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. (IRCI)’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.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: francisabey@gmail.com
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