CHAPTER - III

EVOLUTION OF DEVELOPMENT BANKS IN

INDIA AND ABROAD

Industrialization has been defined in a broad sense as “a process in which changes of a series of strategically production functions are taking place. It involves those basic changes that accompany the mechanization of an enterprise, the building of new industry, the opening of a new market and exploitation of a new territory. This is, in a way, a process of deepening as well as widening of cap ita l1” . Thus, industrial development involves transformation of the behavioral pattern, value system, religious belief, structure of social groups and econom ic arrangements. It not only raises the per capita income of a nation but also provides employment to the unemployed and partially employed. Bryce has rightly observed, “ Industrial deve lopment of under-developed countries has become one of the great world crusades of our time, it is an effort in which the under­developed countries place a major hope of finding a solution to their problem of poverty, insecurity and over-population and ending new realized backwardness in a modern world2”.

Further Prof. N. Williamson has stated that, “ it holds key to the realization of a variety of hopes and aspirations3."

The importance of industrial development in the process of econom ic growth is stressed because industrialization has an innovating power, that can give a forceful impact to the process of modernization, through higher level of employment, social equality and equitable distribution of income i.e. overall social transformation. The need for valid industrial development for the econom ic growth of developing economies is observed by Myrdal. "the deve lopment of

< liicn iic. Pci-Kantz.. Agricu lture and Industrialization Har\ard I m\ersit\ Press. Cam bridge.Ma^achu>ett;>. I'-M1,). pp 6l).

K r\ce. R I) .. Industrial Developm ent - A G u ide tor Accelerated Hconom ic Growth,. pp.(>.W iMiamson. Harold. I . Introduction to Lcononnc Developm ent : Princ ip le* and Patterns. Pren tice

i i- I i f t India P\ t l td. i . pp..-

manufacturing industry has been concomitant with these countries - spectacular economic progress and rise in levels of living.4”

In India not too much could be achieved on the front of industrial development under the foreign regime. The financial system has a close resemblance with a traditional economy characterized by low and constant per capita output5. Industrial sector was slander and stagnant and there was general dearth of entrepreneurship.

During the British regime, a wrong notion was popularized that the industrial development in India was financed by British investments. It was claimed by Vera Anstey and others, “the results of British connection have been instrumental in providing the economy considerable assistance by way of investment finance and management cover.” 6 But the fact was that the British capital invested in India was first raised in India. The original British investment in India coming from Britain especially for this purpose was very small7. Thus the incorrectness of the notion is clear from the statement that “capital in never taken from England to India; it is made there and remitted home8” .

Industrial development and industrial finance are essentially inseparable9, since without finance no industrial development can take place. During the initial course of industrial development, internal sources financed a major part of industrial needs in the country. The entrepreneurs raised finance either from their own savings or from fr iends and members of public who reposed trust on them. But the

\1\rilal. G . A il International Lconom v. Harper and R o w New York. I ‘>56. pp.226.Ik-nnct. R .L . 1: i n a 11 ci a I Sector and Lcononnc Developm ent. Baltim ore. l % 5 . pp.22-24 \nste_v. \ era.. The Lconom ic Developm ent o f India. Longm ans Green and C o.. London. 1952

Isanshal. C j . . The Lconom ic Historv o f India. 195 “ -(>(>. k a lvan i Publisthers. New Delh i. 1979.1 icdru in . C 'lairmonte.. Lconom ic L ibera lization and Underdevelopm ent. 1952. pp.85.Hanson. A .M .. Pub lic Lnterprise and Lconom ic Developm ent. Routledge and kegan Paul Ltd..

1 o ik lo n . 1 9o5. pp 250.

resources coming out of the savings from the profit of the industry could not have financed “more than a moderate rate of growth10” This system of financing industries could prevail only when the size of the viable unit was very small. But with the advance of science and technology and growing competition, both domestic and international, size of industrial units began to expand and with it expanded their need for capital which could no more be satisfied by internal sources only. The Indian economy was conspicuous by the absence of institutions like professional promoters, investments of issue houses, underwriting agencies and financial intermediaries.

