DEVELOPMENT BANKING FINANCE FOR THE CORPORATE SECTOR UNIT III/1

Introduction A Development Bank can be defined: “ A Development bank is that bank which gives priority to development objectives” William Diamond

A Development Bank can be defined:

“ A Development bank is that bank which gives priority to development objectives”

William Diamond

It differs from the commercial banks in the following ways: They do not seek or accept deposits They provide long term and medium term finance They provide development services

It differs from the commercial banks in the following ways:

They do not seek or accept deposits

They provide long term and medium term finance

They provide development services

Objectives To serve as an agent of development in various sectors, viz., industry, agriculture and international trade. To accelerate the growth of economy Rapid industrialization, particularly in the private sector so as to provide additional employment opportunities as well as the higher production. Development of Entrepreneurial skill. To take up rural development

To serve as an agent of development in various sectors, viz., industry, agriculture and international trade.

To accelerate the growth of economy

Rapid industrialization, particularly in the private sector so as to provide additional employment opportunities as well as the higher production.

Development of Entrepreneurial skill.

To take up rural development

To finance projects which are of great importance to the economy. to finance the banking and small scale industries To finance the banking and small scale industries. Providing the technical, and administrative assistance. Undertaking marketing, and investment research and surveys.

To finance projects which are of great importance to the economy.

to finance the banking and small scale industries

To finance the banking and small scale industries.

Providing the technical, and administrative assistance.

Undertaking marketing, and investment research and surveys.

Characteristics A development bank is a multi-purpose financial institution it strives to promote economic development it provides refinance to other financial institutions A development bank provides a package of services from identification to management

A development bank is a multi-purpose financial institution

it strives to promote economic development

it provides refinance to other financial institutions

A development bank provides a package of services from identification to management

A development bank arranges for package of incentives to entrepreneurs. it brings in institutional innovations related to development a development bank is a visionary institution. It is not concerned only with the past or the present but also takes into consideration the future A development bank is a link that spurt all round development

A development bank arranges for package of incentives to entrepreneurs.

it brings in institutional innovations related to development

a development bank is a visionary institution. It is not concerned only with the past or the present but also takes into consideration the future

A development bank is a link that spurt all round development

Need Necessity of medium and long term capital To channelise savings Industrial Finance Modernization of Small Scale Industries Transformation of Agriculture Trade oriented Growth Underdeveloped Capital Market Regional Imbalances Privatization Globalization

Necessity of medium and long term capital

To channelise savings

Industrial Finance

Modernization of Small Scale Industries

Transformation of Agriculture

Trade oriented Growth

Underdeveloped Capital Market

Regional Imbalances

Privatization

Globalization

Different Development Banks

Industrial Finance Corporation of India Limited Establishment: July 1, 1948 Objective: to give short term and medium term loans to industrial concerns.

Establishment: July 1, 1948

Objective: to give short term and medium term loans to industrial concerns.

State Financial Corporation Establishment: State Finance corporation Act was passed in 1951. at present there are 26 such corporations. Objectives: To provide long period loans to small and medium sized industries at state level. Functions: Loan extended up to 20 years. Also provide loan to the service industry. Advance upto 20% of the total loans to the individual industrial units.

Establishment: State Finance corporation Act was passed in 1951. at present there are 26 such corporations.

Objectives: To provide long period loans to small and medium sized industries at state level.

Functions: Loan extended up to 20 years. Also provide loan to the service industry. Advance upto 20% of the total loans to the individual industrial units.

Industrial Development Bank of India Establishment: July 1, 1964. Objectives: Planning, promoting and developing industries to fill the vital gaps in industrial structure; Providing technical and administrative assistance; Undertaking market, and investment research & survey. Acts as an apex institution for term finance for the industry. Lender of the last resort and financing projects that are of national priority.

Establishment: July 1, 1964.

Objectives:

Planning, promoting and developing industries to fill the vital gaps in industrial structure;

Providing technical and administrative assistance;

Undertaking market, and investment research & survey.

Acts as an apex institution for term finance for the industry.

Lender of the last resort and financing projects that are of national priority.

