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TABLE OF CONTENTSPREFACE ACKNOWLEDGEMENTINTRODUCTION TO TOPICOBJECTIVES OF STUDYRESEARCH METHODOLOGYHYPOTHESISINTRODUCTION TO DEVELOPMENT BANKSOBJECTIVES OF DEVELOPMENT BANKSBANKS UNDER STUDYIDBIIFCISIDBINABARDDATA ANALYSIS SUGGESTIONSCONCLUSIONLIMITATION
INTRODUCTION TO TOPIC
TO INDIAN FINANCIAL SYSTEM
HISTORY OF DEVELOPMENT BANKS
INDIAN FINANCIAL SYSTEM
Indian financial system is one of the world largest financial systems. Indian
economy is world 4th biggest economy but this Indian financial system has
under gone through various changes or we can say that it has different
stages since its inception.
Basically Indian financial system can be divided into 3 categories:
Before independence
Pre- 1991 era
Post-1991 era
BEFORE INDEPENDENCE:
In British rule India first time seen the organized financial system, although
all that was meant for britishers but that provided us the layout for future
course of action i.e. to build our own financial system. At that time banks
and other financial institutions were at their infantry stage but the given a
base to build the whole system on them. That time can be considered as the
preliminary stage of Indian financial system and at that time there were no
development banks as the motive of colonial rule was to draw the wealth
not to make country developing.
PRE 1991 ERA:
This era has seen the gradual rise in the economy of India. After
independence banks and other financial institutions to provide funds were
established and development banks were also a part of them which were
established specially to provide financial aid to industrial sector and to
promote entrepreneurship in India.
The financial system in this era was based on socialistic pattern of society
and the economy was of mixed type but basically it was public sector based
economy. The motive was to promote every sector of society to uplift and
earn for him self. Indian financial system continued with this pattern for
about 40 years but in true sense the economic growth never boosted up as
there was so many hindrances and lacks in syetm itself which taken country
in such a crisis that it has to borrow funds by pledging its gold that was
called the crisis of 1991
POST 1991 ERA:
To come out the crisis, India has to adopt the new policy regarding the
financial system to speed up the growth and to raise the economy and in
order to perform that a new policy of LIBERALIZATION-
PRIVATIZATION- GLOBALIZATION i.e. LPG was adopted. The basic
motive was to reduce the government control over the economy and to let it
flourish itself. Indian financial system is currently working on this policy
and now the economic growth rate has also risen. Now the development
banks are working in accordance with the industry in order to satisfy their
need of funds and to provide every possible help required. Although the
growth is still slow in comparison with other countries but soon India will
become the strongest economy of world.
HISTORY OF DEVELOPMENT BANKS
The concept of development banking rose only after Second World War ,
Successive of the Great Depression in 1930s. The demand for
reconstruction funds for the affected nations compelled in setting up a
worldwide institution for reconstructions. As a result the IBRD was set up
in 1945 as a worldwide institution for development and reconstruction. This
concept has been widened all over the world and resulted in setting up of
large number of banks around the world which coordinating the
developmental activities of different nations with different objectives
among the world.
The course of development of financial institutions and markets during the
post-Independence period was largely guided by the process of planned
development pursued in India with emphasis on mobilisation of savings and
channelising investment to meet Plan priorities. At the time of
Independence in 1947, India had a fairly well-developed banking system.
The adoption of bank dominated financial development strategy was aimed
at meeting the sectoral credit needs, particularly of agriculture and industry.
Towards this end, the Reserve Bank concentrated on regulating and
developing mechanisms for institution building. The commercial banking
network was expanded to cater to the requirements of general banking and
for meeting the short-term working capital requirements of industry and
agriculture. Specialised development financial institutions (DFIs) such as
the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership of the
Reserve Bank were set up to meet the long-term financing requirements of
industry and agriculture. To facilitate the growth of these institutions, a
mechanism to provide concessional finance to these institutions was also
put in place by the Reserve Bank.
The first development bank In India incorporated immediately after
independence in 1948 under the Industrial Finance Corporation Act as a
statutory corporation to pioneer institutional credit to medium and large-
scale. Then after in regular intervals the government started new and
different development financial institutions to attain the different objectives
and helpful to five-year plans.
The early history of Indian banking and finance was marked by strong
governmental regulation and control. The roots of the national system were
in the State Bank of India Act of 1955, which nationalized the former
Imperial Bank of India and its seven associate banks. In the early days, this
national system operated along side of a large private banking system.
Banks were limited in their operational flexibility by the government’s
desire to maintain employment in the banking system and were often drawn
into troublesome loans in order to further the government’s social goals.
The financial institutions in India were set up under the strong control of
both central and state Governments, and 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 four
heads according to their economic importance that are:
All-India Development Banks
Specialized Financial Institutions
Investment Institutions
State-level institutions
Other institutions
OBJECTIVES OF STUDY
To find out the role of development banks in Indian financial system
To study the various development banks operating in India
To give glance at the working of development banks
To check the contribution of development banks in economic growth
To check the individual contribution of each development bank
To give check the current stature of Indian financial system
To make a comparative study among various development banks
To find out the weaknesses in financial system regarding with
development banks
RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research
problem. It may be understood as a science of studying how research is
done scientifically. In it we study the various steps that are generally
adopted by a researcher in studying his research problem along with logic
behind him. Why a research study has been undertaken, how a research
problem has been defined, in what way and why the hypothesis has been
formulated, what data have been collected and what particular method has
been adopted, why particular technique of analyzing data has been used and
a host of similar other questions are usually answered when we talk of
research methodology concerning a research problem or study.
RESEARCH DESIGN:
A research design is the arrangement of conditions for collection and
analysis of in a manner and aims to combine relevance to the research
purpose with economy in procedure. In fact the research design is the
conceptual structure within which research I conducted. Research Design is
needed because it facilitates the smooth sailing of the various research
operations thereby making research as efficient as possible yielding
maximum information with minimal expenditure of effort, time and money.
I have adopted descriptive and conclusive research design. Descriptive
research is those studies, which are concerned with describing the
characteristics of a particular individual or a group.
Since the aim is to obtain the accurate information about the
development banks in terms of their role in Indian financial system, I have
studied the various data available in books, journals, magazines and on
internet.
DATA SOURCES:
The researcher can gather primary data, secondary data or
both. Secondary data are data that were collected for another purpose and
already exist somewhere. Primary data are data specially gathered for a
specific purpose or for a specific research project. Since the study is based
on already existing facts and figures, so all the sources of data are secondary
SECONDARY DATA
The main source of information for the study was
Weakly magazines
RBI bulletin
Information available in form of articles
Information available on internet
INTRODUCTION TO DEVELOPMENT BANKS
DEVELOPMENT banks in India have had a chequered and not always a
happy history. Some have managed to come back from the brink by taking
to universal banking, or merging with a normal bank. In general, it may be
said that development banking has lost its charm. So much so that when an
official was shifted from the none-too-healthy Indian Bank to NABARD, a
banking veteran said that she deserved not congratulations but
commiseration.
Political interference and flawed industrial policy have been the main
reasons why development banks have fared badly. At the same time, it
needs to be said that some conceptual errors about the nature of
development banking have made matters worse.
From the time of Independence, political interference in the functioning of
banks has been both overt and covert. For instance, loan melas made many
banks sick. Even now, many villagers think that a loan from a government
bank is a gift; it need not be repaid. In spite of such impressive sounding
institutions as Debt Recovery Tribunals, it is still difficult for banks to
recover in full the amounts due; more often than not, banks have no option
but write-off most of the dues. Periodic concessions to borrowers ordered
by the Reserve Bank of India have made debt recovery quite difficult. In
consequence, ill health has dogged the banks in India.
Though development banks did not have to suffer from loan melas, they too
were subject to political pressure to fund projects of dubious value. For long
years, there was no culture of financial closure; many projects started more
with hope and hype than with calculated design, and with no clear idea of
where the funds would be found to complete them. Even if the project had
been well conceived, administrative delays made many projects unviable.
During the License Raj, getting a manufacturing license was an end in itself.
Licenses were obtained or bought merely because they were there and not
because they made economic sense. It was also possible to control a
company by investing no more than a small fraction of the total cost. It was
not uncommon in those days for not-so-scrupulous-businessmen to recover
their entire investment by extracting commissions. There was no
competition to enforce efficiency. Under such circumstances, the surprise is
not that development banks performed badly but that they survived at all.
Notwithstanding these handicaps, development banks made the situation
worse by a faulty appreciation of their role. Normally, bankers are cautious.
They lend only to the wealthy who can offer safe and substantial collateral.
Bankers are not ambitious: they are content charging a fixed interest even if
the borrower makes a killing and multiples the investment several times.
They also accept as normal the erosion of asset value by inflation.
Development banking is different: Loans are made not to those who have
accumulated wealth in the past but to those who show promise to become
wealthy in the future. Normal banking looks for safety in assets
accumulated from the past; in development banking, possible accumulation
of assets in the future is the true collateral. Thus, while in normal banking,
the collateral is real and tangible, in development banking, the collateral is a
dream; it is intangible. In normal banking, an interest default of more than
90 days becomes a non-performing asset. In the case of development,
growth is rarely smooth; development happens in fits and starts; cash flows
are subject to wild fluctuations and become negative at times.
Hence, development banks need to have a longer perspective than three
months; they should show patience for years. Normal banks can afford to be
myopic; development banks should take the long view. For development
banks, it is the trend line and not the current surplus that is important. As
one development banker blithely explained: "When I see any risk, I take my
money and run away." But that is not development banking; development
banks take risks that ordinary banks will not.
As a token of their support for progress, development banks offer an interest
holiday for the gestation period, and then charge a suitably adjusted flat rate
of interest. That does help new enterprises a little, but only a little. Interest
holiday is too crude a device to help new enterprises that, being babies,
suffer from unexpected (and periodic) teething problems.
There is some truth in the well-worn cliché that bankers lend when the
borrower does not need any money, and foreclose when the borrower is in
distress. Development bankers should be different; they should lend a
helping hand in moments of distress, and make up for the risk they take by
extracting larger returns when the borrower recovers.
For that reason, development banks should not operate on a fixed rate of
interest. They should evolve a mechanism which depends on the health of
the borrower. One possibility is to take a share of the profits. However, that
is highly risky. Profit-related investment is best left to venture capitalists. In
risk taking, development banks fall midway between safety-conscious
traditional banks and the daredevil venture capitalists. In seeking returns,
they need to follow a via media — neither be inflexible with a fixed rate of
interest, nor be volatile and bet on equity.
For development banks, a charge on the running costs of the firm could be
that via media, specifically two of them, (a) rents which include the cost of
all outsourcing of materials and services, and (b) wages. Then, a charge on
the rent and wage costs of the borrowing firm, a charge levied only when
the firm has a surplus to pay, could be the via media that development banks
could adopt.
These two costs are linked to inflation and to national economic growth too.
Hence, however low the charge on these two items, it will, in due course,
overtake whatever fixed rate of interest one may consider as an alternative.
In initial years, the returns from such a charge will be low; even nil. In
course of time, whatever sacrifice is made in the teething (or difficult) years
will always be made good — unless the firm is incurable.
An unsympathetic fixed interest burden often makes otherwise curable firms
mortally ill. A flexible charge will give a breather to recover to many firms
that are liable to become incurably sick in a fixed interest regime. Flexible
charges reduce risks for lending banks too: Because of inflation and growth,
a charge on rents and wages will sooner or later overtake any fixed rate of
interest. With patience, development banks can recover their sacrifices with
little risk.
In other words, development banks should think differently, and should
have a long time horizon. They should acquire the expertise to assess the
optimum waiting period and fix the rate of charge on wage costs and rents
paid accordingly. Incidentally, this kind of charge is not only transparent; it
will also make firms cost-conscious. That is an added benefit, additional
safety.
If development banks charge variable returns, they will need a
complementary deposit regime. Pensioners like to have constant real returns
that are protected against erosion by inflation. Hence, they need returns that
rise with time. Thus, development banks would do well to devise a Pension
Fund with inflation-linked returns. Then, they will have a matched
programme for assets and liabilities.