Before 1906, Indigenous bankers were the main source of money lending. But they charged exorbitant rates of interest and could provide only short-term loans for small-size business. With the growth of jo int stock companies the need for long-term finance was felt. In fact, at that time a handful of managing agents were instrumental in supplying to the needs of long-term finance to the industries through their own earnings. Fiscal Commission reported that, "In early days of industrialization, when neither enterprise nor capital was plentiful, the managing agents provided both and India’s well established industries like Cotton, Jute and Steel etc. own their present position to the pioneering zeal and fostering care of several well-known managing houses”1'. They not only provided block and working capital themselves but also were responsible for the promotion and management of industrial units, acting as financiers and guarantors. They provided valuable service to India's industries. C.R. Cirvante in his famous work entitled. T h e Indian Capital Market' observed, "it was

< m p ia . I . C h a n g i n g S tru c tu re ot' Ind ustria l F in a n ce in Ind ia . O x fo rd I ni\ ersit\ Press . B o m tx n . pp -Rcport ('ii Indian Fiscal Commiss ion I pp .2 I 7.

only because of the adoption of the managing agency system that a jo in t stock organization was made possible in the face of dearth ofinvesto rs12.”

With the rapid industrial development in the country during Second Five Year Plan it came to be realized that the programs of rapid industrial development and managing agency system can not go together. The managing agency system obstructed the expansion of entrepreneurship and delayed the healthy growth of capital market. A terrible concentration of economic power in the hands of Managing Agents and their preference for early pro fit-making ventures led to the promotion of only those manufacturing areas with early profit making expectations. Consequently, a policy of gradual elimination of managing agents was adopted in 1956 and the system was completely abolished in April 1970.

In May, 1916, the Government of India appointed an Indian Industrial Commission to examine and report upon the possibilities of further industrial development in the country. The Commission pointed out that lack of financial facilities was one of the most serious bottlenecks in the encouragement of industrial development in India13. Thence, it recommended the establishment of industrial banks. The Central Banking Inquiry Committee in 1931 recommended the estab lishment of an all India Industrial Finance Corporation to meet long-term requirements of medium and small-scale industr ies14.

Subsequently, similar suggestions were made by some great econom ists of the country like Prof. S.K.Basu (in his pioneering and

( u \an le . V .R .. The Indian Capital M arket. O xtord I ni\ersu\ Press. 1950Repon ot' the Indian Industrial Com m ission 1 lM (>-1 S. Calcutta 191 X.pp.2S IReport o t'the Indian Central Banking Ln^u:: \ Com m ittee 1931. V o l. I. pan -1 .pp. 2S3-8S.

monumental work, Industrial Finance in India15) and Dr. P.S. Lokanathan (in his classic work, industrial Organization in India.)16. But nothing concrete came out until the achievement of Independence inthis respect.

It was the spirit of Swadeshi Movement (1906-1913) that gave impetus to the creation of Commercia l Banks to provide industrial finance. However, the experiment proved to be a big failure during the banking crisis of 1913-15 when most of the Swadeshi Banks closed since the long-term investments could not be realized at a time of crisis.

Shortage of industrial finance was increasingly felt immediately after the World W ar I when a boom period for Indian Industrialists came. As a result, the Tata Industrial Bank was established in 1917 but it could not achieve the main objective and in a very short span of time went into voluntary liquidation in August 1923. This was followed by the failure of several industrial banks. Mr. B.K. Madan states several reasons for their fa i lu re1'.

i. Risk of default.

n. Difficulties in realization

ni. Inadequacy of funds available for long-term investments and

iv. A very conservative outlook of the banks

During the Second World W ar period no solid step could be taken to promote and establish special financial institutions for industries. Commercia l banks were the only important in termediary

