Important 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 industrialization 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-term and long-term 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.

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(IDBI) 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.

Bookmark the permalink.