Development Banks - Indian Economy Notes

Development banks are financial institutions (DFIs) that provide long-term credit for capital-intensive investments with long payback periods, such as urban infrastructure, mining and heavy industry, and irrigation systems. It lays the foundation for industrial growth and development in the country. NABARD is an example of an agriculture development bank.

In this article, we will see the meaning of a development bank, its historical background, objectives of DFIs, and types of DFIs.

What is a Development Bank?

• Development banks are financial institutions that provide long-term credit for capital-intensive investments with long payback periods, such as urban infrastructure, mining and heavy industry, and irrigation systems.
• Such banks frequently lend at low and stable interest rates in order to encourage long-term investments with significant social benefits.
• Term-lending institutions and development finance institutions (DFIs) are other names for development banks.

Historical Background of DFIs

• IFCI (Industrial Finance Corporation of India), formerly known as the Industrial Corporation of India, was founded in 1949.
• This was most likely India's first development bank dedicated to financing industrial investments.
• The World Bank prompted the establishment of the Industrial Credit and Investment Corporation of India (ICICI) in 1955. [This is the parent company of ICICI Bank, India's largest private commercial bank today.]
• It was a joint effort between the government, which owned the majority of the stock, and India's leading industrialists, who owned only a small portion of the stock.
• The goal was to fund modern, relatively large private corporate enterprises.
• IDBI (Industrial Development Bank of India) was established in 1964 as the apex body of all development finance institutions.

Features of Development Bank

The following are the primary characteristics of a development bank:

• It is a type of financial institution.
• It provides business units with medium and long-term financing.
• Unlike commercial banks, it does not accept public deposits.
• It is more than just a short-term lending institution. It is a financial institution with multiple functions.
• It is fundamentally a development bank. Its primary goal is to promote economic development in developing economies by encouraging investment and entrepreneurial activity. It promotes new and small businesses and seeks balanced regional growth.
• It provides financial assistance not only to private-sector enterprises but also to public-sector enterprises.
• It aims to instil the habit of saving and investing in the community.
• It does not compete with traditional financial channels, i.e., finance already made available by banks and other traditional financial institutions. Its primary function is that of a gap-filler, filling in the gaps in existing financial facilities.
• Its motivation is to serve the public good rather than to make a profit. It works in the best interests of the country as a whole.

Objectives of Development Bank

The development banks' primary goals are as follows:

• to encourage industrial development,
• to develop regressive areas,
• to increase the number of job opportunities,
• to boost exports and encourage import substitution
• to promote technological advancement and modernization,
• to encourage more self-employment initiatives,
• to resurrect sick units,
• to improve large-industry management through training,
• to eliminate regional disparities or imbalances,
• to encourage the advancement of science and technology in new areas by providing risk capital,
• to improve the country's capital market

List of Development Banks

In India, we have a few development banks or development financial institutions (DFIs). Some of them are,

Need of Development Bank in the current context

• The economy requires more infrastructure investments than ever before to help it overcome the scars left by the Covid-19 pandemic. Because few commercial lenders are willing to take on infrastructure risk, especially after the previous lending cycle's experience, a development finance institution has become necessary.
• In establishing a DFI, India will revisit an earlier experiment with the concept. ICICI, in its original form, and IDBI were both established as DFIs but were later converted to universal banks due to a perceived need for access to public deposits.
• The earlier generation of DFIs faced financing challenges because retail deposit access was monopolized by banks and the availability of long-term financing without government guarantees was limited.
• We now have a thriving capital market, so there is easy access to funds. We have global access because India is a compelling investment opportunity. As a result, we have access there.
• This development bank could borrow from multilateral development banks as well, and the government could provide a guarantee.
• The DFI is expected to act as a catalyst in funding projects under the Rs 111-lakh-crore National Infrastructure Pipeline, assisting the country in becoming a $5 trillion economy by 2025.

Conclusion

The greater a country's backwardness, the greater the role of the state in economic development. To lay a solid foundation for the new institution, the political and administrative leadership should carefully examine past lessons. The source of finance is the most important of these. In this regard, the agenda for establishing a development bank is encouraging. This is especially true when it comes to providing long-term financing in order to catch up with advanced economies as quickly as possible.