Basil S .K .. Industrial Finance in India. I m\ersit\ ot Calcutta. Ca lcutta . 1 % I1 okanathnn. P S . industrial O rganization in India. London . pp. 179-84.M adan B k . Hank and M ed ium term credit to mdustr> in R B I Bu lle tin . June. 195". pp.221 -227

financial institutions concerned with industrial financing. But the financial gap still existed because the commercial banks had maintained a near perfect aloofness in the matter of advancing long­term loans. The principal features of financial system before independence are aptly described by Gupta in these words :

"Thus the principal features o f the pre-independence industria l f inancial organization are the c losed circle character o f industria l entrepreneurship ; a semi-organized and narrow industria l securities market devoid o f issuing institutions and the virtual absence o f partic ipation by intermediary financial institution in the long-term financing o f indus try13. "

Such a financial system was clearly incapable of promoting new and innovating enterprise and increasing the rate of industrial growth.

In most case of the developing countries the stock of capital is usually found too inadequate to meet the developmental requirements. Edward Nevin rightly says, “the availability lies ultimately at the root of many of these needs... capital alone will not solve the other ingredients whose intelligent combination can eventually bring the impoverished people of the world to a tolerable standard of living. The supply of capital, therefore remains one of the key factors in the solution of the problems 9

Immediately after Independence, the absence of an organized and developed capital market was keenly felt. W ith the grow ing realization of the importance of finance as a basic input and a powerful lubricant for economic development, the quest for appropriate financial intermediaries that could effectively institutionalize savings and

1 p. I P i.’.. 1 ( . op. CU. pp.1)N e \ I . i apita! Rinds in I nderdcN eloped Countries. St. M artins Press Inc. New York . I % 1 -

channelize them for productive uses was greatly intensified.20 The most important inhibiting factor in the industrial development of India was lack of adequate finance. Though some short-term finance was available from the commercial banks but that too was inadequate and cumbersome. There was almost a complete absence of institutional arrangements for providing long and medium-term finance to Indian industries. So the need for setting up deve lopment banks to fill this gap was f e l t . W illiam A.W. Krebs rightly observes it.

"The basic difference between a deve lopm ent bank and a com m erc ia l bank is that, while the la tter engages in f inancing trade and com m erce through short-term loans, a deve lopm ent bank p rov idesm edium and long-term loans21

In India the problem was not only of providing long-term and medium-term capital to the small business concerns but also of promoting successful enterprises with adequate technical know-how. There was also an urgent need for the rehabilitation and modern ization of certain industries that were overworked during the war period. As a result, deve lopment banks were set up to meet soc io-econom ic objectives of the state policy i.e. encouragement to new entrepreneurs and small enterprises, deve lopment of backward regions etc. in addition to the creation of strong financial base in the country. Each deve lopment bank is modeled on a pattern that is best suited to economic, social, cultural and industrial set-up of the country/reg ion in which it opera tes22.

M i\ra. P .C . and A char\a . G .P .. W orking o f the Slate F inancia l Corporations. Ind ian Publishersi v.strihmors. De lh i. 1st Ld ition. 1995. pp.O.

Krebs. \\ iiliam A .W .. The Strategy o f Industrial I.)e\clopnient in Industrial D eve lopm ent: S c ience . i echnoloLj} and De\elopm ent . Cnited States paper prepared for United nations. V o l. IV . S c ie n tif ic Book A g en c ). Calcutta. 1 967.pp. I 4-1 5.

[)a\e . R o h it .(F d ) F inanc ia l Institutions in the Indian F co n o m \ . C om m erce Pam p h le t' 84 B o m b a v iX ve m h e r. I 974. pp I 6-1 7.

With a view to making available a variety of advisory services to entrepreneurs in the preparation of feasibility reports, choice of products and production technology etc. the Industrial Development Bank of India and other All-India Financial Institutions have taken the initiative, in recent years, in establishing a chain of Technical Consultancy Organizations (TCOs). These institutions have devised training programs, which is quite educative and well appreciated by partic ipants from other developing countries.

