Development Banks [Finance Notes for AHSEC Class 12 2024 Exam]

Unit – 1 Part B: Non-Banking Financial Institutions or Development Banks
[Finance Notes for AHSEC Class 12 2024 Exam]

Name	Full Form	Established on	Objective	Head Office
IFCI	Industrial Finance Corporation of India	1-7-1948	To provide medium and long term credit to industries.	New Delhi
IDBI	Industrial Development Bank of India	July, 1964	To finance industries and to promote other financial institutions	Mumbai
SFCs	State Financial Corporations	1953(Punjab)	To finance industries through subscription of securities and discounting of bills.	Every State
NABARD	National Bank for Agriculture and Rural Development	July, 1982	To provide funds in rural areas.	Mumbai
SIDCs	State Industrial Development Corporations	Not available	Development of medium and large scale industries in states.	Every state
SIDBI	Small Industries Development Bank of India	1990	To provide funds to small scale units through SFC, SIDCs and Banks.	Lucknow
NEDFI	North Eastern Development Finance Corporation	1995	To provide funds and other facilities for promotion, expansion, and modernisation of industries in NE region.	Guwahati
LICI	Life Insurance Corporation of India	1956	To promote savings and mobilises funds to cater the need of the government and industries.	Mumbai
GICI	General Insurance Corporation of India	1972	To provide loans and investments in capital market of the country.	Mumbai
UTI	Unit Trust of India	1963	To encourage and mobilise savings and to channelise it into productive ventures to promote economic development.	Mumbai
IBRD	International Bank for Reconstruction and Development (World Bank)	1945	To assist in reconstruction and development of member countries by investments.	Washington
IFC	International Finance Corporation	1956	To provide long term loans in major currencies to its member company.	Washington
IDA	International development Association	1960	To provide soft loan to economically sound projects which create social capital.	Washington
IMF	International Monetary Fund	1945	To promote international co-operation amongst members on international monetary issues.	Washington
ADB	Asian Development Bank	1966	To promote public and private investment for economic development of Asian region.	Manila, Philippines

Long answer type questions and answers

Q.1 . What are development banks? Explain its features and importance.

Ans: Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.

According to William Diamond, “A Development Bank has the opportunity to promote enterprises i.e. to conceive investment proposal and to stimulate others to pursue them or itself to carry them through from the ‘conception’ to ‘realisation’.

Features of Development Bank

a)    Development bank is a specialised financial institution which provides medium and long term finance to business units.

b)    It is a multi-purpose financial institution and not just a term-lending institution.

c)    It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.

d)    Financial assistance is provided by a development bank not only to the private sector but also to the public sector undertakings.

e)    One of its major aims is to promote the saving and investment habit in the community.

f)     Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.

g)    Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. A development bank is motivated by social profits.

Functions of Development Banks

a)    They provide risk capital.

b)    They provide long-term and medium-term finance to industrial undertakings for purchase of new plants and machinery, expansion, modernization, etc.

c)    They purchase the shares and debentures of companies and thus provide them long-term capital.

d)    They help the companies in raising capital from the capital market.

e)    They underwrite the public issues of shares and debentures by the companies. 

f)     They provide promotional, technical and managerial services to the industrial undertakings.

g)    They sponsor programmes for the upgradation of managerial skills and professionalism of management.

h)    They help in promotion of industrial development programmes in backward areas.

i)      They help foreign investors in finding local partners.

Objectives and Importance of Development Banks:

The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:

a)    Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.

b)    Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.

c)    Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.

d)    Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.

e)    Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.

f)     Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.

g)    Management consultancy: Financial institutions provide technical and management consultancy to industrial units.

h)    Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.

i)      Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.

j)      Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.

k)    Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.

Q.2. Write a brief note on IFCI. State its features and objectives.  2022

Ans: The Industrial Finance Corporation of India (IFCI) was established in 1948 under a special Act of Parliament. It was the first development bank of our country. It was set up to make medium and long term credits to industrial concerns in India. IFCI grants loan mainly for starting new ventures, expansion of existing capacity, replacement or renovation. IFCI has been converted into a public limited company with effect from 1-7-1993 in which 50% shares are held by IDBI and remaining 50% shares are held by commercial banks, insurance companies and co-operative banks.

Features of working of IFCI:

a) IFCI is expected to give special attention to new entrepreneurs and technologies.

b) Larger proportion of assistance has been extended to the developed regions of the country.

c) IFCI mainly provide financial assistance to the private sector and the cooperative sector.

d) IFCI participates in the soft loan scheme introduced by the industrial development bank.

e) IFCI sponsored the management development institutions which has been established to promote management education in the country.

Objectives and functions of IFCI:

a)       Granting loans or advances to industrial concerns repayable within a period of 25 years.

b)      Underwriting and direct subscription to the shares of industrial concerns.

c)       Financial assistance to industrial units to backward areas for balanced regional development.

d)      Equipment financing, equipment leasing and hire purchase services to industrial concerns.

e)      Financial assistance to first generation entrepreneurs, particularly technology oriented concerns and professionals.

Q.3. Write a brief note on IDBI? Mention its features, objectives and functions.  2022

Ans: The full form of IDBI is Industrial Development Bank of India. It was established in July, 1964. However, in February 1976, the IDBI was taken over by the government and was made an autonomous institution. It was established with the object of recognizing and integrating the structure of the existing financial institution in the country for gearing up the needs of rapid industrialization.