Sir Arthur Lewis won the Nobel for explaining how poor countries can
develop quickly by exploiting the surplus labour they have. On the same
analogy, the rural areas can develop rapidly by exploiting the cheap land
they have in plenty. The scheme PURA (Providing Urban amenities in
Rural Areas) banks on that idea. PURA starts with the construction of a ring
road linking a loop of villages. The moment the road is built, the value of
land alongside increases. PURA goes further. It runs frequent bus services
on the ring road, at least once 10-15 minutes. With bus services in place, the
ring road connects to large numbers of customers. That connectivity will
attract many new businesses, increasing land values further. Every new
business can become a magnet for yet another setting into motion a virtuous
cycle, and to rapid growth and development of newer and newer businesses.
Then, a project like PURA is best funded by levying a charge on rising rents
rather than depending on a relatively high fixed rate interest. With fixed rate
of interest, compounded every three months, a project like PURA may not
take off at all. A more patient, a more farseeing development bank can fund
a competent real estate developer and share - not his profits - but the rents
he gets.
Traditional banking is lending to the real estate developer at a fixed rate of
interest. Venture funding is taking a share in his profits, but development
banking is the policy of placing a charge on the rents collected. That is not
normal and requires a change in the mindset, a new vision, which could give
development banks a new life.
Definition of a development bank
Development banks are .the institutions engaged in the promotion and
development of industry, agriculture and other key sectors. In the words of
A.G. Kheradjou "A development bank is like a living organism that reacts
to the social-economic environment and Its success depends on reacting
most aptly to that environment". Kheradjou assigns an important task to the
development banks. He feels that these banks should react to the socio-
economic needs. They should satisfy the developmental needs of the
economy and their success is linked to the satisfactory growth of the
economy. In the views of William' Diamond" A development bank has the
opportunity to promote enterprises i.e. to conceive investment proposals
and to stimulate others to pursue tI1em or' itself to carry them through, from
'conception' to 'realization'. In principle, a development bank is well suited
to assume this kind of role. Yet, enterprise creation is fraught with costs and
risks which development bank cannot neglect. Development banks can
prudently undertake them only when they have the requisite financial
strength, technical expertise and the managerial skill to bank. ", In his
views, a developl1!enLbank is an institution which takes up the job of
developing industrial enterprises from its inception to completion. This
process involves costs as well as risks. The bank should have sufficient
financial sources and expertise to promote a new unit. D.M. Mithani states
that. "A development bank may be defined as a financial institution
concerned with providing all types of financial assistance (medium as well
as long-term) to business units. I the form of loans, underwriting,
investment and guarantee operations and development in general and
industrial
The role of a development bank has been emphasised in this definition. In
this view a development bank aims to provide financial and promotional
facilities for the overall development of a country.
Features of a development bank.
A development bank has the following features or characteristics:
1) A development bank does not accept deposits from the public like
commercial banks and other financial institutions who entirely
depend upon saving mobilization.
2) It is a specialized financial institution which provides medium term
and long-term lending facilities.
3) It is a multipurpose financial institution. Besides providing financial
help it undertakes promotional activities also. It helps an enterprises
from planning to operational level.
4) It provides financial assistance to both private as well as public sector
institutions.
5) The role of a development bank is of gap filler., When assistance
from other sources is not sufficient then this channel helps. It does
not compete with normal channels of finance.
6) Development banks primarily aim to accelerate the rate of growth. It
helps industrialization specific and economic development in general
7) The objective of these banks is to serve public interest rather than
earning profits.
8) Development banks react to the socio-economic needs of
development.
GROWTH OF DEVELOPMENT BANKS
Although development banks attracted great attention after World War II
but there one insurances or such institutions even much earlier, First
development bank was found in belgium in 1822 under the name of Societ a
de General de Belgique with the purpose of financing and promoting
industry. It was a joint stock bank which nursed funds through the sale of
shares and bonds in order to finance; commercial and industrial enterprises.
This new technique of banking got impetus only in 1852 when 'Credit
Mobilize of France' was set up. It mobilized resources through the sale of
bonds and promissory notes and made long-term investments particularly in
public utility undertakings, railways, insurance companies and banks. It set
a model for similar investment banks established in Germany, Austria,
Belgium, Netherlands, Italy, Spain and Switzerland. Throughout the 19th
century, the Credit Mobilize provided a great appeal to all countries which
wanted to develop industries on a fast pace. In 1902, Industrial Bank of
Japan was established for the purpose of financing her industrial
development. This bank undertook functions of an issue, a Commercial
Bank and mortgage institutions. Though the bank was helpful in
Financing industrialization but it could not strictly be called a development
bank. World War I, European countries developed specialized institutions to
provide industrial finance for reconstruction, modernization and
development of war regard industries. These banks were mainly mortgage
banks which extended long-term loans to industrial undertakings upon first
mortgage of industrial property. Among the important institutions were
Bank of Finland Ltd., National Hungarian Industrial Mortgage Institute
Ltd., and National Economic Bank of Poland. These banks were helpful in
reviving the war shattered economies of these countries. In the second phase
of development banking a need for financing small scale sector was
recognized. The institutes created after great depression carried out the
functions of capital under writing and direct subscription along with lending
activities. The Industrial credit Company of Ireland and Netherlands,
company for Industrial Financing participated in share capital of industrial
undertakings in addition to granting term loans.
In the next phase of development banking after World War II there was a
trend to combine montage lending with underwriting and equity
participation.
Some institutions developed during this period were Industrial Development
Bank of Canada (1944), France Corporation for Industry Ltd. and industrial
and Commercial Finance Corporation Ltd., England (1945), Industrial
Finance Department of Common wealth Bank of Australia (1945). These
institutions not only provided term loans to industry but also participated in
the share capital of companies. The institutions in England even have the
option to convert their loans into preference or equity shares. Though
English and Canadian institutions could at best be described as finance
corporations but that of Australia could be called a development bank
because it could assist in the establishment and development of industrial
undertakings. Despite the differences in the organization, Scope and
methods of various institutions the main thrust of all of them was to access,
those enterprises where sufficient help was not forthcoming from traditional
sources. They acted essentially as gap fillers in peculiar circumstances of
the pest-war years.
In the last 50 years developing countries have promoted many development
thanks. These banks have been developed with special purpose in mind.
They differ in ownership, organization, scope etc. Some' are exclusively
owned by government (Industrial Development Bank of Nepal, 1959,
National Development Bank of Brazil, 1965) others by private interests
(Industrial Credit and Investment Corporation of India, Industrial Finance
Corporation of Thailand, etc.) Some other Banks (Summer Bank of Turkey)
are meant to promote and finance government ' undertakings only, some
exclusively for private enterprises while some for both. Some banks can
only lend while some can lend and take equities besides underwriting. Some
are concerned with entire economy while some are for specific sectors only.
Some banks are regional, some are national while a few are inter-regional
(Asian Development Bank) or international such as World Bank,
International Finance Corporation, International Development Association
etc. Some banks provide only local currency while some deal in both local
and foreign currencies, etc.
OBJECTIVES OF DEVELOPMENT BANKSEvery country felt the need to accelerate the rate of development in post
world war era. Some countries were directly involved in war while many
others were indirectly affected by it. There was a need for reconstructing
economics at a faster speed. The existing machinery for developmental
activities was not sufficient to the requirements of industry. There was a
need to set up such institutions which would take up promotional activities
besides financing. In this background developmental banks were needed for
the following reasons:
1. Lay Foundations for Industrialization
A number of countries got independence from colonial rule. Their
economies needed to be rehabilitated. Other underdeveloped and developing
countries too needed to accelerate the pace of industrialization. To lay a
solid foundation for growth, establishment of certain key industries such as
cement, engineering, machine making, chemicals, etc. is essential. Private
entrepreneurs were not forthcoming to invest in these vital' areas due to risk
involved and Ibng gestation period in those industries. Moreover, it was
beyond the means and capacity of private individuals to take up these
projects. They needed special facilities from institutions which could extend
long-tenn help. The governments of under developed countries set up
development and institutions to fill the vacuum.
2. Meet Capital Needs
1'nere was a dearth of capital needed to foster industrial growth in
underdeveloped countries. Owing to the low level of income of the people
there were no sufficient surpluses for capitalization. There was a need for
institutions which could meet this gap between demand and supply for
capital.
3. Need for Promotional Activities
Besides capital needs, underdeveloped countries suffered from lack of
expertise, managerial and technical know-how. Developmental banks could
take up the job of and joint sectors and provide managerial and resources
and skills and of channeling them into approved fields under private
auspices are needed in these countries.
4. Help Small and Medium Sectors'
The large scale was, to some extent, able to meet its needs. There was a
need to mitigate sufferings of small and medium size industries which form
a sizeable sector of the industrial economy. Despite the important role
played by these sectors they experience scarcity of capital owing to the
apathy of investors to invest their savings because of their credit worthiness
and profitability. There was a need for special institutions to help these
sectors in playing vital role in the industrialization of developing and under
developed countries.
FUNCTIONS OF DEVELOPMENT BANKS
Development banks have been started with the motive of increasing the
pace of industrialization. The traditional financial institutions could not take
up this challenge because of their limitations. In order to help all round
industrialisation development banks were made multipurpose institutions.
Besides financing they were assigned promotional work also. Some
important functions of these institutions are discussed as follows:
1. Financial Gap Fillers
Development banks do not provide medium-tenn and long-tenn loans only
but they help industrial enterprises in many other ways too. These banks
subscribe to the bonds and debentures of the companies, underwrite to their
shares and debentures and, guarantee the loans raised from foreign and
domestic sources. They also help 'undertakings to acquire machinery from
with in and outside the country.
2. Undertake Entrepreneurial Role
Developing countries lack entrepreneurs who can take up the job of setting
up new projects. It may be due to lack of expertise and managerial ability.
Development banks were assigned the job of entrepreneurial gap filling.
They undertake the task of discovering investment projects, promotion of
industrial enterprises, provide technical and managerial assistance,
undertaking economic and technical research, conducting surveys,
feasibility studies etc. The promotional role of development bank is very
significant for increasing the pace of industrialization.
3. Commercial Banking Business
Development banks normally provide medium and long-term funds to
industrial enterprises. The working capital needs of the units are met by
commercial banks. In developing countries, commercial banks have not
been able to take up this job properly. Their traditional approach in dealing
with lending proposals and assistance on securities has not helped the
industry. Development banks extend financial assistance for meeting
working capital needs to their loan if they fail to arrange such funds from
other sources. So far as taking up of other functions of banks such as
accepting of deposits, opening letters of credit, discounting of bills, etc.
there is no uniform practice in development banks.
4. Joint Finance
Another feature of development bank's operations is to take up joint
financing along with other financial institutions. There may be constraints
of financial resources and legal problems (prescribing maximum limits of
lending) which may force banks to associate with other institutions for
taking up the financing of some projects jointly. It may also not be possible
to meet all the requirements of a concern by one institution, So more than
one institution may join hands. Not only in large projects but also in
medium-size projects it may be desirable for a concern to have, for instance,
the requirements of a foreign loan in a particular currency, met by one
institution and under writing of securities met by another. In case of big
projects where substantial financial assistance is needed, more institutions
may form a consortium to meet their needs. The members of the consortium
will undertake joint appraisal of projects and then decide the quantum of
assistance to be provided by each institution.
5. Refinance Facility
Development banks also extend refinance facility to the lending institutions.
In this scheme there is no direct lending to the enterprise. The lending
institutions are provided funds by development banks against loans
extended' to industrial concerns. In this way the institutions which provide
funds to units are refinanced by development banks. In India, Industrial
Development Bank of India provides reliance against ('term loans granted to
industrial 'concerns by state financial corporations. commercial banks and
state co-operative banks.
