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Banking in India - Part 7 ( Development Financial Institution)

Bankers Corner

Development Financial Institution

  • Financial agencies that provide medium to long-term financial assistance and engaged in promotion and development of key sectors of the economy.
  • These institutions have been set up to meet the growing demands of particular segments, such as export, rural housing and small industries.
  • These institutions have been playing a crucial role in channelising credit to the needy sectors and addressing the challenges/issues faced by them.
  • Development financing is a risky business. It involves financing of industrial and infrastructure projects that usually have a long gestation period. The long tenor of such loans has associated with it uncertainty as to performance of the loan asset. The repayment of the long-term project loans is dependent on the performance of the project and cash flows arising from it rather than the reliability of the collaterals. The project could go wrong for a variety of reasons, such as technological obsolescence, market competition, change of Government policies, natural calamities, poor management skills, poor infrastructure.
  • The markets and banking institutions were highly averse to such uncertain outcome, besides not possessing enough information and skills to predict with any certainty the outcome. There was also the cost considerations associated with such risky ventures. The long-term loan comes with a higher price tag due to the term premium loaded into the pricing. In such a situation the long-term financing would be scarce as well as costly so as to render the project financially unviable.
  • The financial institutions in India were set up under the strong control of both Central and State Governments. The Government utilized these institutions for the achievements in planning and development of the nation as a whole. The all India financial institutions can be classified under the following heads according to their economic importance:
    1. All-India Development Banks (Ex: ICICI, IDBI, IIBI, SIDBI)
    2. Specialized Financial Institutions (Ex: EXIM Bank )
    3. Investment Institutions (Ex: LIC, UTI, GIC)
    4. Refinance Institutions ( Ex: NABARD,NHB)
  • Reserve Bank of India regulates and supervises All India Financial Institutions. These institutions are IDBI, ICICI Ltd, IFCI Ltd., IIBI Ltd., NABARD, NHB, Exim Bank, SlDBI and IDFC. Reserve Bank of India undertakes on-site inspection of these institutions and has also evolved off-site Surveillance system through obtaining periodic information.

Development Banks

  • Development Banks in lndia came into existence in the Post-Independence era. Prior to Independence, only commercial banks existed which provided the business community with short-term working capital finance The need, therefore, was felt for the establishment of institutions, which could provide medium to long-term finance to industry.
  • The first development bank, set up in India in 1948, was the Industrial Finance Corporation of India. Its objective was "to make medium and. long-term credit more readily available to industrial concerns in India, particularly in circumstances where normal banking accommodation was inappropriate or recourse to capital issue method was impracticable." Development Banking differs from commercial banking in several ways.
  • Commercial Banking is primarily concerned with short-term lending for financing working capital requirements of a concern. Development banking, on the other hand, is concerned with lending funds for medium to long-term for financing the investments in fixed assets of the company. commercial banking is security-oriented, while development banking is project-oriented.
  • Development banks also finance large-scale projects jointly with commercial banks. Developments Banks have recently been permitted to grant short-term working capital finance to the corporates. They have entered into various other types of financial activities and have undertaken various financial services as well.
  • INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI) was the first development bank establislied in India in the year 1948. It was established as a statutory corporation undcr the IFCI Act, 1948 with the objective of making mcdium and long term funds more readily available to industrial concerns in India. IFCI was converted into public limited company on July 1, 1993 and is now known as the Industrial Finance Corporation of India Ltd. It aims to provide financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of industrial concerns, etc.
  • INDUSTRIAL DEVELOPMENT BANK OF INDIA: Industrial Development Bank of India is one of the four All India Development Banks in India. In addition, it is the apex banking institution in the field of long-term industrial finance and thus, it functions as the principal financial institution for coordinating the functions and the activities of other All India Financial Institutions. IDBI was established in 1964 as a wholly owned subsidiary of the Reserve Bank of India (RBI). In February 1976, it was de-linked from the RBI and its entire share capital was transferred to the Central Government. As an apex, developmental financial institution, IDBI provides both direct as well as indirect assistance to large and medium scale enterprises. Direct assistance by IDBI constitutes a major part of Bank's total assistance. Direct assistance is provided by way of Project Finance, underwriting and direct subscription to shares and debentures, guarantees for deferred Payments and Equipment Finance Schemes. IDBI provides indirect assistance through refinance of Term Loans and Re-discounting of Bills.
  • INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LIMITED: Industrial Credit and Investment Corporation of India Ltd. (ICICI) was the first development bank set-up as a joint stock company in India in 1955. Though Industrial Finance Corporation of India had already come into existence at that time, necessity to establish another institution in the private sector was felt primarily to channelise the World Bank funds to the Indian industry and also to build up a capital market in India. The core business activity of the ICICI has traditionally been the business of providing project finance. But over the years, it has undertaken many non-projects based activities and has diversified into new but allied activities through the establishment of its subsidiaries. Though ICICI had entered into varied and diversified financial services through its subsidiaries, a significant step was taken by merging itself with its subsidiary ICICI Bank Ltd. Along with ICICI Ltd., two of its subsidiaries-ICICI Personal Finance Services and ICICI Capital were also merged with the Bank. Thus, ICICI Bank Ltd. has become the largest bank in the private sector. the apparent reason for the merger was to emerge as a Universal Bank, i.e. a bank which undertakes all types of banking and financial businesses.
  • INDUSTRIAL INVESTMENT BANK OF INDIA LIMITED: Industrial Investment Bank of India (IIBI) was originally setup as Industrial Reconstruction Bank of India under the Industrial Reconstruction Bank of India Act, 1984, as a principal--credit and reconstruction agency for industrial revival by undertaking modernisation, expansion, reorganization, diversification or rationalisation of industry. However, with the establishment .of the Board for Industrial and Financial Reconstruction (BIFR), the role of IRBI as a principal agency for industrial reconstruction was marginalised. Hence, it was considered prudent to convert IRBI into a full-fledged all-purpose developmental financial institution. IRBI was converted into a Government company under the Companies Act, 1956 and was re-named as Industrial Investment Bank of India (IIBI). This restructuring aims at providing adequate operational flexibility and functional autonomy to meet the challenges of the changing environment. IIBI undertakes all the functions of a development bank. These functions include providing long/inedium-term loan/assistance to medium and large industrial units, and providing under-writing support to, issuing of shares and bonds.
  • SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI): SIDBI is the principal institution in the country for promotion, financing and development of industries in the tiny and small-scale sectors. It co-ordinates the functions of other institutions engaged in similar activities. It is the principal financial institution for promotion, financing and development of small scale industries in the economy. It aims to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development.

