Growth of Development Banks in India | SBI PO Prelims & Mains Preparation - Bank Exams PDF Download

Introduction

Objectives of Development Banks

• To provide finance
• To encourage and motivate entrepreneurs
• To prepare development or business plans
• To help, companies raise capital from the market
• To provide market information about export and domestic markets
• To undertake project evaluation
•  To undertake promotional activities in specific field of operation
• To boost the spirit of entrepreneurship
• To develop industry and economy as a whole

History of Development Banks

• Industrial Finance Corporation of India (IFCI) was the first development bank to be established in 1948
• Industrial development bank established in 1955
• Industrial Development Bank of India (IDBI) set up as RBI subsidiary in 1964
• IDBI became autonomous in 1976
• Small Industries Development Bank of India (SIDBI) setup in 1990
• Industrial Investment Bank of India (IIBI) set up in 1991
• MUDRA Bank set up in 2016
• Apart from the above, there are State Industrial Development Corporations (SIDCs) and State Financial Corporation (SFC)

Functions of Development Banks

• Development banks are the largest source of long-term and medium credit to private industrial sector
• Raising capital for the companies is the primary function of the Development banks
• Development banks provide loans and advances
• Development banks perform underwriting of new issues
• Development banks provide guarantee for loans
• Development banks provide guarantee for deferred payments
• Development banks provide subscription to shares and debentures
• Development banks strengthen the capital market through guarantee of loans and underwriting

Difference between Development Bank and Commercial Bank

• Development banks main emphasis lies on development through various promotional activities while commercial banks are mere credit suppliers
• Development banks do not accept deposits from public while commercial banks accept deposits
• Industry and corporate are the focus target market for development banks while commercial banks target varies from individuals to corporate
• Development banks are normally viewed to provide medium and long-term finance while commercial banks provide short term finance
• Development banks focus on industrial development while commercial banks cater to various needs and developments

Industrial Finance Corporation of India (IFCI)

• IFCI provides long term and medium finances to large scale industries only
• It place special emphasis to provide credit for renovation and expansion of plants and setting up new ventures especially to public limited companies
• Repayment is within 25 years
• Small scale industries are not financed by IFCI

Industrial Development Bank of India (IDBI)

• IDBI was initially established as RBI subsidiary in 1964 and became autonomous in 1974
• It is now an Independent public sector financial institutions under GOI
• IDBI has a strong and pivotal role in the Indian Industrial development
• Set up to provide long-term finance to Indian industries
• IDBI was established as the apex institution to coordinate the activities of the existing financial institutions providing long-term finance
• IDBI finances the industrial units in three ways
• Direct manner in the form of loans and advances
• The indirect manner in the form of refinancing of loans and advances
• Promotional activities in small industries and backwards areas

Small Industrial Development Bank of India (SIDBI)

• Small Industrial Development Bank of India (SIDBI) was established in 1990 to ensure adequate and timely availability of financial assistance to small scale sector
• Focus only on small scale industries
• Act as agents in providing factoring and leasing services to small scale industrial units
• Discounting and rediscounting of bills arising from machinery and equipment sale
• Refinancing of advances and loans extended to small scale industries by primary lending institutions
• Granting of loans for financing exports of products manufactured by small scale industries
• Extending financial support to state industries

Industrial Investment Bank of India (IIBI)

• IIBI set up in 1991
• IIBI has taken over the operations of Industrial Reconstruction Bank of India (IRBI)
• IRBI was working to revive the sick industrial units
• IIBI enjoys the same status as IDBI, ICICI etc
• IIBI main function is to revive the sick industrial units in India
• It also finances the development and promotion of other industries in India State Financial Corporations (SFC)
• SFC are the premier state level agencies catering to long-term financial needs of medium and small size companies
• SFC Act was passed in 1951
• First SFC was established in the year 1953.
• At present, each state in India has an SFC accounting to 26 SFCs
• Financial assistance provided with a repayment period of 20 years
• Underwriting of shares, debentures and bonds by small and medium sized industrial undertakings
• SFCs act as the agent of central government or of IDBI, IFCI etc in offering finance to the industry

MUDRA Bank

• In the month of January 2016, Government of India approved the Mudra conversion to MUDRA bank
• Mudra Bank provides credit or loan to micro and small industries in three categories
• Shishu scheme provides loans up to Rs. 50000
• Kishor from Rs. 50000 to Rs. 5 lakh
• Tarun from Rs. 5 lakh to Rs. 10 lakh