SubjectDEVELOPMENT

BANKINGINDEX

3Chapter 1 : Definition of Development Banks

10Chapter 2 : Lending procedures of development banks

14Chapter 3 : Major objectives of Development Banks

16Chapter 4 : Development Banking in India

18Chapter 5 : Promotional role of development banks in India

21Chapter 6 : Role of development banks in financial sector

24Chapter 7 : Role of development banks in the Indian economy

28Chapter 8 : Role of Reserve Bank of India (RBI) in Indian Economy

33Chapter 9 : SIDBI

35Chapter 10 : EXIM Bank

37Chapter 11 : NABARD

40Chapter 12 : IDBI

47Chapter 13 : IFCI

54Chapter 14 : SFCI

59Chapter 15 : HUDCO

61Chapter 16 : ICICI

62Chapter 17 : IBRD or The World Bank

66Chapter 18 : RBI - Indias apex bank

68Chapter 19 : History of banking in India

73Chapter 20 : Project Appraisal & Management

79Chapter 21 : Nationalization of Indian Banks

85Chapter 22 : Customer Service Strategies in Banking Sector

90Chapter 23 : Major participants and players in financial markets

92Chapter 24 : Investment Banking in India

96Chapter 25 : Principal Functions of Investment Banks

98Chapter 26 : Foreign Institutional Investors (FIIs) & Indian economy

101Chapter 27 : Causes of industrial sickness

107Chapter 28 : Company revival strategies Industrial sickness

113Chapter 29 : GENISIS OF SICA, 1985

129Chapter 30 : Difference between commercial bank & development bank

Chapter 1 : Definition of Development BanksDevelopment banks are those financial 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 them 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 development bank 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 in the form of loans, underwriting, investment and guarantee operations and development in general and industrial.

The role of a development bank has been emphasized 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.1. A development bank has the following features or characteristics:

2. A development bank does not accept deposits from the public like commercial banks and other financial institutions who entirely depend upon saving mobilization.

3. It is a specialized financial institution which provides medium term and long-term lending facilities.

4. It is a multipurpose financial institution. Besides providing financial help it undertakes promotional activities also. It helps enterprises from planning to operational level.

5. It provides financial assistance to both private as well as public sector institutions.

6. 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.

7. Development banks primarily aim to accelerate the rate of growth. It helps industrialization specific and economic development in general

8. The objective of these banks is to serve public interest rather than earning profits.

9. Development banks react to the socio-economic needs of development.

Major objectives of Development Banks

Every 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 IndustrializationA 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 long gestation period in those industries. The governments of under developed countries set up development and institutions to fill the vacuum.

2. Meet Capital NeedsThere 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 ActivitiesBesides 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 SectorsThe 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.

Important 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 industrialization 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 FillersDevelopment banks do not provide medium-term and long-term 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 RoleDeveloping 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 BusinessDevelopment 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 FinanceAnother feature of development banks 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.

5. Refinance Facility

Banks" 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 (IDBI) provides reliance against term loans granted to industrial concerns by state financial corporations. Commercial banks and state co-operative banks.

6. Credit GuaranteeThe 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 SecuritiesDevelopment 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.

Growth of Development Banks

Although development banks attracted great attention after World War II but there were none insurances or such institutions even much earlier, First development bank was found in Belgium in 1822, 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.

Chapter 2 : Lending procedures of development banks

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 ApplicantEvery 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 AppraisalA 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 programmer for completing the project.

3. Economic ViabilityThe 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 AspectsThe 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 FeasibilityThe 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.

6. Managerial CompetenceThe 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 ContributionBesides 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 FactorsVarious 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 SanctionAfter the appraisal report on the project is prepared by the banks 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 DisbursementThe 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.

Chapter 3 : Major objectives of Development Banks

Every 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 IndustrializationA 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 long gestation period in those industries. The governments of under developed countries set up development and institutions to fill the vacuum.

2. Meet Capital NeedsThere 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 ActivitiesBesides 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 SectorsThe 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.

Chapter 4 : 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 (SFCs) 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 SFCs 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 (SIDCs) 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 SIDCs in the country. The State Small Industries Development Corporations (SSIDCs) 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. (IRCI)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.