6. Credit Guarantee
The small scale sector is not getting proper financial facilities due to the
clement of risk since these units do not have sufficient securities to offer for
loans, lending institutions are hesitant to extend them loans. To overcome
this difficulty many countries including India and Japan have devised credit
guarantee scheme and credit insurance scheme. In India, credit guarantee
scheme was introduced in 1960 with the object of enlarging the supply of
institutional credit to small industrial units by granting a degree of
protection to lending institutions against possible losses in respect of such
advances. In Japan besides credit guarantee, insurance is also provided.
These schemes help small scale concerns to avail loan facilities without
hesitation.
7. Underwriting of Securities
Development banks acquire securities of industrial units through either
direct subscribing or underwriting or both. The securities may also be
acquired through promotion work or by converting loans into equity shares
or preference shares. So development banks may build portfolios of
industrial stocks and bonds. These banks do not hold these securities on a
permanent basis. They try to disinvest in these securities in a systematic
way which should not influence market prices of these securities and also
should not lose managerial control of the units.
Development banks have become world wide phenomena. Their functions
depend upon the requirements of the economy and the state of development
of the country. They have become well recognized segments of financial
market. They are playing an important role in the promotion of industries in
developing and underdeveloped countries.
LENDING PROCEDURES OF DEVELOPMENT BANKS
OPERATIONAL ACTIVITIES)
Development banks follow a procedure for evaluating a proposal for a
project. The basic objective is to check whether the applicant fulfils various
conditions prescribed by the lending institution and the project is viable.
The acceptance of a wrong proposal will result in the wastage of scarce
resources. These banks adopt the following procedure for lending:
1. Project Appraisal and Eligibility of Applicant
Every financial institution serves a particular area of activity or there are
certain limits prescribed beyond which they cannot go. Before processing
the application, it is important to find out whether the applicant is eligible
under the norms of the institution or not. The second aspect which is looked
into is to determine whether the enterprise has fulfilled various conditions
prescribed by the government. In case some license is required from the
government. It should have been taken or an assurance is received from the
licensing authority. After satisfying these preliminary issues the project is
appraised by a team of technical financial and economic officers of the
institutions from various discussions with the promoters and clarifications
sought on various points. The bank institution considers financial assistance
in the light of
(I) Guidelines for assistance to industries issued by the government or
others concerned from time to time
(ii) Guidelines issued by the bank
(iii) Policy decisions of the Board of Directors of the bank.
2. Technical Appraisal
A technical appraisal involves the study of:
1) Feasibility and suitability of technical process in Indian conditions.
2) Location, of the project in relation to the availability of raw materials,
power: water. labour, fuel, transport, communication facilities and
market for finished products.
3) The scale of operations and its suitability for the planned project.
4) The technical soundness of the projects.
5) Sources of purchasing plant and machinery and the reputation of
suppliers. etc.
6) Arrangement for the disposal of factory affluent and use of bye
products, if any.
7) The estimated cost of the project and probable selling price of the
product.
8) The programme for completing the project.
9) The sources of supplying various inputs and marketing arrangements.
10) Details of any technical collaboration and its practical aspects.
The technical appraisal determines the suitability of the project.
3. Economic Viability
The economic appraisal will consider the national and industrial priorities of
the project export potential of the product employment potential, study of
market.
4. Assessing Commercial Aspects
The examination of commercial aspects relates to the arrangements for the
purchase of raw materials and sale of finished products. If the concern has
some arrangement for sale then the position of the party should be assessed.
5. Financial Feasibility
The financial feasibility of a new and an existing concern will be assessed
differently. The assessment for a new concern will involve:
1) The needs for fixed assets, working capital and preliminary expenses
will be estimated to find out its needs.
2) The financing plans will be studied in relation to capital structure,
promoters' contribution, debt-equity ratio.
3) Projected cash flow statements both during the construction
and .operation periods
4) Projected profitability and the like dividend in near future.
If a project is already in operation and is undertaking expansion or
diversification, the financial feasibility will be different. The analysis of
existing capital structure, contribution of owners, debt-equity ratio, past
financial performance results shown by profit and loss accounts and
balance sheets, the sources of raising funds, likely needs .of the concern,
future debt-equity ratio (after extending financial help), debt service
coverage, internal rate .of return, in the financial position of the concern and
viability for
6. Managerial Competence
The success .of a concern depends up on the competence of management.
Proper application of various policies will determine the Success of an
enterprise. A lending institution would see the background, qualifications,
business experience of promoters and other persons associated with
management.
7. National Contribution
Besides commercial profitability, national contribution .of the project is also
taken into account. The role of the project in the national economy and its
benefits to the society in the form of good quality products, reasonable
prices, employment generation, helpful in social infrastructure etc. should
be assessed. Development banks aim at the over all welfare of the society.
8. Balancing of Various Factors
Various factors should be balanced against each other. The
circumstances .of the individual project will help in weighing various
factors. Some factors may be strong as their in-depth analysis should be
avoided. In case a project is profitable, there will be no need to assess cash
flow. Weaknesses located in certain areas may be .off set by the good points
in the .other. An experienced management and sound economic outlook
may compensate some weakness in financial positions. The responsibility of
lending bank lies in balancing judiciously different considerations for
arriving at a consensus.
9. Loan Sanction
After the appraisal report on the project is prepared by the bank's officers, it
is placed before the advisory committee consisting of experts drawn from
various fields of the particular industry. If the advisory committee is
satisfied tile proposal then it recommends the case to the Managing Director
or board of Directors along with its own report. When the assistance is
sanctioned hen a letter to this effect is issued to the pay giving details of
conditions.
10. Loan Disbursement
The loan is disbursed after the execution of loan agreement. The execution
of documents of security or guarantee etc. should precede the disbursement
of loan. In case some property is pledged to the bank then title deeds of such
property are properly scrutinized. The fulfillment of various conditions
proceeding to disbursement will determine the time of paying the money to
the party.
11. Follow up
The job of a lending bank does noted by disbursing the assistance. It has
first to see whether the construction .of the project is as per schedule
decided earlier. In case some delay is taking place in executing the plans
then the reasons for it should be determined. Later during operations, the
result should be properly followed. It should be seen whether the revenue
earned by the concern will be sufficient to meet its obligations or not so a
proper follow up by the bank will enable it to follow the progress of the
unit.
DEVELOPMENT BANKING IN INDIA
The foreign rulers in India did not take much interest in the industrial
development of the country. They were interested to take raw materials to
England and bring back finished goods to India. The government did not
show any interest for securing up institutions needed for industrial
financing. The “recommendation for setting up industrial financing
institutions was made in 1931 by Central Banking Enquiry Committee but
no concrete steps were taken. In 1949, Reserve Bank had undertaken a
detailed study to find out the need for specialized institutions. It was in 1948
that the first development bank i.e. Industrial Finance Corporation of India
(IFCI) was established. IFCI was assigned the role of a gap-filler which
implied that it was not expected to compete with the existing channels of
industrial finance. It was expected to provide medium and long-term credit
to industrial concerns only when they could not raise sufficient finances by
raising capital or normal banking accommodation. In view of the vast size
of the country and needs of the economy it was decided 10 set up regional
development banks to cater to the needs of the small and medium
enterprises. In 1951, Parliament passed State Financial Corporation Act.
Under this Act state governments could establish financial corporations for
their respective regions. At present there are 18 State Financial Corporations
(SFC's) in India.
The IFCI and state financial corporations served only a limited purpose.
There was a need for dynamic institutions which could operate as true
development agencies. National Industrial Development Corporation
(NIDC) was established in 1954 with the objective of promoting industries
which could not serve the ambitious role assigned to it and soon turned to
be a financing agency restricting itself to modernization and rehabilitation
of and jute textile industries.
The Industrial Credit and Investment Corporation of India (ICICI) were
established in 1955 as a Joint Stock Company. ICICI was supported by
Government of India, World Bank, Common wealth Development Finance
Corporation and other, foreign institutions. It provides term loans and takes
an active part in the underwriting of and direct investments in the shares of
industrial units. Though ICICI was established in private sector but its
pattern of shareholding and methods of raising funds gives it the
characteristic of a public sector financial institution. .
Another institution, Refinance Corporation for Industry Ltd. (RCI) was set
up in 1958 by Reserve’ Bank of India, LIC and Commercial Banks. The
purpose of RCI was to provide refinance to commercial banks and SFC's
against term loans granted by them to industrial concerns in private sector.
In 1964, Industrial Development Bank of India (IOBI) was set up as an apex
institution in the area of industrial finance, RCI was merged with IDBI.
IDBI was a wholly owned subsidiary of RBI and was expected to co-
ordinate the activities of the institutions engaged in financing, promoting or
developing industry.
However, it is no longer a wholly owned subsidiary of the Reserve Bank of
India. Recently, it made a public issue of shares to increase its capital. In
order to promote industries in the slate another type of institutions, namely,
the State Industrial Development Corporations (SIDC's) were established in
the sixties to promote medium scale industrial units. The state owned
corporations have promoted a number of projects in the joint sector and
assisted sector. At present there are 28 SIDC's in the country. The State
Small Industries Development Corporations (SSIDC's) were also set up to
cater to the needs of industry at state level. These corporations manage
industrial estates, supply
raw materials, run common service facilities and supply machinery on hire
purchase basis. Some states have established their own institutions.
A number of other institutions also participate in industrial financing. The
Unit Trust of India (UTI) established in 1964, Life Insurance Corporation of
India (1956) and General Insurance Corporation of India (GIC) set up in
1973 also finance industrial activities at all India level. Some more units
have been set up to provide help in specific areas such as
rehabilitation of sick units, export finance, agriculture and rural
development. Industrial Reconstruction Corporation of India Ltd. (RCI)'
was set up in 1971 for the rehabilitation of sick units. In 1982 the Export-
Import Bank of India (Exim Bank) was established to provide financial
assistance to exporters and importers. In order to meet credit needs of
agriculture and rural sector, National' Bank for Agriculture and Rural
Development (NABARD) was set up in 1982. It is responsible for short
term, medium term and long-term financing of agriculture and allied
activities. The institutions such as Film Finance
Corporation, Tea Plantation Finance Scheme, Shipping Development Fund,
Newspaper Finance Corporation, Handloom Finance Corporation, Housing
Development Finance Corporation also provide financial various areas.
PROMOTIONAL ROLE OF DEVELOPMENT BANKS IN INDIA
The pace of development cannot be accelerated by providing financial
assistance alone. There are factors which inhibit industrialization of an
underdeveloped country. It is essential to make a correct diagnosis of those
factors and plan things accordingly. The growth potential of different areas,
the availability of natural resources, demand conditions, infrastructure
facilities, etc. should be taken into account before deciding the pattern .of
industrialization of various places. The task of identification of growth
potentialities and preparation of feasibility studies is not an easy task. It
requires huge finances and technical expertise which is beyond the
competence of entrepreneurs of under-developed countries. It is in this area
where development banks can play crucial role. In addition to providing the
traditional role of providing financial assistance, development banks in
India are undertaking promotional role also. Some of the areas where these
banks are participating are:
(1) Surveys of Backward Areas
Under the Industrial Development Bank of India, development institutions
conducted industrial potential surveys in June, 1970 with a view to identify
specific project ideas for implementation in those areas. These surveys
studied the availability of resources, demand potential and availability of
infrastructures facilities. In 1982, Government .of India identified 83
districts in the country where no medium or large scale industrial units
existed. IOBI jointly with IFCI and ICICI launched a programme for
identifying industrial opportunities and needs for. These project ideas were
further screened and developed for arriving at some firm decision about
their implementation. IDBI conducted feasibility studies and cleared
projects for implementation.
(2) Inter-Institutional Groups (IIG's)
With a view to provide a forum to the national and state financial
institutions, IDBI constituted 23 IIG's in various states and union territories
These groups aimed to help accelerate the process of industrial development
in a state with particular emphasis on less developed areas, An attempt was
also made to evolve suitable strategies for industrial development within the
framework of national and state policies and local requirements. IDBI has
been constantly reviewing the functioning of these groups so as to evolve
suitable measures for malting them effective.
