Project on Development-Banks

TABLE OF CONTENTS PREFACE ACKNOWLEDGEMENT INTRODUCTION TO TOPIC OBJECTIVES OF STUDY RESEARCH METHODOLOGY HYPOTHESIS INTRODUCTION TO DEVELOPMENT BANKS OBJECTIVES OF DEVELOPMENT BANKS BANKS UNDER STUDY IDBI IFCI SIDBI NABARD DATA ANALYSIS SUGGESTIONS CONCLUSION LIMITATION

INTRODUCTION TO TOPIC ⇒ TO INDIAN FINANCIAL SYSTEM ⇒ HISTORY OF DEVELOPMENT BANKS INDIAN FINANCIAL SYSTEM Indian financial system is one of the world largest financial systems.

Indian economy is world 4th biggest economy but this Indian financial system has under gone through various changes or we can say that it has different stages since its inception.

Basically Indian financial system can be divided into 3 categories:  Before independence  Pre- 1991 era  Post-1991 era BEFORE INDEPENDENCE: In British rule India first time seen the organized financial system, although all that was meant for britishers but that provided us the layout for future course of action i.e. to build our own financial system. At that time banks and other financial institutions were at their infantry stage but the given a base to build the whole system on them.

That time can be considered as the preliminary stage of Indian financial system and at that time there were no development banks as the motive of colonial rule was to draw the wealth not to make country developing.

PRE 1991 ERA: This era has seen the gradual rise in the economy of India. After independence banks and other financial institutions to provide funds were established and development banks were also a part of them which were established specially to provide financial aid to industrial sector and to promote entrepreneurship in India.

The financial system in this era was based on socialistic pattern of society and the economy was of mixed type but basically it was public sector based economy. The motive was to promote every sector of society to uplift and earn for him self. Indian financial system continued with this pattern for about 40 years but in true sense the economic growth never boosted up as there was so many hindrances and lacks in syetm itself which taken country in such a crisis that it has to borrow funds by pledging its gold that was called the crisis of 1991 POST 1991 ERA: To come out the crisis, India has to adopt the new policy regarding the financial system to speed up the growth and to raise the economy and in order to perform that a new policy of LIBERALIZATIONPRIVATIZATION- GLOBALIZATION i.e. LPG was adopted. The

basic motive was to reduce the government control over the economy and to let it flourish itself. Indian financial system is currently working on this policy and now the economic growth rate has also risen. Now the development banks are working in accordance with the industry in order to satisfy their need of funds and to provide every possible help required. Although the growth is still slow in comparison with other countries but soon India will become the strongest economy of world.

HISTORY OF DEVELOPMENT BANKS The concept of development banking rose only after Second World War , Successive of the Great Depression in 1930s. The demand for reconstruction funds for the affected nations compelled in setting up a worldwide institution for reconstructions. As a result the IBRD was set up in 1945 as a worldwide institution for development and reconstruction. This concept has been widened all over the world and resulted in setting up of large number of banks around the world which coordinating the developmental activities of different nations with different objectives among the world.

The course of development of financial institutions and markets during the post-Independence period was largely guided by the process of planned development pursued in India with emphasis on mobilisation of savings and channelising investment to meet Plan priorities. At the time of Independence in 1947, India had a fairly well-developed banking system. The adoption of bank dominated financial

development strategy was aimed at meeting the sectoral credit needs, particularly of agriculture and industry. Towards this end, the Reserve Bank concentrated on regulating and developing mechanisms for institution building. The commercial banking network was expanded to cater to the requirements of general banking and for meeting the short-term working capital requirements of industry and agriculture.

Specialised development financial institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority ownership of the Reserve Bank were set up to meet the long-term financing requirements of industry and agriculture. To facilitate the growth of these institutions, a mechanism to provide concessional finance to these institutions was also put in place by the Reserve Bank.

The first development bank In India incorporated immediately after independence in 1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to medium and large-scale. Then after in regular intervals the government started new and different development financial institutions to attain the different objectives and helpful to five-year plans.

The early history of Indian banking and finance was marked by strong governmental regulation and control. The roots of the national system were in the State Bank of India Act of 1955, which nationalized the former Imperial Bank of India and its seven associate banks. In the early days, this national system operated along side of a large private banking system. Banks were limited in their operational flexibility by

the government’s desire to maintain employment in the banking system and were often drawn into troublesome loans in order to further the government’s social goals.

The financial institutions in India were set up under the strong control of both central and state Governments, and the Government utilized these institutions for the achievements in planning and development of the nation as a whole. The all India financial institutions can be classified under four heads according to their economic importance that are: •

All-India Development Banks

•

Specialized Financial Institutions

•

Investment Institutions

•

State-level institutions

•

Other institutions

OBJECTIVES OF STUDY ⇒ To find out the role of development banks in Indian financial system ⇒ To study the various development banks operating in India

⇒ To give glance at the working of development banks ⇒ To check the contribution of development banks in economic growth ⇒ To check the individual contribution of each development bank ⇒ To give check the current stature of Indian financial system ⇒ To make a comparative study among various development banks ⇒ To find out the weaknesses in financial system regarding with development banks

RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with logic behind him. Why a research study has been undertaken, how a research problem has been defined, in what way and why the hypothesis has been formulated, what data have been collected and what particular method has been adopted, why particular technique of analyzing data has been used and a host of similar other questions are usually answered when we talk of research methodology concerning a research problem or study.

RESEARCH DESIGN: A research design is the arrangement of conditions for collection and analysis of in a manner and aims to combine relevance to the research purpose with economy in procedure. In fact the research design is the conceptual structure within which research I conducted.

Research Design is needed because it facilitates the smooth sailing of the various research operations thereby making research as efficient as

possible yielding maximum information with minimal expenditure of effort, time and money.

I have adopted descriptive and conclusive research design.

Descriptive research is those studies, which are concerned with describing the characteristics of a particular individual or a group.

Since the aim is to obtain the accurate information about the development banks in terms of their role in Indian financial system, I have studied the various data available in books, journals, magazines and on internet.

DATA SOURCES: The researcher can gather primary data, secondary data or both. Secondary data are data that were collected for another purpose and already exist somewhere. Primary data are data specially gathered for a specific purpose or for a specific research project. Since the study is based on already existing facts and figures, so all the sources of data are secondary SECONDARY DATA The main source of information for the study was  Weakly magazines  RBI bulletin  Information available in form of articles  Information available on internet

INTRODUCTION TO DEVELOPMENT BANKS DEVELOPMENT banks in India have had a chequered and not always a happy history. Some have managed to come back from the brink by taking to universal banking, or merging with a normal bank. In general, it may be said that development banking has lost its charm. So much so that when an official was shifted from the none-too-healthy Indian Bank to NABARD, a banking veteran said that she deserved not congratulations but commiseration.

Political interference and flawed industrial policy have been the main reasons why development banks have fared badly. At the same time, it needs to be said that some conceptual errors about the nature of development banking have made matters worse.

From the time of Independence, political interference in the functioning of banks has been both overt and covert. For instance, loan melas made many banks sick. Even now, many villagers think that a loan from a government bank is a gift; it need not be repaid. In spite of such impressive sounding institutions as Debt Recovery Tribunals, it is still difficult for banks to recover in full the amounts due; more often than not, banks have no option but write-off most of the dues. Periodic concessions to borrowers ordered by the Reserve Bank of India have made debt recovery quite difficult. In consequence, ill health has dogged the banks in India.

Though development banks did not have to suffer from loan melas, they too were subject to political pressure to fund projects of dubious value. For long years, there was no culture of financial closure; many projects started more with hope and hype than with calculated design, and with no clear idea of where the funds would be found to complete them. Even if the project had been well conceived, administrative delays made many projects unviable.

During the License Raj, getting a manufacturing license was an end in itself. Licenses were obtained or bought merely because they were there and not because they made economic sense. It was also possible to control a company by investing no more than a small fraction of the total cost. It was not uncommon in those days for not-so-scrupulousbusinessmen to recover their entire investment by extracting commissions. There was no competition to enforce efficiency. Under such circumstances, the surprise is not that development banks performed badly but that they survived at all.

Notwithstanding these handicaps, development banks made the situation worse by a faulty appreciation of their role. Normally, bankers are cautious. They lend only to the wealthy who can offer safe and substantial collateral. Bankers are not ambitious: they are content charging a fixed interest even if the borrower makes a killing and multiples the investment several times. They also accept as normal the erosion of asset value by inflation.

Development banking is different: Loans are made not to those who have accumulated wealth in the past but to those who show promise to become wealthy in the future. Normal banking looks for safety in assets accumulated from the past; in development banking, possible accumulation of assets in the future is the true collateral. Thus, while in normal banking, the collateral is real and tangible, in development banking, the collateral is a dream; it is intangible. In normal banking, an interest default of more than 90 days becomes a non-performing asset. In the case of development, growth is rarely smooth; development happens in fits and starts; cash flows are subject to wild fluctuations and become negative at times.

Hence, development banks need to have a longer perspective than three months; they should show patience for years. Normal banks can afford to be myopic; development banks should take the long view.

For development banks, it is the trend line and not the current surplus that is important. As one development banker blithely explained: "When I see any risk, I take my money and run away." But that is not development banking; development banks take risks that ordinary banks will not.

As a token of their support for progress, development banks offer an interest holiday for the gestation period, and then charge a suitably adjusted flat rate of interest. That does help new enterprises a little, but only a little. Interest holiday is too crude a device to help new

enterprises that, being babies, suffer from unexpected (and periodic) teething problems.

There is some truth in the well-worn cliché that bankers lend when the borrower does not need any money, and foreclose when the borrower is in distress. Development bankers should be different; they should lend a helping hand in moments of distress, and make up for the risk they take by extracting larger returns when the borrower recovers.

For that reason, development banks should not operate on a fixed rate of interest. They should evolve a mechanism which depends on the health of the borrower. One possibility is to take a share of the profits.

However, that is highly risky. Profit-related investment is best left to venture capitalists. In risk taking, development banks fall midway between safety-conscious traditional banks and the daredevil venture capitalists. In seeking returns, they need to follow a via media — neither be inflexible with a fixed rate of interest, nor be volatile and bet on equity.

For development banks, a charge on the running costs of the firm could be that via media, specifically two of them, (a) rents which include the cost of all outsourcing of materials and services, and (b) wages. Then, a charge on the rent and wage costs of the borrowing firm, a charge levied only when the firm has a surplus to pay, could be the via media that development banks could adopt.

These two costs are linked to inflation and to national economic growth too. Hence, however low the charge on these two items, it will, in due course, overtake whatever fixed rate of interest one may consider as an alternative. In initial years, the returns from such a charge will be low; even nil. In course of time, whatever sacrifice is made in the teething (or difficult) years will always be made good — unless the firm is incurable.

An unsympathetic fixed interest burden often makes otherwise curable firms mortally ill. A flexible charge will give a breather to recover to many firms that are liable to become incurably sick in a fixed interest regime. Flexible charges reduce risks for lending banks too: Because of inflation and growth, a charge on rents and wages will sooner or later overtake any fixed rate of interest. With patience, development banks can recover their sacrifices with little risk.

In other words, development banks should think differently, and should have a long time horizon. They should acquire the expertise to assess the optimum waiting period and fix the rate of charge on wage costs and rents paid accordingly. Incidentally, this kind of charge is not only transparent; it will also make firms cost-conscious. That is an added benefit, additional safety.