Chapter 5 : 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 AreasUnder 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 (IIGs)With a view to provide a forum to the national and state financial institutions, IDBI constituted 23 IIGs 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 (TCOs)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. TCOs 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 (EPPs)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 TCOs 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 ImprovementsDevelopment 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.

Chapter 6 : Role of development banks in financial sector

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 FundsThe 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 FacilitiesEconomic development of a country is linked to the availability of infrastructural facilities. There is a need for roads, water, sewage, communication facilities, electricity etc. Financial institutions prepare their investment policies by keeping national priorities in major and 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 Indiainstitutions 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 ActivitiesAn 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 AreasSome 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 DevelopmentFinancial 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, SFCIs especially help small scale sector while IFCI and SIDCs 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 IndustrializationEconomic 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 GenerationFinancial 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.

Chapter 7 : Role of development banks in the Indian economy

The significance of Development Finance Institutions or DFIs lies in their making available the means to utilize savings generated in the economy, thus helping in capital formation. Capital formation implies the diversion of the productive capacity of the economy to the making of capital goods which increases future productive capacity. The process of Capital Formation involves three distinct but interdependent activities, viz., saving financial intermediation and investment. However, poor country/economy may be, there will be a need for institutions which allow such savings, as are currently forthcoming, to be invested conveniently and safely and which ensure that they are channeled into the most useful purposes. A well-developed financial structure will therefore aid in the collections and disbursements of investible funds and thereby contribute to the capital formation of the economy. Indian capital market although still considered to be underdeveloped has been recording impressive progress during the post-interdependence period.

Support to the Capital Market:The basic purpose of DFIs particularly in the context of a developing economy, is to accelerate the pace of economic development by increasing capital formation, inducing investors and entrepreneurs, sealing the leakages of material and human resources by careful allocation thereof, undertaking development activities, including promotion of industrial units to fill the gaps in the industrial structure and by ensuring that no healthy projects suffer for want of finance and/or technical services. Hence, the DFIs have to perform financial and development functions on finance functions, there is a provision of adequate term finance and in development functions there include providing of foreign currency loans, underwriting of shares and debentures of industrial concerns, direct subscription to equity and preference share capital, guaranteeing of deferred payments, conducting techno-economic surveys, market and investment research and rendering of technical and administrative guidance to the entrepreneurs. Rupee Loans:Rupee loans constitute more than 90 per cent of the total assistance sanctioned and disbursed. This speaks eloquently on DFIs obsession with term loans to the neglect of other forms of assistance which are equally important. Term loans unsupplemented by other forms of assistance had naturally put the borrowers, most of whom are small entrepreneurs, on to a heavy burden of debt-servicing. Since term finance is just one of the inputs but not everything for the entrepreneurs, they had to search for other sources and their abortive efforts to secure other forms of assistance led to sickness in industrial units in many cases.

Foreign Currency Loans:Foreign currency loans are meant for setting up of new industrial projects as also for expansion, diversification, modernization or renovation of existing units in cases where a portion of the loan was for financing import of equipment from abroad and/or technical know-how, in special cases.

Subscription to Debentures and Guarantees:Regarding guarantees, it is well-known that when an entrepreneur purchases some machinery or fixed assets or capital goods on credit, the supplier usually asks him to furnish some guarantee to ensure payment of installments by the purchaser at regular intervals. In such a case, DFIs can act as guarantors for prompt of installments to the supplier of such machinery or capital under a scheme called Deferred Payments Guarantee.

Assistance to Backward Areas:Operations of DFIs in India have been primarily guided by priorities as spelt out in the Five-Year Plans. This is reflected in the lending portfolio and pattern of financial assistance of development financial institutions under different schemes of financing. Institutional finance to projects in backward areas is extended on concessional terms such as lower interest rate, longer moratorium period, extended repayment schedule and relaxed norms in respect of promoters contribution and debt-equity ratio. Such concessions are extended on a graded scale to units in industrially backward districts, classified into the three categories of A, B and c depending upon the degree of their backwardness. Besides, institutions have introduced schemes for extending term loans for project/area-specific infrastructure development. Moreover, in recent years, development banks in India have launched special programmes for intensive development of industrially least developed areas, commonly referred to as the No-industry Districts (NIDs) which do not have any large-scale or medium-scale industrial project. Institutions have initiated industrial potential surveys in these areas.

