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BANKING LAW
PROJECT ON
COMPARATIVE STUDY OF DEVELOPMENT BAND AND
COMMERCIAL BANK
SUBMITTED
TO
SUBMITTED BY
ASST PROF. APARNA SINGH
VIHAN
ROLL NO. - 032
B.A.LL.B. (HONS.)
5th Semester
ARPIT
ACKNOWLEDGEMENT
My Banking Law Research Paper on the topic Comparative study of Development Bank and
Commercial Bank has been given shape and success by the effort of a lot of people who have
contributed in its completion.
I express my humble thanks to Dr. Aparna Singh, under whose supervision the project has
been made and without whose teachings and insights on the various aspects of Banking Law,
the project could not have been fructified.
I also extend my heartiest thanks to my seniors for their insights into the concerned project
and helping me with everything I asked them. The role of the Library Department is
noteworthy. All the staff members helped me generously in getting the materials and
information I needed to complete the project.
Arpit Vihan
B.A LLB (Hons)
V Semester
TABLE OF CONTENT
Introduction
Objective
Major Roles of Development Bank and Commercial Bank
Difference between Development Banks and Commercial Banks
Conclusion
Bibliography
INTRODUCTION
DEVELOPMENT BANK-
Development banking means different to different people, in different places, and at different
times. This only goes to show that development banking has evolved since it was first
conceptualized as an instrument of development. However, in its original form and in its
broadest definition, it is a type of financial intermediation to help the country reach a higher
and sustainable level of development. On the wider context, the desired level of development
includes the whole spectrum of socio-economic progress. Development banking therefore can
also be defined as a form of financial intermediation that provides financing to high priority
investment projects in a developing economy. Both definitions imply that the purpose of
development banking is to bring the country to a higher level of development.1
There are over 500 development finance institutions all over the world, or an average of three
per country serving mostly for the industry, agriculture and trade sectors. In certain countries,
however, there are other specialized DFIs, such as an SME Bank (serving small and medium
enterprises), housing bank, technology bank, infrastructure bank, etc.
There are four general types of development banks: (a) policy banks which directly support
the national governments economic policy plans and directives as can be found in Japan,
China, Korea and Malaysia (b) special-purpose DFIs which support focused sectors of the
economy, e.g., SMEs in Thailand, agriculture in India, infrastructure in Malaysia, etc. (c)
multi-purpose DFIs (sometimes called universal banks, in some context) which support both
development projects as well as commercial businesses as can be seen in the Philippines,
Indonesia, India, etc. and (d) commercially-oriented development banks which support
development through commercial banking services such as in Singapore.2
COMMERCIAL BANKA financial institution that provides services, such as accepting deposits, giving business
loans and auto loans, mortgage lending, and basic investment products like savings accounts
and certificates of deposit. The traditional commercial bank is a brick and mortar institution
with tellers, safe deposit boxes, vaults and ATMs. However, some commercial banks do not
have any physical branches and require consumers to complete all transactions by phone or
Internet.
Commercial banking activities are different than those of investment banking, which include
underwriting, acting as an intermediary between an issuer of securities and the investing
public, facilitating mergers and other corporate reorganizations, and also acting as a broker
for institutional clients. Some commercial banks, such as Citibank and JPMorgan Chase, also
have investment banking divisions, while others, such as Ally, operate strictly on the
commercial side of the business.3
The composition of the board of directors of a scheduled commercial bank shall consist of
whole time chairman. Section 10A of the Banking Regulation Act, 1949 provides that not less
2 < PRIMER on DEVELOPMENT BANKING (Compiled by the ADFIAP Secretariat) >
accessed on 16 OCT 2015
3 <http://www.investopedia.com/terms/c/commercialbank.asp> accessed on 16
OCT 2015
than fifty-one per cent, of the total number of members of the Board of directors of a banking
company shall consist of persons, who shall have special knowledge or practical experience
in respect of one or more of the matters including
economy, banking, co-operation, economics, finance, law, small-scale industry, or any other
matter the special knowledge of, and practical experience in, which would, in the opinion of
the Reserve Bank, be useful to the banking company. Out of the aforesaid number of
directors, not less than two shall be persons having special knowledge or practical experience
in respect of agriculture and rural economy, co-operation or small-scale industry.
