A development bank is a financial institution which provides term finance to business units in the form of loans, Underwriting and investment. It is essentially a multi-purpose financial institution with a broad development outlook.
It provides either loan or equity capital or both and also advisory promotional and entrepreneurial services.
Thus, this administers a blend of financial and development services for economic development in general and industrial development in particular.
The first development bank was the Industrial Development Bank of Japan established in 1902, which provided ship mortgage loans initially.
Features of Development Bank:
Following are the features of Developments bank :
1. It is a specialised financial institution which provides medium and long term finance to business units.
2. It is a multi-purpose financial institution and not just a term lending institution.
3. It is essentially a development-oriented Bank. The primary objective of this bank 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 development.
4. It does not accept deposits from the public, unlike commercial banks. This bank does not perform ordinary banking functions.
5. Financial assistance is provided by this not only to the private sector but also to the public sector undertakings.
6. One of the major aims is to promote savings and investment habit in the community.
7. Its major role is of a gap filler, I.e to fill up the deficiencies of the existing financial facilities.
8. The finance provided by this bank is termed as Institution financing.
Functions of Development Bank :
The main functions of the development bank are :
1. They provide risk capital.
2. They provide long term and medium-term finance to industrial undertakings for purchase of new plant and machinery, expansion and modernisation.
3. They purchase the share and debentures of companies and thus provide them with long term capital.
4. They help companies in raising capital from the capital market.
5. They underwrite the public issues of shares and debentures by the companies.
6. They grant loans in foreign currency for the import of machinery and equipment.
7. They provide guarantees for loans raised by industrial concerns from other sources and even from foreign markets.
8. They arrange for general industrial surveys and feasibility studies for specific projects.
9. They help in the dispersal of industries and development of backward areas.
Objectives And Importance of Development bank :
1. Financing of industries:
The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long term basis.
Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
2. Balanced Regional Development:
Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country.
3. Development of capital market:
In India, financial institutions were set up to develop the capital market.
This bank provides merchants banking, underwriting and issue house services to companies for raising capital from the capital market.
4. Mobilisation of Public Savings:
Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
5. Procurement of Foreign Technology:
Financial institutions help the industrialists to acquire the latest foreign technology by extending foreign currency loans and guarantees.
6. Management Consultancy:
Financial institutions provide technical and management consultancy to industrial units.
They help the borrower to procure right type of technology, warmish plant and acquire expertise in running their units.
7. Training of entrepreneurs:
Financial institutions train and develop entrepreneurs, help them in preparing projects reports and provide the initial capital to lunch their enterprises.
This bank undertakes market and investment research and surveys as also technical and economic studies related to the development of industries.
These banks Co-ordinate the working of other financial term lending institutions engaged in financing, promoting and developing industries.
Types Of Development bank in India:
There are Three types of Development Banks :
1. Development bank for agriculture:
Primary land development banks, state /central land development bank and NABARD.
2. Development bank for Industry:
IDBI, IFCI, ICICI, SIDBI, IRBI etc and SFCs and SIDCs.
3. Development bank for Foreign sector :
Export And Import Bank of India.
Differences between Commercial bank and Development bank :
1. Formation: Commercial bank is generally set up as companies under the companies act.
These banks are usually set up under the special act passed by the government.
2. Nature: Commercial bank is ordinary financial institutions.
These banks are the specialized multi-purpose institution.
3. Raising of funds: Commercial banks accept deposits from the public through different types of account. These deposits are repayable on demand.
These banks do not accept deposits like commercial bank. Their main source of funds is borrowing, grants loans, selling securities etc.
4. Cheque facility: There is a cheque facility in the case of commercial banks. Demand deposits are withdrawal by cheques.
There is no such cheque facility in the case of this bank.
5. Advances: Commercial bank mainly provides short and medium-term loans.
This bank provides medium-term and long term loans.
6. Motive: The basic motive of commercial banks is to maximize profits.
These banks are motivated by social profits i.e aims at providing services.
7. Credit creation: Commercial bank can create credit or multiply deposits while lending.
Development can not create credit creation.
Frequently Question And Answer :
1. Are developments bank a scheduled Bank?
Ans: Yes, a development bank is a scheduled Bank.
2. Is NABARD a developments bank?.
Ans: Yes, NABARD a deb bank.
3. Which was the first developments bank in the world?
Ans: The first development bank was the Industrial Development Bank of Japan established in 1902, which provided ship mortgage loans initially.
4. In which year the first development banks was established?
Ans: In the year 1902 the first development bank was established.
5. What was the primary objective of development banks?
Ans: The primary objective was to promote economic development by promoting investment and entrepreneurial activity in a developing economy.