Promotion of New Entrepreneurs:Development banks in India have also achieved a remarkable success in creating a new class of entrepreneurs and spreading the industrial culture to newer areas and weaker sections of the society. Special capital and seed Capital schemes have been introduced to provide equity type of assistance to new and technically skilled entrepreneurs who lack financial resources of their own even to provide promoters contribution in view of long-term benefits to the society from the emergence of a new class of entrepreneurs. Development banks have been actively involved in the entrepreneurship development programmes and in establishing a set of institutions which identify and train potential entrepreneurs. Again, to make available a package of services encompassing preparation of feasibility of reports, project reports, technical and management consultancy etc. at a reasonable cost, institutions have sponsored a chain of 16 Technical Consultancy organizations covering practically the entire country. Promotional and development functions are as important to institutions as the financing role. The promotional activities like carrying out industrial potential surveys, identification of potential entrepreneurs, conducting entrepreneurship development programmes and providing technical consultancy services have contributed in a significant manner to the process of industrialization and effective utilization of industrial finance by industry. IDBI has created a special technical assistance fund to support its various promotional activities. Over the years, the scope of promotional activities has expanded to include programmes for up gradation of skill of State level development banks and other industrial promotion agencies, conducting special studies on important issues concerning industrial development, encouraging voluntary agencies in implementing their programmes for the uplift of rural areas, village an cottage industries, artisans and other weaker sections of the society.

Impact on Corporate Culture:The project appraisal and follow-up of assisted projects by institutions through various instruments, such as project monitoring and report of nominee directors on the Boards of directors of assisted units, have been mutually rewarding. Through monitoring of assisted projects, the institutions have been able to better appreciate the problems faced by industrial units. It also has been possible for the corporate managements to recognize the fact that interests of the assisted units and those of institutions do not conflict but coincide. Over the years, institutions have succeeded in infusing a sense of constructive partnership with the corporate sector. Institutions have been going through a continuous process of learning by doing and are effecting improvements in their systems and procedures on the basis of their cumulative experience.

The promoters of industrial projects now develop ideas into specific projects more carefully and prepare project reports more systematically. Institutions insist on more critical evaluation of technical feasibility demand factors, marketing strategies and project location and on application of modern techniques of discounted cash flow, internal rate of return, economic rate of return etc., in assessing the prospects of a project. This has produced a favorable impact on the process of decision-making in the corporate seeking financial assistance from institutions. In fact, such impact is not continued to projects assisted by them but also spreads over to projects financed by the corporate sector on its own.

The association of institutions in the management of corporate bodies has considerably facilitated the process of progressive professionalism of the corporate management. Institutions have been able to convince the corporate managements to appropriately re-orient their organizational structure, personal policies and planning and control systems. In many cases, institutions have successfully inducted experts on the Boards of assisted companies. As part of their project follow-up work and through their nominee directors, institutions have also been able to bring about progressive adoption of modern management techniques, such as corporate planning and performance budgeting in the assisted units. The progressive professionalism of industrial management in India reflects one of the major qualitative changes brought about by the institutions.

Chapter 8 : Role of Reserve Bank of India (RBI) in Indian Economy

Bank Issue:Under Section 22 of the Reserve Bank of India Act, the bank has the sole sight to issue bank notes of all denominations. The notice issued by the Reserve bank has the following advantages:

It brings uniformity to note issue.

It is easier to control credit when there is a single agency of note issue.

It keeps the public faith in the paper currency alive.

It helps in the stabilization of the internal and external value of the currency and

Credit can be regulated according to the needs of the business.

The system of note issue as it exists today is known as the minimum reserve system. The currency notes issued by the Bank arid legal tender everywhere in India without any limit. At present, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50 100, and 500. The responsibility of the Bank is not only to put currency into, or withdraw it from, the circulation but also to exchange notes and coins of one denomination into those of other denominations as demanded by the public. All affairs of the Bank relating to note issue are conducted through its Issue Department.