Refinance Institutions

  • NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD): National Bank for Agriculture and Rural Development (NABARD) is the apex financial institution, in the area of agricultural finance and rural development. It was set up in July 1982 by merging the Agricultural Credit Department and Rural Planning and Credit cell of the Reserve Bank of India and the entire undertaking of Agriculture Refinance and Development Corporation. NABARD undertakes the following functions:
    • Credit to Farm Sector: NABARD provides financial assistance to the farm sector by way of refinance for various agriculture and allied activities, like minor irrigation, plantation and horticulture, land development, farm mechanisation, and animal husbandry. The refinance is provided to commercial banks, State Co-operative Banks, Regional Rural Banks and, State Land Development Banks. Besides providing refinance, NABARD also provides short term loans to State Co-operative Banks and Regional Rural Banks for financing seasonal agricultural operation, marketing of crops, purchase of agricultural inputs.
    • Developmental Activities: NABARD undertakes various developmental activities such as formulation of credit plans, building of institutions, promotion of Research and Technology. It also co-ordinates rural credit agencies and develops expertise to deal with agriculture and rural problems.
    • Regulatory Function: The Banking Regulation Act, 1949 has empowered NABARD to inspect the working of the Regional Rural Banks and Co-operative Banks. Its recommendation is required for opening of a new branch before the RBI gives its permission to do so.
  • National Housing Bank (NHB): National Housing Bank (NHB) was set up in July 1988 under the National Housing Bank Act, 1987 as the apex bank in the field of housing finance. It is a wholly owned subsidiary of the Reserve Bank of India. It is, the principal agency to promote housing finance institutions at the regional and local levels and to provide financial and other support to such institutions. National Housing Bank provides re-finance to the Housing Finance Companies, which are spread all over the country and account for the major share, followed by commercial banks and co-operative banks and Land Development Banks.

Specialised Financial Institutions

  • EXPORT-IMPORT BANK OF INDIA (EXIM BANK): Export-Import Bank of India (EXIM Bank) was set up in 1982 for the purpose of financing, facilitating and promoting the foreign trade of EXIM Bank is wholly owned by the Government of India. It is the apex financial institution in the country for co-coordinating the working of institutions engaged in financing exports and imports. Besides export finance, it also renders various advisory services to exporters and other entities connected with foreign trade. Exina Bank undertakes a variety of lending and service programmes, which are meant for Indian entities, Commercial Banks and Overseas entities. Exim Bank operates a wide variety of schemes for the benefit of Indian exporters. Exim Bank provides finance/refinance to commercial banks in India /abroad to enable them to provide finance to Indian exporters/importers from India. Exim Bank also operates schemes for the benefit of Overseas Entities. As a complement to its financing programmes, Exim Bank offers a wide range of information, advisory and support services to Indian companies and foreign entities.

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