Development Banks in India: Types, Functions, Growth, and Working

When India attained independence in 1947, commercial banks refused to provide long-term loans for multi-year industrial factories, dams, or heavy machinery. Commercial banks relied on short-term public deposits (1-3 years) and could not commit money to 15-year industrial gestation projects without courting disaster.

To overcome this deficiency and build national industrial self-reliance, the Government of India established specialized financial institutions known as Development Banks or Development Financial Institutions (DFIs).

1. What is a Development Bank?

A development bank is a specialized financial institution that provides long-term term-finance, risk capital, project counseling, and technical assistance to enterprises in critical socio-economic sectors of the national economy.

• Developmental Motive over Pure Profit: Unlike commercial banks which focus on short-term working capital and maximum quarterly profit margins, development banks evaluate projects based on socio-economic benefits, employment generation, regional industrialization, and technology transfer.

Commercial Banks vs. Development Banks

2. Evolution and Historical Growth of DFIs in India

3. Classification of Development Banks in India

Development banks in India are categorized by operational scope and target sector:

4. In-Depth Study of Major Specialized DFIs

A. NABARD (National Bank for Agriculture and Rural Development)

• Established: July 12, 1982 on the recommendations of the B. Sivaraman Committee (CRAFICARD) under the NABARD Act, 1981.
• Apex Mission: Apex regulatory and developmental body for agricultural finance, rural credit delivery, and cottage industries.
• Key Functions:
  1. Refinancing Apex: Provides short, medium, and long-term refinance to State Cooperative Banks, Regional Rural Banks (RRBs), and commercial banks for agricultural advances.
  2. Rural Infrastructure Development Fund (RIDF): Channels commercial banks’ priority sector shortfall funds into rural roads, bridges, irrigation canals, and rural drinking water.
  3. Supervision: Inspects and supervises Regional Rural Banks and State Cooperative Banks under the Banking Regulation Act.
  4. SHG-Bank Linkage Programme: Pioneer of the world’s largest microfinance movement linking millions of women’s Self Help Groups with formal bank credit.

B. SIDBI (Small Industries Development Bank of India)

• Established: April 2, 1990 under the Small Industries Development Bank of India Act, 1989.
• Headquarters: Lucknow, Uttar Pradesh.
• Apex Mission: Principal financial institution for the promotion, financing, and development of the Micro, Small, and Medium Enterprises (MSME) sector.
• Key Functions:
  1. Extends direct lending and institutional refinance for technological upgradation, raw material financing, and clean energy adoption in MSMEs.
  2. Manages the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), providing collateral-free credit guarantees on bank loans up to specified limits.
  3. Operates MUDRA (Micro Units Development and Refinance Agency), refinancing micro-loans up to INR 10 lakh extended to tiny enterprises.

C. Export-Import Bank of India (EXIM Bank)

• Established: January 1, 1982 under the Export-Import Bank of India Act, 1981.
• Apex Mission: Apex financial institution coordinating the working of all agencies engaged in financing export and import trade of India.
• Key Functions:
  1. Extends Buyer’s Credit and Lines of Credit (LOC) to foreign governments and overseas buyers to import Indian capital goods, industrial plant machinery, and turnkey infrastructure projects.
  2. Provides pre-shipment and post-shipment export finance to domestic Indian exporters.
  3. Supports overseas joint ventures and foreign direct investment by Indian multinational corporations.

D. National Bank for Financing Infrastructure and Development (NaBFID)

• Established: 2021 through an Act of Parliament as India’s premier specialized infrastructure DFI.
• Mission: Anchor the National Infrastructure Pipeline (NIP) by extending ultra long-term financing (20 to 30 years) to highways, railways, clean energy grids, and green hydrogen projects.

5. The Structural Shift: Universal Banking

Following the financial sector reforms of the 1990s and the Khan Committee Report (1998), the traditional DFI model encountered severe funding challenges:

• The government withdrew concessional low-interest budget lines and statutory liquidity ratio (SLR) bond allocations.
• DFIs were forced to borrow from the open market at competitive commercial interest rates while their assets remained locked in long-term, illiquid industrial loans.

What is Universal Banking?

Universal Banking refers to a comprehensive financial supermarket system where a single banking entity offers the full spectrum of financial services under one institutional roof—including commercial retail banking, long-term project finance, merchant banking, mutual funds, insurance, and credit cards.

• The Transition: Industrial giants ICICI (in 2002) and IDBI (in 2004) reversed-merged with their own commercial banking arms to gain access to low-cost retail current and savings account (CASA) deposits, transforming into modern universal banks.

Important Exam Questions for Revision

1. Short Answer Question (3-4 Marks): What were the main recommendations of the Sivaraman Committee regarding rural credit?
2. Medium Answer Question (7-8 Marks): Differentiate between a Commercial Bank and a Development Bank across four key parameters.
3. Long Essay Question (14-15 Marks): Discuss the growth, functions, and working of Development Banks in India. Detail the role of NABARD and SIDBI in promoting rural development and the MSME sector.