Small Industries Development Bank of India Establishment: 1989, started functioning in 1990. Objectives: Acts as an apex institution for term finance, refinance for the small scale industries. To serve as the principal financial institution for promotion, financing and development of the small scale and ancillary industries. To co-ordinate the functions of the institutions engaged in promoting, financing and/or developing the small scale sector.

Establishment: 1989, started functioning in 1990.

Objectives:

Acts as an apex institution for term finance, refinance for the small scale industries.

To serve as the principal financial institution for promotion, financing and development of the small scale and ancillary industries.

To co-ordinate the functions of the institutions engaged in promoting, financing and/or developing the small scale sector.

Industrial Investment Bank of India Ltd. Establishment: earlier known as Industrial Reconstruction Bank of India. It turned into a full fledged all purpose development bank in 1997. Objective : To give financial assistance for the reconstruction of sick or closed industrial units. It offers technical as well as managerial facilities also.

Establishment: earlier known as Industrial Reconstruction Bank of India. It turned into a full fledged all purpose development bank in 1997.

Objective :

To give financial assistance for the reconstruction of sick or closed industrial units.

It offers technical as well as managerial facilities also.

National Housing Bank Establishment : July 1988 Objectives: To promote construction of new houses To advance loans for extension and renovation of old houses. To finance development of slum areas To refinance the loan given to the poor and weaker sections of the society.

Establishment : July 1988

Objectives:

To promote construction of new houses

To advance loans for extension and renovation of old houses.

To finance development of slum areas

To refinance the loan given to the poor and weaker sections of the society.

Industrial Credit and Investment Corporation of India Establishment : 1955, set up with an initiative of World Bank. It was mainly regarded as an investment institution. Objective: Providing assistance in the creation, expansion and modernization of the industrial enterprises; Encouraging and motivating participation of private capital; Encouraging and promoting industrial investment.

Establishment : 1955, set up with an initiative of World Bank. It was mainly regarded as an investment institution.

Objective:

Providing assistance in the creation, expansion and modernization of the industrial enterprises;

Encouraging and motivating participation of private capital;

Encouraging and promoting industrial investment.

National Bank for Agriculture and Rural Development. Establishment : July, 1982 Objective : planning;, promoting and operational matters relating to agriculture and rural development; Training, research and consultancy relating to agriculture and rural development; Coordinating with other institutions engaged in similar work; Acting as a lender of the last resort

Establishment : July, 1982

Objective :

planning;, promoting and operational matters relating to agriculture and rural development;

Training, research and consultancy relating to agriculture and rural development;

Coordinating with other institutions engaged in similar work;

Acting as a lender of the last resort

Limitations Loans to established Entrepreneurs; Contribute towards concentration of economic power. Less interest in Under-writing Ignores the Small scale industries, as they lack proper security to offer for the loans. The capital resources of these Institutions is limited  lack of funds for development. Unbalanced regional grants. Ignores the problem of Industrial Sickness

Loans to established Entrepreneurs;

Contribute towards concentration of economic power.

Less interest in Under-writing

Ignores the Small scale industries, as they lack proper security to offer for the loans.

The capital resources of these Institutions is limited  lack of funds for development.

Unbalanced regional grants.

Ignores the problem of Industrial Sickness

Recommendations of Narasimham Committee on Development Banks: Ownership pattern should be broad based. Should be allowed more autonomy in their working. Only competent persons should be appointed. Representatives of the industrial sector should be included in the boards of development banks. SFC should be made autonomous. Should borrow from capital market at market rates. Should have the sole responsibility in loan sanctions. In case of corporate take overs, development banks should generally lend support to existing management with proven record beneficial to all concerned.

Ownership pattern should be broad based.

Should be allowed more autonomy in their working.

Only competent persons should be appointed.

Representatives of the industrial sector should be included in the boards of development banks.

SFC should be made autonomous.

Should borrow from capital market at market rates.

Should have the sole responsibility in loan sanctions.

In case of corporate take overs, development banks should generally lend support to existing management with proven record beneficial to all concerned.