Structure and Working of Development Banks

Development banks in India play a pivotal role in fostering economic growth by providing long-term financial assistance to various sectors, such as industry, agriculture, infrastructure, and trade. These banks bridge the gap between commercial banking and capital markets by offering financial services tailored to the specific needs of development projects.

Structure of Development Banks in India:

The structure of development banks in India can be broadly categorized based on their ownership, scope, and areas of operation.

1. Ownership Structure

Development banks in India are predominantly owned and regulated by the government, with some private sector participation. Many of these banks were established through acts of Parliament or special government initiatives. For example, the Industrial Finance Corporation of India (IFCI) was set up in 1948 under a special act, while NABARD and SIDBI are owned by the government but operate independently.

2. Categorization Based on Function

Development banks are organized based on the sectors they serve:

• • Industrial Development Banks: These provide long-term capital for industries. Examples include IDBI and IFCI.
  • Agricultural Development Banks: Focused on rural development, these banks include NABARD and State Cooperative Banks.
  • Export-Import Banks: Specializing in foreign trade, the EXIM Bank of India supports export-oriented businesses.
  • Infrastructure Development Banks: These banks finance infrastructure projects, such as highways, railways, and power plants. Examples are IDFC and IIFCL.
  • Small Industries Development Banks: These banks provide credit and support services to small and medium enterprises, such as SIDBI.

3. Organizational Structure

Development banks typically have a hierarchical organizational structure, comprising:

• • Board of Directors: Responsible for overall policy formulation and strategic decisions.
  • Advisory Committees: Assist the board in specific areas, such as risk management and sectoral investment.
  • Operational Units: Comprising divisions for project appraisal, loan disbursement, monitoring, and recovery.

Working Mechanism of Development Banks:

The working of development banks involves several key functions, from identifying viable projects to providing post-disbursement support.

1. Project Identification and Appraisal

Development banks begin their process by identifying potential projects that require financial assistance. They primarily focus on projects that have significant economic potential but lack access to traditional financing sources.

1. • A detailed appraisal is conducted to assess the feasibility of the project, including technical, financial, economic, and environmental aspects.
   • Once the appraisal is completed, the project is presented to the board for approval.
2. Financing Mechanism

Development banks provide long-term finance in various forms:

• • Term Loans: Fixed-interest loans with long repayment periods, primarily for infrastructure and industrial projects.
  • Equity Participation: Some development banks may also invest in the equity of companies to support their capital needs.
  • Refinancing: They provide refinance facilities to other financial institutions, such as regional rural banks and cooperative banks, to ensure the availability of credit in rural areas.

3. Resource Mobilization

Development banks mobilize resources from various sources to fund their operations.

• • Government Grants and Budgetary Support: Many development banks receive direct funding from the government.
  • Market Borrowings: They issue bonds and debentures in the financial market to raise capital.
  • External Assistance: Some banks also receive funds from international financial institutions, such as the World Bank and the Asian Development Bank (ADB).

4. Loan Disbursement and Monitoring

Once a project is approved, the loan is disbursed in phases, depending on the progress of the project. Development banks maintain a close relationship with borrowers and offer advisory services to ensure the successful completion of projects.

• • Regular monitoring is conducted to ensure that the funds are being used for the intended purpose and that the project is on track.
  • Banks may revise the terms of the loan if the borrower faces unforeseen challenges.

5. Risk Management

Given the nature of their operations, development banks face several risks, such as credit risk, market risk, and operational risk. To manage these risks, they:

• • Maintain a diversified portfolio of projects across different sectors and regions.
  • Use hedging strategies and insurance to mitigate financial risks.
  • Implement robust internal controls and governance mechanisms.

6. Recovery and Post-Disbursement Support

After the loan is disbursed, development banks provide post-disbursement support to borrowers in the form of technical and managerial advice. They also monitor loan repayment and recovery.

• • In case of default, development banks may restructure the loan or take legal action to recover the outstanding amount.

Role in Economic Development:

The working of development banks is aligned with national priorities, such as industrialization, infrastructure development, rural upliftment, and export promotion. Over the years, these banks have played a crucial role in:

• Promoting industrial growth by financing large-scale and medium-sized enterprises.
• Supporting rural development through targeted credit and refinancing schemes for agriculture and allied sectors.
• Fostering entrepreneurship by providing capital and advisory support to small businesses and startups.
• Enhancing infrastructure by funding critical projects in transportation, energy, and urban development.