Banker, Agent and Financial Advisor to the State:As a banker agent and financial advisor to the State, the Reserve Bank performs the following functions:

It keeps the banking accounts of the government.

It advances short-term loans to the government and raises loans from the public.

It purchases and sells through bills and currencies on behalf to the government.

It receives and makes payment on behalf of the government.

It manages public debt and

It advises the government on economic matters like deficit financing price stability, management of public debts. etc.

Banker to the Banks:It acts as a guardian for the commercial banks. Commercial banks are required to keep a certain proportion of cash reserves with the Reserve bank. In lieu of this, the Reserve bank provides them various facilities like advancing loans, underwriting securities etc. The RBI controls the volume of reserves of commercial banks and thereby determines the deposits/credit creating ability of the banks. The banks hold a part or all of their reserves with the RBI. Similarly, in times of their needs, the banks borrow funds from the RBI. It is, therefore, called the bank of last resort or the lender of last resort.

Custodian of Foreign Exchange Reserves:It is the responsibility of the Reserve bank to stabilize the external value of the national currency. The Reserve Bank keeps gold and foreign currencies as reserves against note issue and also meets adverse balance of payments with other counties. It also manages foreign currency in accordance with the controls imposed by the government.

As far as the external sector is concerned, the task of the RBI has the following dimensions:

To administer the foreign Exchange Control;

To choose,the exchange rate system and fix or manages the exchange rate between the rupee and other currencies;

To manage exchange reserves;

To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union, and other countries, and with International financial institutions such as the IMF, World Bank, and Asian Development Bank.

The RBI is the custodian of the countrys foreign exchange reserves, id it is vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner. The RBI achieves this through buying and selling of foreign exchange market, from and to schedule banks, which, are the authorized dealers in the Indian, foreign exchange market. The Bank manages the investment of reserves in gold counts abroad and the shares and securities issued by foreign governments and international banks or financial institutions.

Lender of the Last Resort:At one time, it was supposed to be the most important function of the Reserve Bank. When Commercial banks fail to meet obligations of their depositors the Reserve Bank comes to their rescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meeting directly or indirectly all legitimate demands for accommodation by the Commercial Banks under emergency conditions.

Banks of Central Clearance, Settlement and Transfer:The commercial banks are not required to settle the payments of their mutual transactions in cash, it is easier to affect clearance and settlement of claims among them by making entries in their accounts maintained with the Reserve Bank, The Reserve Bank also provides the facility for transfer to money free of charge to member banks.

Controller of Credit:In modern times credit control is considered as the most crucial and important functional of a Reserve Bank. The Reserve Bank regulates and controls the volume and direction of credit by using quantitative and qualitative controls. Quantitative controls include the bank rate policy, the open market operations, and the variable reserve ratio. Qualitative or selective credit control, on the other hand includes rationing of credit, margin requirements, direct action, moral suasion publicity, etc. Besides the above mentioned traditional functions, the Reserve Bank also performs some promotional and supervisory functions. The Reserve Bank promotes the development of agriculture and industry promotes rural credit, etc. The Reserve Bank also acts as an agent for the international institutions as I.M.F., I.B.R.D., etc.

Supervisory Functions:In addition to its traditional central banking functions, the Reserve Bank has certain non- monetary functions of the nature of supervision of banks and promotion of sound banking in India. The supervisory functions of the RBI have helped a great deal in improving the methods of their operation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949 have given the RBI wide powers of:

Supervision and control over commercial and cooperative banks, relating to licensing and establishments.

Branch expansion.

Liquidity of their assets.

Management and methods of working, amalgamation reconstruction and liquidations.

The RBI is authorized to carry out periodical inspections off the banks and to call for returns and necessary information from them.

Promotional RoleA striking feature of the Reserve Bank of India Act was that it made agricultural credit the Banks special responsibility. This reflected the realization that the countrys central bank should make special efforts to develop, under its direction and guidance, a system of institutional credit for a major sector of the economy, namely, agriculture, which then accounted for more than 50 per cent of the national income. However, major advances in agricultural finance materialized only after Indias independence. Over the years, the Reserve Bank has helped to evolve a suitable institutional infrastructure for providing credit in rural areas.

