Concept and Purpose of Development Banking Development banking means different to different

people, in different places, and at different times. This only goes to show that development banking
has evolved since it was first conceptualized as an ‘instrument of development’. However, in its
original form and in its broadest definition, it is a type of financial intermediation to help the country
reach a higher and sustainable level of development. On the wider context, the desired level of
development includes the whole spectrum of socio-economic progress. Development banking
therefore can also be defined as a form of financial intermediation that provides financing to high
priority investment projects in a developing economy. Both definitions imply that the purpose of
development banking is to bring the country to a higher level of development. A development bank
is a ‘bank’ established for the purpose of ‘financing development’. A traditional definition of a
development bank is one which is a national or regional financial institution designed to provide
medium-and longterm capital for productive investment, often accompanied by technical assistance,
in less-developed areas. Development banks fill a gap left by undeveloped capital markets and the
reluctance of commercial banks to offer long-term financing. Difference between a Development
Bank and a Commercial Bank There are several differentiating factors between a development bank
and a commercial bank. Some extreme observations below are made in order to emphasize

enterprise. Developing them explicitly would mean additional costs to the bank. Enterprise
development dramatically limits the number of accounts that a development can handle because
this is timeconsuming. A commercial bank’s main concern is to generate profits. Other benefits are
only incidental. With a commercial bank’s cost-consciousness, economic development would be its
last priority. g) Criteria for Financing: A development bank assumes project risks and does not insist
on too much collateral. It will provide financing as long as the other criteria are met. A commercial
bank pays less attention to the project in relation to the collateral requirements. However, the more
progressive banks are lending against project cash flow and without collateral. h) Assessment of the
Loan Proposal: A development bank employs project appraisal as a means to determine the viability
of the project submitted for financing. Project appraisal looks at the technical, financial, marketing,
management, environmental and economic aspects of the project. Loan repayment is based on the
cash flow to be generated by the project. A commercial bank uses risk asset management as tool to
assess the borrower. It looks at the so-called 5 C’s of credit, i.e., character, capacity, capital,
collateral and condition. It bases loan repayment on the capacity of the borrower to pay (even from
other sources) than from the ‘project’ itself. Thus, it can be said that development bank financing is
project-focused while that of a commercial bank is borrower-oriented. i) Term of Loans Extended: A
development bank provides mainly term loans (maturity of more than one year). On the other hand,
a commercial bank provides mainly short-term loans (less than one year maturity). j) Sources of Loan
Funds: A development bank is dependent on concessionary, long-term funds, e.g. pension funds,
funds from multilateral financial institutions like the World Bank, Asian Development Bank, etc. It
has traditionally limited access to domestic or commercial funds. A commercial bank has a strong
deposit base and its corporate borrowers are also depositors. They can match its commercial
borrowing against its own shortterm loans. k) Lending Policies for Cyclical Industries: A development
bank supports its clients in spite of short-term cycles while a commercial bank does not like cyclical
industries. l) Resource Mobilization: A development bank undertakes project promotion work to
match concessionary long-term financing while a commercial bank mobilizes deposit funds from
small depositors which are lent out to large companies. m) Client Relationship: A development bank
relates more to clients as borrowers. There is less day-to-day business relationship. Trade
transactions of a commercial bank allow for frequent monitoring and close client relationship. n)
Scope of Institutional Mandate: A development bank is essentially a specialized institution. It has
limited branching and range of products. The commercial bank has a generalized charter. It can offer
a wide range of products (especially in the case of universal banks) and can open more branches.
IDBI The Industrial Development Bank of India (IDBI) was established on 1 July 1964 under an Act of
Parliament as a wholly owned subsidiary of the Reserve Bank of India. In 16 February 1976, the
ownership of IDBI was transferred to the Government of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting and
developing industry in the country. Although Government shareholding in the Bank came down
below 100% following IDBI’s public issue in July 1995, the former continues to be the major
shareholder (current shareholding: 75%). IDBI provides financial assistance, both in rupee and
foreign currencies, for green-field projects as also for expansion, modernisation and diversification
purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI also
provides indirect financial assistance by way of refinancing of loans extended by State-level financial
institutions and banks and by way of rediscounting of bills of exchange arising out of sale of
indigenous machinery on deferred payment terms. IDBI has played a pioneering role, particularly in
the pre-reform era (1964– 91),in catalyzing broad based industrial development in the country in
keeping with its Government-ordained ‘development banking’ charter. Narasimam committee
recommends that IDBI should give up its direct financing functions and concentrate only in
promotional and refinancing role. But this recommendation was rejected by the government. Later
RBI constituted a committee under the chairmanship of [Link] to examine the concept of
development financing in the changed global challenges. This committee is the first to recommend
the concept of universal banking.

The committee wanted the development financial institution to diversify its activity. It
recommended to harmonise the role of development financing and banking activities by getting
away from the conventional distinction between commercial banking and developmental banking In
of IDBI Act. NABARD NABARD is the apex institution in the country which looks after the
development of the cottage industry, small industry and village industry, and other rural industries.
NABARD also reaches out to allied economies and supports and promotes integrated development.
And to help NABARD discharge its duty, it has been given certain roles as follows: 1. Serves as an
apex financing agency for the institutions providing investment and production credit for promoting
the various developmental activities in rural areas. 2. Takes measures towards institution building for
improving absorptive capacity of the credit delivery system, including monitoring, formulation of
rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. 3. Co-ordinates
the rural financing activities of all institutions engaged in developmental work at the field level and
maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and
other national level institutions concerned with policy formulation 4. Undertakes monitoring and
evaluation of projects refinanced by it. 5. NABARD refinances the financial institutions which
finances the rural sector. 6. The institutions which help the rural economy, NABARD helps develop.
7.