ICAI Notes- Funding Institutions (Indian Development Banks) | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

FUNDING INSTITUITONS (INDIAN DEVELOPMENT BANKS)

Development Banks are those financial institutions that provide funds and financial assistance to new and upcoming business enterprises. Development banks are distinguishable from commercial banks. Unlike commercial banks they do not accept deposits. They draw their resources from the government and other promoting agencies. As such they are referred to as “purveyors” of credit. While discussing the role of RBI as

a business facilitator we mentioned that the instruments of SLR and CRR are the means through which the funds are usurped from the banking sector and these funds are placed with the development banks (See Know-how #1).
Know-how: SLR and CRR Mechanism

SLR: It represents the ratio of liquid assets of the banks to their deposit liabilities – the liquid assets include among other things, government securities whose issuer is the Reserve Bank of India. Clearly such a ratio is an indicator of banks’ liquidity and solvency i.e. their ability to meet their liabilities on demand. Reserve Bank of India is authorised to stipulate the statutory liquidity ratio and thus mop up funds from the banking sector. These funds may then be made available to the development banks for purveying credit to the businesses. CRR: It is the ratio of cash to the total deposits that the banks are required to maintain on a daily basis. However Banks don’t hold these as cash with themselves, they deposit such cash (aka currency chests) with Reserve Bank of India which is considered as equivalent to holding cash with themselves. The amount raised by the RBI through prescription of this minimum ratio may also be utilised for channelization by development banks. As on 15-01-2019, Current Cash Reserve Ratio stood at 4% and Current Statutory Liquidity Ratio was 19.05%. Thus, RBI can usurp nearly a quarter of bank funds for purveying of credit in response to the developmental needs of the country.

In India, the genesis of development banking may be traced to the setting up of the Industrial Finance Corporation of India (IFCI) in 1948. The setting up of the Industrial Credit and Investment Corporation of India (ICICI) took place in 1955 and the Industries Development Bank of India (IDBI) in 1964. The latter two development banks have since converted into commercial banks. Thus, the IFCI is the lone surviving industrial development bank in India at present. The Small Industries Development Bank of India (SIDBI) spun off from the IDBI in 1990. The National Bank for Agricultural and Rural Development (NABARD) was set up in 1982.

National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India, headquartered at Mumbai with branches all over India. The Bank has been entrusted with “matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India”. NABARD is active in developing financial inclusion policy and is a member of the Alliance for Financial inclusion.

NABARD has been instrumental in grounding rural, social innovations and social enterprises in the rural hinterlands. It has in the process partnered with about 4000 organisations in grounding many of the interventions. The organisation had developed a huge amount of trust capital in its 3 decades of work with rural communities.

1. NABARD is the most important institution in the country which looks after the development of the cottage industry, small industry and village industry, and other rural industries.

2. NABARD also reaches out to allied economies and supports and promotes integrated development.

3. NABARD discharge its duty by undertaking the following roles:

i. Serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas

ii. 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.

iii. Co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, state governments,Reserve Bank of India(RBI) and other national level institutions concerned with policy formulation

iv. Undertakes monitoring and evaluation of projects refinanced by it.

v. NABARD refinances the financial institutions which finances the rural sector.

vi. NABARD partakes in development of institutions which help the rural economy.

vii. NABARD also keeps a check on its client institutes.

viii. It regulates the institutions which provide financial help to the rural economy.

ix. It provides training facilities to the institutions working in the field of rural upliftment.

x. It regulates the cooperative banks and the RRB’s, and manages talent acquisition through IBPS CWE.
NABARD’s refinance is available to state co-operative agriculture and rural development banks (SCARDBs), state co-operative banks (SCBs), regional rural banks (RRBs), commercial banks (CBs) and other financial institutions approved by RBI. While the ultimate beneficiaries of investment credit can be individuals, partnership concerns, companies, State-owned corporations or co-operative societies, production credit is

generally given to individuals. NABARD has its head office at Mumbai, India.

NABARD is also known for its ‘SHG Bank Linkage Programme’ which encourages India’s banks to lend to selfhelp groups (SHGs). Largely because SHGs are composed mainly of poor women, this has evolved into an important Indian tool for microfinance.

NABARD also has a portfolio of Natural Resource Management Programmes involving diverse fields like Watershed Development, Tribal Development and Farm Innovation through dedicated funds set up for the purpose.