Final Project of Development Banks

TABLE OF CONTENTSPREFACE ACKNOWLEDGEMENTINTRODUCTION TO TOPICOBJECTIVES OF STUDYRESEARCH METHODOLOGYHYPOTHESISINTRODUCTION TO DEVELOPMENT BANKSOBJECTIVES OF DEVELOPMENT BANKSBANKS UNDER STUDYIDBIIFCISIDBINABARDDATA ANALYSIS SUGGESTIONSCONCLUSIONLIMITATION

INTRODUCTION TO TOPIC

TO INDIAN FINANCIAL SYSTEM

HISTORY OF DEVELOPMENT BANKS

INDIAN FINANCIAL SYSTEM

Indian financial system is one of the world largest financial systems. Indian

economy is world 4th biggest economy but this Indian financial system has

under gone through various changes or we can say that it has different

stages since its inception.

Basically Indian financial system can be divided into 3 categories:

Before independence

Pre- 1991 era

Post-1991 era

BEFORE INDEPENDENCE:

In British rule India first time seen the organized financial system, although

all that was meant for britishers but that provided us the layout for future

course of action i.e. to build our own financial system. At that time banks

and other financial institutions were at their infantry stage but the given a

base to build the whole system on them. That time can be considered as the

preliminary stage of Indian financial system and at that time there were no

development banks as the motive of colonial rule was to draw the wealth

not to make country developing.

PRE 1991 ERA:

This era has seen the gradual rise in the economy of India. After

independence banks and other financial institutions to provide funds were

established and development banks were also a part of them which were

established specially to provide financial aid to industrial sector and to

promote entrepreneurship in India.

The financial system in this era was based on socialistic pattern of society

and the economy was of mixed type but basically it was public sector based

economy. The motive was to promote every sector of society to uplift and

earn for him self. Indian financial system continued with this pattern for

about 40 years but in true sense the economic growth never boosted up as

there was so many hindrances and lacks in syetm itself which taken country

in such a crisis that it has to borrow funds by pledging its gold that was

called the crisis of 1991

POST 1991 ERA:

To come out the crisis, India has to adopt the new policy regarding the

financial system to speed up the growth and to raise the economy and in

order to perform that a new policy of LIBERALIZATION-

PRIVATIZATION- GLOBALIZATION i.e. LPG was adopted. The basic

motive was to reduce the government control over the economy and to let it

flourish itself. Indian financial system is currently working on this policy

and now the economic growth rate has also risen. Now the development

banks are working in accordance with the industry in order to satisfy their

need of funds and to provide every possible help required. Although the

growth is still slow in comparison with other countries but soon India will

become the strongest economy of world.

HISTORY OF DEVELOPMENT BANKS

The concept of development banking rose only after Second World War ,

Successive of the Great Depression in 1930s. The demand for

reconstruction funds for the affected nations compelled in setting up a

worldwide institution for reconstructions. As a result the IBRD was set up

in 1945 as a worldwide institution for development and reconstruction. This

concept has been widened all over the world and resulted in setting up of

large number of banks around the world which coordinating the

developmental activities of different nations with different objectives

among the world.

The course of development of financial institutions and markets during the

post-Independence period was largely guided by the process of planned

development pursued in India with emphasis on mobilisation of savings and

channelising investment to meet Plan priorities. At the time of

Independence in 1947, India had a fairly well-developed banking system.

The adoption of bank dominated financial development strategy was aimed

at meeting the sectoral credit needs, particularly of agriculture and industry.

Towards this end, the Reserve Bank concentrated on regulating and

developing mechanisms for institution building. The commercial banking

network was expanded to cater to the requirements of general banking and

for meeting the short-term working capital requirements of industry and

agriculture. Specialised development financial institutions (DFIs) such as

the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership of the

Reserve Bank were set up to meet the long-term financing requirements of

industry and agriculture. To facilitate the growth of these institutions, a

mechanism to provide concessional finance to these institutions was also

put in place by the Reserve Bank.

The first development bank In India incorporated immediately after

independence in 1948 under the Industrial Finance Corporation Act as a

statutory corporation to pioneer institutional credit to medium and large-

scale. Then after in regular intervals the government started new and

different development financial institutions to attain the different objectives

and helpful to five-year plans.

The early history of Indian banking and finance was marked by strong

governmental regulation and control. The roots of the national system were

in the State Bank of India Act of 1955, which nationalized the former

Imperial Bank of India and its seven associate banks. In the early days, this

national system operated along side of a large private banking system.

Banks were limited in their operational flexibility by the government’s

desire to maintain employment in the banking system and were often drawn

into troublesome loans in order to further the government’s social goals.

The financial institutions in India were set up under the strong control of

both central and state Governments, and the Government utilized these

institutions for the achievements in planning and development of the nation

as a whole. The all India financial institutions can be classified under four

heads according to their economic importance that are:

All-India Development Banks

Specialized Financial Institutions

Investment Institutions

State-level institutions

Other institutions

OBJECTIVES OF STUDY

To find out the role of development banks in Indian financial system

To study the various development banks operating in India

To give glance at the working of development banks

To check the contribution of development banks in economic growth

To check the individual contribution of each development bank

To give check the current stature of Indian financial system

To make a comparative study among various development banks

To find out the weaknesses in financial system regarding with

development banks

RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research

problem. It may be understood as a science of studying how research is

done scientifically. In it we study the various steps that are generally

adopted by a researcher in studying his research problem along with logic

behind him. Why a research study has been undertaken, how a research

problem has been defined, in what way and why the hypothesis has been

formulated, what data have been collected and what particular method has

been adopted, why particular technique of analyzing data has been used and

a host of similar other questions are usually answered when we talk of

research methodology concerning a research problem or study.

RESEARCH DESIGN:

A research design is the arrangement of conditions for collection and

analysis of in a manner and aims to combine relevance to the research

purpose with economy in procedure. In fact the research design is the

conceptual structure within which research I conducted. Research Design is

needed because it facilitates the smooth sailing of the various research

operations thereby making research as efficient as possible yielding

maximum information with minimal expenditure of effort, time and money.

I have adopted descriptive and conclusive research design. Descriptive

research is those studies, which are concerned with describing the

characteristics of a particular individual or a group.

Since the aim is to obtain the accurate information about the

development banks in terms of their role in Indian financial system, I have

studied the various data available in books, journals, magazines and on

internet.

DATA SOURCES:

The researcher can gather primary data, secondary data or

both. Secondary data are data that were collected for another purpose and

already exist somewhere. Primary data are data specially gathered for a

specific purpose or for a specific research project. Since the study is based

on already existing facts and figures, so all the sources of data are secondary

SECONDARY DATA

The main source of information for the study was

Weakly magazines

RBI bulletin

Information available in form of articles

Information available on internet

INTRODUCTION TO DEVELOPMENT BANKS

DEVELOPMENT banks in India have had a chequered and not always a

happy history. Some have managed to come back from the brink by taking

to universal banking, or merging with a normal bank. In general, it may be

said that development banking has lost its charm. So much so that when an

official was shifted from the none-too-healthy Indian Bank to NABARD, a

banking veteran said that she deserved not congratulations but

commiseration.

Political interference and flawed industrial policy have been the main

reasons why development banks have fared badly. At the same time, it

needs to be said that some conceptual errors about the nature of

development banking have made matters worse.

From the time of Independence, political interference in the functioning of

banks has been both overt and covert. For instance, loan melas made many

banks sick. Even now, many villagers think that a loan from a government

bank is a gift; it need not be repaid. In spite of such impressive sounding

institutions as Debt Recovery Tribunals, it is still difficult for banks to

recover in full the amounts due; more often than not, banks have no option

but write-off most of the dues. Periodic concessions to borrowers ordered

by the Reserve Bank of India have made debt recovery quite difficult. In

consequence, ill health has dogged the banks in India.

Though development banks did not have to suffer from loan melas, they too

were subject to political pressure to fund projects of dubious value. For long

years, there was no culture of financial closure; many projects started more

with hope and hype than with calculated design, and with no clear idea of

where the funds would be found to complete them. Even if the project had

been well conceived, administrative delays made many projects unviable.

During the License Raj, getting a manufacturing license was an end in itself.

Licenses were obtained or bought merely because they were there and not

because they made economic sense. It was also possible to control a

company by investing no more than a small fraction of the total cost. It was

not uncommon in those days for not-so-scrupulous-businessmen to recover

their entire investment by extracting commissions. There was no

competition to enforce efficiency. Under such circumstances, the surprise is

not that development banks performed badly but that they survived at all.

Notwithstanding these handicaps, development banks made the situation

worse by a faulty appreciation of their role. Normally, bankers are cautious.

They lend only to the wealthy who can offer safe and substantial collateral.

Bankers are not ambitious: they are content charging a fixed interest even if

the borrower makes a killing and multiples the investment several times.

They also accept as normal the erosion of asset value by inflation.

Development banking is different: Loans are made not to those who have

accumulated wealth in the past but to those who show promise to become

wealthy in the future. Normal banking looks for safety in assets

accumulated from the past; in development banking, possible accumulation

of assets in the future is the true collateral. Thus, while in normal banking,

the collateral is real and tangible, in development banking, the collateral is a

dream; it is intangible. In normal banking, an interest default of more than

90 days becomes a non-performing asset. In the case of development,

growth is rarely smooth; development happens in fits and starts; cash flows

are subject to wild fluctuations and become negative at times.

Hence, development banks need to have a longer perspective than three

months; they should show patience for years. Normal banks can afford to be

myopic; development banks should take the long view. For development

banks, it is the trend line and not the current surplus that is important. As

one development banker blithely explained: "When I see any risk, I take my

money and run away." But that is not development banking; development

banks take risks that ordinary banks will not.

As a token of their support for progress, development banks offer an interest

holiday for the gestation period, and then charge a suitably adjusted flat rate

of interest. That does help new enterprises a little, but only a little. Interest

holiday is too crude a device to help new enterprises that, being babies,

suffer from unexpected (and periodic) teething problems.

There is some truth in the well-worn cliché that bankers lend when the

borrower does not need any money, and foreclose when the borrower is in

distress. Development bankers should be different; they should lend a

helping hand in moments of distress, and make up for the risk they take by

extracting larger returns when the borrower recovers.

For that reason, development banks should not operate on a fixed rate of

interest. They should evolve a mechanism which depends on the health of

the borrower. One possibility is to take a share of the profits. However, that

is highly risky. Profit-related investment is best left to venture capitalists. In

risk taking, development banks fall midway between safety-conscious

traditional banks and the daredevil venture capitalists. In seeking returns,

they need to follow a via media — neither be inflexible with a fixed rate of

interest, nor be volatile and bet on equity.

For development banks, a charge on the running costs of the firm could be

that via media, specifically two of them, (a) rents which include the cost of

all outsourcing of materials and services, and (b) wages. Then, a charge on

the rent and wage costs of the borrowing firm, a charge levied only when

the firm has a surplus to pay, could be the via media that development banks

could adopt.

These two costs are linked to inflation and to national economic growth too.

Hence, however low the charge on these two items, it will, in due course,

overtake whatever fixed rate of interest one may consider as an alternative.

In initial years, the returns from such a charge will be low; even nil. In

course of time, whatever sacrifice is made in the teething (or difficult) years

will always be made good — unless the firm is incurable.

An unsympathetic fixed interest burden often makes otherwise curable firms

mortally ill. A flexible charge will give a breather to recover to many firms

that are liable to become incurably sick in a fixed interest regime. Flexible

charges reduce risks for lending banks too: Because of inflation and growth,

a charge on rents and wages will sooner or later overtake any fixed rate of

interest. With patience, development banks can recover their sacrifices with

little risk.

In other words, development banks should think differently, and should

have a long time horizon. They should acquire the expertise to assess the

optimum waiting period and fix the rate of charge on wage costs and rents

paid accordingly. Incidentally, this kind of charge is not only transparent; it

will also make firms cost-conscious. That is an added benefit, additional

safety.