If development banks charge variable returns, they will need a complementary deposit regime. Pensioners like to have constant real returns that are protected against erosion by inflation. Hence, they need returns that rise with time. Thus, development banks would do

well to devise a Pension Fund with inflation-linked returns. Then, they will have a matched programme for assets and liabilities.

Sir Arthur Lewis won the Nobel for explaining how poor countries can develop quickly by exploiting the surplus labour they have. On the same analogy, the rural areas can develop rapidly by exploiting the cheap land they have in plenty. The scheme PURA (Providing Urban amenities in Rural Areas) banks on that idea. PURA starts with the construction of a ring road linking a loop of villages. The moment the road is built, the value of land alongside increases. PURA goes further.

It runs frequent bus services on the ring road, at least once 10-15 minutes. With bus services in place, the ring road connects to large numbers of customers. That connectivity will attract many new businesses, increasing land values further. Every new business can become a magnet for yet another setting into motion a virtuous cycle, and to rapid growth and development of newer and newer businesses.

Then, a project like PURA is best funded by levying a charge on rising rents rather than depending on a relatively high fixed rate interest.

With fixed rate of interest, compounded every three months, a project like PURA may not take off at all. A more patient, a more farseeing development bank can fund a competent real estate developer and share - not his profits - but the rents he gets.

Traditional banking is lending to the real estate developer at a fixed rate of interest. Venture funding is taking a share in his profits, but development banking is the policy of placing a charge on the rents

collected. That is not normal and requires a change in the mindset, a new vision, which could give development banks a new life.

Definition of a development bank Development banks are .the institutions engaged in the promotion and development of industry, agriculture and other key sectors. In the words of A.G. Kheradjou "A development bank is like a living organism that reacts to the social-economic environment and Its success depends on reacting most aptly to that environment".

Kheradjou assigns an important task to the development banks. He feels that these banks should react to the socio-economic needs. They should satisfy the developmental needs of the economy and their success is linked to the satisfactory growth of the economy. In the views of William' Diamond" A development bank has the opportunity to promote enterprises i.e. to conceive investment proposals and to stimulate others to pursue tI1em or' itself to carry them through, from 'conception' to 'realization'. In principle, a development bank is well suited to assume this kind of role. Yet, enterprise creation is fraught with costs and risks which development bank cannot neglect.

Development banks can prudently undertake them only when they have the requisite financial strength, technical expertise and the managerial skill to bank. ", In his views, a developl1!enLbank is an institution which takes up the job of developing industrial enterprises from its inception to completion. This process involves costs as well as risks. The bank should have sufficient financial sources and expertise to promote a new unit. D.M. Mithani states that. "A development bank

may be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units. I the form of loans, underwriting, investment and guarantee operations and development in general and industrial The role of a development bank has been emphasised in this definition.

In this view a development bank aims to provide financial and promotional facilities for the overall development of a country.

Features of a development bank.

A development bank has the following features or characteristics: 1) A development bank does not accept deposits from the public like commercial banks and other financial institutions who entirely depend upon saving mobilization.

2) It is a specialized financial institution which provides medium term and long-term lending facilities.

3) It is a multipurpose financial institution. Besides providing financial help it undertakes promotional activities also. It helps an enterprises from planning to operational level.

4) It provides financial assistance to both private as well as public sector institutions.

5) The role of a development bank is of gap filler., When assistance from other sources is not sufficient then this channel helps. It does not compete with normal channels of finance.

6) Development banks primarily aim to accelerate the rate of growth. It helps industrialization specific and economic development in general 7) The objective of these banks is to serve public interest rather than earning profits.

8) Development banks react to the socio-economic needs of development.

GROWTH OF DEVELOPMENT BANKS Although development banks attracted great attention after World War II but there one insurances or such institutions even much earlier, First development bank was found in belgium in 1822 under the name of Societ a de General de Belgique with the purpose of financing and promoting industry. It was a joint stock bank which nursed funds through the sale of shares and bonds in order to finance; commercial and industrial enterprises. This new technique of banking got impetus only in 1852 when 'Credit Mobilize of France' was set up. It mobilized

resources through the sale of bonds and promissory notes and made long-term investments particularly in public utility undertakings, railways, insurance companies and banks. It set a model for similar investment banks established in Germany, Austria, Belgium, Netherlands, Italy, Spain and Switzerland. Throughout the 19th century, the Credit Mobilize provided a great appeal to all countries which wanted to develop industries on a fast pace. In 1902, Industrial Bank of Japan was established for the purpose of financing her industrial development. This bank undertook functions of an issue, a Commercial Bank and mortgage institutions. Though the bank was helpful in Financing industrialization but it could not strictly be called a development bank. World War I, European countries developed specialized institutions to provide industrial finance for reconstruction, modernization and development of war regard industries. These banks were mainly mortgage banks which extended long-term loans to industrial undertakings upon first mortgage of industrial property.

Among the important institutions were Bank of Finland Ltd., National Hungarian Industrial Mortgage Institute Ltd., and National Economic Bank of Poland. These banks were helpful in reviving the war shattered economies of these countries. In the second phase of development banking a need for financing small scale sector was recognized. The institutes created after great depression carried out the functions of capital under writing and direct subscription along with lending activities. The Industrial credit Company of Ireland and

Netherlands, company for Industrial Financing participated in share capital of industrial undertakings in addition to granting term loans.

In the next phase of development banking after World War II there was a trend to combine montage lending with underwriting and equity participation.

Some institutions developed during this period were Industrial Development Bank of Canada (1944), France Corporation for Industry Ltd. and industrial and Commercial Finance Corporation Ltd., England (1945), Industrial Finance Department of Common wealth Bank of Australia (1945). These institutions not only provided term loans to industry but also participated in the share capital of companies. The institutions in England even have the option to convert their loans into preference or equity shares. Though English and Canadian institutions could at best be described as finance corporations but that of Australia could be called a development bank because it could assist in the establishment and development of industrial undertakings. Despite the differences in the organization, Scope and methods of various institutions the main thrust of all of them was to access, those enterprises where sufficient help was not forthcoming from traditional sources. They acted essentially as gap fillers in peculiar circumstances of the pest-war years.

In the last 50 years developing countries have promoted many development thanks. These banks have been developed with special purpose in mind. They differ in ownership, organization, scope etc.

Some' are exclusively owned by government (Industrial Development Bank of Nepal, 1959, National Development Bank of Brazil, 1965) others by private interests (Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of Thailand, etc.)

Some other Banks (Summer Bank of Turkey) are meant to promote and finance government ' undertakings only, some exclusively for private enterprises while some for both. Some banks can only lend while some can lend and take equities besides underwriting. Some are concerned with entire economy while some are for specific sectors only. Some banks are regional, some are national while a few are interregional (Asian Development Bank) or international such as World Bank, International Finance Corporation, International Development Association etc. Some banks provide only local currency while some deal in both local and foreign currencies, etc.

OBJECTIVES OF DEVELOPMENT BANKS Every country felt the need to accelerate the rate of development in post world war era. Some countries were directly involved in war while many others were indirectly affected by it. There was a need for reconstructing economics at a faster speed. The existing machinery for developmental activities was not sufficient to the requirements of industry. There was a need to set up such institutions which would

take up promotional activities besides financing. In this background developmental banks were needed for the following reasons: 1. Lay Foundations for Industrialization A number of countries got independence from colonial rule. Their economies needed to be rehabilitated. Other underdeveloped and developing countries too needed to accelerate the pace of industrialization. To lay a solid foundation for growth, establishment of certain key industries such as cement, engineering, machine making, chemicals, etc. is essential. Private entrepreneurs were not forthcoming to invest in these vital' areas due to risk involved and Ibng gestation period in those industries. Moreover, it was beyond the means and capacity of private individuals to take up these projects.

They needed special facilities from institutions which could extend long-tenn help. The governments of under developed countries set up development and institutions to fill the vacuum.

2. Meet Capital Needs 1'nere was a dearth of capital needed to foster industrial growth in underdeveloped countries. Owing to the low level of income of the people there were no sufficient surpluses for capitalization. There was a need for institutions which could meet this gap between demand and supply for capital.

3. Need for Promotional Activities

Besides capital needs, underdeveloped countries suffered from lack of expertise, managerial and technical know-how. Developmental banks could take up the job of and joint sectors and provide managerial and resources and skills and of channeling them into approved fields under private auspices are needed in these countries.

4. Help Small and Medium Sectors' The large scale was, to some extent, able to meet its needs. There was a need to mitigate sufferings of small and medium size industries which form a sizeable sector of the industrial economy. Despite the important role played by these sectors they experience scarcity of capital owing to the apathy of investors to invest their savings because of their credit worthiness and profitability. There was a need for special institutions to help these sectors in playing vital role in the industrialization of developing and under developed countries.

FUNCTIONS OF DEVELOPMENT BANKS Development banks have been started with the motive of increasing the pace of industrialization. The traditional financial institutions could not take up this challenge because of their limitations. In order to help all round industrialisation development banks were made multipurpose institutions. Besides financing they were assigned promotional work also. Some important functions of these institutions are discussed as follows:

1. Financial Gap Fillers Development banks do not provide medium-tenn and long-tenn loans only but they help industrial enterprises in many other ways too. These banks subscribe to the bonds and debentures of the companies, underwrite to their shares and debentures and, guarantee the loans raised from foreign and domestic sources. They also help 'undertakings to acquire machinery from with in and outside the country.

2. Undertake Entrepreneurial Role Developing countries lack entrepreneurs who can take up the job of setting up new projects. It may be due to lack of expertise and managerial ability. Development banks were assigned the job of entrepreneurial gap filling. They undertake the task of discovering investment projects, promotion of industrial enterprises, provide technical and managerial assistance, undertaking economic and technical research, conducting surveys, feasibility studies etc. The promotional role of development bank is very significant for increasing the pace of industrialization.

3. Commercial Banking Business Development banks normally provide medium and long-term funds to industrial enterprises. The working capital needs of the units are met by commercial banks. In developing countries, commercial banks have not been able to take up this job properly. Their traditional approach in

dealing with lending proposals and assistance on securities has not helped the industry. Development banks extend financial assistance for meeting working capital needs to their loan if they fail to arrange such funds from other sources. So far as taking up of other functions of banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no uniform practice in development banks.

4. Joint Finance Another feature of development bank's operations is to take up joint financing along with other financial institutions. There may be constraints of financial resources and legal problems (prescribing maximum limits of lending) which may force banks to associate with other institutions for taking up the financing of some projects jointly.

It may also not be possible to meet all the requirements of a concern by one institution, So more than one institution may join hands. Not only in large projects but also in medium-size projects it may be desirable for a concern to have, for instance, the requirements of a foreign loan in a particular currency, met by one institution and under writing of securities met by another. In case of big projects where substantial financial assistance is needed, more institutions may form a consortium to meet their needs. The members of the consortium will undertake joint appraisal of projects and then decide the quantum of assistance to be provided by each institution.

5. Refinance Facility Development banks also extend refinance facility to the lending institutions. In this scheme there is no direct lending to the enterprise.

The lending institutions are provided funds by development banks against loans extended' to industrial concerns. In this way the institutions which provide funds to units are refinanced by development banks. In India, Industrial Development Bank of India provides reliance against ('term loans granted to industrial 'concerns by state financial corporations. commercial banks and state co-operative banks.

6. Credit Guarantee The small scale sector is not getting proper financial facilities due to the clement of risk since these units do not have sufficient securities to offer for loans, lending institutions are hesitant to extend them loans.

