Development banking

Industrial finance is very much essential for industrial development. No business can reach its full potential of growth and success without adequate finance. Financial requirement is of two types.

Short term and long term funds.

Short term funds are in form of working capital to meet day to day requirements of business and long term funds help in acquiring fixed assets. All financial institutions in India can be divided into following categories:

1.) All India Development Banks: Industrial Development Bank of India(IDBI), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), State Industrial Development Bank of India(SIDBI), Industrial Investment Bank of India (IIBI).

2.) Specialized Financial Institutions: Risk Capital and Technology Finance Corporation Ltd. (RCTC), Technology Development and Information Corporation of India Ltd. (TDICI), Tourism Finance Corporation of India Ltd. (TFCI).

3.) Investment Institutions: Unit Trust of India (UTI), Life Insurance Corporation (LIC), General Insurance Corporation (GIC) and its subsidiaries.

4.) State Level Institutions: State Financial Corporations (SFC), State Industrial Development Corporation (SIDC).

(I) Industrial Finance Corporation of India (IFCI) july 1948: it was the first all India development bank to be set up in the country. It was set up in 1948 with an object of providing medium and long term credit to industry. On july 1, 1993 it has been converted into a public limited company and know it is known as Industrial Finance Corporation India Ltd.

Financial resources of IFCI consist following components:

a) Capital share

b) Bonds and debentures

c) Other borrowings

Initial capital of IFCI was rs. 5 crore since than it has been increased several times, on March 31, 2000 its capital was 1046 crore.

 Functions of IFCI

a) Granting loans and advances both within rupees or foreign currencies payable within 25 years.

b) Guaranteeing rupee loans.

c) Underwriting of shares and debentures of industrial concern.

d) Financial assistance to new industrial concern.

e) Financial assistance for renovation, expansion, modernization or diversification.


Lending operations of IFCI

It provides financial assistance to all public sector, cooperative sector and public sector. The cumulative assistance at the end of March 2000 was rs 49621 crore.


a) IFCI lending operations have encouraged concentration of wealth and capital

b) IFCI did a little to remove regional imbalances.

c) It failed to exercise necessary control over defaulting borrowers.

(II) State Financial Corporations (SFC) 1951: IFCI was set up for large and medium enterprise. Therefore the need arise to provide financial help to the small and medium concerns. So SFC act was passed by the parliament on Sep, 1951. The first SFC set up in Punjab was in 1953. There are 18 SFC in the country.

Functions of SFC

a) Granting loans to the industrial concerns for a period not exceeding 20 years.

b) Guaranteeing rupee loans.

c) Underwriting of shares and debentures of industrial concern.

d) It also acts as an agent of central and state government, IDBI, IFCI or other financial institutions.


The working group appointed by RBI found that the performance of various SFC’S were not satisfactory. They have failed to meet the demands of medium and small enterprise and the rate of interest charge by them is also very high.

(III) Industrial Credit and Investment Corporation of India (ICICI) JAN 1955: it is second all India development bank like IDBI, IFCI it is a private sector bank but it’s distinguish feature is that it provide underwriting facilities which are generally neglected by other institutions. On April, 1996 SCICI was merged with ICICI.

Financial resources of ICICI consist following components:

Initial capital of ICICI was rs. 149crore in 1971 and in 2000 its capital was 65389 crore.

Functions of ICICI

a) Granting loans and advances both long term and medium term.

b) Guaranteeing rupee loans.

c) Underwriting of new issues or securities.


Lending operations of ICICI

It provides financial assistance in form of rupee loan, foreign currency loan, underwriting of shares bonds and debentures and direct subscription to share and debentures.

(IV) Unit Trust of India (UTI) 1964: UTI a public sector investment institution was set up in 1964 under the UTI act, 1963. The share capital of UTI was subscribed by IDBI, LIC, SBI and its subsidiaries. Unit trusts are popular due to

i) diversified portfolio or pooling of risk: a investor can not avoid his risk if he make direct investment in the shares and debentures of the companies and with small resources he can not have diversified portfolio but by making investment in the shares of unit trusts risk is avoided as they do not make concentrated investments.

ii) Professional management

iii) These are an open end investment that’s why ensuring high degree of liquidity.

                 The main aim of setting up UTI is to encourage the saving of the community and use them in productive purposes for the growth of country’s economy.

(V) Industrial Development Bank of India (IDBI) july 1964: initially it was set up as wholly owned subsidiary of Reserve Bank of India, in 1976, it was made an autonomous institution and its ownership passed from Reserve Bank of India to government of India.

Financial resources of IDBI consist following components:

a) Share capital

b) Bonds and debentures

c) Borrowings from RBI

d) Deposits from companies

In 2000 its total resources were 72169 crore.

Functions of IDBI

a) It provides refinance against the loan granted to industrial concerns by other development banks like SFC, IFCI etc.

b) It plays the role of coordinator at all India level.

c) It also subscribes the share capital and bond issue of IFCI, ICICI, SFC and IIBI.

 Lending operations of IDBI

It provides financial assistance to all kinds of big, medium as well as small enterprises.

It provides direct financial assistance to industrial enterprise, indirect financial assistance through other financial institutions and also provides financial assistance to the backward areas at concessional rate.


a) Inspite of all it assistance to the backward areas and to small sectors its major beneficiaries are big industrial concerns.

b) it mainly concentrate on providing financial assistance the promotional and consultancy work has been ignored.

(VI) State Industrial Development Bank of India (SIDBI) 1990: with a view to ensure large flow of financial and non financial assistance to the small scale sector, the government of India announced in the budget a decision to set up SIDBI as a subsidiary of IDBI the SIDBI act was passed by parliament in oct, 1989 and the bank started its operation from 2 april, 1990.

Financial resources of SIDBI consist following components:

Initial capital of SIDBI was rs. 250 crore since than it has been increased several times.

Functions of IFCI

a) Refinance of loans.

b) Discounting and rediscounting of bills.

c) Provide support to small industries.

(VII) Industrial Investment Bank of India (IIBI) 1971: in India there are number of industries due to unemployment government did not want to shut down these units. So the government of India set up Industrial Reconstruction  Corporation of India (IRCI)in 1971 to provide financial assistance to such sick industrial units and to provide technical and managerial assistance if they need.

In 1985, government converted Industrial Reconstruction Corporation of India (IRCI) into a statutory corporation known as Industrial Reconstruction Bank of India and in 1997 it named as Industrial Investment Bank of India (IIBI) and all the assets and liabilities of IRBI transferred to IIBI.

The above mentioned are the main development banks of India.

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