If development banks charge variable returns, they will need a

complementary deposit regime. Pensioners like to have constant real returns

that are protected against erosion by inflation. Hence, they need returns that

rise with time. Thus, development banks would do well to devise a Pension

Fund with inflation-linked returns. Then, they will have a matched

programme for assets and liabilities.

Sir Arthur Lewis won the Nobel for explaining how poor countries can

develop quickly by exploiting the surplus labour they have. On the same

analogy, the rural areas can develop rapidly by exploiting the cheap land

they have in plenty. The scheme PURA (Providing Urban amenities in

Rural Areas) banks on that idea. PURA starts with the construction of a ring

road linking a loop of villages. The moment the road is built, the value of

land alongside increases. PURA goes further. It runs frequent bus services

on the ring road, at least once 10-15 minutes. With bus services in place, the

ring road connects to large numbers of customers. That connectivity will

attract many new businesses, increasing land values further. Every new

business can become a magnet for yet another setting into motion a virtuous

cycle, and to rapid growth and development of newer and newer businesses.

Then, a project like PURA is best funded by levying a charge on rising rents

rather than depending on a relatively high fixed rate interest. With fixed rate

of interest, compounded every three months, a project like PURA may not

take off at all. A more patient, a more farseeing development bank can fund

a competent real estate developer and share - not his profits - but the rents

he gets.

Traditional banking is lending to the real estate developer at a fixed rate of

interest. Venture funding is taking a share in his profits, but development

banking is the policy of placing a charge on the rents collected. That is not

normal and requires a change in the mindset, a new vision, which could give

development banks a new life.

Definition of a development bank

Development banks are .the institutions engaged in the promotion and

development of industry, agriculture and other key sectors. In the words of

A.G. Kheradjou "A development bank is like a living organism that reacts

to the social-economic environment and Its success depends on reacting

most aptly to that environment". Kheradjou assigns an important task to the

development banks. He feels that these banks should react to the socio-

economic needs. They should satisfy the developmental needs of the

economy and their success is linked to the satisfactory growth of the

economy. In the views of William' Diamond" A development bank has the

opportunity to promote enterprises i.e. to conceive investment proposals

and to stimulate others to pursue tI1em or' itself to carry them through, from

'conception' to 'realization'. In principle, a development bank is well suited

to assume this kind of role. Yet, enterprise creation is fraught with costs and

risks which development bank cannot neglect. Development banks can

prudently undertake them only when they have the requisite financial

strength, technical expertise and the managerial skill to bank. ", In his

views, a developl1!enLbank is an institution which takes up the job of

developing industrial enterprises from its inception to completion. This

process involves costs as well as risks. The bank should have sufficient

financial sources and expertise to promote a new unit. D.M. Mithani states

that. "A development bank may be defined as a financial institution

concerned with providing all types of financial assistance (medium as well

as long-term) to business units. I the form of loans, underwriting,

investment and guarantee operations and development in general and

industrial

The role of a development bank has been emphasised in this definition. In

this view a development bank aims to provide financial and promotional

facilities for the overall development of a country.

Features of a development bank.

A development bank has the following features or characteristics:

1) A development bank does not accept deposits from the public like

commercial banks and other financial institutions who entirely

depend upon saving mobilization.

2) It is a specialized financial institution which provides medium term

and long-term lending facilities.

3) It is a multipurpose financial institution. Besides providing financial

help it undertakes promotional activities also. It helps an enterprises

from planning to operational level.

4) It provides financial assistance to both private as well as public sector

institutions.

5) The role of a development bank is of gap filler., When assistance

from other sources is not sufficient then this channel helps. It does

not compete with normal channels of finance.

6) Development banks primarily aim to accelerate the rate of growth. It

helps industrialization specific and economic development in general

7) The objective of these banks is to serve public interest rather than

earning profits.

8) Development banks react to the socio-economic needs of

development.

GROWTH OF DEVELOPMENT BANKS

Although development banks attracted great attention after World War II

but there one insurances or such institutions even much earlier, First

development bank was found in belgium in 1822 under the name of Societ a

de General de Belgique with the purpose of financing and promoting

industry. It was a joint stock bank which nursed funds through the sale of

shares and bonds in order to finance; commercial and industrial enterprises.

This new technique of banking got impetus only in 1852 when 'Credit

Mobilize of France' was set up. It mobilized resources through the sale of

bonds and promissory notes and made long-term investments particularly in

public utility undertakings, railways, insurance companies and banks. It set

a model for similar investment banks established in Germany, Austria,

Belgium, Netherlands, Italy, Spain and Switzerland. Throughout the 19th

century, the Credit Mobilize provided a great appeal to all countries which

wanted to develop industries on a fast pace. In 1902, Industrial Bank of

Japan was established for the purpose of financing her industrial

development. This bank undertook functions of an issue, a Commercial

Bank and mortgage institutions. Though the bank was helpful in

Financing industrialization but it could not strictly be called a development

bank. World War I, European countries developed specialized institutions to

provide industrial finance for reconstruction, modernization and

development of war regard industries. These banks were mainly mortgage

banks which extended long-term loans to industrial undertakings upon first

mortgage of industrial property. Among the important institutions were

Bank of Finland Ltd., National Hungarian Industrial Mortgage Institute

Ltd., and National Economic Bank of Poland. These banks were helpful in

reviving the war shattered economies of these countries. In the second phase

of development banking a need for financing small scale sector was

recognized. The institutes created after great depression carried out the

functions of capital under writing and direct subscription along with lending

activities. The Industrial credit Company of Ireland and Netherlands,

company for Industrial Financing participated in share capital of industrial

undertakings in addition to granting term loans.

In the next phase of development banking after World War II there was a

trend to combine montage lending with underwriting and equity

participation.

Some institutions developed during this period were Industrial Development

Bank of Canada (1944), France Corporation for Industry Ltd. and industrial

and Commercial Finance Corporation Ltd., England (1945), Industrial

Finance Department of Common wealth Bank of Australia (1945). These

institutions not only provided term loans to industry but also participated in

the share capital of companies. The institutions in England even have the

option to convert their loans into preference or equity shares. Though

English and Canadian institutions could at best be described as finance

corporations but that of Australia could be called a development bank

because it could assist in the establishment and development of industrial

undertakings. Despite the differences in the organization, Scope and

methods of various institutions the main thrust of all of them was to access,

those enterprises where sufficient help was not forthcoming from traditional

sources. They acted essentially as gap fillers in peculiar circumstances of

the pest-war years.

In the last 50 years developing countries have promoted many development

thanks. These banks have been developed with special purpose in mind.

They differ in ownership, organization, scope etc. Some' are exclusively

owned by government (Industrial Development Bank of Nepal, 1959,

National Development Bank of Brazil, 1965) others by private interests

(Industrial Credit and Investment Corporation of India, Industrial Finance

Corporation of Thailand, etc.) Some other Banks (Summer Bank of Turkey)

are meant to promote and finance government ' undertakings only, some

exclusively for private enterprises while some for both. Some banks can

only lend while some can lend and take equities besides underwriting. Some

are concerned with entire economy while some are for specific sectors only.

Some banks are regional, some are national while a few are inter-regional

(Asian Development Bank) or international such as World Bank,

International Finance Corporation, International Development Association

etc. Some banks provide only local currency while some deal in both local

and foreign currencies, etc.

OBJECTIVES OF DEVELOPMENT BANKSEvery country felt the need to accelerate the rate of development in post

world war era. Some countries were directly involved in war while many

others were indirectly affected by it. There was a need for reconstructing

economics at a faster speed. The existing machinery for developmental

activities was not sufficient to the requirements of industry. There was a

need to set up such institutions which would take up promotional activities

besides financing. In this background developmental banks were needed for

the following reasons:

1. Lay Foundations for Industrialization

A number of countries got independence from colonial rule. Their

economies needed to be rehabilitated. Other underdeveloped and developing

countries too needed to accelerate the pace of industrialization. To lay a

solid foundation for growth, establishment of certain key industries such as

cement, engineering, machine making, chemicals, etc. is essential. Private

entrepreneurs were not forthcoming to invest in these vital' areas due to risk

involved and Ibng gestation period in those industries. Moreover, it was

beyond the means and capacity of private individuals to take up these

projects. They needed special facilities from institutions which could extend

long-tenn help. The governments of under developed countries set up

development and institutions to fill the vacuum.

2. Meet Capital Needs

1'nere was a dearth of capital needed to foster industrial growth in

underdeveloped countries. Owing to the low level of income of the people

there were no sufficient surpluses for capitalization. There was a need for

institutions which could meet this gap between demand and supply for

capital.

3. Need for Promotional Activities

Besides capital needs, underdeveloped countries suffered from lack of

expertise, managerial and technical know-how. Developmental banks could

take up the job of and joint sectors and provide managerial and resources

and skills and of channeling them into approved fields under private

auspices are needed in these countries.

4. Help Small and Medium Sectors'

The large scale was, to some extent, able to meet its needs. There was a

need to mitigate sufferings of small and medium size industries which form

a sizeable sector of the industrial economy. Despite the important role

played by these sectors they experience scarcity of capital owing to the

apathy of investors to invest their savings because of their credit worthiness

and profitability. There was a need for special institutions to help these

sectors in playing vital role in the industrialization of developing and under

developed countries.

FUNCTIONS OF DEVELOPMENT BANKS

Development banks have been started with the motive of increasing the

pace of industrialization. The traditional financial institutions could not take

up this challenge because of their limitations. In order to help all round

industrialisation development banks were made multipurpose institutions.

Besides financing they were assigned promotional work also. Some

important functions of these institutions are discussed as follows:

1. Financial Gap Fillers

Development banks do not provide medium-tenn and long-tenn loans only

but they help industrial enterprises in many other ways too. These banks

subscribe to the bonds and debentures of the companies, underwrite to their

shares and debentures and, guarantee the loans raised from foreign and

domestic sources. They also help 'undertakings to acquire machinery from

with in and outside the country.

2. Undertake Entrepreneurial Role

Developing countries lack entrepreneurs who can take up the job of setting

up new projects. It may be due to lack of expertise and managerial ability.

Development banks were assigned the job of entrepreneurial gap filling.

They undertake the task of discovering investment projects, promotion of

industrial enterprises, provide technical and managerial assistance,

undertaking economic and technical research, conducting surveys,

feasibility studies etc. The promotional role of development bank is very

significant for increasing the pace of industrialization.

3. Commercial Banking Business

Development banks normally provide medium and long-term funds to

industrial enterprises. The working capital needs of the units are met by

commercial banks. In developing countries, commercial banks have not

been able to take up this job properly. Their traditional approach in dealing

with lending proposals and assistance on securities has not helped the

industry. Development banks extend financial assistance for meeting

working capital needs to their loan if they fail to arrange such funds from

other sources. So far as taking up of other functions of banks such as

accepting of deposits, opening letters of credit, discounting of bills, etc.

there is no uniform practice in development banks.

4. Joint Finance

Another feature of development bank's operations is to take up joint

financing along with other financial institutions. There may be constraints

of financial resources and legal problems (prescribing maximum limits of

lending) which may force banks to associate with other institutions for

taking up the financing of some projects jointly. It may also not be possible

to meet all the requirements of a concern by one institution, So more than

one institution may join hands. Not only in large projects but also in

medium-size projects it may be desirable for a concern to have, for instance,

the requirements of a foreign loan in a particular currency, met by one

institution and under writing of securities met by another. In case of big

projects where substantial financial assistance is needed, more institutions

may form a consortium to meet their needs. The members of the consortium

will undertake joint appraisal of projects and then decide the quantum of

assistance to be provided by each institution.

5. Refinance Facility

Development banks also extend refinance facility to the lending institutions.

In this scheme there is no direct lending to the enterprise. The lending

institutions are provided funds by development banks against loans

extended' to industrial concerns. In this way the institutions which provide

funds to units are refinanced by development banks. In India, Industrial

Development Bank of India provides reliance against ('term loans granted to

industrial 'concerns by state financial corporations. commercial banks and

state co-operative banks.

