Development Banks Characteristics, Functions

03/05/2020 1 By indiafreenotes

Development banks are specialized financial institutions. They provide medium and long-term finance to the industrial and agricultural sector. They provide finance to both private and public sector. Development banks are multipurpose financial institutions. They do term lending, investment in securities and other activities. They even promote saving and investment habit in the public.

Development banking was started after the World War II. It provided finance to reconstruct the buildings and industries which were destroyed in the war.

In India, development banking was started immediately after independence.

The arrangement of development banks in India is depicted below.

Development Banks in India

Industrial Development Banks

Agricultural Development Banks

Export-Import Development Banks

Housing Development Banks

IFCI NABARD EXIM NHB
IDBI  
SIDBI  

Development banks in India are classified into following four groups:

Industrial Development Banks: It includes, for example, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI).

Agricultural Development Banks: It includes, for example, National Bank for Agriculture & Rural Development (NABARD).

Export-Import Development Banks: It includes, for example, Export-Import Bank of India (EXIM Bank).

Housing Development Banks: It includes, for example, National Housing Bank (NHB).

Industrial Finance Corporation of India (IFCI) is the first development bank in India. It started in 1948 to provide finance to medium and large-scale industries in India.

Characteristics of a Development Bank:

  1. It is a specialised financial institution.
  2. It provides medium and long term finance to business units.
  3. Unlike commercial banks, it does not accept deposits from the public.
  4. It is not just a term-lending institution. It is a multi-purpose financial institution.
  5. It is essentially a development-oriented bank. Its primary object is to promote economic development by promoting investment and entrepreneurial activity in a developing economy. It encourages new and small entrepreneurs and seeks balanced regional growth.
  6. It provides financial assistance not only to the private sector but also to the public sector undertakings.
  7. It aims at promoting the saving and investment habit in the community.
  8. It does not compete with the normal channels of finance, i.e., finance already made available by the banks and other conventional financial institutions. Its major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial facilities.
  9. Its motive is to serve public interest rather than to make profits. It works in the general interest of the nation.

The nine important functions of development banks in India are as follows:

  • To promote and develop small-scale industries (SSI) in India.
  • To finance the development of the housing sector in India.
  • To facilitate the development of large-scale industries (LSI) in India.
  • To help the development of agricultural sector and rural India.
  • To enhance the foreign trade of India.
  • To help to review (cure) sick industrial units.
  • To encourage the development of Indian entrepreneurs.
  • To promote economic activities in backward regions of the country.
  • To contribute in the growth of capital markets.