What is the function of development bank?

A Development Bank is a multipurpose institution which shares entrepreneurial Risk, Changes its approach in tune with the industrial climate and encourages new industrial projects to bring about speedier economic growth. The concept of development banking is based on the assumption that mere provision of finance will not help to bring about entrepreneurial development. Successful entrepreneurial banking should include the discovery of investment projects, undertaking the preparation of project reports, provision of technical will not help to bring about entrepreneurial development. Successful entrepreneurial banking should include the discovery of investment projects, undertaking the preparation of project reports, provision of technical advice and management services and finally assisting the management of industrial units. They are different from commercial banks in three ways:

      They do not seek or accept deposits from the public

    1. They specialise in providing medium and long-term finance (commercial banks specialise in proving short term finance)

    2. Their functions are confined to providing long-term finance.

Development banks provide financial assistance to industry in the following forms:

    1. term loans and advances

    2. subscription to share and debentures

    3. Underwriting of new issues

    4. 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 tow forms facilitate the raising of funds from other sources.

The distinguishing role of development banks is the promotion of economic development by way of providing investment and enterprise in their chosen spheres (manufacturing, agriculture etc) The factors which led to the growth of development banks are the inability of the normal institutional structure to keep pace with the requirement of funds and entrepreneurship of the growing industrial sector. The important development banks are the following.

  1. Industrial fiancé corporation of India Ltd. (IFCI)

  2. Industrial credit and Investment Corporation of India (ICICI)

  3. Industrial Development Bank of India (IDBI)

  4. Small Industrial Development Bank of India (SIDBI)

  5. Exim bank (Export and Import bank)

IDBI (Industrial Development Bank of India) was established as a wholly owned subsidiary of RBI in year 1964. However, in year 1976. the IDBI was made an autonomous institution and was thus delinked from the RBI. It is now independent public ector financial institution whose ownership vets in the Government of India.

The functions of the IDBI can be broadly grouped into three categories, viz.

  1. direct assistance to industrial units in the form of loans and advances.

  2. Indirect assistance through refinancing of the loans and advances given by other financial institution.

  3. Promotional activities in respect of industrialisation of backward areas, small industrial units etc.

Direct Assistance: The industrial development bank of India provides direct assistance to industrial units in the form of loans and advances. Besides, it also sudscribes to their shares and debentures thereby giving then strong financial support. The bank can guarantee the loans and advances raised by the industrial concerns from the scheduled banks, IFCI and other notified sources. It can also underwrite the shares and debentures issued by the industrial concern.

Indirect Financial Assistance: The promotional activities of the Industrial Development bank of India include

  1. special assistance for industrial development in the backward areas.

  2. Assistance to small scale industries and

  3. Special assistance by way of soft loan scheme

With a view to promoting the industrial development of the backward areas the IDBI provides confessional finance assistance to the small and medium projects in these areas. This concession assistance is available upto an account of Rs. 2 crores and has a longer repayment period.