THE ROLE AND FUNCTIONS OF DEVELOPMENT BANKING

Introduction
Development Banks or Development Finance Institutions (DFI’s) as these are normally called in
the financial world are a post World War II phenomenon.Their establishment in Africa, Asia
and other developing countries in most cases coincided with the attainment of independence.
Their mission being “to expedite the pace of development in accordance with the national
priorities and aspirations of the people”.
DFI’s fall into two broad categories viz. national DFI’s and regional DFI’s.Most of the national
DFI’s in the developing world have been in existence for two to three decades.They were
established to serve as handmaidens of their governments in the implementation of their
development plans.
In places like India, a majority of the applicants for financial assistance from the DFI’s in the
initial stages were existing large industrial houses, or Managing agency firms. These institutions
had resources of men, material and money and were therefore, able to conceive, plan and
implement new or expansion projects successfully.Therefore, there was no problem of arrears.
In the wake of socialist policies pursued by these newly independent states, further growth of
large industrial houses and managing agency firms through DFI assistance was considered
monopolistic and exploitative of the majority by the minority. These were conceived as
institution reminiscent of the former British regime.This attitude led to a greater intervention of
the state in the regulation and operation of DFI’s, which in almost all cases were state owned.
FRESH ORIENTATION IN OPERATIONS
In pursuit of the socialist policies, there was need for a redefinition of guidelines to be followed
by DFI’s in extending credit to their clients.The new guidelines placed greater emphasis on
encouraging new entrepreneurs, technocrats, educated unemployed, professionals, and small-
scale enterprises and above all upon balanced regional development.All these were aimed at
fulfilling socially desirable objectives.This was a beginning of a new phase in the operations of
DFI’s, and called for fresh orientation.It entailed relaxation in a number of aspects like
sponsors’ contribution, security margin, longer gestation period etc.Inadequate resources and
absence of any fall back reserves of the new category of sponsors and their insufficient
managerial skills were manifest soon.Pursuit of new guidelines exposed DFI’s to greater risks,
resulting in widespread sickness of the enterprises.Starting at a moderate level, the problem
assumed great dimensions over a period of time, although it did have a spin off in the form of a
new breed of successful entrepreneurs.
Regional DFI's
Regional DFI's were established as part of the economic cooperation of blocks of neighbouring
states in Africa. Their main role being to facilitate the process of accelerating regional
integration process.
These included East African Development Bank (EADB), which was established at the time
when the East African Community was one of the strongest unions in the whole of Africa.
EADB was set to promote the economic development in the region and to act as a catalyst in
promoting balanced economic development amongst member countries.
Among the regional DFI's are African Development Bank (ADB), Preferential Trade Area Bank
(PTA), Arab Bank for Economic Development of Africa (BADEA) and Islamic Development
Bank (IDB). In a bid to strengthen the operations of DFI's, umbrella organisations were created.
These include The Association of African Development Finance Institutions (AADFI),
established in 1975 in Abidjan (Côte d'Ivoire) under the auspices of the ADB.
Its objective being to serve as a medium for technical exchange and cooperation between the
continents' DFI's and to promote economic ties between African countries with a view to
accelerating the regional integration process. These objectives were to be achieved by the
dissemination of technical data through publications, seminars, conferences, round-tables and
meetings. The membership of AADFI comprises 84 members including 64 ordinary members
(national DFI's), 11 special members and 9 Honorary members. The World Federation of
Development Finance Institutions (WFDFI) is an umbrella of sister DFI's from Asia (ADFIAP),
Latin -America (ALIDE) and Europe (ADRM). AADFI is also a member of this organisation.
The Present Scenario
The progressive weakening of the financial position of most of the DFI's and their almost
exclusive reliance on subsidised sources of finance, either from the national governments or from
the external financiers has led to a rethinking on the operations of DFI's in the present-day world,
particularly in market oriented, deregulated economies. This was in light of the fact that, the
conventional differences between DFI's and commercial banks has been gradually disappearing.
Commercial banks have increasingly undertaken development-financing functions. Also, with
development of capital markets and increasing availability of financial instruments to finance
modern business, the DFI's realised increasing competition for the provision of financial
services. DFI's in response are now diversifying into several fields including merchant and
commercial banking either on their own or through their specially created subsidiaries.
A Development Bank is a multilateral development finance institution dedicated to improvingthe
social and economic development of its member nations. Its primary emphasis is the welfareof
the people. For example the Asian Development Bank's overarching goal is to reduce povertyin
Asia and the Pacific. It helps improve the quality of people's lives by providing loans andtechnical
assistance for a broad range of development activities.
A development bank's policies or programs center on the following priorities:

Economic growth

Human development

Gender and development

Good governance

Environmental protection

Private sector development

Regional cooperation
Given below are the principal functions of a development bank:
•
Extend loans and equity investments to its developing member countries (DMCs) for
their economic and social development.
•
Provides technical assistance for the planning and execution of development projects and
programs and for advisory services.
•
Promotes and facilitates investment of public and private capital for development, and
•
Responds to requests for assistance in coordinating development policies and plans of its
developing member countries.
Formation of Development banks In India:
Development banks were set up in India at various points of time starting from the late 1940s
tocater to the medium to long term financing requirements of industry as the capital market
inIndia had not developed sufficiently. The endorsement of planned industrialization at thenational
level provided the critical inducement for establishment of Development banks at bothall-India
and state levels. In order to perform their role, DBs were extended funds in the form ofLong Term
Operations (LTO) Fund of the Reserve bank of India and government guaranteedbonds, which
constituted major sources of their funds. Funds from these sources were not onlyavailable at
concessional rates, but also on a long term basis with their maturity period rangingfrom 10-15
years. On the asset side, their operations were marked by near absence of competition.
A large variety of financial institutions have come into existence over the years to perform
avariety of financial activities. While some of them operate at all-India level, others are state
levelinstitutions. Besides providing direct loans, financial institutions also extend financial
assistanceby way of underwriting and direct subscription and by issuing guarantees. Recently,
some DBshave started extending short term/working capital finance, although long term lending
continuesto be their major activity.