These are in the nature of infrastructure activities for developing that crucial factor in industrial development, namely, the human factor. The gains will be spread over a long period of time and even then they are not quantifiable.

Thus, even within the framework of its traditional lending activities, a development bank has a significant role to play in achieving a socially desirable product-mix, stepping up industrial growth, directing industries to industrially backward regions, preventing concentration of economic power and in promoting the growth of small, new and technical entrepreneurs23.

Evolution of Development Banks AbroadThe growth of development banking is now a world-w ide

phenomenon. Development banking has become a well-recognized branch of finance. In nearly every developing country, deve lopment banks have been established. As a matter of fact, in most countries, there are a number of development banks- some set up to cater to the

V V . De\elopnier.i Banking - Retiv>pcct ar.j pim ped. I lie Journal o f the Indian Institute ot’H . e ; \ v J.muarv- M are :1..

needs of particular regions or states or sectors of the economy24. The emergence of development banks in each country, “ reflects the background situation and the needs of the country in which they appear25”. Evolution of specialized financial institutions even in the advanced countries is a consequence of their special needs and circumstances of the time. Indeed, in some of the developed countries too, it was found necessary to establish development banks, quite sometime back. Ever since the time of Industrial Revolution in England, a significant need of entrepreneurial ability was recognized by those countr ies of European Continent. In the early part of 19th century these countr ies were not economically prosperous as England. There was dearth of capital and other factors of industrialization26. From this background specialized financial institutions, a prototype of today’s deve lopment bank, emerged on the European continent during the 19th cen tu ry27. During the 19th century the earliest institution which arose from this need was the, 'Societe Generals de Belgique’ established in 1822 in Belgium with the specific purpose of financing and promoting industry. This institution promoted many industries and established a number of financial subsidiaries28. Its activities, however, went unnoticed. But it was really the French ‘Credit Mobilier’ established by the Pereire Brothers in 1852, which soon caught the imagination of industria l financiers in different countries. Although so many other financial institutions were working in the field in France at that time but only French Credit Mobilier did the pioneering effort towards building

Sinha. S .L .N .. Developm ent Banking in India Institute for Financial Management and Research. M adras. First Ed ition . June. 1976. p.2.

D iam ond. \\ .. Dev elopment Banks. The John Hopkins Press. Ba ltim ore. 195“ . pp. 104. tiescthenkron .. A lexander.. "E co n o m ic Backw ardness in H istorical Perspective" in Bert llosehtz

•edi the progress o f underdev eloped area. Ch icago I niversitv o f Ch icago Press. 1952. pp..v La ). M \ .. op.cit. pp.27.1 he C h ie f subsidiaries were the "Society National L o w Enterprises Industrials and Com m ercia ls

a : i j the Societv de Com m erce B ruxe lls .'

up an institutional structure of industrial finance. Its main objective was to finance new public utility concerns having very low prospects of immediate gains. After its spectacular success it got involved in the crisis of 1857 and finally dosed down in 1867. The main factors responsib le for its failure were reckless deployment of its funds, greater concern for making immediate gains etc29.

However, during the short career of 15 years it had so much impact on the thinking of people interested in such institution that it became a model for similar investment banks established in Germany, Austria, Belgium, Netherlands, Italy, Spain and Switzerland30. “ It will perhaps be no exaggeration to say that in the days before the War in 1914, it was the only known model before a country which was desirous of funding an 'Industrial Bank’ for the financing of its own industries ; (S.K.Basu 1961 )31.

Germany also did not lag behind in this race. In 1853, they established an institution namely, 'Darmatadter Bank’. This bank was entirely based on the model of French Credit Mobilier and it took a keen interest in providing the capital requisite for the creation and extension of business undertaking. An important feature introduced by this bank was the provision of technical advice and managerial ta lent32.