6. Credit Guarantee

The small scale sector is not getting proper financial facilities due to the

clement of risk since these units do not have sufficient securities to offer for

loans, lending institutions are hesitant to extend them loans. To overcome

this difficulty many countries including India and Japan have devised credit

guarantee scheme and credit insurance scheme. In India, credit guarantee

scheme was introduced in 1960 with the object of enlarging the supply of

institutional credit to small industrial units by granting a degree of

protection to lending institutions against possible losses in respect of such

advances. In Japan besides credit guarantee, insurance is also provided.

These schemes help small scale concerns to avail loan facilities without

hesitation.

7. Underwriting of Securities

Development banks acquire securities of industrial units through either

direct subscribing or underwriting or both. The securities may also be

acquired through promotion work or by converting loans into equity shares

or preference shares. So development banks may build portfolios of

industrial stocks and bonds. These banks do not hold these securities on a

permanent basis. They try to disinvest in these securities in a systematic

way which should not influence market prices of these securities and also

should not lose managerial control of the units.

Development banks have become world wide phenomena. Their functions

depend upon the requirements of the economy and the state of development

of the country. They have become well recognized segments of financial

market. They are playing an important role in the promotion of industries in

developing and underdeveloped countries.

LENDING PROCEDURES OF DEVELOPMENT BANKS

OPERATIONAL ACTIVITIES)

Development banks follow a procedure for evaluating a proposal for a

project. The basic objective is to check whether the applicant fulfils various

conditions prescribed by the lending institution and the project is viable.

The acceptance of a wrong proposal will result in the wastage of scarce

resources. These banks adopt the following procedure for lending:

1. Project Appraisal and Eligibility of Applicant

Every financial institution serves a particular area of activity or there are

certain limits prescribed beyond which they cannot go. Before processing

the application, it is important to find out whether the applicant is eligible

under the norms of the institution or not. The second aspect which is looked

into is to determine whether the enterprise has fulfilled various conditions

prescribed by the government. In case some license is required from the

government. It should have been taken or an assurance is received from the

licensing authority. After satisfying these preliminary issues the project is

appraised by a team of technical financial and economic officers of the

institutions from various discussions with the promoters and clarifications

sought on various points. The bank institution considers financial assistance

in the light of

(I) Guidelines for assistance to industries issued by the government or

others concerned from time to time

(ii) Guidelines issued by the bank

(iii) Policy decisions of the Board of Directors of the bank.

2. Technical Appraisal

A technical appraisal involves the study of:

1) Feasibility and suitability of technical process in Indian conditions.

2) Location, of the project in relation to the availability of raw materials,

power: water. labour, fuel, transport, communication facilities and

market for finished products.

3) The scale of operations and its suitability for the planned project.

4) The technical soundness of the projects.

5) Sources of purchasing plant and machinery and the reputation of

suppliers. etc.

6) Arrangement for the disposal of factory affluent and use of bye

products, if any.

7) The estimated cost of the project and probable selling price of the

product.

8) The programme for completing the project.

9) The sources of supplying various inputs and marketing arrangements.

10) Details of any technical collaboration and its practical aspects.

The technical appraisal determines the suitability of the project.

3. Economic Viability

The economic appraisal will consider the national and industrial priorities of

the project export potential of the product employment potential, study of

market.

4. Assessing Commercial Aspects

The examination of commercial aspects relates to the arrangements for the

purchase of raw materials and sale of finished products. If the concern has

some arrangement for sale then the position of the party should be assessed.

5. Financial Feasibility

The financial feasibility of a new and an existing concern will be assessed

differently. The assessment for a new concern will involve:

1) The needs for fixed assets, working capital and preliminary expenses

will be estimated to find out its needs.

2) The financing plans will be studied in relation to capital structure,

promoters' contribution, debt-equity ratio.

3) Projected cash flow statements both during the construction

and .operation periods

4) Projected profitability and the like dividend in near future.

If a project is already in operation and is undertaking expansion or

diversification, the financial feasibility will be different. The analysis of

existing capital structure, contribution of owners, debt-equity ratio, past

financial performance results shown by profit and loss accounts and

balance sheets, the sources of raising funds, likely needs .of the concern,

future debt-equity ratio (after extending financial help), debt service

coverage, internal rate .of return, in the financial position of the concern and

viability for

6. Managerial Competence

The success .of a concern depends up on the competence of management.

Proper application of various policies will determine the Success of an

enterprise. A lending institution would see the background, qualifications,

business experience of promoters and other persons associated with

management.

7. National Contribution

Besides commercial profitability, national contribution .of the project is also

taken into account. The role of the project in the national economy and its

benefits to the society in the form of good quality products, reasonable

prices, employment generation, helpful in social infrastructure etc. should

be assessed. Development banks aim at the over all welfare of the society.

8. Balancing of Various Factors

Various factors should be balanced against each other. The

circumstances .of the individual project will help in weighing various

factors. Some factors may be strong as their in-depth analysis should be

avoided. In case a project is profitable, there will be no need to assess cash

flow. Weaknesses located in certain areas may be .off set by the good points

in the .other. An experienced management and sound economic outlook

may compensate some weakness in financial positions. The responsibility of

lending bank lies in balancing judiciously different considerations for

arriving at a consensus.

9. Loan Sanction

After the appraisal report on the project is prepared by the bank's officers, it

is placed before the advisory committee consisting of experts drawn from

various fields of the particular industry. If the advisory committee is

satisfied tile proposal then it recommends the case to the Managing Director

or board of Directors along with its own report. When the assistance is

sanctioned hen a letter to this effect is issued to the pay giving details of

conditions.

10. Loan Disbursement

The loan is disbursed after the execution of loan agreement. The execution

of documents of security or guarantee etc. should precede the disbursement

of loan. In case some property is pledged to the bank then title deeds of such

property are properly scrutinized. The fulfillment of various conditions

proceeding to disbursement will determine the time of paying the money to

the party.

11. Follow up

The job of a lending bank does noted by disbursing the assistance. It has

first to see whether the construction .of the project is as per schedule

decided earlier. In case some delay is taking place in executing the plans

then the reasons for it should be determined. Later during operations, the

result should be properly followed. It should be seen whether the revenue

earned by the concern will be sufficient to meet its obligations or not so a

proper follow up by the bank will enable it to follow the progress of the

unit.

DEVELOPMENT BANKING IN INDIA

The foreign rulers in India did not take much interest in the industrial

development of the country. They were interested to take raw materials to

England and bring back finished goods to India. The government did not

show any interest for securing up institutions needed for industrial

financing. The “recommendation for setting up industrial financing

institutions was made in 1931 by Central Banking Enquiry Committee but

no concrete steps were taken. In 1949, Reserve Bank had undertaken a

detailed study to find out the need for specialized institutions. It was in 1948

that the first development bank i.e. Industrial Finance Corporation of India

(IFCI) was established. IFCI was assigned the role of a gap-filler which

implied that it was not expected to compete with the existing channels of

industrial finance. It was expected to provide medium and long-term credit

to industrial concerns only when they could not raise sufficient finances by

raising capital or normal banking accommodation. In view of the vast size

of the country and needs of the economy it was decided 10 set up regional

development banks to cater to the needs of the small and medium

enterprises. In 1951, Parliament passed State Financial Corporation Act.

Under this Act state governments could establish financial corporations for

their respective regions. At present there are 18 State Financial Corporations

(SFC's) in India.

The IFCI and state financial corporations served only a limited purpose.

There was a need for dynamic institutions which could operate as true

development agencies. National Industrial Development Corporation

(NIDC) was established in 1954 with the objective of promoting industries

which could not serve the ambitious role assigned to it and soon turned to

be a financing agency restricting itself to modernization and rehabilitation

of and jute textile industries.

The Industrial Credit and Investment Corporation of India (ICICI) were

established in 1955 as a Joint Stock Company. ICICI was supported by

Government of India, World Bank, Common wealth Development Finance

Corporation and other, foreign institutions. It provides term loans and takes

an active part in the underwriting of and direct investments in the shares of

industrial units. Though ICICI was established in private sector but its

pattern of shareholding and methods of raising funds gives it the

characteristic of a public sector financial institution. .

Another institution, Refinance Corporation for Industry Ltd. (RCI) was set

up in 1958 by Reserve’ Bank of India, LIC and Commercial Banks. The

purpose of RCI was to provide refinance to commercial banks and SFC's

against term loans granted by them to industrial concerns in private sector.

In 1964, Industrial Development Bank of India (IOBI) was set up as an apex

institution in the area of industrial finance, RCI was merged with IDBI.

IDBI was a wholly owned subsidiary of RBI and was expected to co-

ordinate the activities of the institutions engaged in financing, promoting or

developing industry.

However, it is no longer a wholly owned subsidiary of the Reserve Bank of

India. Recently, it made a public issue of shares to increase its capital. In

order to promote industries in the slate another type of institutions, namely,

the State Industrial Development Corporations (SIDC's) were established in

the sixties to promote medium scale industrial units. The state owned

corporations have promoted a number of projects in the joint sector and

assisted sector. At present there are 28 SIDC's in the country. The State

Small Industries Development Corporations (SSIDC's) were also set up to

cater to the needs of industry at state level. These corporations manage

industrial estates, supply

raw materials, run common service facilities and supply machinery on hire

purchase basis. Some states have established their own institutions.

A number of other institutions also participate in industrial financing. The

Unit Trust of India (UTI) established in 1964, Life Insurance Corporation of

India (1956) and General Insurance Corporation of India (GIC) set up in

1973 also finance industrial activities at all India level. Some more units

have been set up to provide help in specific areas such as

rehabilitation of sick units, export finance, agriculture and rural

development. Industrial Reconstruction Corporation of India Ltd. (RCI)'

was set up in 1971 for the rehabilitation of sick units. In 1982 the Export-

Import Bank of India (Exim Bank) was established to provide financial

assistance to exporters and importers. In order to meet credit needs of

agriculture and rural sector, National' Bank for Agriculture and Rural

Development (NABARD) was set up in 1982. It is responsible for short

term, medium term and long-term financing of agriculture and allied

activities. The institutions such as Film Finance

Corporation, Tea Plantation Finance Scheme, Shipping Development Fund,

Newspaper Finance Corporation, Handloom Finance Corporation, Housing

Development Finance Corporation also provide financial various areas.

PROMOTIONAL ROLE OF DEVELOPMENT BANKS IN INDIA

The pace of development cannot be accelerated by providing financial

assistance alone. There are factors which inhibit industrialization of an

underdeveloped country. It is essential to make a correct diagnosis of those

factors and plan things accordingly. The growth potential of different areas,

the availability of natural resources, demand conditions, infrastructure

facilities, etc. should be taken into account before deciding the pattern .of

industrialization of various places. The task of identification of growth

potentialities and preparation of feasibility studies is not an easy task. It

requires huge finances and technical expertise which is beyond the

competence of entrepreneurs of under-developed countries. It is in this area

where development banks can play crucial role. In addition to providing the

traditional role of providing financial assistance, development banks in

India are undertaking promotional role also. Some of the areas where these

banks are participating are:

(1) Surveys of Backward Areas

Under the Industrial Development Bank of India, development institutions

conducted industrial potential surveys in June, 1970 with a view to identify

specific project ideas for implementation in those areas. These surveys

studied the availability of resources, demand potential and availability of

infrastructures facilities. In 1982, Government .of India identified 83

districts in the country where no medium or large scale industrial units

existed. IOBI jointly with IFCI and ICICI launched a programme for

identifying industrial opportunities and needs for. These project ideas were

further screened and developed for arriving at some firm decision about

their implementation. IDBI conducted feasibility studies and cleared

projects for implementation.

(2) Inter-Institutional Groups (IIG's)

With a view to provide a forum to the national and state financial

institutions, IDBI constituted 23 IIG's in various states and union territories

These groups aimed to help accelerate the process of industrial development

in a state with particular emphasis on less developed areas, An attempt was

also made to evolve suitable strategies for industrial development within the

framework of national and state policies and local requirements. IDBI has

been constantly reviewing the functioning of these groups so as to evolve

suitable measures for malting them effective.