To overcome this difficulty many countries including India and Japan have devised credit guarantee scheme and credit insurance scheme. In India, credit guarantee scheme was introduced in 1960 with the object of enlarging the supply of institutional credit to small industrial units by granting a degree of protection to lending institutions against possible losses in respect of such advances. In Japan besides credit guarantee, insurance is also provided. These schemes help small scale concerns to avail loan facilities without hesitation.

7. Underwriting of Securities Development banks acquire securities of industrial units through either direct subscribing or underwriting or both. The securities may also be acquired through promotion work or by converting loans into equity shares or preference shares. So development banks may build portfolios of industrial stocks and bonds. These banks do not hold these securities on a permanent basis. They try to disinvest in these securities in a systematic way which should not influence market prices of these securities and also should not lose managerial control of the units.

Development banks have become world wide phenomena. Their functions depend upon the requirements of the economy and the state of development of the country. They have become well recognized segments of financial market. They are playing an important role in the promotion of industries in developing and underdeveloped countries.

LENDING

PROCEDURES

OF

DEVELOPMENT

BANKS

OPERATIONAL ACTIVITIES) Development banks follow a procedure for evaluating a proposal for a project. The basic objective is to check whether the applicant fulfils various conditions prescribed by the lending institution and the project is viable. The acceptance of a wrong proposal will result in the wastage of scarce resources. These banks adopt the following procedure for lending:

1. Project Appraisal and Eligibility of Applicant Every financial institution serves a particular area of activity or there are certain limits prescribed beyond which they cannot go. Before processing the application, it is important to find out whether the applicant is eligible under the norms of the institution or not. The second aspect which is looked into is to determine whether the enterprise has fulfilled various conditions prescribed by the government. In case some license is required from the government. It should have been taken or an assurance is received from the licensing authority. After satisfying these preliminary issues the project is appraised by a team of technical financial and economic officers of the institutions from various discussions with the promoters and clarifications sought on various points. The bank institution considers financial assistance in the light of (I) Guidelines for assistance to industries issued by the government or others concerned from time to time (ii) Guidelines issued by the bank (iii) Policy decisions of the Board of Directors of the bank.

2. Technical Appraisal A technical appraisal involves the study of: 1) Feasibility and suitability of technical process in Indian conditions.

2) Location, of the project in relation to the availability of raw materials, power: water. labour, fuel, transport, communication facilities and market for finished products.

3) The scale of operations and its suitability for the planned project.

4) The technical soundness of the projects.

5) Sources of purchasing plant and machinery and the reputation of suppliers. etc.

6) Arrangement for the disposal of factory affluent and use of bye products, if any.

7) The estimated cost of the project and probable selling price of the product.

8) The programme for completing the project.

9) The sources of supplying various inputs and marketing arrangements.

10)

Details of any technical collaboration and its practical

aspects. The technical appraisal determines the suitability of the project.

3. Economic Viability The economic appraisal will consider the national and industrial priorities of the project export potential of the product employment potential, study of market.

4. Assessing Commercial Aspects

The examination of commercial aspects relates to the arrangements for the purchase of raw materials and sale of finished products. If the concern has some arrangement for sale then the position of the party should be assessed.

5. Financial Feasibility The financial feasibility of a new and an existing concern will be assessed differently. The assessment for a new concern will involve: 1) The needs for fixed assets, working capital and preliminary expenses will be estimated to find out its needs.

2) The financing plans will be studied in relation to capital structure, promoters' contribution, debt-equity ratio.

3) Projected cash flow statements both during the construction and .operation periods 4) Projected profitability and the like dividend in near future.

If a project is already in operation and is undertaking expansion or diversification, the financial feasibility will be different. The analysis of existing capital structure, contribution of owners, debt-equity ratio, past financial performance results shown by profit and loss accounts and balance sheets, the sources of raising funds, likely needs .of the concern, future debt-equity ratio (after extending financial help), debt service coverage, internal rate .of return, in the financial position of the concern and viability for

6. Managerial Competence The success .of a concern depends up on the competence of management. Proper application of various policies will determine the Success of an enterprise. A lending institution would see the background, qualifications, business experience of promoters and other persons associated with management.

7. National Contribution Besides commercial profitability, national contribution .of the project is also taken into account. The role of the project in the national economy and its benefits to the society in the form of good quality products, reasonable prices, employment generation, helpful in social infrastructure etc. should be assessed. Development banks aim at the over all welfare of the society.

8. Balancing of Various Factors Various factors should be balanced against each other. The circumstances .of the individual project will help in weighing various factors. Some factors may be strong as their in-depth analysis should be avoided. In case a project is profitable, there will be no need to assess cash flow. Weaknesses located in certain areas may be .off set by the good points in the .other. An experienced management and sound economic outlook may compensate some weakness in financial positions. The responsibility of lending bank lies in balancing judiciously different considerations for arriving at a consensus.

9. Loan Sanction After the appraisal report on the project is prepared by the bank's officers, it is placed before the advisory committee consisting of experts drawn from various fields of the particular industry. If the advisory committee is satisfied tile proposal then it recommends the case to the Managing Director or board of Directors along with its own report. When the assistance is sanctioned hen a letter to this effect is issued to the pay giving details of conditions.

10. Loan Disbursement The loan is disbursed after the execution of loan agreement. The execution of documents of security or guarantee etc. should precede the disbursement of loan. In case some property is pledged to the bank then title deeds of such property are properly scrutinized. The fulfillment of various conditions proceeding to disbursement will determine the time of paying the money to the party.

11. Follow up The job of a lending bank does noted by disbursing the assistance. It has first to see whether the construction .of the project is as per schedule decided earlier. In case some delay is taking place in executing the plans then the reasons for it should be determined. Later

during operations, the result should be properly followed. It should be seen whether the revenue earned by the concern will be sufficient to meet its obligations or not so a proper follow up by the bank will enable it to follow the progress of the unit.

DEVELOPMENT BANKING IN INDIA The foreign rulers in India did not take much interest in the industrial development of the country. They were interested to take raw materials to England and bring back finished goods to India. The government did not show any interest for securing up institutions needed for industrial financing. The “recommendation for setting up industrial financing institutions was made in 1931 by Central Banking Enquiry Committee but no concrete steps were taken. In 1949, Reserve Bank had undertaken a detailed study to find out the need for specialized institutions. It was in 1948 that the first development bank i.e. Industrial Finance Corporation of India (IFCI) was established.

IFCI was assigned the role of a gap-filler which implied that it was not expected to compete with the existing channels of industrial finance. It was expected to provide medium and long-term credit to industrial

concerns only when they could not raise sufficient finances by raising capital or normal banking accommodation. In view of the vast size of the country and needs of the economy it was decided 10 set up regional development banks to cater to the needs of the small and medium enterprises. In 1951, Parliament passed State Financial Corporation Act. Under this Act state governments could establish financial corporations for their respective regions. At present there are 18 State Financial Corporations (SFC's) in India.

The IFCI and state financial corporations served only a limited purpose. There was a need for dynamic institutions which could operate

as

true

development

agencies.

National

Industrial

Development Corporation (NIDC) was established in 1954 with the objective of promoting industries which could not serve the ambitious role assigned to it and soon turned to be a financing agency restricting itself to modernization and rehabilitation of and jute textile industries.

The Industrial Credit and Investment Corporation of India (ICICI) were established in 1955 as a Joint Stock Company. ICICI was supported by Government of India, World Bank, Common wealth Development Finance Corporation and other, foreign institutions. It provides term loans and takes an active part in the underwriting of and direct investments in the shares of industrial units. Though ICICI was established in private sector but its pattern of shareholding and methods of raising funds gives it the characteristic of a public sector financial institution. .

Another institution, Refinance Corporation for Industry Ltd. (RCI) was set up in 1958 by Reserve’ Bank of India, LIC and Commercial Banks.

The purpose of RCI was to provide refinance to commercial banks and SFC's against term loans granted by them to industrial concerns in private sector. In 1964, Industrial Development Bank of India (IOBI) was set up as an apex institution in the area of industrial finance, RCI was merged with IDBI. IDBI was a wholly owned subsidiary of RBI and was expected to co-ordinate the activities of the institutions engaged in financing, promoting or developing industry.

However, it is no longer a wholly owned subsidiary of the Reserve Bank of India. Recently, it made a public issue of shares to increase its capital. In order to promote industries in the slate another type of institutions, namely, the State Industrial Development Corporations (SIDC's) were established in the sixties to promote medium scale industrial units. The state owned corporations have promoted a number of projects in the joint sector and assisted sector. At present there are 28 SIDC's in the country. The State Small Industries Development Corporations (SSIDC's) were also set up to cater to the needs of industry at state level. These corporations manage industrial estates, supply raw materials, run common service facilities and supply machinery on hire purchase basis. Some states have established their own institutions.

A number of other institutions also participate in industrial financing.

The Unit Trust of India (UTI) established in 1964, Life Insurance

Corporation of India (1956) and General Insurance Corporation of India (GIC) set up in 1973 also finance industrial activities at all India level. Some more units have been set up to provide help in specific areas such as rehabilitation of sick units, export finance, agriculture and rural development. Industrial Reconstruction Corporation of India Ltd. (RCI)' was set up in 1971 for the rehabilitation of sick units. In 1982 the Export-Import Bank of India (Exim Bank) was established to provide financial assistance to exporters and importers. In order to meet credit needs of agriculture and rural sector, National' Bank for Agriculture and Rural Development (NABARD) was set up in 1982. It is responsible for short term, medium term and long-term financing of agriculture and allied activities. The institutions such as Film Finance Corporation, Tea Plantation Finance Scheme, Shipping Development Fund,

Newspaper

Finance

Corporation,

Handloom

Finance

Corporation, Housing Development Finance Corporation also provide financial various areas.

PROMOTIONAL ROLE OF DEVELOPMENT BANKS IN INDIA The pace of development cannot be accelerated by providing financial assistance alone. There are factors which inhibit industrialization of an underdeveloped country. It is essential to make a correct diagnosis of those factors and plan things accordingly. The growth potential of different areas, the availability of natural resources, demand conditions, infrastructure facilities, etc. should be taken into account

before deciding the pattern .of industrialization of various places. The task of identification of growth potentialities and preparation of feasibility studies is not an easy task. It requires huge finances and technical expertise which is beyond the competence of entrepreneurs of under-developed countries. It is in this area where development banks can play crucial role. In addition to providing the traditional role of providing financial assistance, development banks in India are undertaking promotional role also. Some of the areas where these banks are participating are: (1) Surveys of Backward Areas Under the Industrial Development Bank of India, development institutions conducted industrial potential surveys in June, 1970 with a view to identify specific project ideas for implementation in those areas. These surveys studied the availability of resources, demand potential and availability of infrastructures facilities. In 1982, Government .of India identified 83 districts in the country where no medium or large scale industrial units existed. IOBI jointly with IFCI and ICICI launched a programme for identifying industrial opportunities and needs for. These project ideas were further screened and developed for arriving at some firm decision about their implementation. IDBI conducted feasibility studies and cleared projects for implementation.

(2) Inter-Institutional Groups (IIG's)

With a view to provide a forum to the national and state financial institutions, IDBI constituted 23 IIG's in various states and union territories These groups aimed to help accelerate the process of industrial development in a state with particular emphasis on less developed areas, An attempt was also made to evolve suitable strategies for industrial development within the framework of national and state policies and local requirements. IDBI has been constantly reviewing the functioning of these groups so as to evolve suitable measures for malting them effective.