Twentieth century started with clear understanding of the need of such institutional financing of industries. Japan started the Industrial

W h a le . P .B .. Eng lish and Continental Banking Lecture II. Journal o f In.stitutc o f Bankers. I ondon. \1a>. I 9.> I . pp.202.

I )iam ond. \\ .. op.cit. pp.6.Basil. S.Is... Industrial Finance in India. I m\ersh\ ot C alcutta. I aleutta. 19o 1. pp.5.\an d a . Jax an ta .k .. De\elopm ent Finance. Sarup and Sons. \ e u Delhi. First Fdu ion. _u u l. pp.9.

Bank of Japan in 1902, on the pattern of French Credit Mobilier, to specialize in providing long-term funds to industries33.

After the first World War the problem of industrial financing became all the more acute throughout the world. “Never was such a great demand for long dated capital for industries and never was felt a more imperative need for organizing a special machinery to supply thatcap ita l34” .

To remove the shortage of capital and technical know-how, Company for the Development of Industries’ was set up in South Africa. In 1919 to finance new industries on medium and long-term basis the Government of South Africa established the ‘National Industrial Corporation of Africa Limited35. In 1919 Belgium established, ‘Society National de Credit al Industries’ (SNCI) and France established the ‘Credit National Pour Faciliter la Deparation des Damages Causes par la Guerre ’ to provide long-term credit to industrial enterprises. The ‘Bank Misr’ was set up in 1920 in Egypt to partic ipate in the equities of new concerns and make loans to suitable app lican ts36.

In England, long-term financial needs of industrial enterprises were met by the other wings of British Capital Market viz. Issue houses, Company Promoters and the Underwriters3'.

\i!en. A short Econom ic I l is ten o f M odern Japan, I icon ic Allen and I num . London. 1l)4(>.op -N-M).

H.i-t:. S K . op.cit. pp.5.

Rosenthal, Lris.. The stor\ ot’ the first t\\em> \ears ( 11) 4 0 - I o f the industrial D evelopm enti >v p .-ration o f South A frica L im ited .pp.7.

' nited Nations. Processes and Problems o f Industrialization in under de\eicped countries. \ e u'i ork. ’,955. pp.56.

V n e i i P .N .. Ro ie o f De\ elopment Banks in a Planned L c o n o n n . \ ikas Pub lish ing House I’ m Ltd . D e lh i. I V~4. pp.57.

But the problem was of short and medium-term loans. This problem was remedied by the recommendation of establishing specialized institutions to fill up this ‘gap ’ by the Macmillan Committee. As a result, institutions namely the ‘Industrial and Commercial Finance Corpora tion ’ and 'Finance Corporation for Industry Ltd.’ were set up in 1945.

With the passage of time USA and other countries in the European Continent became keener to set up new and up-to-date agencies for industrial finance in the form of mortgage banks. “Granting long-term amortization loans on first mortgage of property and issuing bonds to raise the necessary funds to finance these loans38’’. The Industrial Mortgage Bank of England” , T he National Hungarian Industrial Mortgage Institute Ltd’, ‘Provincial Mortgage Bank of Saxony ’ were some such typical institutions.

In the post depression period USA felt the need to promote business recovery and the Reconstruction Finance Corporation was created in 1932, to provide emergency financing facilit ies for institutions which provide finance to industry, agriculture and com m erce39. Under similar conditions Government of Italy set up the Institute Moboliare Italians’ in 1931 and the ‘Institute per la Ricostrusione Industria l’ in 1933.

In Canada the Development Bank Act was passed in 1944 to constitute Industrial Development Bank. The Bank provides assistance to those concerns which need new machinery or equipment buildings or extension to existing buildings and supplements the activities of other lenders and provides assistance to small enterprises. Germany

H.im i . S k . Theory and Practice o f Developiv.ci'.t H.mkiivc. Asia Publishing House. Bom tv .v I 'K o .