Another important function of the Bank is the regulation of banking. All the scheduled banks are required to keep with the Reserve Bank a consolidated 3 per cent of their total deposits, and the Reserve Bank has power to increase this percentage up to 15. These banks must have capital and reserves of not less than Rs.5 lakhs. The accumulation of these balances with the Reserve Bank places it in a position to use them freely in emergencies to support the scheduled banks themselves in times of need as the lender of last resort. To a certain extent, it is also possible for the Reserve Bank to influence the credit policy of scheduled banks by means of an open market operations policy, that is, by the purchase and sale of securities or bills in the market. The Reserve bank has another instrument of control in the form of the bank rate, which it publishes from time to time.

Further, the Bank has been given the following special powers to control banking companies under the Banking Companies Act, 1949:

The power to issue licenses to banks operating in India.

The power to have supervision and inspection of banks.

The power to control the opening of new branches.

The power to examine and sanction schemes of arrangement and amalgamation.

The power to recommend the liquidation of weak banking companies.

The power to receive and scrutinize prescribed returns, and to call for any other information relating to the banking business.

The power to caution or prohibit banking companies generally or any banking company in particular from entering into any particular transaction or transactions.

The power to control the lending policy of, and advances by banking companies or any particular bank in the public interest and to give directions as to the purpose for which advances mayor may not be made, the margins to be maintained in respect of secured advances and the interest to be charged on advances.

Chapter 9 : Small scale Industrial Development Bank of India (SIDBI)The Small scale Industrial Development Bank of India (SIDBI) was set up in October 1989 under the Act of parliament as a wholly owned subsidiary of the IDBI. It is the central or apex or principal institution which oversees co-ordinates and further strengthens various arrangements for providing financial and non-financial assistance to small-scale, tiny, and cottage industries.

SIDBI objectives are:

To initiate steps for technological up gradation and modernization of existing units

To expand channels for marketing of SSI sector products in India and abroad

To promote employment-oriented industries in semi-urban areas and to check migration of population to big cities.

It operates two funds: Small Industries Development Fund and Small Industries Development Assistance Fund. The operation of the former and of National Equity Fund which were earlier looked by IDBI is now handled by the SIDBI. Its financial assistance is channeled through the existing credit delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, co-operative banks and RRBs. The total number of institutions eligible for assistance from SIDBI is 900. It discounts and rediscounts bills arising from the sale of machinery to small units; extends seed capital/soft loan assistance through National Equity Fund and through seed capital schemes of specialized lending institutions; refinance loans; and provide services like factoring, Leasing and so on.

The union budget 1996-97 envisaged a number of measures to develop small-scale sector with SIDBI as the focal point. They include:

SIDBI will now refinance the SFCs and commercial banks for modernization projects up to Rs 50 lakhs from unutilized corpus of about Rs 75 crore;

SIDBIs refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc. for composite loans will be doubled to Rs 100 lakhs

SIDBI will participate in venture capital funds set up by public sector institutions as well as private companies up to 50 percent of the total corpus of the fund, provided such fund is dedicated to the financing of small-scale industry;

SIDBI will provide refinance lending institutions which are now permitted to lend to SSI units seeking ISO certification of quality.

Since its inception SIDBI has provided assistance to the entire SSIs sector including tiny, village, and cottage industries through suitable schemes tailored to meet the requirement of setting up of new products, expansions, diversifications, modernization, and rehabilitation. It has provided equity capital, domestic and foreign currency term loans, working capital finance, etc.

SIDBI has entered into MOU with many banks, governmental agencies, international agencies, R&D institutions, and industry associations for developing SSIs.

Chapter 10

Google Buzz"

: Export-import bank of India (EXIM Bank)

The Export-import bank of India (EXIM Bank) was set up in January 1982 as a statutory corporation wholly owned by central government. Its paid up capital in 1988-89 was Rs 220.50 crores.

