Wednesday, May 18, 2011

What are the functions of Development Banks? Describe its Quantitative and Qualitative roles.

What are the functions of Development Banks? Describe its Quantitative and Qualitative roles.


Development banks provide financial assistance to industry in the following forms:
i) Term loans and advances
ii) Subscription to shares and debentures
iii) Underwriting of new issues
iv) Guarantees for term loans and deferred payments

The first two forms place funds directly in the hands of companies as subscription to shares and debentures. The last two forms facilitate the raising of funds from other sources.

Aggregative Role of Development Financing Institutions
Development Financing Institutions consist of Development Banks like the IDBI, SIDBI, NABARD and the State Finance Corporations. Three of the development financing institutions has exited from the market after the RBI announced its policy of harmonization of the development and banking functions. They are: ICICI with a reverse merger with its off-spring ICICI Bank Ltd., impending merger of IFCI with the Punjab National Bank, and the winding up of the IRBI due to its unsustainable nature. The IDBI is also slated for conversion to a Bank and the Parliament already gave its approval. The process is yet to commence. The role played by development banks is of two broad types.

1. Quantitative Role
This is the part played by development banks as a constituent of the industrial financing system in India and refers to the magnitude of funds provided by them jointly to industrial enterprises. The magnitude of industrial financing by these development banks has been considerable.
These banks have emerged as the single most important source of institutional finance to industry and have come to occupy a pre-eminent position in the institutional structure of the financial system. The annual average of sanctioned assistance by all the development banks during the three year period 1978-79 to 1980-81 touched an all time high of Rs.1808 crores. At present, as much as one-third of the gross fixed capital formation in private industry is being contributed by development banks
In India, their operations have the effect of improving the allocative efficiency of the financial system. The development banks perform the function of being a substitute for the capital market. When industrial enterprises are unable to raise funds from the normal channels, development banks fill the gap as well as restore or resuscitate the capital market.
As integral part of their lending operations, they thoroughly appraise projects as regards the priority aspect, financial viability and economic soundness and so on. The rigorous and exacting scrutiny by development banks tones up the quality of industrial projects and enables a more efficient use of available project resources.
Appraisal by the development banks is impersonal and objective. This results in financial assistance to diverse enterprises for a wide variety of purposes which would not otherwise have been possible. Included in this category are; new enterprises, small or medium–sized firms, enterprises in backward regions, and non-traditional industries

2. Qualitative Role
Development banking in India has an overwhelmingly qualitative dimension too in terms of the recent orientation towards promotional or innovative functions in their operations. With the evolution of a meaningful strategy of industrial development, a more positive role has been assigned to, and it being played by, development banks in India since 1969-70. The essential elements of these are:
(i) Development of backward regions
(ii) Encouragement to a new class of small entrepreneurs and enterprises
(iii) Rehabilitation of sick mills

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