Development Banks Introduction, Types, Functions, Growth

Development Banks are specialized financial institutions that provide medium and long-term capital for the development of key sectors such as agriculture, industry, infrastructure, and commerce. Unlike commercial banks that primarily offer short-term credit, development banks focus on funding large-scale projects that stimulate economic growth. They play a crucial role in bridging the gap between capital supply and demand for projects that may not attract private investors due to high risks or long gestation periods. In India, institutions like IDBI, NABARD, and SIDBI are examples of development banks that support industrial growth, rural development, and small enterprises.

Types of Development Banks in India:

1. Industrial Development Banks

These banks are primarily focused on promoting industrial growth by providing long-term finance to large and medium-sized industrial enterprises. They assist in setting up new industries and modernizing existing ones.

• Examples:
  • Industrial Development Bank of India (IDBI)
  • Industrial Finance Corporation of India (IFCI)
  • Industrial Investment Bank of India (IIBI)

Functions:

• Financing large industrial projects
• Offering term loans and working capital assistance
• Encouraging modernization and technology adoption

2. Agricultural Development Banks

These banks provide financial assistance to the agricultural sector, which includes farmers, rural entrepreneurs, and cooperative societies. They finance agricultural projects, rural infrastructure, and allied activities like fisheries and forestry.

• Examples:
  • National Bank for Agriculture and Rural Development (NABARD)
  • State Cooperative Agricultural and Rural Development Banks (SCARDBs)

Functions:

• Providing credit for agricultural operations
• Financing rural infrastructure and irrigation projects
• Supporting rural development programs

3. Export-Import Development Banks

These banks are dedicated to promoting foreign trade by financing export and import activities. They offer credit facilities and services to exporters and importers, helping them compete in the global market.

• Example:
  • Export-Import Bank of India (EXIM Bank)

Functions:

• Providing pre-shipment and post-shipment credit
• Facilitating foreign trade through lines of credit
• Supporting export-oriented industries and joint ventures abroad

4. Small Industries Development Banks

These banks cater to the financing needs of small-scale and medium-sized enterprises (SMEs) by providing them with long-term capital and working capital.

• Example:
  • Small Industries Development Bank of India (SIDBI)

Functions:

• Offering direct loans, refinancing, and equity support to SMEs
• Promoting entrepreneurship and skill development
• Supporting microfinance institutions

5. Housing Development Banks

These banks focus on providing long-term finance for housing and real estate development. They support both individual borrowers and builders for constructing residential properties.

• Example:
  • National Housing Bank (NHB)

Functions:

• Providing refinance facilities to housing finance institutions
• Ensuring the availability of affordable housing credit
• Promoting housing infrastructure development

6. Infrastructure Development Banks

Infrastructure development banks finance large-scale infrastructure projects such as roads, highways, ports, airports, and power plants. They play a vital role in ensuring sustainable economic development by investing in critical infrastructure.

• Examples:
  • India Infrastructure Finance Company Limited (IIFCL)
  • Infrastructure Development Finance Company (IDFC)

Functions:

• Financing public and private infrastructure projects
• Mobilizing resources for long-term infrastructure development
• Providing advisory and consultancy services for infrastructure projects

7. Microfinance Institutions (MFIs) and Rural Development Banks

These banks provide financial services to low-income individuals and small businesses, especially in rural areas, to promote financial inclusion.

• Examples:
  • Regional Rural Banks (RRBs)
  • NABARD-supported MFIs

Functions:

• Offering microloans and credit to rural entrepreneurs
• Promoting rural livelihoods and self-employment
• Supporting rural women through self-help groups (SHGs)

8. Cooperative Banks and Societies

These banks focus on providing credit to cooperative societies engaged in agriculture, small businesses, and rural development.

• Examples:
  • State Cooperative Banks
  • District Cooperative Banks
  • Primary Agricultural Credit Societies (PACS)

Functions:

• Offering credit to cooperative societies
• Promoting cooperative movements in agriculture and industry
• Financing rural and semi-urban economies

Functions of Development Banks in India:

• Project Financing

One of the primary functions of development banks is to provide medium- and long-term financing to industrial and infrastructure projects. These projects often require substantial capital, and development banks bridge the gap by offering loans at reasonable interest rates. They support large-scale industrial undertakings that are crucial for national development but may not secure funding from commercial banks due to high risks.