(3) Establishing Technical Consultancy Organizations (TCO's),
There is a need for technical consultancy at the time of selling up a new unit
and at the time of making change like modernization, expansion,
diversification, etc. The small and medium scale units cannot pay high fees
of consultancy agencies. With a view to help these entrepreneurs, financial
institutions set up 17 consultancy organization for providing consultancy at
nominal rates. These organizations provide consultancy services to small
and medium entrepreneurs, commercial banks, state-level financial
institutions and other agencies engaged in industrial promotion and
development. The consultancy services covered so far include market
surveys, preparation of feasibility and project reports, entrepreneur ship
development programmes, diagnostic studies and rehabilitation schemes for
sick units, services for implementing projects on turn-key basis. TCO's have
been giving thrust to modernization small and medium scale sectors also. In
this respect they have undertaken in depth studies of specific sub- sectors of
small scale industry so as to identify their modernization needs and prepare
modernization programmes.
(4) Entrepreneurial Development Programmes (EPP's)
Industrial development of a country is directly influenced by the quality of
entrepreneurs it has produced, with a view to impart requisite training to
entrepreneurs. IDBI has been encouraging entrepreneurial development
programmes. It has mainly used the agency of TCO's for drawing up and
conducting these programmes to cater to the needs of entrepreneurs from
small and medium scale sectors. IDBI meets up to 50 per cent of the cost of
such programmes and the balance cost is met by state governments or other
sponsoring institutions.
Development banks have also been trying to strengthen the infrastructure
for conducting entrepreneurial development programmes. The main thrust
has been to institutionalize entrepreneurship activities, generating,
sharpening and sharing knowledge through research documentation and
publication, developing a cadre of professionals. A major step in this area
was the setting up of Entrepreneurship Development Institute of India,
Ahmedabad in 1983. The objective of this institution was to train EPP
trainers, providing resource inputs running model development
programmes, conducting.
(5) Technological Improvements
Development banks, especially IDBI have been helping small and medium
sectors in developing and upgrading of their technology so that they arc able
to match the pace of development. These banks also encourage
entrepreneurs to adopt sophisticated technology with the help of academic
and research institutes and also to encourage entrepreneurship among
science and technology graduates. Development banks have done a good
job in promoting industrial activities in various parts of the country. The
development of backward areas is a gigantic task in India. Private
entrepreneurs cannot measure to this task of their own. So development
banks are expected to play an important role in this regard. These banks
should help in setting up new projects by associating private entrepreneurs
so that their management is left to them. After a particular stage of a project
the development institutions should transfer the responsibility to private
sector and same resource should be used to develop more units.
Development banks, in co-operation with private sector, can certainly help
in accelerating the pace of industrial development.
Role of development banks in financial system
Financial institutions provide means and mechanism of transferring
resources from those who have an excess of income over expenditure to
those who can make productive use of the same. The commercial banks and
investment institutions mobilize savings of people and channel them into
productive uses. Financial institutions provide all type of assistant required
infrastructural facilities Institutions e p economic persons who can take the
development in the following ways.
1. Providing Funds:-
The underdeveloped countries have low levels of capital formation. Due to
low incomes, people are not able to save sufficient funds which are needed
for sensing up new units and also for expansion diversification and
modernization of existing units. The persons who have the capability of
starting a business but does not have requisite help approach to financial
institutions for help. These institutions help large number of persons for
taking up some industrial activity. The addition of new industrial units and
increasing the activities of existing units will certainly help in accelerating
the pace of economic development. Financial institutions have large
inventible funds which are used for productive purposes
2. Infrastructural Facilities
Economic development of a country is linked to the availability of
infrastructural facilities. There is a need for roads, water, sewerage,
communication facilities, electricity etc. Financial institutions prepare their
investment policies by keeping national priorities in miner-The institutions
invest in those aim is which can help in increasing the development of the
country. Indian industry and agriculture is facing acute shortage of
electricity. All India" institutions are giving priority to invest funds in
projects generating electricity. These investments will certainly increase the
availability of electricity. Small entrepreneurs cannot spare funds for
creating infrastructural facilities. To overcome this problem, institutions at
state level are developing industrial estates and provide sheds, having all
facilities at easy installments. So financial institutions are helping in the
creation of all those facilities which are essential for the development of a
country
3. Promotional Activities
An entrepreneur faces many problems while setting up a new unit. One has
to undertake a feasibility report, prepare project report, complete
registration formalities, seek approval from various agencies etc. All these
things require time, money and energy. Some people are not able to
undertake this exercise or some do not even take initiative. Financial
institutions are the expense and manpower resources for undertaking the
exercise of starting a new unit. So these institutions take up this work on
behalf of entrepreneurs. Some units may be set up jointly with some
financial institutions and in that case the formalities are completed
collectively. Some units may not have come up had they not received
promotional help from financial institutions. The promotional role of
financial institutions is helpful in increasing the development of a country.
4. Development of Backward Areas
Some areas remain neglected because facilities needed for setting up new
units are not available here. The entrepreneurs set up new units at those
places which are already developed. It causes imbalance in economic
development of some areas. In order to help the development of backward
areas, financial institutions provide special assistance to entrepreneurs for
setting up new units in these areas. IDBI, IFCI, ICICI give priority in giving
assistance to units set up in backward areas and even charge lower interest
rates on lending. Such efforts certainly encourage entrepreneurs to set up
new units in backward areas. The industrial units in these areas improve
basic amenities and create employment opportunities. These measures will
certainly help in increasing the economic development of backward areas.
5. Planned Development
Financial institutions help in planned development of the economy.
Different institutions earmark their spheres of activities so that every
business activity is helped. Some institutions like SIDBI, SFCI's especially
help small scale sector while IFCI and SIDC's finance large scale sector or
extend loans above a certain limit. Some institutions help different segments
like foreign trade, tourism etc. In this way financial institutions devise their
roles and help the development in their own way. Financial institutions also
follow the development priorities set by central and state governments.
They give preference to those industrial activities which have been specified
in industrial policy statements and in five year plans. Financial institutions
help in the overall development of the country
6. Accelerating Industrialization
Economic development of a country is linked to the level of
industrialization there. The setting up of more industrial units will generate
direct and indirect employment, make available goods and services in the
country and help in increasing the standard of living. Financial institutions
provide requisite financial, managerial, technical help for setting up new
units. In some areas private entrepreneurs do not want to risk their funds or
gestation period His long but the industries are needed for the development
of the area. Financial institutions provide sufficient funds for their
development. Since 1947, financial institutions have played a key role in
accelerating the pace of industrialization. The country has progressed in
almost all areas of economic development.
7. Employment Generation
Financial institutions have helped both Direct and indirect employment
generation. They have employed many persons to man their offices. Besides
office staff, institutions need the services of experts which help them in
finalizing lending proposals. These institutions help in creating employment
by financing new and existing industrial units. They also help in creating
employment opportunities in backward areas by encouraging the setting
up of units in those areas, Thus financial institutions have helped in creating
new and better job opportunities.
ALL INDIA DEVELPOMENTS BANKS
In India, various financial institutions were set up after independence only.
The Government of India has taken sleeps to set up institutions which assist
various sectors of the economy. At present the country has 12 institutions at
the national level and 46 at the state level. The All India Financial
Institutions comprise six: All-India Development Banks, namely: Industrial
Development Bank of India, Industrial Finance Corporation of India Ltd.,
Industrial Credit and Investment Corporation of India Ltd., Small Industries
Development Investment Bank of India, Industrial Reconstruction Bank of
India and SCICI Ltd. Specialized institutions comprise of Risk Capital and
Technology Finance Corporation Ltd., Technology Development and
Information Company of India Ltd. and Tourism Finance Corporation of
India Ltd. There are three investment institutions: Life Insurance
Corporation of India Ltd., Unit Trust of India and General Insurance
Corporation of India. At state level there are 18 State Finance Corporations
and 18 state finance corporations and 28 state industry development
corporations.
INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
At the same time raw industrial units were to be set up for industrializing
the country. Government of India came forward to set up the Industrial
Finance Corporation of India (IFCI) in July 1948 under a Special Act. The
Industrial Development Bank of India, scheduled banks, insurance
companies, investment trusts and co-operative banks are the shareholders of
IFCI. The Government of India has guaranteed the repayment of capital and
the payment of a minimum annual dividend. Since July I, 1993, the
corporation has been converted into a company and it has been given the
status of a Ltd. Company with the name Industrial Finance Corporations of
India Ltd. IFCI has got itself registered with Companies Act, 1956. Before
July I, 1993, general public was not permitted to hold shares of IFCI, only
Government of India, RBI, Scheduled Banks, Insurance Companies and Co-
operative Societies were holding the shares of IFCI.
Management of IFCI
The corporation has 13 members Board of Directors, including Chairman.
The Chairman is appointed by Government of India after consulting
Industrial Development Bank of India. He works on a whole time basis and
has tenure of 3 years. Out of the 12 directors, four are nominated by the
IDBI, two by scheduled banks, two by co-operative banks and two by other
financial institutions like insurance companies, investment trusts, etc. IDBI
normally nominates three outside persons as directors who are experts in the
fields of industry, labour and economics, the fourth nominee is the Central
Manager of IDBI. The Board meets once in a month. It frames policies by
keeping in view the interests of industry, commerce and general public. The
Board acts as per the instructions received from the government and IDBI.
The Central Government reserves the power up to the Board and appoints a
new one in its place.
The Board is assisted by the Central Committee which consists of the
chairman, two directors elected by nominated directors and the Board of
directors elected by the elected directors. This committee assists the Board
in discharge of its functions. It .can act on all matters under the competence
of the Board, So this committee practically transacts the entire business of
the corporation. IFCI also has Standing Advisory Committees one each for
textile, sugar, jute, hotels, engineering and chemical processes and allied
industries. The experts in different fields appointed on Advisory
Committees. The chairman is the ex-officio member of all Advisory
Committees. All applications for assistance are first discussed by Advisory
Committees before they go to Central Committees.
Financial Resources of IFCI
The financial resources of the corporation consist of share capital bonds and
debentures and borrowings.'
a) Share Capital:-
The IFCI was set up with an authorised capital of Rs. 10crores
consisting of 20,000 shares of Rs. 5,000 each. This capital was later on
increased at different times and by March, 2003 it was Rs. 1068 crores.
The capital was subscribed by Central Government, Reserve Bank of
India, scheduled banks, Life Insurance Corporation, investment trusts,
co-operative banks are other financial institutions. In 1964, the share
capital held by the central government and RBI was transferred to the
Industrial Development Bank. The corporation thus became a subsidiary
of IDBI. The central government had guaranteed the shares of the
corporation both for repayment of the principal and for the payment of a
dividend at 2.5 per cent on the original issue and 4 per cent on the
additional issues. However, since July I, 1993IFC has been converted
into a limited company.
b) Bonds and Debentures:-
The corporation is authorized to issue bonds and debentures to
supplement its resources but these should not exceed ten times of paid-
up capital and reserve fund. The bonds and debentures stood at a figure
of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on 31st March
2003. The bonds and debentures are also guaranteed by the central
government for both payment of interest at such rates as may be fixed at
the time the bonds and debentures are issued.
c) Borrowings:-
The corporation is authorized to borrow from government IDBI and
financial institutions. Its borrowings from IDBI and Govt. of India were
Rs. 975.6 crore on March 31, 2003. Total assets of IFCI as on March 31,
2003 aggregated Rs. 22866 crore including investments of Rs. 3820.3
crore and loans and advances of Rs. 13212.8crore.
Priority Criterion for Investments
IFCI plans its financing policies as per the priorities set by the government
through Industrial Policy Statements. The Industries which are in high
priority are given more importance. Following considerations are taken into
account while selecting a financial proposal:
i. Importance of the project for national economy.
ii. Employment-oriented and labour-intensive nature of the project.
iii. Export potential of the unit,
iv. Projects located in backward areas or 'no industry districts.
v. Projects initiated by new or technician entrepreneurs.
vi. Projects which will harness indigellously available technology,
technical know how and raw materials.
vii. Projects which will help rural areas.
viii. Projects which help in conserving energy or which manufacture
renewable energy systems or devices.
ix. Projects to be set up in co-operative sector.