(3) Establishing Technical Consultancy Organizations (TCO's),

There is a need for technical consultancy at the time of selling up a new unit

and at the time of making change like modernization, expansion,

diversification, etc. The small and medium scale units cannot pay high fees

of consultancy agencies. With a view to help these entrepreneurs, financial

institutions set up 17 consultancy organization for providing consultancy at

nominal rates. These organizations provide consultancy services to small

and medium entrepreneurs, commercial banks, state-level financial

institutions and other agencies engaged in industrial promotion and

development. The consultancy services covered so far include market

surveys, preparation of feasibility and project reports, entrepreneur ship

development programmes, diagnostic studies and rehabilitation schemes for

sick units, services for implementing projects on turn-key basis. TCO's have

been giving thrust to modernization small and medium scale sectors also. In

this respect they have undertaken in depth studies of specific sub- sectors of

small scale industry so as to identify their modernization needs and prepare

modernization programmes.

(4) Entrepreneurial Development Programmes (EPP's)

Industrial development of a country is directly influenced by the quality of

entrepreneurs it has produced, with a view to impart requisite training to

entrepreneurs. IDBI has been encouraging entrepreneurial development

programmes. It has mainly used the agency of TCO's for drawing up and

conducting these programmes to cater to the needs of entrepreneurs from

small and medium scale sectors. IDBI meets up to 50 per cent of the cost of

such programmes and the balance cost is met by state governments or other

sponsoring institutions.

Development banks have also been trying to strengthen the infrastructure

for conducting entrepreneurial development programmes. The main thrust

has been to institutionalize entrepreneurship activities, generating,

sharpening and sharing knowledge through research documentation and

publication, developing a cadre of professionals. A major step in this area

was the setting up of Entrepreneurship Development Institute of India,

Ahmedabad in 1983. The objective of this institution was to train EPP

trainers, providing resource inputs running model development

programmes, conducting.

(5) Technological Improvements

Development banks, especially IDBI have been helping small and medium

sectors in developing and upgrading of their technology so that they arc able

to match the pace of development. These banks also encourage

entrepreneurs to adopt sophisticated technology with the help of academic

and research institutes and also to encourage entrepreneurship among

science and technology graduates. Development banks have done a good

job in promoting industrial activities in various parts of the country. The

development of backward areas is a gigantic task in India. Private

entrepreneurs cannot measure to this task of their own. So development

banks are expected to play an important role in this regard. These banks

should help in setting up new projects by associating private entrepreneurs

so that their management is left to them. After a particular stage of a project

the development institutions should transfer the responsibility to private

sector and same resource should be used to develop more units.

Development banks, in co-operation with private sector, can certainly help

in accelerating the pace of industrial development.

Role of development banks in financial system

Financial institutions provide means and mechanism of transferring

resources from those who have an excess of income over expenditure to

those who can make productive use of the same. The commercial banks and

investment institutions mobilize savings of people and channel them into

productive uses. Financial institutions provide all type of assistant required

infrastructural facilities Institutions e p economic persons who can take the

development in the following ways.

1. Providing Funds:-

The underdeveloped countries have low levels of capital formation. Due to

low incomes, people are not able to save sufficient funds which are needed

for sensing up new units and also for expansion diversification and

modernization of existing units. The persons who have the capability of

starting a business but does not have requisite help approach to financial

institutions for help. These institutions help large number of persons for

taking up some industrial activity. The addition of new industrial units and

increasing the activities of existing units will certainly help in accelerating

the pace of economic development. Financial institutions have large

inventible funds which are used for productive purposes

2. Infrastructural Facilities

Economic development of a country is linked to the availability of

infrastructural facilities. There is a need for roads, water, sewerage,

communication facilities, electricity etc. Financial institutions prepare their

investment policies by keeping national priorities in miner-The institutions

invest in those aim is which can help in increasing the development of the

country. Indian industry and agriculture is facing acute shortage of

electricity. All India" institutions are giving priority to invest funds in

projects generating electricity. These investments will certainly increase the

availability of electricity. Small entrepreneurs cannot spare funds for

creating infrastructural facilities. To overcome this problem, institutions at

state level are developing industrial estates and provide sheds, having all

facilities at easy installments. So financial institutions are helping in the

creation of all those facilities which are essential for the development of a

country

3. Promotional Activities

An entrepreneur faces many problems while setting up a new unit. One has

to undertake a feasibility report, prepare project report, complete

registration formalities, seek approval from various agencies etc. All these

things require time, money and energy. Some people are not able to

undertake this exercise or some do not even take initiative. Financial

institutions are the expense and manpower resources for undertaking the

exercise of starting a new unit. So these institutions take up this work on

behalf of entrepreneurs. Some units may be set up jointly with some

financial institutions and in that case the formalities are completed

collectively. Some units may not have come up had they not received

promotional help from financial institutions. The promotional role of

financial institutions is helpful in increasing the development of a country.

4. Development of Backward Areas

Some areas remain neglected because facilities needed for setting up new

units are not available here. The entrepreneurs set up new units at those

places which are already developed. It causes imbalance in economic

development of some areas. In order to help the development of backward

areas, financial institutions provide special assistance to entrepreneurs for

setting up new units in these areas. IDBI, IFCI, ICICI give priority in giving

assistance to units set up in backward areas and even charge lower interest

rates on lending. Such efforts certainly encourage entrepreneurs to set up

new units in backward areas. The industrial units in these areas improve

basic amenities and create employment opportunities. These measures will

certainly help in increasing the economic development of backward areas.

5. Planned Development

Financial institutions help in planned development of the economy.

Different institutions earmark their spheres of activities so that every

business activity is helped. Some institutions like SIDBI, SFCI's especially

help small scale sector while IFCI and SIDC's finance large scale sector or

extend loans above a certain limit. Some institutions help different segments

like foreign trade, tourism etc. In this way financial institutions devise their

roles and help the development in their own way. Financial institutions also

follow the development priorities set by central and state governments.

They give preference to those industrial activities which have been specified

in industrial policy statements and in five year plans. Financial institutions

help in the overall development of the country

6. Accelerating Industrialization

Economic development of a country is linked to the level of

industrialization there. The setting up of more industrial units will generate

direct and indirect employment, make available goods and services in the

country and help in increasing the standard of living. Financial institutions

provide requisite financial, managerial, technical help for setting up new

units. In some areas private entrepreneurs do not want to risk their funds or

gestation period His long but the industries are needed for the development

of the area. Financial institutions provide sufficient funds for their

development. Since 1947, financial institutions have played a key role in

accelerating the pace of industrialization. The country has progressed in

almost all areas of economic development.

7. Employment Generation

Financial institutions have helped both Direct and indirect employment

generation. They have employed many persons to man their offices. Besides

office staff, institutions need the services of experts which help them in

finalizing lending proposals. These institutions help in creating employment

by financing new and existing industrial units. They also help in creating

employment opportunities in backward areas by encouraging the setting

up of units in those areas, Thus financial institutions have helped in creating

new and better job opportunities.

ALL INDIA DEVELPOMENTS BANKS

In India, various financial institutions were set up after independence only.

The Government of India has taken sleeps to set up institutions which assist

various sectors of the economy. At present the country has 12 institutions at

the national level and 46 at the state level. The All India Financial

Institutions comprise six: All-India Development Banks, namely: Industrial

Development Bank of India, Industrial Finance Corporation of India Ltd.,

Industrial Credit and Investment Corporation of India Ltd., Small Industries

Development Investment Bank of India, Industrial Reconstruction Bank of

India and SCICI Ltd. Specialized institutions comprise of Risk Capital and

Technology Finance Corporation Ltd., Technology Development and

Information Company of India Ltd. and Tourism Finance Corporation of

India Ltd. There are three investment institutions: Life Insurance

Corporation of India Ltd., Unit Trust of India and General Insurance

Corporation of India. At state level there are 18 State Finance Corporations

and 18 state finance corporations and 28 state industry development

corporations.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

At the same time raw industrial units were to be set up for industrializing

the country. Government of India came forward to set up the Industrial

Finance Corporation of India (IFCI) in July 1948 under a Special Act. The

Industrial Development Bank of India, scheduled banks, insurance

companies, investment trusts and co-operative banks are the shareholders of

IFCI. The Government of India has guaranteed the repayment of capital and

the payment of a minimum annual dividend. Since July I, 1993, the

corporation has been converted into a company and it has been given the

status of a Ltd. Company with the name Industrial Finance Corporations of

India Ltd. IFCI has got itself registered with Companies Act, 1956. Before

July I, 1993, general public was not permitted to hold shares of IFCI, only

Government of India, RBI, Scheduled Banks, Insurance Companies and Co-

operative Societies were holding the shares of IFCI.

Management of IFCI

The corporation has 13 members Board of Directors, including Chairman.

The Chairman is appointed by Government of India after consulting

Industrial Development Bank of India. He works on a whole time basis and

has tenure of 3 years. Out of the 12 directors, four are nominated by the

IDBI, two by scheduled banks, two by co-operative banks and two by other

financial institutions like insurance companies, investment trusts, etc. IDBI

normally nominates three outside persons as directors who are experts in the

fields of industry, labour and economics, the fourth nominee is the Central

Manager of IDBI. The Board meets once in a month. It frames policies by

keeping in view the interests of industry, commerce and general public. The

Board acts as per the instructions received from the government and IDBI.

The Central Government reserves the power up to the Board and appoints a

new one in its place.

The Board is assisted by the Central Committee which consists of the

chairman, two directors elected by nominated directors and the Board of

directors elected by the elected directors. This committee assists the Board

in discharge of its functions. It .can act on all matters under the competence

of the Board, So this committee practically transacts the entire business of

the corporation. IFCI also has Standing Advisory Committees one each for

textile, sugar, jute, hotels, engineering and chemical processes and allied

industries. The experts in different fields appointed on Advisory

Committees. The chairman is the ex-officio member of all Advisory

Committees. All applications for assistance are first discussed by Advisory

Committees before they go to Central Committees.

Financial Resources of IFCI

The financial resources of the corporation consist of share capital bonds and

debentures and borrowings.'

a) Share Capital:-

The IFCI was set up with an authorised capital of Rs. 10crores

consisting of 20,000 shares of Rs. 5,000 each. This capital was later on

increased at different times and by March, 2003 it was Rs. 1068 crores.

The capital was subscribed by Central Government, Reserve Bank of

India, scheduled banks, Life Insurance Corporation, investment trusts,

co-operative banks are other financial institutions. In 1964, the share

capital held by the central government and RBI was transferred to the

Industrial Development Bank. The corporation thus became a subsidiary

of IDBI. The central government had guaranteed the shares of the

corporation both for repayment of the principal and for the payment of a

dividend at 2.5 per cent on the original issue and 4 per cent on the

additional issues. However, since July I, 1993IFC has been converted

into a limited company.

b) Bonds and Debentures:-

The corporation is authorized to issue bonds and debentures to

supplement its resources but these should not exceed ten times of paid-

up capital and reserve fund. The bonds and debentures stood at a figure

of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on 31st March

2003. The bonds and debentures are also guaranteed by the central

government for both payment of interest at such rates as may be fixed at

the time the bonds and debentures are issued.

c) Borrowings:-

The corporation is authorized to borrow from government IDBI and

financial institutions. Its borrowings from IDBI and Govt. of India were

Rs. 975.6 crore on March 31, 2003. Total assets of IFCI as on March 31,

2003 aggregated Rs. 22866 crore including investments of Rs. 3820.3

crore and loans and advances of Rs. 13212.8crore.

Priority Criterion for Investments

IFCI plans its financing policies as per the priorities set by the government

through Industrial Policy Statements. The Industries which are in high

priority are given more importance. Following considerations are taken into

account while selecting a financial proposal:

i. Importance of the project for national economy.

ii. Employment-oriented and labour-intensive nature of the project.

iii. Export potential of the unit,

iv. Projects located in backward areas or 'no industry districts.

v. Projects initiated by new or technician entrepreneurs.

vi. Projects which will harness indigellously available technology,

technical know how and raw materials.

vii. Projects which will help rural areas.

viii. Projects which help in conserving energy or which manufacture

renewable energy systems or devices.

ix. Projects to be set up in co-operative sector.