Besides the above the board of the scheduled bank shall consist of the directors representing
workmen and officer employees. The Reserve Bank of India and the Central Government
also has right to appoint their nominees into the board of the banks.4
OBJECTIVE
The objective of this study is to analyze the basic difference between development bank and
commercial banks, and also, with emphasis on understanding the structure and major roles of
both of these banks.
DEVELOPMENT BANKA development bank has at least five major roles in the economic development of a country:
(a) As an initiator, i.e., with a supply-leading role (in anticipation of future demand) such as
in technology transfer, strategic industries, environment issues, etc.
4 < EVALUATION AND STRUCTURE OF COMMERCIAL BANKS IN INDIA Vinod Raina, ACS,
Company Secretary Anjani Technolast Limited, Noida accessed on 16 OCT 2015
COMMERCIAL BANKBesides performing the usual commercial banking functions, banks in developing countries
play an effective role in their economic development. The majority of people in such
countries are poor, unemployed and engaged in traditional agriculture.
There is acute shortage of capital. People lack initiative and enterprise. Means of transport are
undeveloped. Industry is depressed. The commercial banks help in overcoming these
obstacles and promoting economic development. The role of a commercial bank in a
developing country is discussed as under.
savings of the few rich. By mobilising savings, the banks channelise them into productive
investments. Thus they help in the capital formation of a developing country.
2. Financing Industry:
The commercial banks finance the industrial sector in a number of ways. They provide shortterm, medium-term and long-term loans to industry. In India they provide short-term loans.
Income of the Latin American countries like Guatemala, they advance medium-term loans for
one to three years. But in Korea, the commercial banks also advance long-term loans to
industry.
In India, the commercial banks undertake short-term and medium-term financing of small
scale industries, and also provide hire- purchase finance. Besides, they underwrite the shares
and debentures of large scale industries. Thus they not only provide finance for industry but
also help in developing the capital market which is undeveloped in such countries.
3. Financing Trade:
The commercial banks help in financing both internal and external trade. The banks provide
loans to retailers and wholesalers to stock goods in which they deal. They also help in the
movement of goods from one place to another by providing all types of facilities such as
discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.
Moreover, they finance both exports and imports of developing countries by providing
foreign exchange facilities to importers and exporters of goods.6
4. Financing Agriculture:
The commercial banks help the large agricultural sector in developing countries in a number
of ways. They provide loans to traders in agricultural commodities. They open a network of
branches in rural areas to provide agricultural credit. They provide finance directly to
6 < http://www.yourarticlelibrary.com/banking/commercial-banks-7-importantrole-of-commercial-banks-in-a-developing-country/10968/> accessed on 18 OCT
2015
agriculturists for the marketing of their produce, for the modernisation and mechanisation of
their farms, for providing irrigation facilities, for developing land, etc.
They also provide financial assistance for animal husbandry, dairy farming, sheep breeding,
poultry farming, pisciculture and horticulture. The small and marginal farmers and landless
agricultural workers, artisans and petty shopkeepers in rural areas are provided financial
assistance through the regional rural banks in India. These regional rural banks operate under
a commercial bank. Thus the commercial banks meet the credit requirements of all types of
rural people.
commercial banks for the success of its policy of monetary management in keeping with
requirements of a developing economy.
Thus the commercial banks contribute much to the growth of a developing economy by
granting loans to agriculture, trade and industry, by helping in physical and human capital
formation and by following the monetary policy of the country.7
There are several differentiating factors between a development bank and a commercial bank.