Eligibility for Assistance under Direct Financing
Following types of industrial concerns are eligible for direct finance under
IFCI Act, amended from time to time:
i. Limited companies incorporated in India, in private, public or joint
Sector
ii. Co-operative societies registered in India, which are engaged or
propose to engage in any of the activities related to
a. Manufacture, preservation or processing of goods
b. Shipping
c. Mining
d. Hotel industry
e. Generation or distribution of electricity or any other form of
power
f. Transport of passengers or goods.
g. Maintenance, repair or servicing of machinery or vehicles.
h. Assembling, repairing or packing of articles.
i. Development of contiguous area of land as an industrial estate.
j. Fishing or providing shore facilities for fishing.
k. Providing special or technical knowledge or other services for
promotion of industrial growth.
l. Research and Development of any process or product in
relation to any of the matters aforesaid.
Purpose of Direct Assistance
IFCI provides direct financial assistance for the following causes:
a. Setting up of new industrial projects.
b. Expansion of existing units or for diversification into new lines of
activity.
c. For renovation and modernization of existing units.
IFCI does not ordinarily provide funds for working capital purpose as this
function is left to commercial banks. It does not allow utilizing its assistance
for meeting existing liabilities of the industrial concerns. Similarly, foreign
currency loans can be used for purchasing capital goods only and not of raw
material.
FUNCTIONS OF IFCI
IFCI is authorized to render financial assistance in one or more of the
following forms:
i. Granting loans or advances to or subscribing to debentures of
industrial concerns repayable within 25 years. Also it can convert part
of such loans or debentures into equity share capital at its option.
ii. Underwriting the issue of industrial securities i.e. shares, stock,
bonds, 0r debentures to be disposed off within 7 years.
iii. Subscribing directly to the shares and debentures of public limited
companies.
iv. Guaranteeing of deferred payments for the purchase of capital goods
from abroad or within India.
v. Guaranteeing of loans raised by industrial concerns from scheduled
balls or state co-operative banks.
vi. Acting as an agent of the Central Government or the World Bank in
respect of loans sanctioned to the industrial concerns.
IFCI provides financial assistance to eligible industrial concerns regardless
of their size. However, now-a-days, it entertains applications from those
industrial concerns whose project cost is about Rs. 2 crores because upto
project cost of Rs. 2 crores various state level institutions (such as Financial
Corporations, SIDCs and banks) are expected to meet the financial
requirements of viable concerns. While approving a loan application, IFCI
gives due consideration to the feasibility of the project, its importance to the
nation, development of the backward areas, social and economic viability,
etc. The most of the assistance sanctioned by IFCI has gone to industries of
national priority such as fertilizers, cement, power generation, paper,
industrial machinery etc. The corporation is giving a special consideration
to the less developed areas and assistance to them has been stepped up. It
has sanctioned nearly 49 per cent of its assistance for projects in backward
districts. The corporation has recently been participating in soft loan
schemes under which loans on confessional rates are given to units in
selected industries. Such assistance is given for modernization, replacement
and renovation of plant and equipment.
IFCI introduced a scheme for sick units also. The scheme was for the
revival of sick units in the tiny and small scale sectors. Another scheme was
framed for the self-employment of unemployed young persons. The
corporation has diversified not merchant banking also. Financing of leasing
and hire purchase companies, hospitals, equipment leasing etc. were the
other new activities of the corporation in the last few years.
Promotional Activities
The IFCI has been playing very important role as a financial institution in
providing financial assistance to eligible industrial concerns. However, no
less important is its promotional role whereby it has been creating industrial
opportunities also. It has been taking up directly as well as indirectly; such
steps and activities are regarded necessary for the acceleration of the
process of industrialization in the country.
The promotional role of IFCI has been to fill the gaps, either in the
institutional infrastructure for the promotion and growth of industries, or in
the provision of the much needed guidance in project intensification,
formulation, implementation and operation, etc. to the new tiny, small-scale
or medium scale entrepreneurs or in the efforts at improving the
productivity of human and material resources.
(a) Development of Backward Areas: - The main thrust of all financial
institutions has been to remover regional imbalances by promoting
industrialization of backward areas. IFCI introduce a scheme of
confessional finance for projects set up in backward areas. The
backward-districts were divided into three categories depending upon
the state of development there. All these categories were eligible for
concessional finance. Nearly 50 per cent of total lending of IFCI has
been to develop backward areas.
(b)Promotional Schemes:- IFCI has been operating six promotional
schemes with the object of helping entrepreneurs to set up new units,
broadening the entrepreneurial base, encouraging the adoption of new
technology, tackling 'the problem of sickness and promoting
opportunities for self development and . self employment of
unemployed persons etc. These schemes are as such:
a. Subsidy for Adopting Indigenous Technology:- The projects
which use indigenously developed technology are entitled to a
concession in the form of subsidy covering interest payments
due to IFCI during the first three years of operations,
extendable to five years.
b. Meeting Cost of Market Studies: - The entrepreneurs setting
up medium sized industrial projects for the first time can avail
75 per cent of the cost of market survey/study subject to a
ceiling of Rs. 15,000 provided it is handled by Technical
Consultancy Organization. .
c. Meeting Cost of Feasibility Studies: - IFCI provides subsidy
for the fees paid for consultancy assignments relating to
feasibility, project reports etc. The amount allowable is 80 per
cent of the fees of Rs. 7,500 whichever is less. This limit is Rs.
8,500 or 100 per cent of the total fees whichever is less for
handicapped or scheduled caste persons.
d. Promoting Small Scale and Ancillary Industries: - For the
identification of products suitable for ancillary or further
processing in small scale sector and preparation of feasibility
reports a subsidy of Rs.0.1 million per annum for technical
consultancy organization is allowed.
e. Revival of Sick Units: - There is a subsidy to the extent of 80
per cent or Rs. 5,000 (whichever is less) for the fees charged by
a technical consultancy organization for carrying out a
diagnostic study or for the implementation of rehabilitation
programme. This facility is allowed to tiny units or units in
small scale sector.'
f. Self-development and Self employment Scheme: - An
unemployed person in the age group of 21 to 35 years may be
allowed a soft loan for providing margin money for getting a
loan from a bank or a financial institution. The soft loan at
interest free rate in first year and has confessional interest later
on. The amount available under this scheme is 25% of margin
money subject to Rs. 5000.
INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
Industrial Development Bank of India was set up to accelerate the
development of the country. A number of financial institutions came into
existence after independence and were catering to a variety of needs of the
industry. There was a lack of co-ordinating different institutions and it led to
overlapping and duplication in their efforts: At the same time some gigantic
projects of national importance were not getting required financial
assistance. It was in response to this need that the Industrial Development
Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary
of Reserve Bank of India. The bank was to act as an apex institution co-
coordinating functions of all the financial institutions into a single
integrated movement of development banking and supplementing their
resources for industrial financing and as an agency for providing financial
suppon to all worthwhile projects of national importance whose access to
existing institutional sources is limited.
The ownership of IDBI was transferred to Central Government on February
16, 1976. It is now working as state owned autonomous corporation.
Besides acting as a reserviour on which other financial institutions can
draw, IDBI provides direct financial assistance to industrial units to bridge
the gap between supply and demand of medium and long term finance.
The IDBI Act was amended, in 1994, to permit public ownership upto 49
percent., In 1995, it raised more than Rs. 20 billion through its first initial
public offer (IPO) of equity. It reduced the stake of the government to 72.14
percent. Further, in June 2000, a pan of the equity shareholding of the
government was convened into preference share capital which was
redeemed in March 2001, resulting into further reduction of government
stake to 58.47 percent.
Financial Resources of IDBI
a. Share Capital. IDBI was formed with an authorized capital of Rs. 50
crores which was raised a number of times. In October, 1994,
Government of India's amended certain provisions of IDBI Act under
which its authorised capital has been increased to Rs. 2000 crore
which can further be increased to Rs. 5000 crore. A pan of equity
capital (Rs. 253 crore) has been convened into preference capital.
IDBI has been permitted to issue equity capital to public with a
stipulation that at no time Government holding will be less than 51
per cent. As on March 31,2003 the paid up capital of IDBI stood at
Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore.
b. Borrowings. The bank is authorised to raise its resources through
borrowings from Government of India, Reserve Bank of India and
other fmancia1 institutions. On March 31, 2003, the bank had
borrowings of Rs. 41798.0 crore by way of bonds and debentures,
deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from
Government of India and other sources.
Management of IDBI
The management of IDBI is vested in a Board of Directors consisting of 22
persons including a full-time Chairman-cum-Managing Director appointed
by the Central Government. The other members of the Board comprise of a
representative of the RBI, a representative each of the all-India financial
institutions, two officials of the Central Government, three representative
search of he public sector banks and SFCs and five representatives having
special knowledge and experience of industry; The .Board has constituted
an Executive Committee consisting of ten directors. Ad-hoc committees of
Advisers are also constituted to advise it on. specific projects.
Recently, Government of India ha9 sought to repeal the IDBI Act. 1964. by
introducing The Industrial Development Bank.(Transfer of Undertaking and
Repeal) Bill 2002 is Lok Sabha. The Bill is aimed at convening IDBI into a
company under the Companies Act as also enabling it to undertake banking
business.
Functions of IDBI
The main functions of IDBI are as follows:
1) To co-ordinate the activities of other institutions providing term
finance to industry and to act as an apex institution.
2) To provide refinance to financial institutions granting medium and
long-term loans to industry.
3) To provide refinance to scheduled banks or co-operative banks.
4) To provide refinance for export credit granted by banks and financial
institutions
5) To provide technical and administrative assistance for promotion
management or growth of industry.
6) To undertake market surveys and techno-economic studies for the
development of industry.
7) To grant direct loans and advances to industrial concerns. IDBI is
empowered to finance all types of industrial concerns engaged or
proposed to be engaged in the manufacture, preservation or
processing of goods, mining, hotel, industry, fishing, shipping
transport, generation or distribution of power, etc. The bank can also
assist concerns engaged in the setting up of industrial estates or
research and development of any process or product or in providing
technical knowledge for the promotion of industries. Until recently
IDBI also functioned as Expon Bank of the country.
8) To render financial assistance to industrial concerns. IDBI operates
various schemes of assistance. e.g., Direct Assistance Scheme. Soft
Loans Scheme. Technical Development Fund Scheme, Refinance
Industrial Loans Scheme. Bill Re-discounting Scheme. Seed Capital
Assistance Scheme. Overseas Investment Finance Scheme.
Development Assistance Fund, etc.
OPERATIONS OF IDBI
Since its inception in 1964, IDBI has extended its operations to various
areas of industrial sector. It provides direct as well as indirect financial
assistance for increasing the pace of industrial development. Aggregate
assistance sanctioned by March. 2003 amounted to Rs. 223932.1 crore and
disbursements amounted to Rs. 168166.5crores. The operation
1. Direct Assistance
Direct financial assistance includes project finance assistal1ce, soft-loan
assitace, assistance under technical development fund scheme and
rehabilitation assistance for sick units. Various schemes under direct
assistance are discussed as follows:-
1) Project Finance Assistance: - Under project finance scheme. the
IDBI extends direct assistance to industrial concerns in the form of :
a. Project loans
b. Subscription to and/or underwriting of issues of shares and
debentures.
c. Guarantee for loans and deferred payments.
Financial assistance under this scheme is granted for setting up new projects
as well as for expansion and Modernization renovation of existing units.
IDBI normally extends assistance to public limited companies in the private,
public, joint sector and co-operative sectors. Bank's assistance is sought for
projects involving large capital outlay or sophisticated technology. Bank
gives preference to units set up by new entrepreneurs or projects located in
backward areas. The repayment period is settled by looking at the capacity
of the enterprise. Normally, repayment is spread over a period of 8-10 years
with a grace period of 2-3 years. These loans are usually secured by a first
legal mortgage of the immovable properties of the borrowing concern and
floating charge on its other assets, subject to a first charge on raw materials,
stocks, etc. for working capital borrowings.
