Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.
According to William Diamond, “A Development Bank has the opportunity to promote enterprises i.e. to conceive investment proposal and to stimulate others to pursue them or itself to carry them through from the ‘conception’ to ‘realisation’.
Functions of Development Banks
The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:
(a) Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
(b) Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.
(c) Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.
(d) Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
(e) Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.
(f) Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
(g) Management consultancy: Financial institutions provide technical and management consultancy to industrial units.
(h) Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.
(i) Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.
(j) Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.
(k) Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.