(3) Establishing Technical Consultancy Organizations (TCO's), There is a need for technical consultancy at the time of selling up a new unit and at the time of making change like modernization, expansion, diversification, etc. The small and medium scale units cannot pay high fees of consultancy agencies. With a view to help these entrepreneurs, financial institutions set up 17 consultancy organization for providing consultancy at nominal rates. These organizations provide consultancy services to small and medium entrepreneurs, commercial banks, state-level financial institutions and other agencies engaged in industrial promotion and development. The consultancy services covered so far include market surveys, preparation of feasibility and project reports, entrepreneur ship development programmes, diagnostic studies and rehabilitation schemes for sick units, services for implementing projects on turn-key basis. TCO's have been giving thrust to modernization small and

medium scale sectors also. In this respect they have undertaken in depth studies of specific sub- sectors of small scale industry so as to identify their modernization needs and prepare modernization programmes.

(4) Entrepreneurial Development Programmes (EPP's) Industrial development of a country is directly influenced by the quality of entrepreneurs it has produced, with a view to impart requisite training to entrepreneurs. IDBI has been encouraging entrepreneurial development programmes. It has mainly used the agency of TCO's for drawing up and conducting these programmes to cater to the needs of entrepreneurs from small and medium scale sectors. IDBI meets up to 50 per cent of the cost of such programmes and the balance cost is met by state governments or other sponsoring institutions.

Development banks have also been trying to strengthen the infrastructure

for

programmes.

The

conducting main

entrepreneurial

thrust

has

been

to

development institutionalize

entrepreneurship activities, generating, sharpening and sharing knowledge

through

research

documentation

and

publication,

developing a cadre of professionals. A major step in this area was the setting up of Entrepreneurship Development Institute of India, Ahmedabad in 1983. The objective of this institution was to train EPP

trainers, providing resource inputs running model development programmes, conducting.

(5) Technological Improvements Development banks, especially IDBI have been helping small and medium sectors in developing and upgrading of their technology so that they arc able to match the pace of development. These banks also encourage entrepreneurs to adopt sophisticated technology with the help of academic and research institutes and also to encourage entrepreneurship

among

science

and

technology

graduates.

Development banks have done a good job in promoting industrial activities in various parts of the country. The development of backward areas is a gigantic task in India. Private entrepreneurs cannot measure to this task of their own. So development banks are expected to play an important role in this regard. These banks should help in setting up new projects by associating private entrepreneurs so that their management is left to them. After a particular stage of a project the development institutions should transfer the responsibility to private sector and same resource should be used to develop more units.

Development banks, in co-operation with private sector, can certainly help in accelerating the pace of industrial development.

Role of development banks in financial system Financial institutions provide means and mechanism of transferring resources from those who have an excess of income over expenditure to those who can make productive use of the same. The commercial banks and investment institutions mobilize savings of people and channel them into productive uses. Financial institutions provide all type of assistant required infrastructural facilities Institutions e p economic persons who can take the development in the following ways.

1. Providing Funds:The underdeveloped countries have low levels of capital formation.

Due to low incomes, people are not able to save sufficient funds which are needed for sensing up new units and also for expansion diversification and modernization of existing units. The persons who have the capability of starting a business but does not have requisite help approach

to financial institutions for help. These institutions

help large number of persons for taking up some industrial activity.

The addition of new industrial units and increasing the activities of existing units will certainly help in accelerating the pace of economic development. Financial institutions have large inventible funds which are used for productive purposes 2. Infrastructural Facilities

Economic development of a country is linked to the availability of infrastructural facilities. There is a need for roads, water, sewerage, communication facilities, electricity etc. Financial institutions prepare their investment policies by keeping national priorities in miner-The institutions invest in those aim is which can help in increasing the development of the country. Indian industry and agriculture is facing acute shortage of electricity. All India" institutions are giving priority to invest funds in projects generating electricity. These investments will

certainly

increase

the

availability

of

electricity.

Small

entrepreneurs cannot spare funds for creating infrastructural facilities.

To overcome this problem, institutions at state level are developing industrial estates and provide sheds, having all facilities at easy installments. So financial institutions are helping in the creation of all those facilities which are essential for the development of a country 3. Promotional Activities An entrepreneur faces many problems while setting up a new unit. One has to undertake a feasibility report, prepare project report, complete registration formalities, seek approval from various agencies etc. All these things require time, money and energy. Some people are not able to undertake this exercise or some do not even take initiative. Financial institutions are the expense and manpower resources for undertaking the exercise of starting a new unit. So these institutions take up this work on behalf of entrepreneurs. Some units may be set up jointly with some financial institutions and in that case the formalities are completed collectively. Some units may not have come up had they

not received promotional help from financial institutions. The promotional role of financial institutions is helpful in increasing the development of a country.

4. Development of Backward Areas Some areas remain neglected because facilities needed for setting up new units are not available here. The entrepreneurs set up new units at those places which are already developed. It causes imbalance in economic development of some areas. In order to help the development of backward areas, financial institutions provide special assistance to entrepreneurs for setting up new units in these areas.

IDBI, IFCI, ICICI give priority in giving assistance to units set up in backward areas and even charge lower interest rates on lending. Such efforts certainly encourage entrepreneurs to set up new units in backward areas. The industrial units in these areas improve basic amenities and create employment opportunities. These measures will certainly help in increasing the economic development of backward areas.

5. Planned Development Financial institutions help in planned development of the economy.

Different institutions earmark their spheres of activities so that every business activity is helped. Some institutions like SIDBI, SFCI's especially help small scale sector while IFCI and SIDC's finance large scale sector or extend loans above a certain limit. Some institutions

help different segments like foreign trade, tourism etc. In this way financial institutions devise their roles and help the development in their own way. Financial institutions also follow the development priorities set by central and state governments. They give preference to those industrial activities which have been specified in industrial policy statements and in five year plans. Financial institutions help in the overall development of the country 6. Accelerating Industrialization Economic development of a country is linked to the level of industrialization there. The setting up of more industrial units will generate direct and indirect employment, make available goods and services in the country and help in increasing the standard of living.

Financial institutions provide requisite financial, managerial, technical help for setting up new units. In some areas private entrepreneurs do not want to risk their funds or gestation period His long but the industries are needed for the development of the area. Financial institutions provide sufficient funds for their development. Since 1947, financial institutions have played a key role in accelerating the pace of industrialization. The country has progressed in almost all areas of economic development.

7. Employment Generation Financial institutions have helped both Direct and indirect employment generation. They have employed many persons to man their offices.

Besides office staff, institutions need the services of experts which help them in finalizing lending proposals. These institutions help in creating employment by financing new and existing industrial units.

They also help in creating employment opportunities in backward areas by encouraging the setting up of units in those areas, Thus financial institutions have helped in creating new and better job opportunities.

ALL INDIA DEVELPOMENTS BANKS In India, various financial institutions were set up after independence only. The Government of India has taken sleeps to set up institutions which assist various sectors of the economy. At present the country has 12 institutions at the national level and 46 at the state level. The All India Financial Institutions comprise six: All-India Development Banks, namely: Industrial Development Bank of India, Industrial Finance Corporation of India Ltd., Industrial Credit and Investment Corporation of India Ltd., Small Industries Development Investment Bank of India, Industrial Reconstruction Bank of India and SCICI Ltd. Specialized institutions comprise of Risk Capital and Technology

Finance Corporation Ltd., Technology Development and Information Company of India Ltd. and Tourism Finance Corporation of India Ltd. There are three investment institutions: Life Insurance Corporation of India Ltd., Unit Trust of India and General Insurance Corporation of India. At state level there are 18 State Finance Corporations and 18 state finance corporations and 28 state industry development corporations.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI) At the same time raw industrial units were to be set up for industrializing the country. Government of India came forward to set up the Industrial Finance Corporation of India (IFCI) in July 1948 under a Special Act. The Industrial Development Bank of India, scheduled banks, insurance companies, investment trusts and cooperative banks are the shareholders of IFCI. The Government of India has guaranteed the repayment of capital and the payment of a minimum annual dividend. Since July I, 1993, the corporation has been converted into a company and it has been given the status of a Ltd. Company with the name Industrial Finance Corporations of India Ltd. IFCI has got itself registered with Companies Act, 1956. Before July I, 1993, general public was not permitted to hold shares of IFCI, only Government of India, RBI, Scheduled Banks, Insurance Companies and Co-operative Societies were holding the shares of IFCI.

Management of IFCI The corporation has 13 members Board of Directors, including Chairman. The Chairman is appointed by Government of India after consulting Industrial Development Bank of India. He works on a whole time basis and has tenure of 3 years. Out of the 12 directors, four are nominated by the IDBI, two by scheduled banks, two by cooperative banks and two by other financial institutions like insurance companies, investment trusts, etc. IDBI normally nominates three outside persons as directors who are experts in the fields of industry, labour and economics, the fourth nominee is the Central Manager of IDBI. The Board meets once in a month. It frames policies by keeping in view the interests of industry, commerce and general public. The Board acts as per the instructions received from the government and IDBI. The Central Government reserves the power up to the Board and appoints a new one in its place.

The Board is assisted by the Central Committee which consists of the chairman, two directors elected by nominated directors and the Board of directors elected by the elected directors. This committee assists the Board in discharge of its functions. It .can act on all matters under the competence of the Board, So this committee practically transacts the entire business of the corporation. IFCI also has Standing Advisory Committees one each for textile, sugar, jute, hotels, engineering and

chemical processes and allied industries. The experts in different fields appointed on Advisory Committees. The chairman is the ex-officio member of all Advisory Committees. All applications for assistance are first discussed by Advisory Committees before they go to Central Committees.

Financial Resources of IFCI The financial resources of the corporation consist of share capital bonds and debentures and borrowings.' a) Share Capital:The IFCI was set up with an authorised capital of Rs. 10crores consisting of 20,000 shares of Rs. 5,000 each. This capital was later on increased at different times and by March, 2003 it was Rs. 1068 crores. The capital was subscribed by Central Government, Reserve Bank of India, scheduled banks, Life Insurance Corporation, investment

trusts,

co-operative

banks

are

other

financial

institutions. In 1964, the share capital held by the central government and RBI was transferred to the Industrial Development Bank. The corporation thus became a subsidiary of IDBI. The central government had guaranteed the shares of the corporation both for repayment of the principal and for the payment of a dividend at 2.5 per cent on the original issue and 4 per cent on the additional issues. However, since July I, 1993IFC has been converted into a limited company.

b) Bonds and Debentures:The corporation is authorized to issue bonds and debentures to supplement its resources but these should not exceed ten times of paid-up capital and reserve fund. The bonds and debentures stood at a figure of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on 31st March 2003. The bonds and debentures are also guaranteed by the central government for both payment of interest at such rates as may be fixed at the time the bonds and debentures are issued. c) Borrowings:The corporation is authorized to borrow from government IDBI and financial institutions. Its borrowings from IDBI and Govt. of India were Rs. 975.6 crore on March 31, 2003. Total assets of IFCI as on March 31, 2003 aggregated Rs. 22866 crore including investments of Rs. 3820.3 crore and loans and advances of Rs. 13212.8crore.

Priority Criterion for Investments IFCI plans its financing policies as per the priorities set by the government through Industrial Policy Statements. The Industries which are in high priority are given more importance. Following considerations are taken into account while selecting a financial proposal: i.

Importance of the project for national economy.

ii.

Employment-oriented and labour-intensive nature of the project.

iii.

Export potential of the unit,

iv.

Projects located in backward areas or 'no industry districts.

v.

