Page 28 - Banking Finance July 2022

ARTICLE

various companies listed in India. Also, invest in mutual funds for a concern to have, for instance, the requirements of a
and facilitate the growth of capital markets in India. foreign loan in a particular currency, met by one institution and
under the writing of securities met by another.
Financial Gap Fillers
Development banks not only provide medium-term and long- Refinance Facility:
term loans but they also help industrial enterprises in many Development banks also extend the refinance facility to the
other ways. It is not possible for the commercial banks to lending institutions. In this scheme, there is no direct lending
fulfill all financial needs of all the customers. Issue of Non- to the enterprise. The lending institutions are provided funds
performing assets, absence of organized capital market, by development banks against loans extended to industrial
absence of adequate facilities for financing industries arise concerns. In this way, the institutions which provide funds
the problem of slow development. Such development banks to units are refinanced by development banks. In India, the
fulfill this credit gap. They provide long-term funds for Industrial Development Bank of India (IDBI) provides
industries and help in growth. reliance against term loans granted to industrial concerns
by state financial corporations.
Undertake Entrepreneurial Role:
Credit Guarantee:
Developing countries lack entrepreneurs who can take up
the job of setting up new projects. It may be due to a lack The small scale sector is not getting proper financial facilities
of expertise and managerial ability. Development banks due to the clement of risk since these units do not have
were assigned the job of entrepreneurial gap filling. They sufficient securities to offer for loans, lending institutions are
undertake the task of discovering investment projects, hesitant to extend the loans. To overcome this difficulty
promotion of industrial enterprises, provide technical and many countries including India and Japan have devised the
managerial assistance, undertaking economic and technical credit guarantee scheme and credit insurance scheme.
research, conducting surveys, feasibility studies, etc. The
promotional role of the development bank is very significant Underwriting of Securities:
for increasing the pace of industrialization. Development banks acquire securities of industrial units
through either direct subscribing or underwriting or both.
Commercial Banking Business: The securities may also be acquired through promotion
work or by converting loans into equity shares or preference
Development banks normally provide medium and long-term
shares. So, In India, a credit guarantee scheme was
funds to industrial enterprises. The working capital needs of
introduced in 1960 with the object of enlarging the supply
the units are generally met by commercial banks. In
of institutional credit to small industrial units by granting a
developing countries, commercial banks have not been able
degree of protection to lending institutions against possible
to take up this job properly. Their traditional approach in
losses in respect of such advances.
dealing with lending proposals and assistance on securities has
not helped the industry. Development banks extend financial
Conclusion
assistance for meeting working capital needs to their loan if
The development banks have a dual objective of
they fail to arrange such funds from other sources.
contributing to the development as well as earning a
financial return on the investment. Hence there is an
Joint Finance:
inherent conflict in the operational objectives of
Another feature of the development bank's operations is to
development bank. They have to limit their lending to the
take up joint financing along with other financial institutions. financially viable projects, with an acceptable financial rate
There may be constraints of financial resources and legal of return. Also, long term loans represent a higher level of
problems (prescribing maximum limits of lending) which may uncertainty and will have higher interest rates than the
force banks to associate with other institutions for taking up short term loans. But, these financial institutions are
the financing of some projects jointly. It may also not be possible concerned with providing all types of financial assistance,
to meet all the requirements of concern by one institution, so medium as well as long-term. Thus, the role of these
more than one institution may join hands. Not only in large institutions in the development trajectories of the developing
projects but also in medium-sized projects it may be desirable countries cannot be underestimated.

28 | 2022 | JULY | BANKING FINANCE