Eligibility for Assistance under Direct Financing

Following types of industrial concerns are eligible for direct finance under

IFCI Act, amended from time to time:

i. Limited companies incorporated in India, in private, public or joint

Sector

ii. Co-operative societies registered in India, which are engaged or

propose to engage in any of the activities related to

a. Manufacture, preservation or processing of goods

b. Shipping

c. Mining

d. Hotel industry

e. Generation or distribution of electricity or any other form of

power

f. Transport of passengers or goods.

g. Maintenance, repair or servicing of machinery or vehicles.

h. Assembling, repairing or packing of articles.

i. Development of contiguous area of land as an industrial estate.

j. Fishing or providing shore facilities for fishing.

k. Providing special or technical knowledge or other services for

promotion of industrial growth.

l. Research and Development of any process or product in

relation to any of the matters aforesaid.

Purpose of Direct Assistance

IFCI provides direct financial assistance for the following causes:

a. Setting up of new industrial projects.

b. Expansion of existing units or for diversification into new lines of

activity.

c. For renovation and modernization of existing units.

IFCI does not ordinarily provide funds for working capital purpose as this

function is left to commercial banks. It does not allow utilizing its assistance

for meeting existing liabilities of the industrial concerns. Similarly, foreign

currency loans can be used for purchasing capital goods only and not of raw

material.

FUNCTIONS OF IFCI

IFCI is authorized to render financial assistance in one or more of the

following forms:

i. Granting loans or advances to or subscribing to debentures of

industrial concerns repayable within 25 years. Also it can convert part

of such loans or debentures into equity share capital at its option.

ii. Underwriting the issue of industrial securities i.e. shares, stock,

bonds, 0r debentures to be disposed off within 7 years.

iii. Subscribing directly to the shares and debentures of public limited

companies.

iv. Guaranteeing of deferred payments for the purchase of capital goods

from abroad or within India.

v. Guaranteeing of loans raised by industrial concerns from scheduled

balls or state co-operative banks.

vi. Acting as an agent of the Central Government or the World Bank in

respect of loans sanctioned to the industrial concerns.

IFCI provides financial assistance to eligible industrial concerns regardless

of their size. However, now-a-days, it entertains applications from those

industrial concerns whose project cost is about Rs. 2 crores because upto

project cost of Rs. 2 crores various state level institutions (such as Financial

Corporations, SIDCs and banks) are expected to meet the financial

requirements of viable concerns. While approving a loan application, IFCI

gives due consideration to the feasibility of the project, its importance to the

nation, development of the backward areas, social and economic viability,

etc. The most of the assistance sanctioned by IFCI has gone to industries of

national priority such as fertilizers, cement, power generation, paper,

industrial machinery etc. The corporation is giving a special consideration

to the less developed areas and assistance to them has been stepped up. It

has sanctioned nearly 49 per cent of its assistance for projects in backward

districts. The corporation has recently been participating in soft loan

schemes under which loans on confessional rates are given to units in

selected industries. Such assistance is given for modernization, replacement

and renovation of plant and equipment.

IFCI introduced a scheme for sick units also. The scheme was for the

revival of sick units in the tiny and small scale sectors. Another scheme was

framed for the self-employment of unemployed young persons. The

corporation has diversified not merchant banking also. Financing of leasing

and hire purchase companies, hospitals, equipment leasing etc. were the

other new activities of the corporation in the last few years.

Promotional Activities

The IFCI has been playing very important role as a financial institution in

providing financial assistance to eligible industrial concerns. However, no

less important is its promotional role whereby it has been creating industrial

opportunities also. It has been taking up directly as well as indirectly; such

steps and activities are regarded necessary for the acceleration of the

process of industrialization in the country.

The promotional role of IFCI has been to fill the gaps, either in the

institutional infrastructure for the promotion and growth of industries, or in

the provision of the much needed guidance in project intensification,

formulation, implementation and operation, etc. to the new tiny, small-scale

or medium scale entrepreneurs or in the efforts at improving the

productivity of human and material resources.

(a) Development of Backward Areas: - The main thrust of all financial

institutions has been to remover regional imbalances by promoting

industrialization of backward areas. IFCI introduce a scheme of

confessional finance for projects set up in backward areas. The

backward-districts were divided into three categories depending upon

the state of development there. All these categories were eligible for

concessional finance. Nearly 50 per cent of total lending of IFCI has

been to develop backward areas.

(b)Promotional Schemes:- IFCI has been operating six promotional

schemes with the object of helping entrepreneurs to set up new units,

broadening the entrepreneurial base, encouraging the adoption of new

technology, tackling 'the problem of sickness and promoting

opportunities for self development and . self employment of

unemployed persons etc. These schemes are as such:

a. Subsidy for Adopting Indigenous Technology:- The projects

which use indigenously developed technology are entitled to a

concession in the form of subsidy covering interest payments

due to IFCI during the first three years of operations,

extendable to five years.

b. Meeting Cost of Market Studies: - The entrepreneurs setting

up medium sized industrial projects for the first time can avail

75 per cent of the cost of market survey/study subject to a

ceiling of Rs. 15,000 provided it is handled by Technical

Consultancy Organization. .

c. Meeting Cost of Feasibility Studies: - IFCI provides subsidy

for the fees paid for consultancy assignments relating to

feasibility, project reports etc. The amount allowable is 80 per

cent of the fees of Rs. 7,500 whichever is less. This limit is Rs.

8,500 or 100 per cent of the total fees whichever is less for

handicapped or scheduled caste persons.

d. Promoting Small Scale and Ancillary Industries: - For the

identification of products suitable for ancillary or further

processing in small scale sector and preparation of feasibility

reports a subsidy of Rs.0.1 million per annum for technical

consultancy organization is allowed.

e. Revival of Sick Units: - There is a subsidy to the extent of 80

per cent or Rs. 5,000 (whichever is less) for the fees charged by

a technical consultancy organization for carrying out a

diagnostic study or for the implementation of rehabilitation

programme. This facility is allowed to tiny units or units in

small scale sector.'

f. Self-development and Self employment Scheme: - An

unemployed person in the age group of 21 to 35 years may be

allowed a soft loan for providing margin money for getting a

loan from a bank or a financial institution. The soft loan at

interest free rate in first year and has confessional interest later

on. The amount available under this scheme is 25% of margin

money subject to Rs. 5000.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

Industrial Development Bank of India was set up to accelerate the

development of the country. A number of financial institutions came into

existence after independence and were catering to a variety of needs of the

industry. There was a lack of co-ordinating different institutions and it led to

overlapping and duplication in their efforts: At the same time some gigantic

projects of national importance were not getting required financial

assistance. It was in response to this need that the Industrial Development

Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary

of Reserve Bank of India. The bank was to act as an apex institution co-

coordinating functions of all the financial institutions into a single

integrated movement of development banking and supplementing their

resources for industrial financing and as an agency for providing financial

suppon to all worthwhile projects of national importance whose access to

existing institutional sources is limited.

The ownership of IDBI was transferred to Central Government on February

16, 1976. It is now working as state owned autonomous corporation.

Besides acting as a reserviour on which other financial institutions can

draw, IDBI provides direct financial assistance to industrial units to bridge

the gap between supply and demand of medium and long term finance.

The IDBI Act was amended, in 1994, to permit public ownership upto 49

percent., In 1995, it raised more than Rs. 20 billion through its first initial

public offer (IPO) of equity. It reduced the stake of the government to 72.14

percent. Further, in June 2000, a pan of the equity shareholding of the

government was convened into preference share capital which was

redeemed in March 2001, resulting into further reduction of government

stake to 58.47 percent.

Financial Resources of IDBI

a. Share Capital. IDBI was formed with an authorized capital of Rs. 50

crores which was raised a number of times. In October, 1994,

Government of India's amended certain provisions of IDBI Act under

which its authorised capital has been increased to Rs. 2000 crore

which can further be increased to Rs. 5000 crore. A pan of equity

capital (Rs. 253 crore) has been convened into preference capital.

IDBI has been permitted to issue equity capital to public with a

stipulation that at no time Government holding will be less than 51

per cent. As on March 31,2003 the paid up capital of IDBI stood at

Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore.

b. Borrowings. The bank is authorised to raise its resources through

borrowings from Government of India, Reserve Bank of India and

other fmancia1 institutions. On March 31, 2003, the bank had

borrowings of Rs. 41798.0 crore by way of bonds and debentures,

deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from

Government of India and other sources.

Management of IDBI

The management of IDBI is vested in a Board of Directors consisting of 22

persons including a full-time Chairman-cum-Managing Director appointed

by the Central Government. The other members of the Board comprise of a

representative of the RBI, a representative each of the all-India financial

institutions, two officials of the Central Government, three representative

search of he public sector banks and SFCs and five representatives having

special knowledge and experience of industry; The .Board has constituted

an Executive Committee consisting of ten directors. Ad-hoc committees of

Advisers are also constituted to advise it on. specific projects.

Recently, Government of India ha9 sought to repeal the IDBI Act. 1964. by

introducing The Industrial Development Bank.(Transfer of Undertaking and

Repeal) Bill 2002 is Lok Sabha. The Bill is aimed at convening IDBI into a

company under the Companies Act as also enabling it to undertake banking

business.

Functions of IDBI

The main functions of IDBI are as follows:

1) To co-ordinate the activities of other institutions providing term

finance to industry and to act as an apex institution.

2) To provide refinance to financial institutions granting medium and

long-term loans to industry.

3) To provide refinance to scheduled banks or co-operative banks.

4) To provide refinance for export credit granted by banks and financial

institutions

5) To provide technical and administrative assistance for promotion

management or growth of industry.

6) To undertake market surveys and techno-economic studies for the

development of industry.

7) To grant direct loans and advances to industrial concerns. IDBI is

empowered to finance all types of industrial concerns engaged or

proposed to be engaged in the manufacture, preservation or

processing of goods, mining, hotel, industry, fishing, shipping

transport, generation or distribution of power, etc. The bank can also

assist concerns engaged in the setting up of industrial estates or

research and development of any process or product or in providing

technical knowledge for the promotion of industries. Until recently

IDBI also functioned as Expon Bank of the country.

8) To render financial assistance to industrial concerns. IDBI operates

various schemes of assistance. e.g., Direct Assistance Scheme. Soft

Loans Scheme. Technical Development Fund Scheme, Refinance

Industrial Loans Scheme. Bill Re-discounting Scheme. Seed Capital

Assistance Scheme. Overseas Investment Finance Scheme.

Development Assistance Fund, etc.

OPERATIONS OF IDBI

Since its inception in 1964, IDBI has extended its operations to various

areas of industrial sector. It provides direct as well as indirect financial

assistance for increasing the pace of industrial development. Aggregate

assistance sanctioned by March. 2003 amounted to Rs. 223932.1 crore and

disbursements amounted to Rs. 168166.5crores. The operation

1. Direct Assistance

Direct financial assistance includes project finance assistal1ce, soft-loan

assitace, assistance under technical development fund scheme and

rehabilitation assistance for sick units. Various schemes under direct

assistance are discussed as follows:-

1) Project Finance Assistance: - Under project finance scheme. the

IDBI extends direct assistance to industrial concerns in the form of :

a. Project loans

b. Subscription to and/or underwriting of issues of shares and

debentures.

c. Guarantee for loans and deferred payments.

Financial assistance under this scheme is granted for setting up new projects

as well as for expansion and Modernization renovation of existing units.

IDBI normally extends assistance to public limited companies in the private,

public, joint sector and co-operative sectors. Bank's assistance is sought for

projects involving large capital outlay or sophisticated technology. Bank

gives preference to units set up by new entrepreneurs or projects located in

backward areas. The repayment period is settled by looking at the capacity

of the enterprise. Normally, repayment is spread over a period of 8-10 years

with a grace period of 2-3 years. These loans are usually secured by a first

legal mortgage of the immovable properties of the borrowing concern and

floating charge on its other assets, subject to a first charge on raw materials,

stocks, etc. for working capital borrowings.