Projects initiated by new or technician entrepreneurs.

vi.

Projects which will harness indigellously available technology, technical know how and raw materials.

vii.

Projects which will help rural areas.

viii.

Projects which help in conserving energy or which manufacture renewable energy systems or devices.

ix.

Projects to be set up in co-operative sector.

Eligibility for Assistance under Direct Financing Following types of industrial concerns are eligible for direct finance under IFCI Act, amended from time to time: i.

Limited companies incorporated in India, in private, public or joint Sector

ii.

Co-operative societies registered in India, which are engaged or propose to engage in any of the activities related to a. Manufacture, preservation or processing of goods b. Shipping c. Mining d. Hotel industry e. Generation or distribution of electricity or any other form of power f. Transport of passengers or goods.

g. Maintenance, repair or servicing of machinery or vehicles. h. Assembling, repairing or packing of articles. i. Development of contiguous area of land as an industrial estate. j. Fishing or providing shore facilities for fishing. k. Providing special or technical knowledge or other services for promotion of industrial growth. l. Research and Development of any process or product in relation to any of the matters aforesaid.

Purpose of Direct Assistance IFCI provides direct financial assistance for the following causes: a. Setting up of new industrial projects. b. Expansion of existing units or for diversification into new lines of activity. c. For renovation and modernization of existing units.

IFCI does not ordinarily provide funds for working capital purpose as this function is left to commercial banks. It does not allow utilizing its assistance for meeting existing liabilities of the industrial concerns.

Similarly, foreign currency loans can be used for purchasing capital goods only and not of raw material.

FUNCTIONS OF IFCI IFCI is authorized to render financial assistance in one or more of the following forms: i.

Granting loans or advances to or subscribing to debentures of industrial concerns repayable within 25 years. Also it can convert part of such loans or debentures into equity share capital at its option.

ii.

Underwriting the issue of industrial securities i.e. shares, stock, bonds, 0r debentures to be disposed off within 7 years.

iii.

Subscribing directly to the shares and debentures of public limited companies.

iv.

Guaranteeing of deferred payments for the purchase of capital goods from abroad or within India.

v.

Guaranteeing of loans raised by industrial concerns from scheduled balls or state co-operative banks.

vi.

Acting as an agent of the Central Government or the World Bank in respect of loans sanctioned to the industrial concerns.

IFCI provides financial assistance to eligible industrial concerns regardless of their size. However, now-a-days, it entertains applications from those industrial concerns whose project cost is about Rs. 2 crores because upto project cost of Rs. 2 crores various state level institutions (such as Financial Corporations, SIDCs and banks) are expected to meet the financial requirements of viable concerns.

While approving a loan application, IFCI gives due consideration to the feasibility of the project, its importance to the nation, development of the backward areas, social and economic viability, etc. The most of the assistance sanctioned by IFCI has gone to industries of national priority such as fertilizers, cement, power generation, paper, industrial machinery etc. The corporation is giving a special consideration to the less developed areas and assistance to them has been stepped up. It has sanctioned nearly 49 per cent of its assistance for projects in backward districts. The corporation has recently been participating in soft loan schemes under which loans on confessional rates are given to units in selected industries. Such assistance is given for modernization, replacement and renovation of plant and equipment.

IFCI introduced a scheme for sick units also. The scheme was for the revival of sick units in the tiny and small scale sectors. Another scheme was framed for the self-employment of unemployed young persons. The corporation has diversified not merchant banking also.

Financing of leasing and hire purchase companies, hospitals, equipment leasing etc. were the other new activities of the corporation in the last few years.

Promotional Activities The IFCI has been playing very important role as a financial institution in providing financial assistance to eligible industrial concerns.

However, no less important is its promotional role whereby it has been creating industrial opportunities also. It has been taking up directly as

well as indirectly; such steps and activities are regarded necessary for the acceleration of the process of industrialization in the country.

The promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure for the promotion and growth of industries, or in the provision of the much needed guidance in project intensification, formulation, implementation and operation, etc. to the new tiny, small-scale or medium scale entrepreneurs or in the efforts at improving the productivity of human and material resources. (a) Development of Backward Areas: - The main thrust of all financial institutions has been to remover regional imbalances by promoting industrialization of backward areas. IFCI introduce a scheme of confessional finance for projects set up in backward areas. The backward-districts were divided into three categories depending upon the state of development there. All these categories were eligible for concessional finance. Nearly 50 per cent of total lending of IFCI has been to develop backward areas. (b) Promotional

Schemes:-

IFCI

has

been

operating

six

promotional schemes with the object of helping entrepreneurs to set up new units, broadening the entrepreneurial base, encouraging the adoption of new technology, tackling 'the problem of sickness and promoting opportunities for self development and . self employment of unemployed persons etc.

These schemes are as such:

a. Subsidy for Adopting Indigenous Technology:- The projects which use indigenously developed technology are entitled to a concession in the form of subsidy covering interest payments due to IFCI during the first three years of operations, extendable to five years. b. Meeting Cost of Market Studies: - The entrepreneurs setting up medium sized industrial projects for the first time can avail 75 per cent of the cost of market survey/study subject to a ceiling of Rs. 15,000 provided it is handled by Technical Consultancy Organization. . c. Meeting Cost of Feasibility Studies: - IFCI provides subsidy for the fees paid for consultancy assignments relating to feasibility, project reports etc. The amount allowable is 80 per cent of the fees of Rs. 7,500 whichever is less. This limit is Rs. 8,500 or 100 per cent of the total fees whichever is less for handicapped or scheduled caste persons. d. Promoting Small Scale and Ancillary Industries: - For the identification of products suitable for ancillary or further processing in small scale sector and preparation of feasibility reports a subsidy of

Rs.0.1 million per

annum for technical consultancy organization is allowed. e. Revival of Sick Units: - There is a subsidy to the extent of 80 per cent or Rs. 5,000 (whichever is less) for the fees charged by a technical consultancy organization for

carrying out a diagnostic study or for the implementation of rehabilitation programme. This facility is allowed to tiny units or units in small scale sector.' f. Self-development and Self employment Scheme: - An unemployed person in the age group of 21 to 35 years may be allowed a soft loan for providing margin money for getting a loan from a bank or a financial institution.

The soft loan at interest free rate in first year and has confessional interest later on. The amount available under this scheme is 25% of margin money subject to Rs. 5000.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) Industrial Development Bank of India was set up to accelerate the development of the country. A number of financial institutions came into existence after independence and were catering to a variety of needs of the industry. There was a lack of co-ordinating different institutions and it led to overlapping and duplication in their efforts: At the same time some gigantic projects of national importance were not getting required financial assistance. It was in response to this need that the Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary of Reserve Bank of India. The bank was to act as an apex institution co-coordinating functions of all the financial institutions into a single integrated movement of development banking and supplementing their resources for industrial financing and as an agency for providing financial suppon to all worthwhile projects of national importance whose access to existing institutional sources is limited.

The ownership of IDBI was transferred to Central Government on February 16, 1976. It is now working as state owned autonomous corporation. Besides acting as a reserviour on which other financial institutions can draw, IDBI provides direct financial assistance to industrial units to bridge the gap between supply and demand of medium and long term finance.

The IDBI Act was amended, in 1994, to permit public ownership upto 49 percent., In 1995, it raised more than Rs. 20 billion through its first initial public offer (IPO) of equity. It reduced the stake of the

government to 72.14 percent. Further, in June 2000, a pan of the equity shareholding of the government was convened into preference share capital which was redeemed in March 2001, resulting into further reduction of government stake to 58.47 percent.

Financial Resources of IDBI a. Share Capital. IDBI was formed with an authorized capital of Rs. 50 crores which was raised a number of times. In October, 1994, Government of India's amended certain provisions of IDBI Act under which its authorised capital has been increased to Rs. 2000 crore which can further be increased to Rs. 5000 crore. A pan of equity capital (Rs. 253 crore) has been convened into preference capital. IDBI has been permitted to issue equity capital to public with a stipulation that at no time Government holding will be less than 51 per cent. As on March 31,2003 the paid up capital of IDBI stood at Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore. b. Borrowings. The bank is authorised to raise its resources through borrowings from Government of India, Reserve Bank of India and other fmancia1 institutions. On March 31, 2003, the bank had borrowings of Rs. 41798.0 crore by way of bonds and debentures, deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from Government of India and other sources.

Management of IDBI

The management of IDBI is vested in a Board of Directors consisting of 22 persons including a full-time Chairman-cum-Managing Director appointed by the Central Government. The other members of the Board comprise of a representative of the RBI, a representative each of the all-India financial institutions, two officials of the Central Government, three representative search of he public sector banks and SFCs and five representatives having special knowledge and experience of industry; The .Board has constituted an Executive Committee consisting of ten directors. Ad-hoc committees of Advisers are also constituted to advise it on. specific projects.

Recently, Government of India ha9 sought to repeal the IDBI Act. 1964. by introducing The Industrial Development Bank.(Transfer of Undertaking and Repeal) Bill 2002 is Lok Sabha. The Bill is aimed at convening IDBI into a company under the Companies Act as also enabling it to undertake banking business.

Functions of IDBI The main functions of IDBI are as follows: 1) To co-ordinate the activities of other institutions providing term finance to industry and to act as an apex institution.

2) To provide refinance to financial institutions granting medium and long-term loans to industry.

3) To provide refinance to scheduled banks or co-operative banks.

4) To provide refinance for export credit granted by banks and financial institutions

5) To provide technical and administrative assistance for promotion management or growth of industry.

6) To undertake market surveys and techno-economic studies for the development of industry.

7) To grant direct loans and advances to industrial concerns. IDBI is empowered to finance all types of industrial concerns engaged or proposed to be engaged in the manufacture, preservation or processing of goods, mining, hotel, industry, fishing, shipping transport, generation or distribution of power, etc. The bank can also assist concerns engaged in the setting up of industrial estates or research and development of any process or product or in providing technical knowledge for the promotion of industries. Until recently IDBI also functioned as Expon Bank of the country.

8) To render financial assistance to industrial concerns. IDBI operates various schemes of assistance. e.g., Direct Assistance Scheme. Soft Loans Scheme. Technical Development Fund Scheme, Refinance Industrial Loans Scheme. Bill Rediscounting Scheme. Seed Capital Assistance Scheme. Overseas Investment Finance Scheme. Development Assistance Fund, etc.

OPERATIONS OF IDBI Since its inception in 1964, IDBI has extended its operations to various areas of industrial sector. It provides direct as well as indirect financial assistance for increasing the pace of industrial development.

Aggregate assistance sanctioned by March. 2003 amounted to Rs. 223932.1 crore and disbursements amounted to Rs. 168166.5crores.

The operation 1. Direct Assistance Direct financial assistance includes project finance assistal1ce, softloan assitace, assistance under technical development fund scheme and rehabilitation assistance for sick units. Various schemes under direct assistance are discussed as follows:-

1) Project Finance Assistance: - Under project finance scheme. the IDBI extends direct assistance to industrial concerns in the form of : a. Project loans b. Subscription to and/or underwriting of issues of shares and debentures. c. Guarantee for loans and deferred payments.

Financial assistance under this scheme is granted for setting up new projects as well as for expansion and Modernization renovation of existing units. IDBI normally extends assistance to public limited companies in the private, public, joint sector and co-operative sectors.

Bank's assistance is sought for projects involving large capital outlay or sophisticated technology. Bank gives preference to units set up by

new entrepreneurs or projects located in backward areas. The repayment period is settled by looking at the capacity of the enterprise.

