TABLE OF CONTENTS

PREFACE
ACKNOWLEDGEMENT
INTRODUCTION TO TOPIC
OBJECTIVES OF STUDY
RESEARCH METHODOLOGY
HYPOTHESIS
INTRODUCTION TO DEVELOPMENT BANKS
OBJECTIVES OF DEVELOPMENT BANKS
BANKS UNDER STUDY
IDBI
IFCI
SIDBI
NABARD
DATA ANALYSIS
SUGGESTIONS
CONCLUSION
LIMITATION
 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 BANKS

Every 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 Sanctions Growth Disbursements Growth rate
1980-81 206.6 rate% 108.9 19.7
1981-82 218.1 49.8 169.4 55.6
1982-83 230.2 5.6 196.1 15.8
1983-84 321.9 5.5 224.5 14.5
1984-85 415.4 39.8 272.9 21.6
1985-86 499.2 29 403.9 48
1986-87 798.1 20.2 451.6 11.8
1987-88 922.6 59.9 657.1 45.5
1988-89 1635.5 15.6 997.5 51.8
1989-90 1817 77.3 1121.8 12.5
1990-91 2429.8 11.1 1574.3 40.6
1991-92 2421.2 33.7 1604.4 1.9
1992-93 2347.9 -0.4 1733.4 8
1993-94 3745.9 -3 2163.1 24.2
1994-95 4327 59.5 2838.7 32.4
1995-96 6579.7 15.5 4586.5 61.6
1996-97 3952.2 52.1 5175.5 12.5
1997-98 5708.2 -39.9 5615 8.5
1998-99 3622.8 44.4 4836.4 -13.9
1999-00 2045.6 -36.5 3374.3 -30.5
2000-01 1417.9 -43.5 2152.7 -36.9
2001-02 778 -30.7 1069.9 -49
2002-03 2035.1 -45.1 1796.5 63.8
161.6
total from 45426.7 44169.2
1970 to 2003

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 Sanctions Disbursements
1998-99 3129.6 4229.3
1999-00 1900.3 3027.4
2000-01 1371.2 2093.2
2001-02 721.4 1065.6
2002-03 2021.7 1783.1

up to march 2003 37122.6 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. Purpose Sanctions Disbursements
1 New 15919.6 15611.3
2 Expansion 6649.2 6547.5
3 Rehabilitation 115.7 114.2
4 Modernization 5459.8 5480.4
5 Working capital 837.5 774.2
6 Others 16279.4 15476.1

7 total 45261.1 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. Sector Sanction Disbursements
1 Public 1541.1 1539.1
2 Joint 2192 2146
3 Cooperative 867,1 838.4
4 Private 40660.9 39480.1

5 total 45261.1 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. Purpose Year Sanctions
1 New 1998-2003 67498.8
2 Expansion 1998-2003 50627.3
3 Rehabilitation 1998-2003 12976.5
4 Modernization 1998-2003 1415.8
5 Working capital 1998-2003 44086.5

6 total 176604.9

IDBI AND SECTOR WISE ASSISTANCE

Serial no Sectors Amount Percentage
1 Public 34963 16.05
2 Joint 11753.7 5.39
3 Cooperative 1802.2 .83
4 Private 169304.2 77.71
5 Trust 50 .02
total 217873.3 100

IDBI AND INSTITUTION WISE ASSISTANCE

Serial no. Institutions 2000-01 2001-02
1 SFC 129.8 87.7
2 SIDC 233.2 99.6

Total 363 187.3

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. Purpose Earlier Present
1 Investment limits 2 lakh 5 lakh
for tiny units for
purpose of
2 refinance 5 lakh 10 lakh
Size of projects
3 eligible for assist. 75000 150000
Quantum of
4 equity assistance 10 lakh 20 lakh
Project outlay
component for
5 eligibility 2 lakh 5 lakh
6 Eligible loan 7.5 lakh 10 lakh
limit
Eligible loan
limit under
normal refinance
scheme

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 Sanctions Growth% Disbursements Growth
1997-98 295
1998-99 1764.8 498.2 279
1999-00 1820.4 3.2 672.4 141.1
2000-01 3276.5 79.4 766.5 13.9
2001-02 3008.1 -7.9 1506.2 96.5
2002-03 2304.1 -23.4 949.3 -37
up to march 12459.7 4173.6
2003
 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
 Business line
 The economic times
 Business standard