The bank does not hold shares & debentures, taken over under legal

obligation for underwriting or taken over directly, for a longer period. As a

matter of policy, the bank places major emphasis on the long-term

economic viability of the projects rather than on the immediate sale ability

of their products. In the case of assistance in the form of guarantees of loans

and deferred payments, the bank charges a guarantee commission of 1 per

cent in normal cases.

There has been a constant increase in direct assistance. Upto March, 2003

cumulative assistance in the form of direct loans to industrial concerns

and .subscriptions came to Rs. 102601.8 crore. Most of this assistance was

in priority sector industries such as basic industrial chemicals, cement,

fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and

industrial machinery.

IDBI introduced special schemes for industrialization of backward areas. In

a scheme introduced in 1969 it offered concessional rates of interest, longer

grace periods for repayments, etc. These concessions were available to

small and medium units having project cost upto Rs. 3 crores. In

collaboration With IFCI and ICICI, the bank is also giving concessional

rupee assistance upto Rs. 2 crores and underwriting assistance up to Rs.l

crore. The assistance to backward areas has also been increasing.

To achieve balanced regional growth and accelerate industrial development

IDBI initiated promotion and development activities. In co-operation with

other institutions the bank conducted industrial potential surveys in a

number of states.

2) Soft Loan Scheme

IDBI introduced in 1976 the soft loan scheme to provide financial assistance

to product units in selected industries viz., cement, cotton, textiles. jute,

sugar and certain engineering industries to modernize. Financial replace and

renovate their plant and equipment so as to achieve higher and more

economic levels of production. This scheme is implemented by IDBI

with .financial participation by IFCI and ICICI. The basic criteria for

assistance under the scheme are the weakness or non-viability of industrial

concerns arising out of mechanical obsolescence. Industrial concerns which

are not in a position 10 bear the normal lending rate of interest of the

financial institutions are provided on accessional assistance to the full extent

of the loan. In other cases the limit of concessional assistance is 66 per cent

of the loan. Assistance under this scheme is based on the requirements of

individual cases. As such, no minimum or maximum limit of'1m!\11tas

been prescribed. The repayment period extends up to 15 years with a

moratorium period of 3-5 years. The loans under his scheme are secured as

a first charge on fixed assets. The bank may insist on personal or other

guarantees also.

This scheme was modified in Jan. 1984 and was named as Soft Loan

Scheme for modernization so as to cover deserving units in all industries.

Under this scheme assist3nce is available to production units for financing

modernization especially to upgrade technology, Export orientation, import

substitution, Energy saving, prevention of pollution, recycling of wastes,

etc. The performance under this scheme has not been encouraging because

of convertibility clause.

3) Technical Development Fund Scheme

The Government of India introduced the Technical Development Fund

(TDF) Scheme in March. 1976 for issue of import licenses for import of

small value balancing equipment, technical know how, foreign consultancy

services and drawings and designs by industrial units to enable them to

achieve fuller capacity utilization, technological up gradation and higher

exports. Some industrial units found it difficult to take advantage of the

import license issued under this scheme for want of rupee resources. In

January, 1977, IDBI introduced a scheme for providing matching rupee

loans to industrial units to enable them to utilize import licenses issued

under TDF scheme. The scheme which was started for six specified

industries now covers all industries as also import of any other input needed

by the industrial units for improving export capabilities. This scheme of the

bank has not been successful as only one-fourth of the units sought this

assistance.

Rehabilitation Assistance to Sick Units

The problem of growing industrial sickness in India is a cause of worry. It

adversely affects production, employment, generation of income and

utilization of productive resources. With a view to combat sickness, IDBI

has devised the Refinance Scheme for Industrial Rehabilitation. The units

which have been assisted by State Financial Corporation or State Industrial

Development Corporations and are classified as sick are eligible under this

scheme. There should be a possibility of the unit being revived in a

reasonable time. The bank provides for capital expenditure required for

restarting the unit on viable level. The need for margin money for additional

term-loan and working

Capital, working capital term loan, payment of statutory liabilities, cash

losses during rehabilitation period etc. are met by the bank. The bank has

also been trying to bring merger of sick units with healthy units.

2. Indirect Assistance

IDBI cannot provide direct financial assistance to various industrial units

situated in different parts of tile country. It has adopted a strategy under

which it extends financial assistance directly to large and complicated

industrial units involving large capital outlays and sophisticated technology.

It helps small scale in industries indirectly through providing assistance to

other financial institutions which, in turn, help these industries. The indirect

help of IDBI takes the form of refinancing of industrial loans, rediscounting

of bills, seed capital assistance and financial support to 6ther institutions by

way of subscribing to their shares, debentures, bonds etc.

1) Refinance of Industrial Loans

IDBI provides refinance facility against term loans granted by the

eligible credit institutions to industrial concerns for setting up of

industrial projects as also for their expansion, modernization and

diversification. IDBI provides refinance to commercial banks, regional

rural banks, state, co-operative banks, state financial corporations, state

industrial development corporations or other institutions extending term

loan assistance to industrial units. Industrial units seeking term loan

approach the eligible financial institutions which, after sanctioning the

loans, approach the IDBI for refinance facility. The appraisal of loan

application is done by primary institution by keeping in view the

guidelines issued by central government and the IDBI. The bank relies in

the appraisal done by the primary lending institutions that have to bear

primary responsibility for the loans granted by them. IDBI sanctioned a

sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial

loans. Since 1967, IDBI has been extending indirect financial help to

small scale sector principally through its schemes of refinance of

industrial loans and bills discounting.

2) Rediscounting of Bills

IDBI introduced another indirect financing' scheme in 1965, whereby

rediscounting facility of machinery bills was, introduced. This scheme

was to help indigenous machinery manufacturers and their purchases.

The purchaser of machinery accepts bills of exchange or promissory

notes of the seller and undertakes to take the payment in installments.

The seller gets the bills discounted with his banker who in turn

rediscounts these bills with min. The buyer is enabled to acquire the

machinery on deferred payment terms without going through the usual

procedures involved in obtaining a project loan. The usual deferred

period is 5 years but in deserving cases it can be extended upto 7 years.

The scheme has been extended for expansion and diversification of

existing units also. The rediscounting facility has been made available to

imported machinery also where bills will be required to be drawn by

local agents of foreign firms.

3) Seed Capital Assistance:-

With a view to help first generation entrepreneurs who have the skills

but lack financial resources, IDBI started seed capital assistance scheme

in September, 1976. Under the first scheme, Financial Corporations

provide seed capital assistance to projects in small scale sector from their

special class of share capital contributed by IDBI and the state

government. The maximum amount of assistance under this scheme is to

meet the gap in the equity contribution which is 20 per cent of the cost of

the project or Rs. 2 lakhs whichever, is less. Under the second scheme

which is operated through State Industrial Development Corporations

seed capital assistance is given to medium sized projects costing up to

Rs. 1 crore. The assistance is available to meet the gap in promoter’s

contribution as well as in equity where no public issue of shares is

envisaged. The assistance is interest free with a service charge of I per

cent annum and a moratorium of 5 years is available for repayment of

loans.

NATIONAL BANK FOR AGRICULTURE AND RURAL

DEVELOPMENT

(NABARD)

NABARD is set up as an apex Development Bank with a mandate for

facilitating credit flow for promotion and development of agriculture, small-

scale industries, cottage and village industries, handicrafts and other rural

crafts. It also has the mandate to support all other allied economic activities

in rural areas, promote integrated and sustainable rural development and

secure prosperity of rural areas. In discharging its role as a facilitator for

rural prosperity NABARD is entrusted with

1. Providing refinance to lending institutions in rural areas

2. Bringing about or promoting institutional development and

3. Evaluating, monitoring and inspecting the client banks

Besides this pivotal role, NABARD also:

Acts as a coordinator in the operations of rural credit institutions

Extends assistance to the government, the Reserve Bank of India and

other organizations in matters relating to rural development

Offers training and research facilities for banks, cooperatives and

organizations working in the field of rural development

Helps the state governments in reaching their targets of providing

assistance to eligible institutions in agriculture and rural development

Acts as regulator for cooperative banks and RRBs

GENESIS AND HISTORICAL BACKGROUND

The Committee to Review Arrangements for Institutional Credit for

Agriculture and Rural Development (CRAFICARD) set up by the RBI

under the Chairmanship of

Shri B Sivaraman in its report submitted to Governor, Reserve Bank of

India on November 28, 1979 recommended the establishment of NABARD.

The Parliament through the Act 61 of 81, approved its setting up.

The Committee after reviewing the arrangements came to the conclusion

that a new arrangement would be necessary at the national level for

achieving the desired focuses and thrust towards integration of credit

activities in the context of the strategy for Integrated Rural Development.

Against the backdrop of the massive credit needs of rural development and

the need to uplift the weaker sections in the rural areas within a given time

horizon the arrangement called for a separate institutional set-up. Similarly

The Reserve Bank had onerous responsibilities to discharge in respect of its

many basic functions of central banking in monetary and credit regulations

and was not therefore in a position to devote undivided attention to the

operational details of the emerging complex credit problems. This paved the

way for the establishment of NABARD.

CRAFICARD also found it prudent to integrate short term, medium term

and long-term credit structure for the agriculture sector by establishing a

new bank. NABARD is the result of this recommendation. It was set up

with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000

crore, fully subscribed by the Government of India and the RBI.

MISSION

Promoting sustainable and equitable agriculture and rural development

through effective credit support, related services, institution building and

other innovative initiatives

In pursuing this mission, NABARD focuses its activities on:

Credit functions, involving preparation of potential-linked credit

plans annually for all districts of the country for identification of

credit potential, monitoring the flow of ground level rural credit,

issuing policy and operational guidelines to rural financing

institutions and providing credit facilities to eligible institutions under

various programmes

NABARD's credit functions cover planning, dispensation and monitoring of

credit.

This activity involves:

Framing policy and guidelines for rural financial institutions

Providing credit facilities to issuing organizations

Preparation of potential-linked credit plans annually for all districts

for identification of credit potential

Monitoring the flow of ground level rural credit

Development functions concerning reinforcement of the credit

functions and making credit more productive

Credit is a critical factor in development of agriculture and rural sector as it

enables investment in capital formation and technological up gradation,

Hence strengthening of rural financial institutions, which deliver credit to

the sector, has been identified by NABARD as a thrust area. Various

initiatives have been taken to strengthen the cooperative credit structure and

the regional rural banks, so that adequate and timely credit is made available

to the needy.

In order to reinforce the credit functions and to make credit more

productive, NABARD has been undertaking a number of developmental

and promotional activities such as:-

• Help cooperative banks and Regional Rural Banks to prepare development

actionsplans for them

• Enter into MoU with state governments and cooperative banks specifying

their respective obligations to improve the affairs of the banks in a

stipulated timeframe

• Help Regional Rural Banks and the sponsor banks to enter into MoUs

specifying their respective obligations to improve the affairs of the Regional

Rural Banks in a stipulated timeframe

• Monitor implementation of development action plans of banks and

fulfillment of obligations under MoUs

• Provide financial assistance to cooperatives and Regional Rural Banks for

establishment of technical, monitoring and evaluations cells

• Provide organization development intervention (ODI) through reputed

training institutes like Bankers Institute of Rural Development (BIRD),

Lucknow www.birdindia.com, National Bank Staff College, Lucknow

www.nbsc.in and College of Agriculture Banking, Pune, etc.

• Provide financial support for the training institutes of cooperative banks

• Provide training for senior and middle level executives of commercial

banks, Regional Rural Banks and cooperative banks

• Create awareness among the borrowers on ethics of repayment through

Vikas Volunteer Vahini and Farmer’s clubs

• Provide financial assistance to cooperative banks for building improved

management information system, computerization of operations and

development of human resources

Supervisory functions ensuring the proper functioning of

cooperative banks and regional rural banks

As an apex bank involved in refinancing credit needs of major financial

institutions in the country engaged in offering financial assistance to

agriculture and rural development operations and programmes, NABARD

has been sharing with the Reserve Bank of India certain supervisory

functions in respect of cooperative banks and Regional Rural Banks

(RRBs).

As part of these functions, it

• Undertakes inspection of Regional Rural Banks (RRBs) and cooperative

banks (other than urban/primary cooperative banks) under the provisions of

Banking Regulation Act, 1949.