The bank does not hold shares & debentures, taken over under legal
obligation for underwriting or taken over directly, for a longer period. As a
matter of policy, the bank places major emphasis on the long-term
economic viability of the projects rather than on the immediate sale ability
of their products. In the case of assistance in the form of guarantees of loans
and deferred payments, the bank charges a guarantee commission of 1 per
cent in normal cases.
There has been a constant increase in direct assistance. Upto March, 2003
cumulative assistance in the form of direct loans to industrial concerns
and .subscriptions came to Rs. 102601.8 crore. Most of this assistance was
in priority sector industries such as basic industrial chemicals, cement,
fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and
industrial machinery.
IDBI introduced special schemes for industrialization of backward areas. In
a scheme introduced in 1969 it offered concessional rates of interest, longer
grace periods for repayments, etc. These concessions were available to
small and medium units having project cost upto Rs. 3 crores. In
collaboration With IFCI and ICICI, the bank is also giving concessional
rupee assistance upto Rs. 2 crores and underwriting assistance up to Rs.l
crore. The assistance to backward areas has also been increasing.
To achieve balanced regional growth and accelerate industrial development
IDBI initiated promotion and development activities. In co-operation with
other institutions the bank conducted industrial potential surveys in a
number of states.
2) Soft Loan Scheme
IDBI introduced in 1976 the soft loan scheme to provide financial assistance
to product units in selected industries viz., cement, cotton, textiles. jute,
sugar and certain engineering industries to modernize. Financial replace and
renovate their plant and equipment so as to achieve higher and more
economic levels of production. This scheme is implemented by IDBI
with .financial participation by IFCI and ICICI. The basic criteria for
assistance under the scheme are the weakness or non-viability of industrial
concerns arising out of mechanical obsolescence. Industrial concerns which
are not in a position 10 bear the normal lending rate of interest of the
financial institutions are provided on accessional assistance to the full extent
of the loan. In other cases the limit of concessional assistance is 66 per cent
of the loan. Assistance under this scheme is based on the requirements of
individual cases. As such, no minimum or maximum limit of'1m!\11tas
been prescribed. The repayment period extends up to 15 years with a
moratorium period of 3-5 years. The loans under his scheme are secured as
a first charge on fixed assets. The bank may insist on personal or other
guarantees also.
This scheme was modified in Jan. 1984 and was named as Soft Loan
Scheme for modernization so as to cover deserving units in all industries.
Under this scheme assist3nce is available to production units for financing
modernization especially to upgrade technology, Export orientation, import
substitution, Energy saving, prevention of pollution, recycling of wastes,
etc. The performance under this scheme has not been encouraging because
of convertibility clause.
3) Technical Development Fund Scheme
The Government of India introduced the Technical Development Fund
(TDF) Scheme in March. 1976 for issue of import licenses for import of
small value balancing equipment, technical know how, foreign consultancy
services and drawings and designs by industrial units to enable them to
achieve fuller capacity utilization, technological up gradation and higher
exports. Some industrial units found it difficult to take advantage of the
import license issued under this scheme for want of rupee resources. In
January, 1977, IDBI introduced a scheme for providing matching rupee
loans to industrial units to enable them to utilize import licenses issued
under TDF scheme. The scheme which was started for six specified
industries now covers all industries as also import of any other input needed
by the industrial units for improving export capabilities. This scheme of the
bank has not been successful as only one-fourth of the units sought this
assistance.
Rehabilitation Assistance to Sick Units
The problem of growing industrial sickness in India is a cause of worry. It
adversely affects production, employment, generation of income and
utilization of productive resources. With a view to combat sickness, IDBI
has devised the Refinance Scheme for Industrial Rehabilitation. The units
which have been assisted by State Financial Corporation or State Industrial
Development Corporations and are classified as sick are eligible under this
scheme. There should be a possibility of the unit being revived in a
reasonable time. The bank provides for capital expenditure required for
restarting the unit on viable level. The need for margin money for additional
term-loan and working
Capital, working capital term loan, payment of statutory liabilities, cash
losses during rehabilitation period etc. are met by the bank. The bank has
also been trying to bring merger of sick units with healthy units.
2. Indirect Assistance
IDBI cannot provide direct financial assistance to various industrial units
situated in different parts of tile country. It has adopted a strategy under
which it extends financial assistance directly to large and complicated
industrial units involving large capital outlays and sophisticated technology.
It helps small scale in industries indirectly through providing assistance to
other financial institutions which, in turn, help these industries. The indirect
help of IDBI takes the form of refinancing of industrial loans, rediscounting
of bills, seed capital assistance and financial support to 6ther institutions by
way of subscribing to their shares, debentures, bonds etc.
1) Refinance of Industrial Loans
IDBI provides refinance facility against term loans granted by the
eligible credit institutions to industrial concerns for setting up of
industrial projects as also for their expansion, modernization and
diversification. IDBI provides refinance to commercial banks, regional
rural banks, state, co-operative banks, state financial corporations, state
industrial development corporations or other institutions extending term
loan assistance to industrial units. Industrial units seeking term loan
approach the eligible financial institutions which, after sanctioning the
loans, approach the IDBI for refinance facility. The appraisal of loan
application is done by primary institution by keeping in view the
guidelines issued by central government and the IDBI. The bank relies in
the appraisal done by the primary lending institutions that have to bear
primary responsibility for the loans granted by them. IDBI sanctioned a
sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial
loans. Since 1967, IDBI has been extending indirect financial help to
small scale sector principally through its schemes of refinance of
industrial loans and bills discounting.
2) Rediscounting of Bills
IDBI introduced another indirect financing' scheme in 1965, whereby
rediscounting facility of machinery bills was, introduced. This scheme
was to help indigenous machinery manufacturers and their purchases.
The purchaser of machinery accepts bills of exchange or promissory
notes of the seller and undertakes to take the payment in installments.
The seller gets the bills discounted with his banker who in turn
rediscounts these bills with min. The buyer is enabled to acquire the
machinery on deferred payment terms without going through the usual
procedures involved in obtaining a project loan. The usual deferred
period is 5 years but in deserving cases it can be extended upto 7 years.
The scheme has been extended for expansion and diversification of
existing units also. The rediscounting facility has been made available to
imported machinery also where bills will be required to be drawn by
local agents of foreign firms.
3) Seed Capital Assistance:-
With a view to help first generation entrepreneurs who have the skills
but lack financial resources, IDBI started seed capital assistance scheme
in September, 1976. Under the first scheme, Financial Corporations
provide seed capital assistance to projects in small scale sector from their
special class of share capital contributed by IDBI and the state
government. The maximum amount of assistance under this scheme is to
meet the gap in the equity contribution which is 20 per cent of the cost of
the project or Rs. 2 lakhs whichever, is less. Under the second scheme
which is operated through State Industrial Development Corporations
seed capital assistance is given to medium sized projects costing up to
Rs. 1 crore. The assistance is available to meet the gap in promoter’s
contribution as well as in equity where no public issue of shares is
envisaged. The assistance is interest free with a service charge of I per
cent annum and a moratorium of 5 years is available for repayment of
loans.
NATIONAL BANK FOR AGRICULTURE AND RURAL
DEVELOPMENT
(NABARD)
NABARD is set up as an apex Development Bank with a mandate for
facilitating credit flow for promotion and development of agriculture, small-
scale industries, cottage and village industries, handicrafts and other rural
crafts. It also has the mandate to support all other allied economic activities
in rural areas, promote integrated and sustainable rural development and
secure prosperity of rural areas. In discharging its role as a facilitator for
rural prosperity NABARD is entrusted with
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the client banks
Besides this pivotal role, NABARD also:
Acts as a coordinator in the operations of rural credit institutions
Extends assistance to the government, the Reserve Bank of India and
other organizations in matters relating to rural development
Offers training and research facilities for banks, cooperatives and
organizations working in the field of rural development
Helps the state governments in reaching their targets of providing
assistance to eligible institutions in agriculture and rural development
Acts as regulator for cooperative banks and RRBs
GENESIS AND HISTORICAL BACKGROUND
The Committee to Review Arrangements for Institutional Credit for
Agriculture and Rural Development (CRAFICARD) set up by the RBI
under the Chairmanship of
Shri B Sivaraman in its report submitted to Governor, Reserve Bank of
India on November 28, 1979 recommended the establishment of NABARD.
The Parliament through the Act 61 of 81, approved its setting up.
The Committee after reviewing the arrangements came to the conclusion
that a new arrangement would be necessary at the national level for
achieving the desired focuses and thrust towards integration of credit
activities in the context of the strategy for Integrated Rural Development.
Against the backdrop of the massive credit needs of rural development and
the need to uplift the weaker sections in the rural areas within a given time
horizon the arrangement called for a separate institutional set-up. Similarly
The Reserve Bank had onerous responsibilities to discharge in respect of its
many basic functions of central banking in monetary and credit regulations
and was not therefore in a position to devote undivided attention to the
operational details of the emerging complex credit problems. This paved the
way for the establishment of NABARD.
CRAFICARD also found it prudent to integrate short term, medium term
and long-term credit structure for the agriculture sector by establishing a
new bank. NABARD is the result of this recommendation. It was set up
with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000
crore, fully subscribed by the Government of India and the RBI.
MISSION
Promoting sustainable and equitable agriculture and rural development
through effective credit support, related services, institution building and
other innovative initiatives
In pursuing this mission, NABARD focuses its activities on:
Credit functions, involving preparation of potential-linked credit
plans annually for all districts of the country for identification of
credit potential, monitoring the flow of ground level rural credit,
issuing policy and operational guidelines to rural financing
institutions and providing credit facilities to eligible institutions under
various programmes
NABARD's credit functions cover planning, dispensation and monitoring of
credit.
This activity involves:
Framing policy and guidelines for rural financial institutions
Providing credit facilities to issuing organizations
Preparation of potential-linked credit plans annually for all districts
for identification of credit potential
Monitoring the flow of ground level rural credit
Development functions concerning reinforcement of the credit
functions and making credit more productive
Credit is a critical factor in development of agriculture and rural sector as it
enables investment in capital formation and technological up gradation,
Hence strengthening of rural financial institutions, which deliver credit to
the sector, has been identified by NABARD as a thrust area. Various
initiatives have been taken to strengthen the cooperative credit structure and
the regional rural banks, so that adequate and timely credit is made available
to the needy.
In order to reinforce the credit functions and to make credit more
productive, NABARD has been undertaking a number of developmental
and promotional activities such as:-
• Help cooperative banks and Regional Rural Banks to prepare development
actionsplans for them
• Enter into MoU with state governments and cooperative banks specifying
their respective obligations to improve the affairs of the banks in a
stipulated timeframe
• Help Regional Rural Banks and the sponsor banks to enter into MoUs
specifying their respective obligations to improve the affairs of the Regional
Rural Banks in a stipulated timeframe
• Monitor implementation of development action plans of banks and
fulfillment of obligations under MoUs
• Provide financial assistance to cooperatives and Regional Rural Banks for
establishment of technical, monitoring and evaluations cells
• Provide organization development intervention (ODI) through reputed
training institutes like Bankers Institute of Rural Development (BIRD),
Lucknow www.birdindia.com, National Bank Staff College, Lucknow
www.nbsc.in and College of Agriculture Banking, Pune, etc.
• Provide financial support for the training institutes of cooperative banks
• Provide training for senior and middle level executives of commercial
banks, Regional Rural Banks and cooperative banks
• Create awareness among the borrowers on ethics of repayment through
Vikas Volunteer Vahini and Farmer’s clubs
• Provide financial assistance to cooperative banks for building improved
management information system, computerization of operations and
development of human resources
Supervisory functions ensuring the proper functioning of
cooperative banks and regional rural banks
As an apex bank involved in refinancing credit needs of major financial
institutions in the country engaged in offering financial assistance to
agriculture and rural development operations and programmes, NABARD
has been sharing with the Reserve Bank of India certain supervisory
functions in respect of cooperative banks and Regional Rural Banks
(RRBs).
