to projects in North-Eastern area underthe bill rediscounting scheme

Non-financial measures

(A) Aim at helping potential entrepreneurs in identifying andformulating viable projects, technical assistance etc.


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Total assistance sanctioned by IDBI in 1999-2000 was Rs.28,308 crores. Of this, the share of direct assistance was Rs. 26,350crores (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. 26,350crores sanctioned by IDBI in 1999-2000 was Rs. 8,914 crores (i.e., ashigh as 34 per cent).

The cumulative assistance sanctioned by IDBI till the end ofMarch 2000 aggregated Rs. 2,16,401 crores. Considering theunderdeveloped nature of the capital market and the difficultieswhich a large number of industrial firms encounter in raising fundsfrom the market, this quantum of assistance is not small.

Industry-wise analysis of IDBIs financial assistance reveals thatcore and other manufacturing sectors accounted for bulk of theassistance sanctioned and disbursed.


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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 1970-71 1980-81 1990-91 2000-01 2002-03

1 Loan sanctioned 70 1280 6250 22420 2890

2 Loan Disbursed 58 1010 4460 17470 3920


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Promotional Functions of the IDBI

IDBI performs certain promotional functions as well.These include

Provision of training in project evaluation and development ofentrepreneurship.

A special scheme has been initiated for no industriesdistricts. Under this scheme, IDBI has done surveys to studythe industrial potential of no industry districts.

The programme is to arrange training for potentialentrepreneurs in these districts besides giving financial,technical and administrative assistance to selected projects.

It also runs a Technical Consultancy Organisation (TCO). TCOhas also made considerable progress in training newentrepreneurs.

Besides doing feasibility studies, project appraisals, industrialand market potential surveys, etc.,


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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.


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Critical Appraisal

The IDBI was set up three and a half decades ago tofunction as an apex institution in the field of developmentfinance.

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 rangeand pattern of assistance have grown. This is a significantcontribution when we view it in the light of the fact thatcapital market in the country is still not very much developed.

However, without undermining the importance of thecontributions 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 concernsas a secondary activity is not very appropriate.

.


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Secondly, in spite of all its pretensions in providingassistance to projects in backward areas and also to the small-scale sector, the largest beneficiaries of the assistance

provided by the IDBI are big industrial concerns. Thus, thedistributional consequences of its working are in allprobability not very healthy

Finally, the IDBI has mainly concentrated on providing

financial assistance. The promotional and consultancy workhas not been assigned the same importance as financialassistance. Thus there is need for a change in the approach ofthe IDBI towards industrial development. The financialperformance of IDBI in recent years has also raised manyeyebrows as its profitability has been declining.

Moreover, the ratio of its non-performing assets to netassets rose to as high 13.40 per cent in 1999-2000. These arewarning signals for IDBI.


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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.


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Documents

Module 3- Development Banks