W n iian ison.. G row th ol ihc A m cncan [•.conoi'n\. IVer.tice-i Inli. \ c w ̂ ork. i. pp S.'

established their eminent development bank in the Kreditanstalt fur Wiederfbau, popularly known as KFW (Reconstruction Loan Corporation) establisthed in 1948 for providing loan assistance to the developing countries besides providing loan assistance to domestic enterprises. The most formidable role in the reconstruction of German economy has been played by the Industrial Credit Bank which was established in 1949 for the purpose of providing long-term finance for the reconstruction and improvement of German industries. The Industrial Finance Department of Commercial Bank of Australia (1945) inc luded varied promotional functions besides promotion of finance to industries.

For the rehabilitation of war ravaged industries, the ‘Netherlands Finance Corporation for National Reconstruction’ was established in 1945 in Holland and the ‘Horstal Bank’ was established in Denmark the same year.

‘Corporation de Fomento de la Production’, forerunner of deve lopment corporations in Latin American countries was establishedin 1939 in Chile.

For developing of basic industries and providing both financial and technical aid to the country various institutions were set up like. Institute de Fomento Industrial’ in 1940, Colombia ; ‘National Financer in 1934, Mexico ; ‘ Industrial Development Company’ in 1942. Puerto Rico; ‘Corporation Boliviana de Fomento ’ in 1942, Bolivia. Corporation Venezo lava de Fomento’ in 1946. Venezuela, 'Banco National de Desenvolv imento Economic’ in 1952 Brazil etc.

In 1946. Iraq establisthed a separate Industrial Bank' to devote fu l l attention to industries.

After the establishment of ‘ Industrial Finance Corporation’ in 1949 Pakistan Government felt the need to industrialize at a faster rate. So in 1952, ‘Pakistan Industrial Development Corporation’, was established. To provide facilities to small units the ‘Small Industries Corpora tion ’ was set up in 1956.

Simultaneously with the growth of development banks at the national level, international development banks have been established. There is a global institution in this sphere, namely, the 'World Bank’ or The ‘International Bank for Reconstruction and Development’ (IBRD) as it is officially called. It was established towards the close of 1945. World Bank has two affiliates namely the in ternationa l Finance Corpora tion ’ (IFC) established in 1956 and the in ternationa l Development Association ’ (IDA) set up in 1960.

With the guarantee of the member Governments the IBRD can only give loans. The IFC was established to provide loan and investment assistance to private sector units in the member countries without Government guarantee. The IDA was established for the purpose of making soft loans; the loans are practically free of interest, have a grace period of 10 years and repayment is spread over 40 years thereafter.

Besides, there are regional multinational development banks, the earliest of them established in 1960. It was called the in te r-American Development Bank’, followed by the establishment of the African Development Bank’ in 1964 and the ‘Asian Development Bank' in 1966. In Europe too, there is a development bank called the ‘European Investment Bank ’ that was set up in 1958 as an institution of the European Economic Community.

It is difficult to imagine the course of economic growth which has taken place in the world without the significant contribution made by these financing institutions. Their catalytic importance should not be underestimated40.

It should be noted that there is a considerable variety of deve lopment banks, set up in response to the varying needs of different countries and of different times of the same country. There cannot be any finality or rigidity about the detailed objectives, structure and methods of these institutions. Development banks have to adapt themselves continuously to the emerging needs of the dynamic econom y41.

Evolution of Development Banks in India

In India the earliest attempt to set up a banking institution dates back to Jan 1773 when the then Governor of Bengal, Warren Hastings, recommended the establishment of a ‘General Bank in Bengal and B ihar. The bank was set up in 1773, but it proved to be only a short­lived experiment42. In India, banking on Western lines started when the first jo in t stock bank by the name of 'Bank of Hindustan' was set up at Calcutta under European management . But this Bank also failed. It was with the setting up of three ‘Presidency Banks' at Bengal (1806). Bombay (1840) and Madras(1843) that modern banking got some impetus. ‘Oudh Commercial Bank’ set up in 1881 was the first purely

I V s .ii. \ .i.sant... Do\ elopment Bank ing : l>>ues and Options. H im alava IL i i 'C . B o m b ay .> N S . p p . . '9

V n i i . i . s . L A . , o p .c i t . p p .5-6 ."Rcxcrx e Bank ot India : Functions and \\ ork inu" publisthcd b\ R B I . 4 L d i t : . , ‘ 'S.-. pp !