Features of IDBI:

a)       It provides direct loans to the industrial concerns;

b)      Extending refinancing facilities for industrial and export credit.

c)       Subscribing to and underwriting of the shares, bonds and debentures of the industrial concerns.

d)      Acceptance, discounting and rediscounting the commercial bills of the industrial concerns;

The objectives of IDBI are:

a)       Planning, promoting and developing industries to fill the gaps in the industrial structure in India.

b)      Providing technical and administrative assistance for promotion etc.

c)       Co-coordinating the working of institutions engaged in financing.

d)      Undertaking market and investment research and surveys for techno-economic studies in connection with development of industry.

The functions of IDBI are:

a)       It renders technical, managerial and administrative assistance for promotion, management and expansion of industry.

b)      It provides financing facilities to IFCI, SFC and other financial institutions approved by the Government.

c)       It co-ordinates the activities of other financial institutions for the promotion and development of industries.

d)      By purchasing and / or underwriting shares and debentures of industrial concerns it provides capital.

e)      It also provides guarantee for deferred payments due from industrial concerns and for loans raised by them.

Q.4. Write a brief note on State Financial Corporations (SFCs).

Ans: In order to provide finance to small and medium scale industries need for a separate financial institution was felt. Accordingly, the government of India passed the State Financial Corporation Act in 1951, enabling the state government to set up State Financial Corporation. As a result, the first SFC was set up by the Punjab Government in 1953. In Assam, Assam Finance Corporation was set up in 1954. The SFC meets the financial requirements of small industrial concerns in private sector.

Objective:

a) The main objective of the SFCs is to provide financial assistance to medium and small scale industrial concerns. SFC especially comes into the picture when traditional banking system does not provide requisite funds. The assistance by SFC is for medium and long term capital requirements. They help both new as well as existing units for purposes of establishment, modernization, renovation, expansion and diversification.

b) To assist industrial concerns engaged in mining, hotel industry, road transport, generation or distribution of electricity or any other form of power.

c) To assist industrial concerns engaged in manufacturing, preservation or processing of essential goods.

d) To provide special or technical knowledge or other service for the promotion and growth of industries.

Functions of SFC:

The main function of the SFC’s is to provide loans to small and medium scale industries engaged in the manufacture, preservation or processing of goods, mining, etc., State Financial Corporations are authorised to grant financial assistance in the following forms:

1. Granting of loans or advances to Industrial concerns repayable within a period not exceeding twenty years.

2. Subscribing to the debentures of industrial concerns repayable within a period not exceeding twenty years.

3. Guaranteeing loans raised by industrial concerns repayable within twenty years.

4. Underwriting the issue of stocks, shares, bonds, or debentures by the industrial concerns subject to their being disposed off within seven years.

5. Guaranteeing deferred payment due from and individual concern in connection with purchase of capital goods in India.

6. Acting as an agent of the Central Government or the Industrial Finance Corporation of India in respect of any business with an industrial concern in respect of loans sanctioned to them.

Q.5. Write a brief note on NABARD.                        2015, 2017, 2020, 2022

Ans: The National Bank for Agriculture and Rural Development (NABARD), a developing bank, came into existence on July 12, 1982, under an Act of Parliament with an initial capital of Rs. 100 crores. It is an apex institution set up for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas. The NABARD has taken over the functions of ARDC (Agricultural Refinance and Development Corporation) and refinancing functions of RBI in respect of co-operative banks and the RRBs.

Objectives/Functions of NABARD

a)       Integrated rural development.

b)      To provide training and Research facilities for rural Development.

c)       To keep a check on all the projects which are refinanced by NABARD; through timely inspection, monitoring and evaluation.

d)      To Act as a coordinator and regulator for rural credit institutions.

e)      Promotion and development of agriculture, Small Scale industries, cottage and village industries, handicrafts and other rural crafts.

f)        To formulate rural credit plans on annual basis for all districts in country.

Q.6. Write a brief note on SIDBI.

Ans: Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of parliament. It is a wholly-owned subsidiary of Industrial Development Bank of India (IDBI). It serves as the principal financial institution for Promotion, Financing, Development if industry in the small scale sector and Coordinating the functions of other institutions engaged in Similar activities. The Small Scale industry (SSI) sector, which is vibrant and dynamic sub-sector of the India’s industrial economy, is the prime area of SIDBI’s business.

Q.7. Write a brief note on State Industrial Development Corporation (SIDCs)

Ans: SIDC: The State Industrial Development Corporation were incorporated under the Companies Act, 1956 as wholly owned state Govt. undertaking for promoting industrial development. Their main objective is the development of medium and large scale industries in their respective states. At present there are 28 SIDCs in India.

Functions of SIDCs:

a)       Providing term loans to medium and large scale industries.

b)      Underwriting and direct subscription of shares / debentures of industries.

c)       Undertaking Entrepreneurship development programmes in respective states.

d)      Administration of incentive scheme of Central and State Govt.

e)      Technical guidance and assistance in plant location.

Q.8. Write a brief note on North Eastern Development Finance Corporation (NEFDi)

Ans: NEDFi: The North Eastern Development Finance Corporation was incorporated under the companies Act, 1956 on    9-8-1995. It registered office was at Guwahati, Assam.

Objectives of NEFDi

a)       To provide credit and other facilities for promotion, expansion and modernization of industries and infrastructural project in the NER of India.

b)      To provide credit and other facilities for agriculture, poultry, dairy, farming etc. in NER of India.