As part of these functions, it
• Undertakes inspection of Regional Rural Banks (RRBs) and cooperative
banks (other than urban/primary cooperative banks) under the provisions of
Banking Regulation Act, 1949.
• Undertakes inspection of State Cooperative Agriculture and Rural
Development Banks (SCARDBs) and apex non-credit cooperative societies
on a voluntary basis
• Undertakes portfolio inspections, systems study, besides off-site
surveillance of cooperative banks and Regional Rural Banks (RRBs)
• Provides recommendations to Reserve Bank of India on opening of new
branches by State Cooperative Banks and Regional Rural Banks (RRBs)
• Administering the Credit Monitoring Arrangements in SCBs and CCBs.
Core Functions
NABARD has been entrusted with the statutory responsibility of conducting
inspections of State Cooperative Banks (SCBs), District Central
Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the
provision of the Banking Regulation Act, 1949. In addition, NABARD has
also been conducting periodic inspections of state level cooperative
institutions such as State Cooperative Agriculture and Rural Development
Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc.
on a voluntary basis.
Objectives of Inspection
• To protect the interest of the present and future depositors
• To ensure that the business conducted by these banks is in conformity with
the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc
• To ensure observance of rules, guidelines, etc. formulated and issued by
NABARD/RBI/Government
• To examine the financial soundness of the banks
• To suggest ways and means for strengthening the institutions so as to
enable them to play more efficient role in rural credit
Instruments of Supervision
• Periodic on-site inspection of 31 SCBs, 366 DCCBs, 20 SCARDBs and
102 RRBs and other Apex level Cooperative institutions
• Supplementary Appraisal
• Off-site Surveillance System ( OSS )
• Portfolio inspection/System study
• CMA returns
Supervisory Strategy
In the wake of the banking sector reforms, new set of international
norms/practices were made applicable to Commercial Banks (CBs) to make
them more competitive and sustainable in the changing scenario. The co-
operative banks and RRBs were also to function in the general banking
environment, emerging out of the financial sector reforms, introduced by
the GOI/RBI. Accordingly, the prudential norms were extended to them in
phases. While the capital adequacy norm has not yet been made applicable
to these banks, the other prudential norms viz. income recognition, asset
classification and provisioning, which were made applicable by RBI to the
commercial banking sector had been extended to cover RRBs in 1995-96,
SCBs and DCCBs in 1996-97 and to SCARDBs in 1997-98. NABARD,
through a concrete and time-bound supervision strategy, facilities these
banks to adjust to the new financial discipline so as to internalize prudential
norms stipulated.
Current Focus
Under the revised strategy, a sharper focus of the NABARD’s inspection
was given on the core areas of the functioning of banks pertaining to Capital
Adequacy, Asset Quality, Management Earnings, Liquidity and Systems
Compliance (CAMELSC). Thus, NABARD’s focus in its statutory ‘on-site’
inspections is on core assessments leaving the collateral appraisals to
supplementary inspections. The micro level aspects are to be taken care of
by the banks themselves by way of internal inspections or by other agencies
such as auditors. In this direction, through a series of workshops and
meetings held with the Chief Executives and the Chief Auditors of
cooperative banks, NABARD attempted to ensure that the other areas,
particularly relating to the internal checks and controls, revenue and income
realization by way of interest on loans and deposits and other routine
features of carrying out general banking transactions were suitably taken
care of by the respective banks and their concurrent/statutory audit systems.
Off-site Surveillance
As a part of the new strategy of supervision, a system of `Off-site
Surveillance' has been introduced as a supplementary tool to the on-site
inspection. Its objectives are to obtain and analyze critical data on a
continuous basis, to identify areas of supervisory concern and to identify
early warning signals and risky areas requiring further probe. The system
basically envisages desk scrutiny of operations of cooperative banks and
RRBs through a set of statutory and non-statutory returns. While the
periodical statutory on-site inspections attempt an overall evaluation of the
performance of the banks with a stipulated period, off-site surveillance
envisages continuous supervision supplementing the on-site inspections
with additional instruments of supervision.
BOARD OF SUPERVISION (for SCBs, DCCBs and RRBs)
Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted
by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal
Committee to the Board of Directors of NABARD.
The broad powers and functions of the Board of Supervision are:
• Giving directions and guidance in respect of policies and on matters
relating to supervision and inspection, reviewing the inspection findings,
suggesting appropriate measures
• Reviewing the follow-up action taken by Department of Supervision
(DoS) on matters of frauds and internal checks and control
• Identifying the emerging supervisory issues in the functioning of
cooperative banks/RRBs such as NPAs recovery, investment portfolio,
credit monitoring system, management practices, frauds, etc.
• Suggesting necessary follow-up measures
• Recommending appropriate training for Inspecting Officers of NABARD
for imparting necessary skills and knowledge
• Suggest measures for strengthening of DoS
• Recommend issue of directions by RBI
• Oversee the quality of inspections carried out and the reports issued
• Review the information generated through off-site surveillance and other
supplementary vehicles, action taken thereon
• Undertake any other functions entrusted from time to time by the Board of
Directors of NABARD
The Board of Supervision, since its formation on 20 November 1999 , has
held 31 meetings till 1 0 January 2007 and reviewed the financial position
of Cooperative Banks and RRBs. Based on the observations of BoS,
authorities concerned have been apprised of the weaknesses.
Other Initiatives
• The day-to-day functioning of the supervised banks is being monitored
through various statutory returns prescribed by the RBI/NABARD
including OSS returns
• Periodic coordination Meets are conducted with RPCD, RBI to discuss the
policy and operational matters relating to supervision
• State level groups comprising RCS, Apex bank, Cooperation and Finance
Department, State Government, Director of Audit and non-compliant banks
have been constituted/convened for preparing/discussing suitable strategy
for Section 11 non-compliant banks and monitoring the progress of Action
Plan prepared by them to facilitate them recompliance with the provision
• Periodic discussions are held with the MD, Apex Banks, RCS, and State
Government etc. to discuss the supervisory concerns.
RO set up
Suitable and adequate officers are placed in DoS units at RO level to
undertake inspection of banks, issue inspection reports and take other follow
up measures including review, monitoring compliance and OSS, etc. in
conformity with DoS, HO guidelines.
OBJECTIVES
NABARD was established in terms of the Preamble to the Act, "for
providing credit for the promotion of agriculture, small scale industries,
cottage and village industries, handicrafts and other rural crafts and other
allied economic activities in rural areas with a view to promoting IRDP and
securing prosperity of rural areas and for matters connected therewith in
incidental thereto".
The main objectives of the NABARD as stated in the statement of
objectives while placing the bill before the Lok Sabha were categorized as
under:
1. The National Bank will be an apex organization in respect of all matters
relating to policy, planning operational aspects in the field of credit for
promotion of Agriculture, Small Scale Industries, Cottage and Village
Industries, Handicrafts and other rural crafts and other allied economic
activities in rural areas.
2. The Bank will serve as a refinancing institution for institutional credit
such as long-term, short-term for the promotion of activities in the rural
areas.
3. The Bank will also provide direct lending to any institution as may
approve by the Central Government.
4. The Bank will have organic links with the Reserve Bank and maintain a
close link with in.
MAJOR ACTIVITIES
• Preparing of Potential Linked Credit Plans for identification of exploitable
potentials under agriculture and other activities available for development
through bank credit.
• Refinancing banks for extending loans for investment and production
purpose in rural areas.
• Providing loans to State Government/Non Government Organizations
(NGOs)/Panchayati Raj Institutions (PRIs) for developing rural
infrastructure.
• Supporting credit innovations of Non Government Organizations (NGOs)
and other non-formal agencies.
• Extending formal banking services to the unreached rural poor by
evolving a supplementary credit delivery strategy in a cost effective manner
by promoting Self Help Groups (SHGs)
• Promoting participatory watershed development for enhancing
productivity and profitability of rain fed agriculture in a sustainable manner.
• On-site inspection of cooperative banks and Regional Rural Banks (RRBs)
and iff-site surveillance over health of cooperatives and RRBs.
ROLE AND FUNCTIONS OF NABARD
• NABARD is an apex institution accredited with all matters concerning
policy, planning and operations in the field of credit for agriculture and
other economic activities in rural areas.
• It is an apex refinancing agency for the institutions providing investment
and production credit for promoting the various developmental activities in
rural areas
• It takes measures towards institution building for improving absorptive
capacity of the credit delivery system, including monitoring, formulation of
rehabilitation schemes, restructuring of credit institutions, training of
personnel, etc.
• It co-ordinates the rural financing activities of all the institutions engaged
in developmental work at the field level and maintains liaison with
Government of India, State Governments, Reserve Bank of India and other
national level institutions concerned with policy formulation.
• It prepares, on annual basis, rural credit plans for all districts in the
country; these plans form the base for annual credit plans of all rural
financial institutions
• It undertakes monitoring and evaluation of projects refinanced by it.
• It promotes research in the fields of rural banking, agriculture and rural
development
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA
(SIDBI)
SIDBI is a Principal Development Financial Institution for:
-- Promotion
-- Financing and
-- Development of Industries in the small scale sector and
--Co-coordinating the functions of other institutions engaged in similar
activities.
Provision of Charter
SIDBI was established on April 2, 1990. The Charter establishing it, The
Small Industries Development Bank of India Act, 1989 envisaged SIDBI to
be "the principal financial institution for the promotion, financing and
development of industry in the small scale sector and to co-ordinate the
functions of the institutions engaged in the promotion and financing or
developing industry in the small scale sector and for matters connected
therewith or incidental thereto.
Business Domain of SIDBI
The business domain of SIDBI consists of small scale industrial units,
which contribute significantly to the national economy in terms of
production, employment and exports. Small scale industries are the
industrial units in which the investment in plant and machinery does not
exceed Rs.10 million . About 3.1 million such units, employing 17.2 million
persons account for a share of 36 per cent of India's exports and 40 per cent
of industrial manufacture. In addition, SIDBI's assistance flows to the
transport, health care and tourism sectors and also to the professional and
self-employed persons setting up small-sized professional ventures.
SIDBI among Top 30 Development Banks of the World
SIDBI retained its position in the top 30 Development Banks of the World
in the latest ranking of The Banker, London. As per the May 2001 issue of
The Banker, London, SIDBI ranked 25th both in terms of Capital and
Assets
Mission
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
Vision
To emerge as a single window for meeting the financial and developmental
needs of the MSME sector to make it strong, vibrant and globally
competitive, to position SIDBI Brand as the preferred and customer -
friendly institution and for enhancement of share - holder wealth and
highest corporate values through modern technology platform
OBJECTIVES
Mandatory Objectives
Four basic objectives are set out in the SIDBI Charter. They are:
Financing
Promotion
Development
Co-ordination
For orderly growth of industry in the small scale sector, The Charter has
provided SIDBI considerable flexibility in adopting appropriate operational
strategies to meet these objectives. The activities of SIDBI, as they have
evolved over the period of time, now meet almost all the requirements of
small scale industries which fall into a wide spectrum constituting modern
and technologically superior units at one end and traditional units at the
other.
Development Outlook
The major issues confronting SSIs are identified to be:
Technology obsolescence
Managerial inadequacies
Delayed Payments
Poor Quality
Incidence of Sickness
Lack of Appropriate Infrastructure and
Lack of Marketing Network
There can be many more similar issues hindering the orderly growth of
SSIs.
Over the years, SIDBI has put in place financing schemes either through its
direct financing mechanism or through indirect assistance mechanism and
special focus programmes under its P&D initiatives. In its approach, SIDBI
has struck a good balance between financing and providing other support
services.
SHAREHOLDING
The entire issued capital of Rs.450 crore has been divided into 45 crore
shares of Rs.10 each. Of the total Rs.450 crore subscribed by IDBI, while
setting up of SIDBI, 19.21% has been retained by it and balance 80.79% has
been transferred / divested in favour of banks / institutions / insurance
companies owned and controlled by the Central Government.
PRODUCTS AND SERVICES
DIRECT FINANCE
Objective:
SIDBI had been providing refinance to State Level Finance Corporations /
State Industrial Development Corporations / Banks etc., against their loans
granted to small scale units.