Some extreme observations below are made in order to emphasize traditional differences
between the two in order to emphasize the point. Actual practice, of course, differs from
commercial bank to commercial bank and from development bank to development bank. As
the countrys capital markets develop, there shall be less difference between these specialized
institutions and the similarities shall become more apparent. With this as a premise, the
traditional differences between development and commercial banks are in the following
areas:
a) Impetus for the Creation of the Institution: A development bank is created as an instrument
of economic development while a commercial bank is created by business opportunities.
b) Posture Relative to Business Opportunities: A development bank is supposed to be proactive as it should take an active role to promote projects and to develop institutions
(entrepreneurs). The projects chosen are those that are consistent with the economic
development priorities. A commercial bank is known to be reactive to business opportunities.
It requires bankability only after the entrepreneurs decision has been made; it waits for the
idea to culminate into a funding requirement.
c) Types of Projects Supported: For a development bank, there is an explicit effort to support
economic development projects. The following desired impact projects form the basis for
scanning for opportunities: import substitution (at competitive prices); exports; increased
local demand; regional development (for example, tourism); and increased industrial
efficiency through better technology. For a commercial bank, the abovementioned goals are
not the starting point for the identification of projects. Rather, they would most likely be sidebenefits. A commercial bank has little concern for these objectives, except for the viability of
the bank transaction. In short, a development banks activities are project-based while that of
the commercial bank are transaction-based.
d) Search Process for Projects Financed: A development bank goes into a planning cycle,
identifying which are the likely areas to go into. For example, if it determines that export is
an area to be promoted, then it conducts a marketing study and seeks entrepreneurs to
implement related projects. For the commercial bank, the search process is different. It asks,
Are you an exporter?,then looks at that entrepreneurs cash balance to determine if there is
a marketing opportunity for the transaction.
e) Project Promotion Activities: A development bank offers counselling and advisory services
for enterprise development and promotion as part of its development lending process. A
commercial bank offers legal and business advice, appraisal services and credit investigation,
usually for a fee. It undertakes very little project promotion and institutional development. Its
emphasis is on client development and marketing.
f) Strategic Goals: A development bank has a more difficult strategic objective because it is
involved with the concerns of the country, specifically economic development. Aside from
this, after providing financing, it is also concerned with developing the enterprise.
Developing them explicitly would mean additional costs to the bank. Enterprise development
dramatically limits the number of accounts that a development can handle because this is
time-consuming. A commercial banks main concern is to generate profits. Other benefits are
only incidental. With a commercial banks cost-consciousness, economic development would
be its last priority.
g) Criteria for Financing: A development bank assumes project risks and does not insist on
too much collateral. It will provide financing as long as the other criteria are met. A
commercial bank pays less attention to the project in relation to the collateral requirements.
However, the more progressive banks are lending against project cash flow and without
collateral.
i) Term of Loans Extended: A development bank provides mainly term loans (maturity of
more than one year). On the other hand, a commercial bank provides mainly short-term loans
(less than one year maturity).
k) Lending Policies for Cyclical Industries: A development bank supports its clients in spite
of short-term cycles while a commercial bank does not like cyclical industries.
CONCLUSION
From the above discussion, undoubtedly, we can say that, both commercial banks and
development banks form the most important part of financial intermediaries. Commercial
Banks accepts deposits from the general public and extends loans to the households, firms
and the government. Banks form a significant part of the infrastructure essential for breaking
vicious circle of poverty and promoting economic growth.
Basically, both these banks are meant for the upliftment of the developing country. Both these
banks are playing a major role in Indian economics. A development bank is created as an
8 < http://www.adfiap.org/wp-content/uploads/2009/10/Development-BankingPrimer.pdf> accessed on 21 OCT 2015
BIBLIOGRAPHY
by Smriti Chand
http://www.adfiap.org
http://www.yourarticlelibrary.com
Evolution and Structure of Commercial Bank in India by Vinod Raina
Primer on Development Bank Compiled by the ADFIAP Secretariat
http://www.investopedia.com
Maheshwari, S.K. Banking Law and Practice.