Indian bank followed by ‘Punjab National Bank’ in 1894 and thePeop le ’s Bank’ in 1901.

India emerged as a free nation in 1947 after a long colonial era. It was at this time that the Indian Government recognized the need of econom ic development and adopted the industrialization as a quick and short path to economic progress. Success in the implementation of programmes for planned industrial development depends, to a large extent, on the availability of adequate financial resources for a w ide variety of projects43.

The commercia l banks in India could only meet the short-term work ing capital requirements of the industries. Thus the Indian Government took over the responsibility of making the plans, formulating the polic ies and adopting the strategies of growth by setting up various deve lopment banks with the expectation that they would help in removing the obstacles to industrialization44.

The First f ive-year plan expressed the situation as - “the problem was not merely one of making the existing econom ic s ituations work more efficiently or making small adjustments in them, what was required, was a transformation of that system so as to ensure greater effic iency as well as equality and justice45.

The idea of establishing specialized institutions for the provision of finance for industry was given by different Commissions and Comm ittees long before Independence For eg. ‘ Indian Industrial Com m iss ion ’ (1916-1918) and 'External Capital Comm ittee ’ (1924) had advocated for the creation of specialized institutions. In 1931 the Central Banking Inquiry Committee strongly recommended the creation

Desai. Yasant.. op.oil. pp..' I .Lai. M. V.. op.cit. pp.3 I .Hanning Commission . Go\ 1. ot' India. Lirsi Li\ e Year Plan. April. 11)5 I .

of ‘Provincial Industrial Credit Corporations ‘ and an All-India Institution for the purpose of meeting the financial requirements of industries of regional and national importance respectively. But nothing concre te emerged till Independence. In 1945 a detailed study was carried out by the Reserve Bank of India with the help of Finance Wing of the Planning and Development Department of the Central Government to explore the possibilities of establishing both all-India and regional institutions of industrial finance. Ardeshir Dalai and C.D. Deshmukh, the then planning member and Governor o f the Reserve Bank of India, respectively, gave a practical approach. The proposal passed through several stages and finally took concrete shape with the estab lishment of the Industrial Finance Corporation of India in July 1948. “The first step towards building up a structure of deve lopment f inance institutions was taken with the establishment of the Industrial F inance Corporation of India in 1948, with a view to providing medium and long-term credit to units in the corporate sector and industrial coopera tives”46.

Industrial F inance Corporation of India was the first institution of its kind and the role assigned to it was that of a gap-filler, which implied that, it was expected not to compete with the existing channels of industria l finance. It was expected to provide medium and long-term cred it to industrial concerns including cooperatives, only when they could not raise funds by taking recourse to capital issue method or normal banking accommodation.

The establishment of Industrial Finance Corporation of India was fo l lowed by the creation of regional institutions at state-levels so that a chain of specialized institutions could be built up. It was necessary

Desai. Vasant.. op.cit. pp.42.

because the promotion of a few large-scale enterprises without supporting a great number of specialized sub-suppliers and processors would considerably weaken the overall economic effects of the financing by development banks. Moreover, financing of small and medium-s ized enterprises was also considered necessary from the standpo in t of income and employment generation. Thence, the State Financial Corporation Act 1951 was passed and the State Finance Corporation came into existence to supplement the long term financing of the Industrial Finance Corporation of India.

These statutory corporations were expected to provide a solution to the long-standing complaint of inadequate long-term financing facilit ies for both large as well as small enterprises. Besides, they were expected to underwrite new issues, promote and encourage new enterpr ises and while doing so adopt a rational attitude rather than to continue with the traditional and conservative practices for the advance of loans. But they could not do so due to -

1) their constitutional bindings.