• Undertakes inspection of State Cooperative Agriculture and Rural

Development Banks (SCARDBs) and apex non-credit cooperative societies

on a voluntary basis

• Undertakes portfolio inspections, systems study, besides off-site

surveillance of cooperative banks and Regional Rural Banks (RRBs)

• Provides recommendations to Reserve Bank of India on opening of new

branches by State Cooperative Banks and Regional Rural Banks (RRBs)

• Administering the Credit Monitoring Arrangements in SCBs and CCBs.

Core Functions

NABARD has been entrusted with the statutory responsibility of conducting

inspections of State Cooperative Banks (SCBs), District Central

Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the

provision of the Banking Regulation Act, 1949. In addition, NABARD has

also been conducting periodic inspections of state level cooperative

institutions such as State Cooperative Agriculture and Rural Development

Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc.

on a voluntary basis.

Objectives of Inspection

• To protect the interest of the present and future depositors

• To ensure that the business conducted by these banks is in conformity with

the provisions of the relevant Acts/Rules, regulations/Bye-Laws, etc

• To ensure observance of rules, guidelines, etc. formulated and issued by

NABARD/RBI/Government

• To examine the financial soundness of the banks

• To suggest ways and means for strengthening the institutions so as to

enable them to play more efficient role in rural credit

Instruments of Supervision

• Periodic on-site inspection of 31 SCBs, 366 DCCBs, 20 SCARDBs and

102 RRBs and other Apex level Cooperative institutions

• Supplementary Appraisal

• Off-site Surveillance System ( OSS )

• Portfolio inspection/System study

• CMA returns

Supervisory Strategy

In the wake of the banking sector reforms, new set of international

norms/practices were made applicable to Commercial Banks (CBs) to make

them more competitive and sustainable in the changing scenario. The co-

operative banks and RRBs were also to function in the general banking

environment, emerging out of the financial sector reforms, introduced by

the GOI/RBI. Accordingly, the prudential norms were extended to them in

phases. While the capital adequacy norm has not yet been made applicable

to these banks, the other prudential norms viz. income recognition, asset

classification and provisioning, which were made applicable by RBI to the

commercial banking sector had been extended to cover RRBs in 1995-96,

SCBs and DCCBs in 1996-97 and to SCARDBs in 1997-98. NABARD,

through a concrete and time-bound supervision strategy, facilities these

banks to adjust to the new financial discipline so as to internalize prudential

norms stipulated.

Current Focus

Under the revised strategy, a sharper focus of the NABARD’s inspection

was given on the core areas of the functioning of banks pertaining to Capital

Adequacy, Asset Quality, Management Earnings, Liquidity and Systems

Compliance (CAMELSC). Thus, NABARD’s focus in its statutory ‘on-site’

inspections is on core assessments leaving the collateral appraisals to

supplementary inspections. The micro level aspects are to be taken care of

by the banks themselves by way of internal inspections or by other agencies

such as auditors. In this direction, through a series of workshops and

meetings held with the Chief Executives and the Chief Auditors of

cooperative banks, NABARD attempted to ensure that the other areas,

particularly relating to the internal checks and controls, revenue and income

realization by way of interest on loans and deposits and other routine

features of carrying out general banking transactions were suitably taken

care of by the respective banks and their concurrent/statutory audit systems.

Off-site Surveillance

As a part of the new strategy of supervision, a system of `Off-site

Surveillance' has been introduced as a supplementary tool to the on-site

inspection. Its objectives are to obtain and analyze critical data on a

continuous basis, to identify areas of supervisory concern and to identify

early warning signals and risky areas requiring further probe. The system

basically envisages desk scrutiny of operations of cooperative banks and

RRBs through a set of statutory and non-statutory returns. While the

periodical statutory on-site inspections attempt an overall evaluation of the

performance of the banks with a stipulated period, off-site surveillance

envisages continuous supervision supplementing the on-site inspections

with additional instruments of supervision.

BOARD OF SUPERVISION (for SCBs, DCCBs and RRBs)

Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted

by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal

Committee to the Board of Directors of NABARD.

The broad powers and functions of the Board of Supervision are:

• Giving directions and guidance in respect of policies and on matters

relating to supervision and inspection, reviewing the inspection findings,

suggesting appropriate measures

• Reviewing the follow-up action taken by Department of Supervision

(DoS) on matters of frauds and internal checks and control

• Identifying the emerging supervisory issues in the functioning of

cooperative banks/RRBs such as NPAs recovery, investment portfolio,

credit monitoring system, management practices, frauds, etc.

• Suggesting necessary follow-up measures

• Recommending appropriate training for Inspecting Officers of NABARD

for imparting necessary skills and knowledge

• Suggest measures for strengthening of DoS

• Recommend issue of directions by RBI

• Oversee the quality of inspections carried out and the reports issued

• Review the information generated through off-site surveillance and other

supplementary vehicles, action taken thereon

• Undertake any other functions entrusted from time to time by the Board of

Directors of NABARD

The Board of Supervision, since its formation on 20 November 1999 , has

held 31 meetings till 1 0 January 2007 and reviewed the financial position

of Cooperative Banks and RRBs. Based on the observations of BoS,

authorities concerned have been apprised of the weaknesses.

Other Initiatives

• The day-to-day functioning of the supervised banks is being monitored

through various statutory returns prescribed by the RBI/NABARD

including OSS returns

• Periodic coordination Meets are conducted with RPCD, RBI to discuss the

policy and operational matters relating to supervision

• State level groups comprising RCS, Apex bank, Cooperation and Finance

Department, State Government, Director of Audit and non-compliant banks

have been constituted/convened for preparing/discussing suitable strategy

for Section 11 non-compliant banks and monitoring the progress of Action

Plan prepared by them to facilitate them recompliance with the provision

• Periodic discussions are held with the MD, Apex Banks, RCS, and State

Government etc. to discuss the supervisory concerns.

RO set up

Suitable and adequate officers are placed in DoS units at RO level to

undertake inspection of banks, issue inspection reports and take other follow

up measures including review, monitoring compliance and OSS, etc. in

conformity with DoS, HO guidelines.

OBJECTIVES

NABARD was established in terms of the Preamble to the Act, "for

providing credit for the promotion of agriculture, small scale industries,

cottage and village industries, handicrafts and other rural crafts and other

allied economic activities in rural areas with a view to promoting IRDP and

securing prosperity of rural areas and for matters connected therewith in

incidental thereto".

The main objectives of the NABARD as stated in the statement of

objectives while placing the bill before the Lok Sabha were categorized as

under:

1. The National Bank will be an apex organization in respect of all matters

relating to policy, planning operational aspects in the field of credit for

promotion of Agriculture, Small Scale Industries, Cottage and Village

Industries, Handicrafts and other rural crafts and other allied economic

activities in rural areas.

2. The Bank will serve as a refinancing institution for institutional credit

such as long-term, short-term for the promotion of activities in the rural

areas.

3. The Bank will also provide direct lending to any institution as may

approve by the Central Government.

4. The Bank will have organic links with the Reserve Bank and maintain a

close link with in.

MAJOR ACTIVITIES

• Preparing of Potential Linked Credit Plans for identification of exploitable

potentials under agriculture and other activities available for development

through bank credit.

• Refinancing banks for extending loans for investment and production

purpose in rural areas.

• Providing loans to State Government/Non Government Organizations

(NGOs)/Panchayati Raj Institutions (PRIs) for developing rural

infrastructure.

• Supporting credit innovations of Non Government Organizations (NGOs)

and other non-formal agencies.

• Extending formal banking services to the unreached rural poor by

evolving a supplementary credit delivery strategy in a cost effective manner

by promoting Self Help Groups (SHGs)

• Promoting participatory watershed development for enhancing

productivity and profitability of rain fed agriculture in a sustainable manner.

• On-site inspection of cooperative banks and Regional Rural Banks (RRBs)

and iff-site surveillance over health of cooperatives and RRBs.

ROLE AND FUNCTIONS OF NABARD

• NABARD is an apex institution accredited with all matters concerning

policy, planning and operations in the field of credit for agriculture and

other economic activities in rural areas.

• It is an apex refinancing agency for the institutions providing investment

and production credit for promoting the various developmental activities in

rural areas

• It takes measures towards institution building for improving absorptive

capacity of the credit delivery system, including monitoring, formulation of

rehabilitation schemes, restructuring of credit institutions, training of

personnel, etc.

• It co-ordinates the rural financing activities of all the institutions engaged

in developmental work at the field level and maintains liaison with

Government of India, State Governments, Reserve Bank of India and other

national level institutions concerned with policy formulation.

• It prepares, on annual basis, rural credit plans for all districts in the

country; these plans form the base for annual credit plans of all rural

financial institutions

• It undertakes monitoring and evaluation of projects refinanced by it.

• It promotes research in the fields of rural banking, agriculture and rural

development

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA

(SIDBI)

SIDBI is a Principal Development Financial Institution for:

-- Promotion

-- Financing and

-- Development of Industries in the small scale sector and

--Co-coordinating the functions of other institutions engaged in similar

activities.

Provision of Charter

SIDBI was established on April 2, 1990. The Charter establishing it, The

Small Industries Development Bank of India Act, 1989 envisaged SIDBI to

be "the principal financial institution for the promotion, financing and

development of industry in the small scale sector and to co-ordinate the

functions of the institutions engaged in the promotion and financing or

developing industry in the small scale sector and for matters connected

therewith or incidental thereto.

Business Domain of SIDBI

The business domain of SIDBI consists of small scale industrial units,

which contribute significantly to the national economy in terms of

production, employment and exports. Small scale industries are the

industrial units in which the investment in plant and machinery does not

exceed Rs.10 million . About 3.1 million such units, employing 17.2 million

persons account for a share of 36 per cent of India's exports and 40 per cent

of industrial manufacture. In addition, SIDBI's assistance flows to the

transport, health care and tourism sectors and also to the professional and

self-employed persons setting up small-sized professional ventures.

SIDBI among Top 30 Development Banks of the World

SIDBI retained its position in the top 30 Development Banks of the World

in the latest ranking of The Banker, London. As per the May 2001 issue of

The Banker, London, SIDBI ranked 25th both in terms of Capital and

Assets

Mission

To empower the Micro, Small and Medium Enterprises (MSME) sector

with a view to contributing to the process of economic growth, employment

generation and balanced regional development

Vision

To emerge as a single window for meeting the financial and developmental

needs of the MSME sector to make it strong, vibrant and globally

competitive, to position SIDBI Brand as the preferred and customer -

friendly institution and for enhancement of share - holder wealth and

highest corporate values through modern technology platform

OBJECTIVES

Mandatory Objectives

Four basic objectives are set out in the SIDBI Charter. They are:

Financing

Promotion

Development

Co-ordination

For orderly growth of industry in the small scale sector, The Charter has

provided SIDBI considerable flexibility in adopting appropriate operational

strategies to meet these objectives. The activities of SIDBI, as they have

evolved over the period of time, now meet almost all the requirements of

small scale industries which fall into a wide spectrum constituting modern

and technologically superior units at one end and traditional units at the

other.

Development Outlook

The major issues confronting SSIs are identified to be:

Technology obsolescence

Managerial inadequacies

Delayed Payments

Poor Quality

Incidence of Sickness

Lack of Appropriate Infrastructure and

Lack of Marketing Network

There can be many more similar issues hindering the orderly growth of

SSIs.

Over the years, SIDBI has put in place financing schemes either through its

direct financing mechanism or through indirect assistance mechanism and

special focus programmes under its P&D initiatives. In its approach, SIDBI

has struck a good balance between financing and providing other support

services.

SHAREHOLDING

The entire issued capital of Rs.450 crore has been divided into 45 crore

shares of Rs.10 each. Of the total Rs.450 crore subscribed by IDBI, while

setting up of SIDBI, 19.21% has been retained by it and balance 80.79% has

been transferred / divested in favour of banks / institutions / insurance

companies owned and controlled by the Central Government.