Activities performed by EXIM Bank: It grants direct loans in India and outside for the purpose of imports and exports;

Refinances loans to banks and other notified financial institutions for the purpose of international trade ;

Rediscounts usance export bills for banks;

Provide overseas investment finance for Indian companies toward their equity participation in joint venture abroad and guarantees, along with banks, obligations on behalf of project exporters;

It is also a co-coordinating agency in the field of international finance and it undertakes development of merchant banking activities in relation to export oriented industries;

Thus it provides fund based as well as non fund based assistance in the foreign trade sector.

The main objective of Export-Import Bank (EXIM Bank) is to provide financial assistance to promote the export production in India. The financial assistance provided by the EXIM Bank widely includes the following:

Direct financial assistance

Direct financial assistance

Foreign investment finance

Term loaning options for export production and export development

Pre-shipping credit

Buyers credit

Lines of credit

Re-loaning facility

Export bills rediscounting

Refinance to commercial banks

The Export-Import Bank also provides non-funded facility in the form of guarantees to the Indian exporters.

Development of export makers

Expansion of export production capacity

Production for exports

Financing post-shipment activities

Export of manufactured goods

Export of projects

Export of technology and softwares

Chapter 11 : National Bank of Agriculture and Rural Development (NABARD)National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India. It has been accredited with matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India.

NABARD was established by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas.

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. It provides short term finance assistance for period of 18 months to state co-operative banks, commercial banks, RRBs, and so on for wide range of activities in the areas of production, trading, marketing and storage. It also gives loans up to 20 years of maturity to the state government to enable them to subscribe to the share capital of co-operative credit societies. NABARD serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas. NABARD 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.

NABARD co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation and also undertakes monitoring and evaluation of projects refinanced by it.

NABARDs refinance is available to State Co-operative Agriculture and Rural Development Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs), Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate beneficiaries of investment credit can be individuals, partnership concerns, companies, State-owned corporations or co-operative societies, production credit is generally given to individuals.

NABARD provides: Long term finance for minor irrigation facilities, plantations, horticulture, land development, farm mechanizations, animal husbandry, fisheries etc.

Short term loan assistance fir financing of seasonal agricultural operations, marketing of crops, purchase/procurement/distribution of agricultural inputs etc.

Medium loan facilities for approved agricultural purposes;

Working capital refinance for handloom weavers

Refinance for financing government- sponsored programmes such as IRDP, Rozgar Yojna etc.

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

General aspects of NABARD: NABARD should be a managing agency of Government of India for public investments in rural India.

It should be the chief overseer, grand planner for public investment and ensure that each rupee spent in rural India generates a net positive return for rural India.

NABARD should not resort to passive funding. NABARD has to make things happen by organizing people and providing knowledge.

The strength of NABARD is its good networking capabilities. It can act as a coordinating agency for all the developmental works taking place at the grass roots level.

The greatest comparative advantage of NABARD is its ability to decontaminate the effects of subsidy and making public spending more efficient.

It is a folly for NABARD to become a Commercial Bank. It is the only institution which can handle public finance better than the government.

Chapter 12 : 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 support 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. 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 ofgovernment stake to 58.47 percent.

Financial Resources of IDBI1. 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 Indias amended certain provisions of IDBI Act under which its authorized 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.

2. Borrowings: The bank is authorized 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 IDBIThe 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 has 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 IDBIThe 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.

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 IDBISince 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. The major operations of IDBI are;

1. Direct AssistanceDirect financial assistance includes project finance assistal1ce, soft-loan assistance, assistance under technical development fund scheme and rehabilitation assistance for sick units. Various schemes under direct assistance are discussed as follows:-

a) Project Finance Assistance: - Under project finance scheme. The IDBI extends direct assistance to industrial concerns in the form of:

1. Project loans

2. Subscription to and/or underwriting of issues of shares and debentures.

3. 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. Banks 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.1crore. 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.

b) Soft Loan SchemeIDBI 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.

c) Technical Development Fund SchemeThe 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 UnitsThe 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 AssistanceIDBI 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.

a) 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.

b) Rediscounting of BillsIDBI 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.

c) 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.

Chapter 13 : 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 IFCIThe 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 IFCIThe financial resources of the corporation consist of share capital bonds and debentures and borrowings.

a) Share Capital: The IFCI was set up with an authorized 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 corporat