Normally, repayment is spread over a period of 8-10 years with a grace period of 2-3 years. These loans are usually secured by a first legal mortgage of the immovable properties of the borrowing concern and floating charge on its other assets, subject to a first charge on raw materials, stocks, etc. for working capital borrowings.

The bank does not hold shares & debentures, taken over under legal obligation for underwriting or taken over directly, for a longer period.

As a matter of policy, the bank places major emphasis on the longterm economic viability of the projects rather than on the immediate sale ability of their products. In the case of assistance in the form of guarantees of loans and deferred payments, the bank charges a guarantee commission of 1 per cent in normal cases.

There has been a constant increase in direct assistance. Upto March, 2003 cumulative assistance in the form of direct loans to industrial concerns and .subscriptions came to Rs. 102601.8 crore. Most of this assistance was in priority sector industries such as basic industrial chemicals, cement, fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and industrial machinery.

IDBI introduced special schemes for industrialization of backward areas. In a scheme introduced in 1969 it offered concessional rates of interest, longer grace periods for repayments, etc. These concessions were available to small and medium units having project cost upto Rs. 3 crores. In collaboration With IFCI and ICICI, the bank is also giving

concessional rupee assistance upto Rs. 2 crores and underwriting assistance up to Rs.l crore. The assistance to backward areas has also been increasing.

To achieve balanced regional growth and accelerate industrial development IDBI initiated promotion and development activities. In co-operation with other institutions the bank conducted industrial potential surveys in a number of states.

2) Soft Loan Scheme IDBI introduced in 1976 the soft loan scheme to provide financial assistance to product units in selected industries viz., cement, cotton, textiles. jute, sugar and certain engineering industries to modernize.

Financial replace and renovate their plant and equipment so as to achieve higher and more economic levels of production. This scheme is implemented by IDBI with .financial participation by IFCI and ICICI. The basic criteria for assistance under the scheme are the weakness or non-viability of industrial concerns arising out of mechanical obsolescence. Industrial concerns which are not in a position 10 bear the normal lending rate of interest of the financial institutions are provided on accessional assistance to the full extent of the loan. In other cases the limit of concessional assistance is 66 per cent of the loan. Assistance under this scheme is based on the requirements of individual cases. As such, no minimum or maximum limit of'1m!\11tas been prescribed. The repayment period extends up to 15 years with a moratorium period of 3-5 years. The loans under his

scheme are secured as a first charge on fixed assets. The bank may insist on personal or other guarantees also.

This scheme was modified in Jan. 1984 and was named as Soft Loan Scheme for modernization so as to cover deserving units in all industries. Under this scheme assist3nce is available to production units for financing modernization especially to upgrade technology, Export orientation, import substitution, Energy saving, prevention of pollution, recycling of wastes, etc. The performance under this scheme has not been encouraging because of convertibility clause.

3) Technical Development Fund Scheme The Government of India introduced the Technical Development Fund (TDF) Scheme in March. 1976 for issue of import licenses for import of small value balancing equipment, technical know how, foreign consultancy services and drawings and designs by industrial units to enable them to achieve fuller capacity utilization, technological up gradation and higher exports. Some industrial units found it difficult to take advantage of the import license issued under this scheme for want of rupee resources. In January, 1977, IDBI introduced a scheme for providing matching rupee loans to industrial units to enable them to utilize import licenses issued under TDF scheme. The scheme which was started for six specified industries

now covers all industries as also import of any other input needed by the industrial units for improving export capabilities. This scheme of the bank has not been successful as only one-fourth of the units sought this assistance.

Rehabilitation Assistance to Sick Units The problem of growing industrial sickness in India is a cause of worry. It adversely affects production, employment, generation of income and utilization of productive resources. With a view to combat sickness, IDBI has devised the Refinance Scheme for Industrial Rehabilitation. The units which have been assisted by State Financial Corporation or State Industrial Development Corporations and are classified as sick are eligible under this scheme. There should be a possibility of the unit being revived in a reasonable time. The bank provides for capital expenditure required for restarting the unit on viable level. The need for margin money for additional term-loan and working Capital, working capital term loan, payment of statutory liabilities, cash losses during rehabilitation period etc. are met by the bank. The bank has also been trying to bring merger of sick units with healthy units.

2. Indirect Assistance IDBI cannot provide direct financial assistance to various industrial units situated in different parts of tile country. It has adopted a strategy under which it extends financial assistance directly to large and complicated industrial units involving large capital outlays and sophisticated technology. It helps small scale in industries indirectly through providing assistance to other financial institutions which, in turn, help these industries. The indirect help of IDBI takes the form of refinancing of industrial loans, rediscounting of bills, seed capital assistance and financial support to 6ther institutions by way of subscribing to their shares, debentures, bonds etc.

1) Refinance of Industrial Loans IDBI provides refinance facility against term loans granted by the eligible credit institutions to industrial concerns for setting up of industrial projects as also for their expansion, modernization and diversification. IDBI provides refinance to commercial banks, regional rural banks, state, co-operative banks, state financial corporations, state industrial development corporations or other institutions extending term loan assistance to industrial units.

Industrial units seeking term loan approach the eligible financial institutions which, after sanctioning the loans, approach the IDBI for refinance facility. The appraisal of loan application is done by primary institution by keeping in view the guidelines issued by

central government and the IDBI. The bank relies in the appraisal done by the primary lending institutions that have to bear primary responsibility for the loans granted by them. IDBI sanctioned a sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial loans. Since 1967, IDBI has been extending indirect financial help to small scale sector principally through its schemes of refinance of industrial loans and bills discounting.

2) Rediscounting of Bills IDBI introduced another indirect financing' scheme in 1965, whereby rediscounting facility of machinery bills was, introduced.

This scheme was to help indigenous machinery manufacturers and their purchases. The purchaser of machinery accepts bills of exchange or promissory notes of the seller and undertakes to take the payment in installments. The seller gets the bills discounted with his banker who in turn rediscounts these bills with min. The buyer is enabled to acquire the machinery on deferred payment terms without going through the usual procedures involved in obtaining a project loan. The usual deferred period is 5 years but in deserving cases it can be extended upto 7 years. The scheme has been extended for expansion and diversification of existing units also. The rediscounting facility has been made available to imported machinery also where bills will be required to be drawn by local agents of foreign firms.

3) Seed Capital Assistance:-

With a view to help first generation entrepreneurs who have the skills but lack financial resources, IDBI started seed capital assistance scheme in September, 1976. Under the first scheme, Financial Corporations provide seed capital assistance to projects in small scale sector from their special class of share capital contributed by IDBI and the state government. The maximum amount of assistance under this scheme is to meet the gap in the equity contribution which is 20 per cent of the cost of the project or Rs. 2 lakhs whichever, is less. Under the second scheme which is operated through State Industrial Development Corporations seed capital assistance is given to medium sized projects costing up to Rs. 1 crore. The assistance is available to meet the gap in promoter’s contribution as well as in equity where no public issue of shares is envisaged. The assistance is interest free with a service charge of I per cent annum and a moratorium of 5 years is available for repayment of loans.

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT (NABARD) NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with 1. Providing refinance to lending institutions in rural areas 2. Bringing about or promoting institutional development and 3. Evaluating, monitoring and inspecting the client banks Besides this pivotal role, NABARD also:  Acts as a coordinator in the operations of rural credit institutions  Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development

 Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development  Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development  Acts as regulator for cooperative banks and RRBs GENESIS AND HISTORICAL BACKGROUND The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD) set up by the RBI under the Chairmanship of Shri B Sivaraman in its report submitted to Governor, Reserve Bank of India on November 28, 1979 recommended the establishment of NABARD. The Parliament through the Act 61 of 81, approved its setting up.

The Committee after reviewing the arrangements came to the conclusion that a new arrangement would be necessary at the national level for achieving the desired focuses and thrust towards integration of credit activities in the context of the strategy for Integrated Rural Development. Against the backdrop of the massive credit needs of

rural development and the need to uplift the weaker sections in the rural areas within a given time horizon the arrangement called for a separate institutional set-up. Similarly The Reserve Bank had onerous responsibilities to discharge in respect of its many basic functions of central banking in monetary and credit regulations and was not therefore in a position to devote undivided attention to the operational details of the emerging complex credit problems. This paved the way for the establishment of NABARD. CRAFICARD also found it prudent to integrate short term, medium term and long-term credit structure for the agriculture sector by establishing a new bank. NABARD is the result of this recommendation. It was set up with an initial capital of Rs 100 crore, which was enhanced to Rs 2,000 crore, fully subscribed by the Government of India and the RBI.

MISSION

Promoting sustainable and equitable agriculture and rural development through effective credit support, related services, institution building and other innovative initiatives In pursuing this mission, NABARD focuses its activities on:  Credit functions, involving preparation of potential-linked credit plans annually for all districts of the country for identification of credit potential, monitoring the flow of ground level rural credit, issuing policy and operational guidelines to rural financing institutions and providing credit facilities to eligible institutions under various programmes NABARD's credit functions cover planning, dispensation and monitoring of credit.

This activity involves:  Framing policy and guidelines for rural financial institutions  Providing credit facilities to issuing organizations  Preparation of potential-linked credit plans annually for all districts for identification of credit potential  Monitoring the flow of ground level rural credit



Development functions concerning reinforcement of the credit functions and making credit more productive

Credit is a critical factor in development of agriculture and rural sector as it enables investment in capital formation and technological up gradation, Hence strengthening of rural financial institutions, which deliver credit to the sector, has been identified by NABARD as a thrust area. Various initiatives have been taken to strengthen the cooperative credit structure and the regional rural banks, so that adequate and timely credit is made available to the needy.

In order to reinforce the credit functions and to make credit more productive,

NABARD

has

been

undertaking

a

number

of

developmental and promotional activities such as:• Help cooperative banks and Regional Rural Banks to prepare development actionsplans for them • Enter into MoU with state governments and cooperative banks specifying their respective obligations to improve the affairs of the banks in a stipulated timeframe

• Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their respective obligations to improve the affairs of the Regional Rural Banks in a stipulated timeframe • Monitor implementation of development action plans of banks and fulfillment of obligations under MoUs • Provide financial assistance to cooperatives and Regional Rural Banks for establishment of technical, monitoring and evaluations cells

• Provide organization development intervention (ODI) through reputed training institutes like Bankers Institute of Rural Development (BIRD), Lucknow www.birdindia.com, National Bank Staff College, Lucknow www.nbsc.in and College of Agriculture Banking, Pune, etc.

• Provide financial support for the training institutes of cooperative banks • Provide training for senior and middle level executives of commercial banks, Regional Rural Banks and cooperative banks

• Create awareness among the borrowers on ethics of repayment through Vikas Volunteer Vahini and Farmer’s clubs • Provide financial assistance to cooperative banks for building improved management information system, computerization of operations and development of human resources

 Supervisory functions ensuring the proper functioning of cooperative banks and regional rural banks As an apex bank involved in refinancing credit needs of major financial institutions in the country engaged in offering financial assistance to agriculture and rural development operations and programmes, NABARD has been sharing with the Reserve Bank of India certain supervisory functions in respect of cooperative banks and Regional Rural Banks (RRBs).

As part of these functions, it • Undertakes inspection of Regional Rural Banks (RRBs) and cooperative banks (other than urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.