Since the formation of SIDBI in April, 1990 a need was felt/ representations
were made that SIDBI being the principal financial institution for the small
sector, should take up the financing of SSI projects directly on a selective
basis.
So it was decided to introduce direct assistance schemes to supplement the
other available channels of credit flow to the small industries sector. Since
then, SIDBI has evolved itself into a supplier of a range of products and
services to the Small & Medium Enterprises [SME] sector.
BILLS FINANCE
Objectives:
Bills Finance Scheme involves provision of medium and short-term finance
for the benefit of the small-scale sector. Bills Finance seeks to provide
finance, to manufacturers of indigenous machinery, capital equipment,
components sub-assemblies etc, based on compliance to the various
eligibility criteria, norms etc as applicable to the respective schemes.
To be eligible under the various bills schemes, one of the parties to the
transactions to the scheme has to be an industrial unit in the small-scale
sector within the meaning of Section 2(h) of the SIDBI Act, 1989.
REFINANCE
Objective
Refinance scheme is introduced for catering to the need of funds
of Primary Lending Institutes for financing small-scale industries. Under the
scheme, SIDBI grants refinance against term loans granted by the eligible
PLIs to industrial concerns for setting up industrial projects in the small
scale sector as also for their expansion / modernization / diversification.
Term loans granted by the PLIs for other specified eligible activities /
purposes are also eligible for refinance.
INTERNATIONAL FINANCE
Objective
The main objective of the various International Finance schemes is
to enable small-scale industries to raise finance at internationally
competitive rates to fulfil their export commitments. The financial
assistance is being offered in USD and Euro currencies. Assistance in
Rupees is also considered, independent of foreign currency limits.
SIDBI has a license to deal in foreign exchange as a "restricted"
Authorised Dealer (i.e. SIDBI confines its foreign exchange activities
only to its own exposures and to exposures for its customers. The
Mumbai Head Office (MHO) of SIDBI operates as a Category 'A'
branch that maintains foreign currency positions, nostro account with
foreign correspondent banks and provides cover to other branches
(Category 'B' branches) that carry out forex business.
PROMOTIONAL ACTIVITIES
Objective
As an apex financial institution for promotion, financing and development
of industry in the small scale sector, SIDBI meets the varied developmental
needs of the Indian SSI sector by its wide-ranging Promotional and
Developmental (P&D) activities.
P&D initiatives of the Bank aim at improving the inherent strength of small
scale sector on one hand as also economic development of poor through
promotion of micro-enterprises.
In pursuance of its multifaceted P&D activity, synergistic with its business
activities aimed at development of the small industries, SIDBI looks
forward to a partnership with NGOs, associate financial institutions,
corporate bodies, R&D laboratories, marketing agencies, etc., for national
level programmes.
SIDBI has identified the following thrust areas of P&D activities, which are
being undertaken in partnership with various institutions, agencies, and
NGOs:
DATA ANALYSIS
Data analysis of IFCI in concern with various sectors as per the assistance
provided by it to them
IFCI AND INDUSTRIAL FINANCE
The sanctions of IFCI went up to Rs. 6579.7 crore in 1995-96 from 32.3
crore in 1970-71, but it declined to Rs. 778 crore by 2001-02. up to march
2003, total sanctioned assistance was Rs. 45426.7 crore while
disbursements were Rs. 44169.2 crore.
Year
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
Sanctions
206.6
218.1
230.2
321.9
415.4
499.2
798.1
922.6
1635.5
1817
2429.8
2421.2
2347.9
3745.9
Growth rate
%
49.8
5.6
5.5
39.8
29
20.2
59.9
15.6
77.3
11.1
33.7
-0.4
-3
Disbursements
108.9
169.4
196.1
224.5
272.9
403.9
451.6
657.1
997.5
1121.8
1574.3
1604.4
1733.4
2163.1
Growth rate
19.7
55.6
15.8
14.5
21.6
48
11.8
45.5
51.8
12.5
40.6
1.9
8
24.2
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
total from
1970 to 2003
4327
6579.7
3952.2
5708.2
3622.8
2045.6
1417.9
778
2035.1
45426.7
59.5
15.5
52.1
-39.9
44.4
-36.5
-43.5
-30.7
-45.1
161.6
2838.7
4586.5
5175.5
5615
4836.4
3374.3
2152.7
1069.9
1796.5
44169.2
32.4
61.6
12.5
8.5
-13.9
-30.5
-36.9
-49
63.8
IFCI AND PRODUCT WISE ASSISTANCE
IFCI provides direct financial assistance for financing projects in terms of
rupee loans, foreign currency loans, and by underwriting and direct
subscription to shares, debentures and bonds.
Years
1998-99
1999-00
2000-01
2001-02
2002-03
up to march 2003
Sanctions
3129.6
1900.3
1371.2
721.4
2021.7
37122.6
Disbursements
4229.3
3027.4
2093.2
1065.6
1783.1
35926.4
IFCI AND PURPOSE WISE ASSISTANCE
In the purpose wise sanctions and disbursements, new projects got Rs.
15919.6 cr which is 35.17 % of total sanctions up to march 2003.
Serial no.
1
2
3
4
5
6
7
Purpose
New
Expansion
Rehabilitation
Modernization
Working capital
Others
total
Sanctions
15919.6
6649.2
115.7
5459.8
837.5
16279.4
45261.1
Disbursements
15611.3
6547.5
114.2
5480.4
774.2
15476.1
44003.6
IFCI AND SECTOR WISE ASSISTANCE
The IFCI provided maximum assistance to private sector by giving Rs. 40660.9 cr as on
march 2003. This constitutes over 89% of total assistance by IFCI. The public sector got
very little out of the total sanctions of IFCI.
Serial no.
1
2
3
4
5
Sector
Public
Joint
Cooperative
Private
total
Sanction
1541.1
2192
867,1
40660.9
45261.1
Disbursements
1539.1
2146
838.4
39480.1
44003.6
DATA ANALYSIS OF IDBI
The main objective of IDBI is to provide term finance and financial services
for establishment of new projects as well as the expansion, diversification,
modernization and technology up gradation of existing industrial
enterprises. It is one of the most important financial institutions which has
provided lot of funds for industrial activities in the country.
IDBI AND PURPOSE WISE ASSISTANCE
Serial no.
1
2
3
4
5
6
Purpose
New
Expansion
Rehabilitation
Modernization
Working capital
total
Year
1998-2003
1998-2003
1998-2003
1998-2003
1998-2003
Sanctions
67498.8
50627.3
12976.5
1415.8
44086.5
176604.9
IDBI AND SECTOR WISE ASSISTANCE
Serial no
1
2
3
4
Sectors
Public
Joint
Cooperative
Private
Amount
34963
11753.7
1802.2
169304.2
Percentage
16.05
5.39
.83
77.71
5 Trust
total
50
217873.3
.02
100
IDBI AND INSTITUTION WISE ASSISTANCE
Serial no.
1
2
Institutions
SFC
SIDC
Total
2000-01
129.8
233.2
363
2001-02
87.7
99.6
187.3
DATA ANALYSIS OF NABARD
NATIONAL BANK OF AGRICULTURE AND RURAL
DEVELOPMENT
It is responsible for short term, medium term and long-term financing of
agriculture and allied activities. The institutions such as Film Finance
Corporation, Tea Plantation Finance Scheme, Shipping Development Fund,
Newspaper Finance Corporation, Handloom Finance Corporation, Housing
Development Finance Corporation also provide financial various areas.
Here the various financial activities of NABARD are given and analyzed in
accordance with each other.
With its effective overseeing and monitoring of the implementation
of the Government of India's programme to double the flow of credit
to agriculture over a three-year period from 2004-2005, the total
disbursement of credit reached Rs 1,25,309 during 2004-2005.
Ground level credit flow to agriculture and allied activities reached
Rs 1,57,480 crore in 2005-2006.
Refinance disbursement to commercial banks, state cooperative
banks, state cooperative agriculture and rural development banks,
RRBs and other eligible financial institutions aggregated Rs 8,622.37
crore.
As on 31 January 2007 through the Rural Infrastructure Development
Fund (RIDF), Rs,59,795.35 crore have been sanctioned for 2,31,702
projects covering irrigation, rural roads and bridges, health and
education, soil conservation, drinking water schemes, etc. Developing
among hosts of other infrastructures, RIDF will create 20971 schools,
6239 primary health centers and provide drinking water supply in
7267 villages
Watershed Development Fund, with cumulative sanctions of
Rs.578.95 crore for 427 projects in 124 districts of 14 states, has
created a People’s Movement in rural India.
Farmers now enjoy financial access and security through 582.50 lakh
Kisan Credit Cards that have been issued through a vast rural banking
network.
District Rural Industries Project (DRIP) has generated employment
for 23.34 lakh persons with 10.95 lakh units in 105 districts.
DATA ANALYSIS OF SIDBI
SMALL INDUSTRY DEVELOPMENT BANK OF INDIA
SIDBI has some eligibility criteria for industries to seek any kind of
assistance or funding and from the recent times SIDBI has raised it
eligibility criteria for every institution to gain financial assistance. Here
follows the change in the criteria of SIDBI
Serial no.
1
2
3
4
5
6
Purpose
Investment limits
for tiny units for
purpose of
refinance
Size of projects
eligible for assist.
Quantum of
equity assistance
Project outlay
component for
eligibility
Eligible loan
limit
Eligible loan
limit under
normal refinance
scheme
Earlier
2 lakh
5 lakh
75000
10 lakh
2 lakh
7.5 lakh
Present
5 lakh
10 lakh
150000
20 lakh
5 lakh
10 lakh
SIDBI AND FINANCIAL ASSISTANCE
The sanctions of SIDBI are generally given to those entrepreneurs who have business of
small scale and fulfill the criteria of SIDBI. It undertakes a large variety of promotional
and developmental activities in order to improve the strength of small scale units,
creating employment opportunities and new way for economic development of poor.
Year
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
up to march
2003
Sanctions
295
1764.8
1820.4
3276.5
3008.1
2304.1
12459.7
Growth%
498.2
3.2
79.4
-7.9
-23.4
Disbursements
279
672.4
766.5
1506.2
949.3
4173.6
Growth
141.1
13.9
96.5
-37
OVER VIEW OF TOPIC
Development bank plays a very important role in economic development of
our country. Since independence they have contributed a lot to the inception
of industrialization and all other technological innovations. There basic
objective is to assist the development in country which perform by proving
every kind of help possible i.e. financial, advisory, technological etc.
This study helps in portraying the current picture of development banks in
India and shows their role in economy. It also helps in showing the various
schemes that banks have and their whole procedure to provide the assistance
to people.
This study also shows the various lacks in the system of development banks
due which they fail in some sphere to achieve their set targets. There are
various drawbacks in our own financial system that hinderers the growth of
these development banks such as lack of funds with government, lack of
project, lack of efficient machinery,
In this study all the possible measure to remove these hindrances are
described through which we can move more speedily then other economies
in world.
In this study four major development banks in India are taken into research
work i.e. IDBI, IFCI, SIDBI, and NABARD. All the schemes, assistances
and programs are studied and highligtened. Every bank differs from his
objective with each other so as the assistance provided by them.
Every bank has separate guidelines and management to take care of
activities which are performing and work areas are also different, although
their main motive is same which the development of country through
balanced economic growth.
This study throws light on the working of these development banks and how
they performed their activities in past.
LIMITATIONS OF STUDY
Although lots of care and efforts are made to ensure the fault free study but
still there remains certain limitations which possibly may occur such as
Lack of time acted as constraint in study
Lack of development banks in near by areas also acts as constraint as
it’s not possible to get the real exposure.
Researcher limitations in knowledge are also the limitations of study.
The study is based on secondary data so any kind of discrepancy in
that will cause same in the study.
BIBLOGRAPHY
WEBSITIES
http: //www.idbi.com
http: //www.sidbi.com
http: //www.google.com
http: //www.banknetindia.com
NEWSPAPERS
Financial express
Business line
The economic times
Business standard