{"id":51639,"date":"2019-08-28T19:00:40","date_gmt":"2019-08-28T13:30:40","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=51639"},"modified":"2019-08-28T16:06:56","modified_gmt":"2019-08-28T10:36:56","slug":"7-pm-rediscovering-development-banks-28th-august-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-rediscovering-development-banks-28th-august-2019\/","title":{"rendered":"7 PM | Rediscovering development banks | 28th August, 2019"},"content":{"rendered":"\n<p><strong>Context:<\/strong>\nSignificance of Development banks for Indian economy<\/p>\n\n\n\n<p><strong>Development Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>A development bank is a \u2018bank\u2019\nestablished for the purpose of \u2018financing development\u2019. They provide medium and\nlong-term finance to the industrial and agricultural sector. They provide\nfinance to both private and public sector. <\/li><li>Development banks are multipurpose\nfinancial institutions. They do term lending, investment in securities and\nother activities. They even promote saving and investment habit in the public.<\/li><li>The first development bank In India\nincorporated immediately after independence in 1948 under the Industrial\nFinance Corporation Act as a statutory corporation to pioneer institutional\ncredit to medium and large-scale.<\/li><\/ul>\n\n\n\n<p><strong>Special\ncharacteristics of Development Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>A development bank does not accept\ndeposits from the public like commercial banks and other financial institutions\nwho entirely depend upon saving mobilization.<\/li><li>The role of a development bank is of gap\nfiller. When assistance from other sources is not sufficient then this channel\nhelps. It does not compete with normal channels of finance.<\/li><li>It is a multipurpose financial\ninstitution. Besides providing financial help it undertakes promotional\nactivities also. It helps enterprises from planning to operational level.<\/li><\/ul>\n\n\n\n<p><strong>Role\nof Development Banks for Indian economy:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Capital\nformation:<\/strong>\nThe significance of Development Banks lies in\ntheir making available the means to utilize savings generated in the economy,\nthus helping in capital formation. Capital formation implies the diversion of\nthe productive capacity of the economy to the making of capital goods which\nincreases future productive capacity<\/li><li><strong>Entrepreneurial role:<\/strong>\nDeveloping\ncountries lack entrepreneurs who can take up the job of setting up new\nprojects. It may be due to lack of expertise and managerial ability.\nDevelopment banks were assigned the job of entrepreneurial gap filling.<\/li><li><strong>Joint finance:<\/strong> Another\nfeature of the development bank\u2019s operations is to take up joint financing\nalong with other financial institutions. There may be constraints of financial\nresources and legal problems (prescribing maximum limits of lending) which may\nforce banks to associate with other institutions for taking up the financing of\nsome projects jointly.<\/li><li><strong>Subscription\nto guarantees:<\/strong> It is well-known\nthat when an entrepreneur purchases some machinery or fixed assets or capital\ngoods on credit, the supplier usually asks him to furnish some guarantee to\nensure payment of installments by the purchaser at regular intervals. <\/li><li>In such a case, Development\nBanks can act as guarantors for prompt of installments to the supplier of such\nmachinery or capital under a scheme called \u2018Deferred Payments Guarantee\u2019<\/li><li><strong>Assistance to backward areas:<\/strong>\nInstitutional finance to projects in backward areas is extended on concessional\nterms such as lower interest rate, longer moratorium period, extended repayment\nschedule and relaxed norms in respect of promoters\u2019 contribution and\ndebt-equity ratio. <\/li><li>Moreover, in recent\nyears, development banks in India have launched special programmes for\nintensive development of industrially least developed areas, commonly referred\nto as the No-industry Districts (NID\u2019s) which do not have any large-scale or\nmedium-scale industrial project.<\/li><li><strong>Impact on corporate culture:<\/strong>\nOver the years, Development Banks have succeeded in infusing a sense of\nconstructive partnership with the corporate sector. Institutions have been\ngoing through a continuous process of learning by doing and are effecting\nimprovements in their systems and procedures on the basis of their cumulative\nexperience.<\/li><\/ul>\n\n\n\n<p><strong>Issues with the Development Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Big business<\/strong> <strong>houses:<\/strong> main criticism of development\nbanking in India is that big business groups were able to garner a\ndisproportionate share of the disbursals made by these institutions.<\/li><li><strong>Lack\nof control:<\/strong> The Government did not use its influence to exert\ncontrol over the firms with which development finance institutions were\ninvolved. The latter, as providers of\nequity and credit to companies, were eligible to have nominees on the boards of\ndirectors of such companies<\/li><li><strong>Time\ntaking:<\/strong>\nThe inability of the banks to process loans in a reasonable time frame and to\nprovide loans to projects lacking quality, along with the need for them to\nreorient their financing towards new industries<\/li><li><strong>Non-performing\nAssets:<\/strong>\nDevelopment Banks got discredited for mounting non-performing assets, allegedly\ncaused by politically motivated lending and inadequate professionalism in\nassessing investment projects for economic, technical and financial viability.<\/li><li>After 1991, following the Narasimham\nCommittee reports on financial sector reforms; development finance institutions\nwere disbanded and got converted to commercial banks. The result was a steep\nfall in long-term credit from tenure of 10-15 years to five years.<\/li><\/ul>\n\n\n\n<p><strong>Need\nof Development Banks:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Infrastructure\nneeds:<\/strong>\nWorld Economic Forum&#8217;s Executive Chairman Klaus Schwab said that in order to\ncompete effectively on the international level, India needs to spend 8 hundred\nbillion dollars on its infrastructure in next ten years.<\/li><li>Commercial banks in India provide short\nterm capital with the tenure of 5 years. So government should initiate to\nlaunch development banks to fulfill the needs of infrastructure lending.<\/li><li><strong>Other\ncountries:<\/strong>\nChina\u2019s development banks-the Agricultural Development Bank of China, China\nDevelopment Bank, and the Export-Import Bank of China-have been at the\nforefront of financing its industrial prowess. <\/li><li>After the global financial crisis, these\ninstitutions have underwritten China\u2019s risky technological investments helping\nit gain global dominance in IT hardware and software companies. <\/li><li>Germany\u2019s development bank, KfW, has\nbeen spearheading long-term investment in green technologies and for\nsustainable development efforts requiring long-term capital.<\/li><\/ul>\n\n\n\n<p>Way forward: <\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Development bank plays a very important\nrole in economic development of our country. Since independence they have\ncontributed to the inception of industrialization and all other technological\ninnovations. <\/li><li>There basic objective is to assist the\ndevelopment in country which perform by proving every kind of help possible\ni.e. financial, advisory, technological etc. In this light, the Finance\nMinister\u2019s agenda for setting up a development bank is welcome.<\/li><li>One sincerely hopes that the political\nand administrative leadership carefully weigh in the past lessons to lay a firm\nfoundation for the new institution.<\/li><\/ul>\n\n\n\n<p>Source: <a href=\"https:\/\/www.thehindu.com\/opinion\/op-ed\/rediscovering-development-banks\/article29271773.ece\">https:\/\/www.thehindu.com\/opinion\/op-ed\/rediscovering-development-banks\/article29271773.ece<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: Significance of Development banks for Indian economy Development Banks: A development bank is a \u2018bank\u2019 established for the purpose of \u2018financing development\u2019. 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&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-rediscovering-development-banks-28th-august-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Rediscovering development banks | 28th August, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-51639","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":{"total":0,"cached_at":1700789059,"cached_date":1704932895},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51639","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=51639"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/51639\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=51639"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=51639"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=51639"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}