• Undertakes inspection of State Cooperative Agriculture and Rural Development Banks (SCARDBs) and apex non-credit cooperative societies on a voluntary basis

• Undertakes portfolio inspections, systems study, besides off-site surveillance of cooperative banks and Regional Rural Banks (RRBs) • Provides recommendations to Reserve Bank of India on opening of new branches by State Cooperative Banks and Regional Rural Banks (RRBs) • Administering the Credit Monitoring Arrangements in SCBs and CCBs.  Core Functions NABARD has been entrusted with the statutory responsibility of conducting inspections of State Cooperative Banks (SCBs), District Central Cooperative Banks (DCCBs) and Regional Rural Banks (RRBs) under the provision of the Banking Regulation Act, 1949. In addition, NABARD has also been conducting periodic inspections of state level cooperative institutions such as State Cooperative Agriculture and Rural Development Banks (SCARDBs), Apex Weavers Societies, Marketing Federations, etc. on a voluntary basis.

Objectives of Inspection • To protect the interest of the present and future depositors

• To ensure that the business conducted by these banks is in conformity

with the provisions of the relevant Acts/Rules,

regulations/Bye-Laws, etc • To ensure observance of rules, guidelines, etc. formulated and issued

by NABARD/RBI/Government • To examine the financial soundness of the banks • To suggest ways and means for strengthening the institutions so as to enable them to play more efficient role in rural credit Instruments of Supervision • Periodic on-site inspection of 31 SCBs, 366 DCCBs, 20 SCARDBs and 102 RRBs and other Apex level Cooperative institutions • Supplementary Appraisal • Off-site Surveillance System ( OSS ) • Portfolio inspection/System study • CMA returns Supervisory Strategy

In the wake of the banking sector reforms, new set of international norms/practices were made applicable to Commercial Banks (CBs) to make them more competitive and sustainable in the changing scenario.

The co-operative banks and RRBs were also to function in the general banking environment, emerging out of the financial sector reforms, introduced by the GOI/RBI. Accordingly, the prudential norms were extended to them in phases. While the capital adequacy norm has not yet been made applicable to these banks, the other prudential norms viz. income recognition, asset classification and provisioning, which were made applicable by RBI to the commercial banking sector had been extended to cover RRBs in 1995-96, SCBs and DCCBs in 199697 and to SCARDBs in 1997-98. NABARD, through a concrete and time-bound supervision strategy, facilities these banks to adjust to the new financial discipline so as to internalize prudential norms stipulated.

Current Focus Under the revised strategy, a sharper focus of the NABARD’s inspection was given on the core areas of the functioning of banks pertaining to Capital Adequacy, Asset Quality, Management Earnings, Liquidity and Systems Compliance (CAMELSC). Thus, NABARD’s

focus in its statutory ‘on-site’ inspections is on core assessments leaving the collateral appraisals to supplementary inspections. The micro level aspects are to be taken care of by the banks themselves by way of internal inspections or by other agencies such as auditors. In this direction, through a series of workshops and meetings held with the Chief Executives and the Chief Auditors of cooperative banks, NABARD attempted to ensure that the other areas, particularly relating to the internal checks and controls, revenue and income realization by way of interest on loans and deposits and other routine features of carrying out general banking transactions were suitably taken care of by the respective banks and their concurrent/statutory audit systems.

Off-site Surveillance As a part of the new strategy of supervision, a system of `Off-site Surveillance' has been introduced as a supplementary tool to the onsite inspection. Its objectives are to obtain and analyze critical data on a continuous basis, to identify areas of supervisory concern and to identify early warning signals and risky areas requiring further probe.

The system basically envisages desk scrutiny of operations of cooperative banks and RRBs through a set of statutory and nonstatutory returns. While the periodical statutory on-site inspections attempt an overall evaluation of the performance of the banks with a

stipulated

period,

off-site

surveillance

envisages

continuous

supervision supplementing the on-site inspections with additional instruments of supervision.

BOARD OF SUPERVISION (for SCBs, DCCBs and RRBs) Board of Supervision (for SCBs, DCCBs and RRBs) has been constituted by NABARD under Section 13(3) of NABARD Act, 1981 as an Internal Committee to the Board of Directors of NABARD. The broad powers and functions of the Board of Supervision are: • Giving directions and guidance in respect of policies and on matters relating to supervision and inspection, reviewing the inspection findings, suggesting appropriate measures • Reviewing the follow-up action taken by Department of Supervision (DoS) on matters of frauds and internal checks and control • Identifying the emerging supervisory issues in the functioning of cooperative banks/RRBs such as NPAs recovery, investment portfolio, credit monitoring system, management practices, frauds, etc.

• Suggesting necessary follow-up measures

• Recommending appropriate training for Inspecting Officers of NABARD for imparting necessary skills and knowledge • Suggest measures for strengthening of DoS • Recommend issue of directions by RBI • Oversee the quality of inspections carried out and the reports issued • Review the information generated through off-site surveillance and other supplementary vehicles, action taken thereon • Undertake any other functions entrusted from time to time by the Board of Directors of

NABARD

The Board of Supervision, since its formation on 20 November 1999 , has held 31 meetings till 1 0 January 2007 and reviewed the financial position of Cooperative Banks and RRBs. Based on the observations of BoS, authorities concerned have been apprised of the weaknesses.

Other Initiatives • The day-to-day functioning of the supervised banks is being monitored through various statutory returns prescribed by the RBI/NABARD including OSS returns

• Periodic coordination Meets are conducted with RPCD, RBI to discuss the policy and operational matters relating to supervision • State level groups comprising RCS, Apex bank, Cooperation and Finance Department, State Government, Director of Audit and noncompliant

banks

have

been

constituted/convened

for

preparing/discussing suitable strategy for Section 11 non-compliant banks and monitoring the progress of Action Plan prepared by them to facilitate them recompliance with the provision • Periodic discussions are held with the MD, Apex Banks, RCS, and State Government etc. to discuss the supervisory concerns.

RO set up Suitable and adequate officers are placed in DoS units at RO level to undertake inspection of banks, issue inspection reports and take other follow up measures including review, monitoring compliance and OSS, etc. in conformity with DoS, HO guidelines.

OBJECTIVES NABARD was established in terms of the Preamble to the Act, "for providing credit for the promotion of agriculture, small scale

industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting IRDP and securing prosperity of rural areas and for matters connected therewith in incidental thereto".

The main objectives of the NABARD as stated in the statement of objectives while placing the bill before the Lok Sabha were categorized as under: 1. The National Bank will be an apex organization in respect of all matters relating to policy, planning operational aspects in the field of credit for promotion of Agriculture, Small Scale Industries, Cottage and Village Industries, Handicrafts and other rural crafts and other allied economic activities in rural areas.

2. The Bank will serve as a refinancing institution for institutional credit such as long-term, short-term for the promotion of activities in the rural areas.

3. The Bank will also provide direct lending to any institution as may approve by the Central Government.

4. The Bank will have organic links with the Reserve Bank and maintain a close link with in.

MAJOR ACTIVITIES • Preparing of Potential Linked Credit Plans for identification of exploitable potentials under agriculture and other activities available for development through bank credit.

• Refinancing banks for extending loans for investment and production purpose in rural areas.

•

Providing

Organizations

loans

to

State

(NGOs)/Panchayati

Government/Non Raj

Institutions

Government (PRIs)

for

developing rural infrastructure.

• Supporting credit innovations of Non Government Organizations (NGOs) and other non-formal agencies.

• Extending formal banking services to the unreached rural poor by evolving a supplementary credit delivery strategy in a cost effective manner by promoting Self Help Groups (SHGs)

• Promoting participatory watershed development for enhancing productivity and profitability of rain fed agriculture in a sustainable manner.

• On-site inspection of cooperative banks and Regional Rural Banks (RRBs) and iff-site surveillance over health of cooperatives and RRBs.

ROLE AND FUNCTIONS OF NABARD • NABARD is an apex institution accredited with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas.

• It is an apex refinancing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas

• It takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

• It co-ordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India and other national level institutions concerned with policy formulation.

• It prepares, on annual basis, rural credit plans for all districts in the country; these plans form the base for annual credit plans of all rural financial institutions • It undertakes monitoring and evaluation of projects refinanced by it.

• It promotes research in the fields of rural banking, agriculture and rural development

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) SIDBI is a Principal Development Financial Institution for: -- Promotion -- Financing and -- Development of Industries in the small scale sector and --Co-coordinating the functions of other institutions engaged in similar activities.

Provision of Charter SIDBI was established on April 2, 1990. The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be "the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector and for matters connected therewith or incidental thereto.

Business Domain of SIDBI The business domain of SIDBI consists of small scale industrial units, which contribute significantly to the national economy in terms of production, employment and exports. Small scale industries are the industrial units in which the investment in plant and machinery does not exceed Rs.10 million . About 3.1 million such units, employing 17.2 million persons account for a share of 36 per cent of India's

exports and 40 per cent of industrial manufacture. In addition, SIDBI's assistance flows to the transport, health care and tourism sectors and also to the professional and self-employed persons setting up smallsized professional ventures.

SIDBI among Top 30 Development Banks of the World SIDBI retained its position in the top 30 Development Banks of the World in the latest ranking of The Banker, London. As per the May 2001 issue of The Banker, London, SIDBI ranked 25th both in terms of Capital and Assets Mission To empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development Vision To emerge as a single window for meeting the financial and developmental needs of the MSME sector to make it strong, vibrant and globally competitive, to position SIDBI Brand as the preferred and customer - friendly institution and for enhancement of share - holder wealth and highest corporate values through modern technology platform OBJECTIVES Mandatory Objectives

Four basic objectives are set out in the SIDBI Charter. They are:  Financing  Promotion  Development  Co-ordination For orderly growth of industry in the small scale sector, The Charter has provided SIDBI considerable flexibility in adopting appropriate operational strategies to meet these objectives. The activities of SIDBI, as they have evolved over the period of time, now meet almost all the requirements of small scale industries which fall into a wide spectrum constituting modern and technologically superior units at one end and traditional units at the other.

Development Outlook The major issues confronting SSIs are identified to be:  Technology obsolescence  Managerial inadequacies  Delayed Payments

 Poor Quality  Incidence of Sickness  Lack of Appropriate Infrastructure and  Lack of Marketing Network There can be many more similar issues hindering the orderly growth of SSIs. Over the years, SIDBI has put in place financing schemes either through its direct financing mechanism or through indirect assistance mechanism and special focus programmes under its P&D initiatives. In its approach, SIDBI has struck a good balance between financing and providing other support services.

SHAREHOLDING The entire issued capital of Rs.450 crore has been divided into 45 crore shares of Rs.10 each. Of the total Rs.450 crore subscribed by IDBI, while setting up of SIDBI, 19.21% has been retained by it and balance 80.79% has been transferred / divested in favour of banks / institutions / insurance companies owned and controlled by the Central Government.

PRODUCTS AND SERVICES  DIRECT FINANCE Objective: SIDBI had been providing refinance to State Level Finance Corporations / State Industrial Development Corporations / Banks etc., against their loans granted to small scale units.

Since the formation of SIDBI in April, 1990 a need was felt/ representations were made that SIDBI being the principal financial institution for the small sector, should take up the financing of SSI projects directly on a selective basis.

So it was decided to introduce direct assistance schemes to supplement the other available channels of credit flow to the small industries sector. Since then, SIDBI has evolved itself into a supplier of a range of products and services to the Small & Medium Enterprises [SME] sector.  BILLS FINANCE Objectives: Bills Finance Scheme involves provision of medium and short-term finance for the benefit of the small-scale sector. Bills Finance seeks to provide finance, to manufacturers of indigenous machinery, capital

equipment, components sub-assemblies etc, based on compliance to the various eligibility criteria, norms etc as applicable to the respective schemes.