PRODUCTS AND SERVICES

DIRECT FINANCE

Objective:

SIDBI had been providing refinance to State Level Finance Corporations /

State Industrial Development Corporations / Banks etc., against their loans

granted to small scale units.

Since the formation of SIDBI in April, 1990 a need was felt/ representations

were made that SIDBI being the principal financial institution for the small

sector, should take up the financing of SSI projects directly on a selective

basis.

So it was decided to introduce direct assistance schemes to supplement the

other available channels of credit flow to the small industries sector. Since

then, SIDBI has evolved itself into a supplier of a range of products and

services to the Small & Medium Enterprises [SME] sector.

BILLS FINANCE

Objectives:

Bills Finance Scheme involves provision of medium and short-term finance

for the benefit of the small-scale sector. Bills Finance seeks to provide

finance, to manufacturers of indigenous machinery, capital equipment,

components sub-assemblies etc, based on compliance to the various

eligibility criteria, norms etc as applicable to the respective schemes.

To be eligible under the various bills schemes, one of the parties to the

transactions to the scheme has to be an industrial unit in the small-scale

sector within the meaning of Section 2(h) of the SIDBI Act, 1989.

REFINANCE

Objective

Refinance scheme is introduced for catering to the need of funds

of Primary Lending Institutes for financing small-scale industries. Under the

scheme, SIDBI grants refinance against term loans granted by the eligible

PLIs to industrial concerns for setting up industrial projects in the small

scale sector as also for their expansion / modernization / diversification.

Term loans granted by the PLIs for other specified eligible activities /

purposes are also eligible for refinance.

INTERNATIONAL FINANCE

Objective

The main objective of the various International Finance schemes is

to enable small-scale industries to raise finance at internationally

competitive rates to fulfil their export commitments. The financial

assistance is being offered in USD and Euro currencies. Assistance in

Rupees is also considered, independent of foreign currency limits.

SIDBI has a license to deal in foreign exchange as a "restricted"

Authorised Dealer (i.e. SIDBI confines its foreign exchange activities

only to its own exposures and to exposures for its customers. The

Mumbai Head Office (MHO) of SIDBI operates as a Category 'A'

branch that maintains foreign currency positions, nostro account with

foreign correspondent banks and provides cover to other branches

(Category 'B' branches) that carry out forex business.

PROMOTIONAL ACTIVITIES

Objective

As an apex financial institution for promotion, financing and development

of industry in the small scale sector, SIDBI meets the varied developmental

needs of the Indian SSI sector by its wide-ranging Promotional and

Developmental (P&D) activities.

P&D initiatives of the Bank aim at improving the inherent strength of small

scale sector on one hand as also economic development of poor through

promotion of micro-enterprises.

In pursuance of its multifaceted P&D activity, synergistic with its business

activities aimed at development of the small industries, SIDBI looks

forward to a partnership with NGOs, associate financial institutions,

corporate bodies, R&D laboratories, marketing agencies, etc., for national

level programmes.

SIDBI has identified the following thrust areas of P&D activities, which are

being undertaken in partnership with various institutions, agencies, and

NGOs:

DATA ANALYSIS

Data analysis of IFCI in concern with various sectors as per the assistance

provided by it to them

IFCI AND INDUSTRIAL FINANCE

The sanctions of IFCI went up to Rs. 6579.7 crore in 1995-96 from 32.3

crore in 1970-71, but it declined to Rs. 778 crore by 2001-02. up to march

2003, total sanctioned assistance was Rs. 45426.7 crore while

disbursements were Rs. 44169.2 crore.

Year

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

Sanctions

206.6

218.1

230.2

321.9

415.4

499.2

798.1

922.6

1635.5

1817

2429.8

2421.2

2347.9

3745.9

Growth rate

%

49.8

5.6

5.5

39.8

29

20.2

59.9

15.6

77.3

11.1

33.7

-0.4

-3

Disbursements

108.9

169.4

196.1

224.5

272.9

403.9

451.6

657.1

997.5

1121.8

1574.3

1604.4

1733.4

2163.1

Growth rate

19.7

55.6

15.8

14.5

21.6

48

11.8

45.5

51.8

12.5

40.6

1.9

8

24.2

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

total from

1970 to 2003

4327

6579.7

3952.2

5708.2

3622.8

2045.6

1417.9

778

2035.1

45426.7

59.5

15.5

52.1

-39.9

44.4

-36.5

-43.5

-30.7

-45.1

161.6

2838.7

4586.5

5175.5

5615

4836.4

3374.3

2152.7

1069.9

1796.5

44169.2

32.4

61.6

12.5

8.5

-13.9

-30.5

-36.9

-49

63.8

IFCI AND PRODUCT WISE ASSISTANCE

IFCI provides direct financial assistance for financing projects in terms of

rupee loans, foreign currency loans, and by underwriting and direct

subscription to shares, debentures and bonds.

Years

1998-99

1999-00

2000-01

2001-02

2002-03

up to march 2003

Sanctions

3129.6

1900.3

1371.2

721.4

2021.7

37122.6

Disbursements

4229.3

3027.4

2093.2

1065.6

1783.1

35926.4

IFCI AND PURPOSE WISE ASSISTANCE

In the purpose wise sanctions and disbursements, new projects got Rs.

15919.6 cr which is 35.17 % of total sanctions up to march 2003.

Serial no.

1

2

3

4

5

6

7

Purpose

New

Expansion

Rehabilitation

Modernization

Working capital

Others

total

Sanctions

15919.6

6649.2

115.7

5459.8

837.5

16279.4

45261.1

Disbursements

15611.3

6547.5

114.2

5480.4

774.2

15476.1

44003.6

IFCI AND SECTOR WISE ASSISTANCE

The IFCI provided maximum assistance to private sector by giving Rs. 40660.9 cr as on

march 2003. This constitutes over 89% of total assistance by IFCI. The public sector got

very little out of the total sanctions of IFCI.

Serial no.

1

2

3

4

5

Sector

Public

Joint

Cooperative

Private

total

Sanction

1541.1

2192

867,1

40660.9

45261.1

Disbursements

1539.1

2146

838.4

39480.1

44003.6

DATA ANALYSIS OF IDBI

The main objective of IDBI is to provide term finance and financial services

for establishment of new projects as well as the expansion, diversification,

modernization and technology up gradation of existing industrial

enterprises. It is one of the most important financial institutions which has

provided lot of funds for industrial activities in the country.

IDBI AND PURPOSE WISE ASSISTANCE

Serial no.

1

2

3

4

5

6

Purpose

New

Expansion

Rehabilitation

Modernization

Working capital

total

Year

1998-2003

1998-2003

1998-2003

1998-2003

1998-2003

Sanctions

67498.8

50627.3

12976.5

1415.8

44086.5

176604.9

IDBI AND SECTOR WISE ASSISTANCE

Serial no

1

2

3

4

Sectors

Public

Joint

Cooperative

Private

Amount

34963

11753.7

1802.2

169304.2

Percentage

16.05

5.39

.83

77.71

5 Trust

total

50

217873.3

.02

100

IDBI AND INSTITUTION WISE ASSISTANCE

Serial no.

1

2

Institutions

SFC

SIDC

Total

2000-01

129.8

233.2

363

2001-02

87.7

99.6

187.3

DATA ANALYSIS OF NABARD

NATIONAL BANK OF AGRICULTURE AND RURAL

DEVELOPMENT

It is responsible for short term, medium term and long-term financing of

agriculture and allied activities. The institutions such as Film Finance

Corporation, Tea Plantation Finance Scheme, Shipping Development Fund,

Newspaper Finance Corporation, Handloom Finance Corporation, Housing

Development Finance Corporation also provide financial various areas.

Here the various financial activities of NABARD are given and analyzed in

accordance with each other.

With its effective overseeing and monitoring of the implementation

of the Government of India's programme to double the flow of credit

to agriculture over a three-year period from 2004-2005, the total

disbursement of credit reached Rs 1,25,309 during 2004-2005.

Ground level credit flow to agriculture and allied activities reached

Rs 1,57,480 crore in 2005-2006.

Refinance disbursement to commercial banks, state cooperative

banks, state cooperative agriculture and rural development banks,

RRBs and other eligible financial institutions aggregated Rs 8,622.37

crore.

As on 31 January 2007 through the Rural Infrastructure Development

Fund (RIDF), Rs,59,795.35 crore have been sanctioned for 2,31,702

projects covering irrigation, rural roads and bridges, health and

education, soil conservation, drinking water schemes, etc. Developing

among hosts of other infrastructures, RIDF will create 20971 schools,

6239 primary health centers and provide drinking water supply in

7267 villages

Watershed Development Fund, with cumulative sanctions of

Rs.578.95 crore for 427 projects in 124 districts of 14 states, has

created a People’s Movement in rural India.

Farmers now enjoy financial access and security through 582.50 lakh

Kisan Credit Cards that have been issued through a vast rural banking

network.

District Rural Industries Project (DRIP) has generated employment

for 23.34 lakh persons with 10.95 lakh units in 105 districts.

DATA ANALYSIS OF SIDBI

SMALL INDUSTRY DEVELOPMENT BANK OF INDIA

SIDBI has some eligibility criteria for industries to seek any kind of

assistance or funding and from the recent times SIDBI has raised it

eligibility criteria for every institution to gain financial assistance. Here

follows the change in the criteria of SIDBI

Serial no.

1

2

3

4

5

6

Purpose

Investment limits

for tiny units for

purpose of

refinance

Size of projects

eligible for assist.

Quantum of

equity assistance

Project outlay

component for

eligibility

Eligible loan

limit

Eligible loan

limit under

normal refinance

scheme

Earlier

2 lakh

5 lakh

75000

10 lakh

2 lakh

7.5 lakh

Present

5 lakh

10 lakh

150000

20 lakh

5 lakh

10 lakh

SIDBI AND FINANCIAL ASSISTANCE

The sanctions of SIDBI are generally given to those entrepreneurs who have business of

small scale and fulfill the criteria of SIDBI. It undertakes a large variety of promotional

and developmental activities in order to improve the strength of small scale units,

creating employment opportunities and new way for economic development of poor.

Year

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

up to march

2003

Sanctions

295

1764.8

1820.4

3276.5

3008.1

2304.1

12459.7

Growth%

498.2

3.2

79.4

-7.9

-23.4

Disbursements

279

672.4

766.5

1506.2

949.3

4173.6

Growth

141.1

13.9

96.5

-37

OVER VIEW OF TOPIC

Development bank plays a very important role in economic development of

our country. Since independence they have contributed a lot to the inception

of industrialization and all other technological innovations. There basic

objective is to assist the development in country which perform by proving

every kind of help possible i.e. financial, advisory, technological etc.

This study helps in portraying the current picture of development banks in

India and shows their role in economy. It also helps in showing the various

schemes that banks have and their whole procedure to provide the assistance

to people.

This study also shows the various lacks in the system of development banks

due which they fail in some sphere to achieve their set targets. There are

various drawbacks in our own financial system that hinderers the growth of

these development banks such as lack of funds with government, lack of

project, lack of efficient machinery,

In this study all the possible measure to remove these hindrances are

described through which we can move more speedily then other economies

in world.

In this study four major development banks in India are taken into research

work i.e. IDBI, IFCI, SIDBI, and NABARD. All the schemes, assistances

and programs are studied and highligtened. Every bank differs from his

objective with each other so as the assistance provided by them.

Every bank has separate guidelines and management to take care of

activities which are performing and work areas are also different, although

their main motive is same which the development of country through

balanced economic growth.

This study throws light on the working of these development banks and how

they performed their activities in past.

LIMITATIONS OF STUDY

Although lots of care and efforts are made to ensure the fault free study but

still there remains certain limitations which possibly may occur such as

Lack of time acted as constraint in study

Lack of development banks in near by areas also acts as constraint as

it’s not possible to get the real exposure.

Researcher limitations in knowledge are also the limitations of study.

The study is based on secondary data so any kind of discrepancy in

that will cause same in the study.

BIBLOGRAPHY

WEBSITIES

http: //www.idbi.com

http: //www.sidbi.com

http: //www.google.com

http: //www.banknetindia.com

NEWSPAPERS

Financial express

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