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Development Banks

Among the institutions whose role in the development of the less developed regions is well recognised but inadequately emphasised are the development banks. Playing multiple roles, these institutions have helped promote, nurture, support and monitor a range of activities, though their most important function has been as drivers of industrial development.

A Development Bank is a polygonal development finance institution devoted to improving the social and monetary development of its associate nations. Its main emphasis is the welfare of the people. For example the Asian Development Bank's overarching goal is to decrease poverty in Asia and the Pacific. It helps improve the value of people's lives by providing loans and scientific support for a broad variety of development activities.

All underdeveloped countries launching on national development strategies, often in the aftermath of decolonisation, were keen on accelerating the pace of growth of productivity and per capita GDP.

This was the obvious requirement for alleviating poverty and reducing the developmental gap that separated them from the developed countries.

To realise this goal, they considered industrialisation to be an important prerequisite.

This stemmed from the perspective that modern economic growth was a process characterised by an increase in the share of employment in the non-agricultural sector, and within the latter by a change in the scale of productive units, the growth of factory production and a shift from personal enterprise to the impersonal organisation of economic firms

A development bank's policies or programs center on the following priorities

a) Economic Growth
b) Human Development c) Gender and Development d) Good Governance e) Environmental Protection

f) Private Sector Development

g) Regional cooperation

The main functions of a Development Bank:

a) Increase loans and equity investments to its developing associate countries (DMCs) for their monetary and social development.

b) Provides technical help for the planning and implementation of development projects and programs and for advisory services.

c) Promotes and facilitates speculation of public and private capital for growth and development.

d) Responds to requests for assistance in coordinating growth policies and plans of its increasing member countries.

Formation of Development Banks In India:

Development banks were set up in India at various points of time starting from the late 1940s to cater to the medium to long term financing requirements of industry as the capital market in India had not developed sufficiently. The endorsement of planned industrialization at the national level provided the critical enticement for organization of Development banks at both all-India and state levels.

In order to perform their role, Development Banks were extended funds in the shape of Long Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds, which constituted main sources of their funds. Funds from these sources were not only available at concessional rates, but also on a long term basis with their maturity period ranging from 10-15 years.

Formation of Development Banks In India

On the asset side, their operations were marked by near absence of competition. A large variety of economic institutions have come into existence over the years to perform a type of financial actions While some of them operate at all-India level, others are state level institutions. Besides providing direct loans, financial institutions also extend economic assistance by way of underwriting and direct contribution and by issuing guarantees. Recently, some Development Banks have started extending short term/working capital finance, although long term lending continues to be their major activity

Development banks provide financial assistance to industry in the following forms

Term loans and advances

Subscription to shares and debentures

Underwriting of new issues

Guarantees for term loans and deferred payments

The first two forms place funds directly in the hands of companies as subscription to shares and debentures. The last two forms facilitate the raising of funds from other sources.

This is the part played by development banks as a constituent of the industrial financing system in India and refers to the magnitude of funds provided by them jointly to industrial enterprises. The magnitude of industrial financing by these development banks has been considerable.

These banks have emerged as the single most important source of institutional finance to industry and have come to occupy a preeminent position in the institutional structure of the financial system. At present, as much as one-third of the gross fixed capital formation in private industry is being contributed by development banks

Quantitative Role

In India, their operations have the effect of improving the allocative efficiency of the financial system. The development banks perform the function of being a substitute for the capital market. When industrial enterprises are unable to raise funds from the normal channels, development banks fill the gap as well as restore or resuscitate the capital market.

As integral part of their lending operations, they thoroughly appraise projects as regards the priority aspect, financial viability and economic soundness and so on. The rigorous and exacting scrutiny by development banks tones up the quality of industrial projects and enables a more efficient use of available project resources.

Appraisal by the development banks is impersonal and objective. This results in financial assistance to diverse enterprises for a wide variety of purposes which would not otherwise have been possible. Included in this category are; new enterprises, small or mediumsized firms, enterprises in backward regions, and non-traditional industries

Qualitative Role
Development banking in India has an overwhelmingly qualitative dimension too in terms of the recent orientation towards promotional or innovative functions in their operations. With the evolution of a meaningful strategy of industrial development, a more positive role has been assigned to, and it being played by, development banks in India.

(i) Development of backward regions (ii) Encouragement to a new class of small entrepreneurs and enterprises (iii) Rehabilitation of sick mills