• Promoting Industrial Growth

Development banks encourage the growth of key industries by providing financial assistance to emerging sectors, especially in underdeveloped regions. Institutions like the Industrial Development Bank of India (IDBI) have played a significant role in supporting industries such as steel, textiles, and engineering, contributing to balanced regional development.

• Financing Infrastructure Development

Development banks focus on infrastructure projects such as roads, ports, power plants, and telecommunication networks. These sectors require long-term investment and carry high risks, which commercial banks often avoid. Development banks like India Infrastructure Finance Company Limited (IIFCL) facilitate the growth of infrastructure by offering tailored financial solutions.

• Support for Small and Medium Enterprises (SMEs)

SMEs are critical for job creation and economic diversification but often face difficulties in securing credit. Development banks like Small Industries Development Bank of India (SIDBI) provide customized financial products, refinancing schemes, and venture capital to promote small-scale industries.

• Encouraging Innovation and Entrepreneurship

Development banks foster innovation by supporting research and development activities, as well as providing seed capital to new ventures. By offering financial assistance to startups and innovative projects, they contribute to the creation of a knowledge-driven economy.

• Export Promotion

Development banks assist in promoting exports by offering pre-shipment and post-shipment credit, financing export-oriented units, and providing foreign exchange services. Institutions like the Export-Import Bank of India (EXIM Bank) play a key role in enhancing India’s global trade competitiveness.

• Providing Technical Assistance

In addition to financial services, development banks offer technical assistance to enterprises in the form of project evaluation, feasibility studies, and advisory services. This ensures the successful implementation of funded projects.

• Promoting Rural Development

Banks like National Bank for Agriculture and Rural Development (NABARD) focus on providing credit for agriculture and rural development. They help improve rural livelihoods by financing irrigation, rural infrastructure, and self-help groups.

Growth of Development Banks in India:

• Post-Independence Industrialization Drive

After independence, India prioritized industrialization to reduce dependence on imports and boost self-sufficiency. The government realized that commercial banks were not equipped to provide long-term financing required for industrial growth. As a result, development banks such as the Industrial Finance Corporation of India (IFCI), established in 1948, and the Industrial Development Bank of India (IDBI), set up in 1964, were created to support large-scale industrial projects. These banks provided crucial funding for industries like steel, cement, and textiles, thereby laying the foundation for industrial development.

• Expansion into Rural and Agricultural Sectors

In the 1970s and 1980s, the focus shifted towards rural development and agriculture. The establishment of NABARD (National Bank for Agriculture and Rural Development) in 1982 marked a significant step in providing institutional credit for agriculture and rural infrastructure. NABARD has played a vital role in supporting rural livelihoods by financing irrigation, rural roads, and rural credit institutions. This expansion into the agricultural sector reflected the government’s strategy to ensure inclusive development and reduce the rural-urban divide.

• Diversification into Small and Medium Enterprises (SMEs)

Recognizing the importance of small and medium enterprises (SMEs) in job creation and economic diversification, the government established the Small Industries Development Bank of India (SIDBI) in 1990. SIDBI’s mission was to offer financial and non-financial support to small-scale industries, which were often overlooked by traditional banks. This marked a crucial phase in the growth of development banks, as they began to cater to emerging sectors and promote entrepreneurship.

• Infrastructure Development Initiatives

The liberalization era of the 1990s highlighted the need for robust infrastructure to attract foreign investment and sustain economic growth. To meet this demand, specialized infrastructure development banks like the India Infrastructure Finance Company Limited (IIFCL) and Infrastructure Development Finance Company (IDFC) were established. These institutions played a significant role in financing large infrastructure projects, including highways, power plants, and ports, thereby contributing to economic modernization.

• Role in Promoting Export and Foreign Trade

With globalization and increasing trade, development banks expanded their scope to support export-oriented businesses. The Export-Import Bank of India (EXIM Bank), established in 1982, facilitated foreign trade by offering financial assistance and credit to exporters. This initiative helped Indian businesses penetrate global markets and enhanced India’s trade competitiveness.

• Recent Developments and Technological Advancements

In recent years, development banks have embraced digital technology to enhance their services and expand outreach. NABARD and SIDBI have introduced digital platforms to streamline credit delivery and improve financial inclusion. Moreover, initiatives like MUDRA loans, supported by development banks, have played a key role in financing micro and small enterprises.