A

Project REPORT
ON
“ Role and Growth of Development Bank
in India”

In the partial fulfillment for the degree of

Master of Business Administration
(Session 2009-2011)

Under the supervision of: Submitted by:

MR. Sarabjeet Sarao Nishant Saini
Faculty(MBA) Roll no:94026
RIMT
SUBMITTED TO
RIMT-Maharaja Aggrasen Engineering College
(Approved by Punjab Technical University-134003)
 PREFACE

MBA is a stepping stone to the Management career and to develop good Managers is
necessary that the theoretical knowledge must be supplemented with exposure to the real
environment.

Theoretical knowledge just provides the base and is not sufficient to produce a good
Manager that’s why the practical knowledge is needed.

Therefore, the Research Project is an essential requirement for the student of MBA. This
Research Project not only helps the student to utilize his/her skills properly and learn
field realities but also provides a chance to the organization to find out talent among the
building Managers in the very beginning.

.
 ACKNOWLEDGEMENT

An assignment puts the knowledge & experience of an individual to litmus test.

There is always a sense of gratitude that one likes to express towards the persons who
helped to change an effort to success. So, this becomes obligatory on my part to record
my thanks to them who guided and inspired me during my training.
I am highly obliged to my faculty of MBA for the constant motivation without which
the project would not have reached its destination.
Sincere thanks also due to the respondents who extended their cooperation by providing
the information for this study and showing interest in my research.
I would also like to convey thanks to MR. Sarabjeet Sarao, Faculty for the ready
assistance and her valuable suggestions.
The never-ending support of my parents and my family made it a reality, so I would
like to thanks my parents and my dear friends.

(Nishant Saini)

DECLARATION

I hereby declare that, the project entitled “Role and Growth of Development Bank
in India” at JAMMU for the partial fulfillment of MBA degree from Punjab
University. It is the original work done by me and the information provided in the
study is authentic to the best of my knowledge.

This study has not been submitted to any other institution or university for the award
of any other degree.

DATE:-

NISHANT SAINI

CERTIFICATE

This is to certify that NISHANT SAINI has completed the research project entitled
“Role and Growth of Development Bank
in India”” under my supervision. To the best of my knowledge, the report consists of
result of an empirical study conducted by my student. In my opinion, the work is of
the requisite standard expected of an MBA student. Therefore, I recommended the
same to be sent for evaluation.
DATE MR. SARABJEET SARAO
Faculty(MBA) .
RIMT
 TABLE OF CONTENTS

• INTRODUCTION TO TOPIC

• OBJECTIVES OF STUDY

• RESEARCH METHODOLOGY

• 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 study the various development banks operating in India

⇒ To give glance at the working of development banks

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

⇒ To check the contribution of development banks in economic growth

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

Sampling

The study is limited to a sample of top 4 development bank.

1. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
2. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

3. NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT

(NABARD)
4. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

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 them
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 development bank
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 Iong 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-tern 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 vgjghjustrial 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 industrialization 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-tern and long-tern 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 element 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 foru
0…………m 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, 2009 it was Rs. 1168 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 rate% Disbursements Growth rate
1980-81 206.6 49.8 108.9 19.7
1981-82 218.1 5.6 169.4 55.6
1982-83 230.2 5.5 196.1 15.8
1983-84 321.9 39.8 224.5 14.5
1984-85 415.4 29 272.9 21.6
1985-86 499.2 20.2 403.9 48
1986-87 798.1 59.9 451.6 11.8
1987-88 922.6 15.6 657.1 45.5
1988-89 1635.5 77.3 997.5 51.8
1989-90 1817 11.1 1121.8 12.5
1990-91 2429.8 33.7 1574.3 40.6
1991-92 2421.2 -0.4 1604.4 1.9
1992-93 2347.9 -3 1733.4 8
1993-94 3745.9 59.5 2163.1 24.2
1994-95 4327 15.5 2838.7 32.4
1995-96 6579.7 52.1 4586.5 61.6
1996-97 3952.2 -39.9 5175.5 12.5
1997-98 5708.2 44.4 5615 8.5
1998-99 3622.8 -36.5 4836.4 -13.9
1999-00 2045.6 -43.5 3374.3 -30.5
2000-01 1417.9 -30.7 2152.7 -36.9
2001-02 778 -45.1 1069.9 -49
2002-03 2035.1 16.16 1796.5 63.8
2003-04 1574 15.04 1987 15
2004-05 1269 -45 1845 24
2005-06 1789 24.32 2045 48
2006-07 1354 35.45 3348 46
2007-08 2064 24.36 3458 45
2008-09 1548 54.25 2487 24
593399.2
total from 1970 55024.7
to 2009

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 200 67498.8
2 Expansion 3-2009 50627.3
3 Rehabilitation 2003-2009 12976.5
4 Modernization 2003-2009 1415.8
5 Working capital 2003-2009 44086.5
2003-2009
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 refinance
2 Size of projects 5 lakh 10 lakh
eligible for assist.
3 Quantum of equity 75000 150000
assistance
4 Project outlay 10 lakh 20 lakh
component for
eligibility
5 Eligible loan limit 2 lakh 5 lakh
6 Eligible loan limit 7.5 lakh 10 lakh
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 1764.8 498 279
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
2003-04 2548.7 14.5 1087 11.15
2004-05 2874.8 27 948 -48
2005-06 3478 32 1087 24
2006-2009 8745 34 921 15
up to march 12459.7 7173.6
2003
 CONCLUSION

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.