To be eligible under the various bills schemes, one of the parties to the transactions to the scheme has to be an industrial unit in the smallscale sector within the meaning of Section 2(h) of the SIDBI Act, 1989.  REFINANCE Objective Refinance scheme is introduced for catering to the need of funds of Primary Lending Institutes for financing small-scale industries. Under the scheme, SIDBI grants refinance against term loans granted by the eligible PLIs to industrial concerns for setting up industrial projects in the small scale sector as also for their expansion / modernization / diversification. Term loans granted by the PLIs for other specified eligible activities / purposes are also eligible for refinance.  INTERNATIONAL FINANCE Objective 

The main objective of the various International Finance schemes is to enable small-scale industries to raise finance at internationally

competitive

rates

to

fulfil

their

export

commitments. The financial assistance is being offered in USD

and Euro currencies. Assistance in Rupees is also considered, independent of foreign currency limits. SIDBI has a license to deal in foreign exchange as a "restricted" Authorised Dealer (i.e.

SIDBI confines its foreign exchange activities only to its own exposures and to exposures for its customers. The Mumbai Head Office (MHO) of SIDBI operates as a Category 'A' branch that maintains foreign currency positions, nostro account with foreign correspondent banks and provides cover to other branches (Category 'B' branches) that carry out forex business.  PROMOTIONAL ACTIVITIES Objective As an apex financial institution for promotion, financing and development of industry in the small scale sector, SIDBI meets the varied developmental needs of the Indian SSI sector by its wideranging Promotional and Developmental (P&D) activities.

P&D initiatives of the Bank aim at improving the inherent strength of small scale sector on one hand as also economic development of poor through promotion of micro-enterprises.

In pursuance of its multifaceted P&D activity, synergistic with its business activities aimed at development of the small industries, SIDBI looks forward to a partnership with NGOs, associate financial institutions, corporate bodies, R&D laboratories, marketing agencies, etc., for national level programmes.

SIDBI has identified the following thrust areas of P&D activities, which are being undertaken in partnership with various institutions, agencies, and NGOs: DATA ANALYSIS Data analysis of IFCI in concern with various sectors as per the assistance provided by it to them IFCI AND INDUSTRIAL FINANCE The sanctions of IFCI went up to Rs. 6579.7 crore in 1995-96 from 32.3 crore in 1970-71, but it declined to Rs. 778 crore by 2001-02. up to march 2003, total sanctioned assistance was Rs. 45426.7 crore while disbursements were Rs. 44169.2 crore.

Year

Sanctions

Growth rate

Disbursements Growth rate

1980-81

206.6

%

108.9

19.7

1981-82

218.1

49.8

169.4

55.6

1982-83

230.2

5.6

196.1

15.8

1983-84

321.9

5.5

224.5

14.5

1984-85

415.4

39.8

272.9

21.6

1985-86

499.2

29

403.9

48

1986-87

798.1

20.2

451.6

11.8

1987-88

922.6

59.9

657.1

45.5

1988-89

1635.5

15.6

997.5

51.8

1989-90

1817

77.3

1121.8

12.5

1990-91

2429.8

11.1

1574.3

40.6

1991-92

2421.2

33.7

1604.4

1.9

1992-93

2347.9

-0.4

1733.4

8

1993-94

3745.9

-3

2163.1

24.2

1994-95

4327

59.5

2838.7

32.4

1995-96

6579.7

15.5

4586.5

61.6

1996-97

3952.2

52.1

5175.5

12.5

1997-98

5708.2

-39.9

5615

8.5

1998-99

3622.8

44.4

4836.4

-13.9

1999-00

2045.6

-36.5

3374.3

-30.5

2000-01

1417.9

-43.5

2152.7

-36.9

2001-02

778

-30.7

1069.9

-49

2002-03

2035.1

-45.1

1796.5

63.8

161.6 total from

45426.7

44169.2

1970 to 2003

IFCI AND PRODUCT WISE ASSISTANCE IFCI provides direct financial assistance for financing projects in terms of rupee loans, foreign currency loans, and by underwriting and direct subscription to shares, debentures and bonds.

Years

Sanctions

Disbursements

1998-99

3129.6

4229.3

1999-00

1900.3

3027.4

2000-01

1371.2

2093.2

2001-02

721.4

1065.6

2002-03

2021.7

1783.1

up to march 2003

37122.6

35926.4

IFCI AND PURPOSE WISE ASSISTANCE In the purpose wise sanctions and disbursements, new projects got Rs. 15919.6 cr which is 35.17 % of total sanctions up to march 2003.

Serial no.

Purpose

Sanctions

Disbursements

1

New

15919.6

15611.3

2

Expansion

6649.2

6547.5

3

Rehabilitation

115.7

114.2

4

Modernization

5459.8

5480.4

5

Working capital

837.5

774.2

6

Others

16279.4

15476.1

7

total

45261.1

44003.6

IFCI AND SECTOR WISE ASSISTANCE The IFCI provided maximum assistance to private sector by giving Rs. 40660.9 cr as on march 2003. This constitutes over 89% of total assistance by IFCI. The public sector got very little out of the total sanctions of IFCI. Serial no.

Sector

Sanction

Disbursements

1

Public

1541.1

1539.1

2

Joint

2192

2146

3

Cooperative

867,1

838.4

4

Private

40660.9

39480.1

5

total

45261.1

44003.6

DATA ANALYSIS OF IDBI The main objective of IDBI is to provide term finance and financial services for establishment of new projects as well as the expansion, diversification, modernization and technology up gradation of existing industrial enterprises. It is one of the most important financial institutions which has provided lot of funds for industrial activities in the country.

IDBI AND PURPOSE WISE ASSISTANCE Serial no.

Purpose

Year

Sanctions

1

New

1998-2003

67498.8

2

Expansion

1998-2003

50627.3

3

Rehabilitation

1998-2003

12976.5

4

Modernization

1998-2003

1415.8

5

Working capital

1998-2003

44086.5

6

total

IDBI AND SECTOR WISE ASSISTANCE

176604.9

Serial no

Sectors

Amount

Percentage

1

Public

34963

16.05

2

Joint

11753.7

5.39

3

Cooperative

1802.2

.83

4

Private

169304.2

77.71

5

Trust

50

.02

total

217873.3

100

IDBI AND INSTITUTION WISE ASSISTANCE Serial no.

Institutions

2000-01

2001-02

1

SFC

129.8

87.7

2

SIDC

233.2

99.6

Total

363

187.3

DATA ANALYSIS OF NABARD NATIONAL

BANK

OF

AGRICULTURE

AND

RURAL

DEVELOPMENT It is responsible for short term, medium term and long-term financing of agriculture and allied activities. The institutions such as Film Finance Corporation, Tea Plantation Finance Scheme, Shipping Development Fund, Newspaper Finance Corporation, Handloom Finance Corporation, Housing Development Finance Corporation also provide financial various areas. Here the various financial activities of NABARD are given and analyzed in accordance with each other.  With

its

effective

overseeing

and

monitoring

of

the

implementation of the Government of India's programme to double the flow of credit to agriculture over a three-year period from 2004-2005, the total disbursement of credit reached Rs 1,25,309 during 2004-2005. Ground level credit flow to

agriculture and allied activities reached Rs 1,57,480 crore in 2005-2006.  Refinance disbursement to commercial banks, state cooperative banks, state cooperative agriculture and rural development banks, RRBs and other eligible financial institutions aggregated Rs 8,622.37 crore.  As on 31 January 2007 through the Rural Infrastructure Development Fund (RIDF), Rs,59,795.35 crore have been sanctioned for 2,31,702 projects covering irrigation, rural roads and bridges, health and education, soil conservation, drinking water schemes, etc. Developing among hosts of other infrastructures, RIDF will create 20971 schools, 6239 primary health centers and provide drinking water supply in 7267 villages  Watershed Development Fund, with cumulative sanctions of Rs.578.95 crore for 427 projects in 124 districts of 14 states, has created a People’s Movement in rural India.

 Farmers now enjoy financial access and security through 582.50 lakh

Kisan Credit Cards that have been issued through a vast rural banking network.  District Rural Industries Project (DRIP) has generated employment for 23.34 lakh persons with 10.95 lakh units in 105 districts.

DATA ANALYSIS OF SIDBI SMALL INDUSTRY DEVELOPMENT BANK OF INDIA SIDBI has some eligibility criteria for industries to seek any kind of assistance or funding and from the recent times SIDBI has raised it eligibility criteria for every institution to gain financial assistance.

Here follows the change in the criteria of SIDBI Serial no.

Purpose

Earlier

1

Investment limits 2 lakh

Present 5 lakh

for tiny units for purpose 2

of

refinance

5 lakh

10 lakh

eligible for assist. 75000

150000

Size of projects 3

Quantum 4

of

equity assistance Project component

5

eligibility

6

Eligible limit

10 lakh

20 lakh

2 lakh

5 lakh

outlay for loan 7.5 lakh

10 lakh

Eligible limit

loan under

normal refinance scheme

SIDBI AND FINANCIAL ASSISTANCE The sanctions of SIDBI are generally given to those entrepreneurs who have business of small scale and fulfill the criteria of SIDBI. It undertakes a large variety of promotional and developmental activities in order to improve the strength of small scale units, creating employment opportunities and new way for economic development of poor.

Year

Sanctions

Growth%

Disbursements Growth

1997-98

295

1998-99

1764.8

498.2

279

1999-00

1820.4

3.2

672.4

141.1

2000-01

3276.5

79.4

766.5

13.9

2001-02

3008.1

-7.9

1506.2

96.5

2002-03

2304.1

-23.4

949.3

-37

up to march 12459.7

4173.6

2003

OVER VIEW OF TOPIC Development bank plays a very important role in economic development of our country. Since independence they have contributed a lot to the inception of industrialization and all other technological innovations. There basic objective is to assist the development in country which perform by proving every kind of help possible i.e. financial, advisory, technological etc.

This study helps in portraying the current picture of development banks in India and shows their role in economy. It also helps in showing the various schemes that banks have and their whole procedure to provide the assistance to people.

This study also shows the various lacks in the system of development banks due which they fail in some sphere to achieve their set targets.

There are various drawbacks in our own financial system that hinderers the growth of these development banks such as lack of funds with government, lack of project, lack of efficient machinery, In this study all the possible measure to remove these hindrances are described through which we can move more speedily then other economies in world.

In this study four major development banks in India are taken into research work i.e. IDBI, IFCI, SIDBI, and NABARD. All the schemes, assistances and programs are studied and highligtened. Every bank differs from his objective with each other so as the assistance provided by them.

Every bank has separate guidelines and management to take care of activities which are performing and work areas are also different, although their main motive is same which the development of country through balanced economic growth.

This study throws light on the working of these development banks and how they performed their activities in past.

LIMITATIONS OF STUDY Although lots of care and efforts are made to ensure the fault free study but still there remains certain limitations which possibly may occur such as  Lack of time acted as constraint in study  Lack of development banks in near by areas also acts as constraint as it’s not possible to get the real exposure.  Researcher limitations in knowledge are also the limitations of study.  The study is based on secondary data so any kind of discrepancy in that will cause same in the study.

BIBLOGRAPHY WEBSITIES  http: //www.idbi.com  http: //www.sidbi.com

 http: //www.google.com  http: //www.banknetindia.com NEWSPAPERS  Financial express  Business line  The economic times  Business standard