2) lack of viable financial structure

3) excessive degree of Government control and interference

4) lack of competent and sufficient technical staff.

Their orthodox approach proved to be a serious obstacleto providing capital to really deserving industrial enterprises.M.Y. Khan has commented upon the failure of both the IndustrialF inance Corporation of India and the State Finance Corporation.

“Their polic ies were characterized by excessive caution; their procedures were dilatory, they concentrated on traditional industr ies and m ore em phasis was laid on security rather than on prospects. It

was no wonder, therefore, that they failed to make any impact on the availability o f long-term finance to industry and consequently, could not ju s t i fy the expectation o f solving the prob lem o f chronic shortage o f industr ia l capital in India47

Thus the need for the establishment of true development agencies of some more dynamic nature was felt and the two institutions, the ‘National Industrial Development Corpora tion ’ (NIDC) and the indus tr ia l Credit and Investment Corporation of India ’ (ICICI) were created. The NIDC was established in 1954 as a wholly owned Government company with the objective of promoting industries which were considered vital for the growth o f the economy but could not be easily developed otherwise. Thus , it was not expected to function mere ly as financial agency but provide both entrepreneurial and f inancia l assistance. But it soon got transformed into a financing agency restricting itself to the modernization and rehabilitation of cotton and ju te textile industries. Since it has been converted into a consu ltancy organization, now it is no more to be considered a deve lopment bank. The Industrial Credit and Investment Corporation of India was set up in 1955 as a joint stock company with support from the Government of India, the World Bank, the Commonwealth Deve lopment Finance Corporation (CDFC) and other foreign institutions. Its ownership, however, was entirely in the private sector. The prime motive behind the ICICI was to establish a bank , which should be free from any interference from the government and also to provide a viable financial structure for the corporate private sector. From the very beginning it has been an issuing-cum-lending institution and started underwriting work, which was followed by other institutions.

Khan . M .Y . . Indian F inancia l Svstem : Theorv and Practice. V ikas Publish ing House P\t. Ltd. New D e lh i. 'I bird Revised Ed ition . 1985. pp. I 34.

In promoting industrial investment the ICICI seeks cooperation from the other financial institutions, both Indian and foreign. As a recip ient of loans from the World Bank it has served as a channel for the World Bank ’s aid to industries in the private sector. The bulk of its assistance has been to the existing companies though sympathetic consideration has been given to the demand for loans made by the new companies.

In 1956 by the nationalization of the life insurance companies and estab lishment of a single body named as the Life Insurance Corporation o f India (LIC) the list of institutions was further enlarged.

In 1958 the Government of India decided to introduce a scheme of term lending by the Commercial Banks. As a result, the Refinance Corporation for Industry (RCI) was setup in 1958 by the Reserve Bank of India, Life Insurance Corporation and Commercial Banks with a view to provid ing refinance to commercial banks against long and medium term loans granted by them. Subsequently, in 1962 the RCI was authorized to provide refinance to SFCs, also against term-loans granted by them to industrial concerns in the private sector. Since the scope of the activities of the RCI was narrow, it was not fit to emerge as an apex development bank of the country and later on, it was merged with the IDBI when it came into existence in 1964.

The major reorganization and strengthening of the structure of specialized financial institutions took place in 1964 with the estab lishment of IDBI as an apex institution in the sphere of medium and long-term financing. It was established to coordinate the activities of the existing financial institutions and also to provide them assistance in the financing work by the facility of refinancing of long-term loans, subsidiz ing their bonds and debentures, rediscounting the bills of

commercia l banks and SFCs and guaranteeing their deferred payments. IDBI’s direct assistance is available to medium and large- scale projects undertaken by public limited companies, cooperative societies and technocrat entrepreneurs.

To stimulate and pool the savings of the middle and low-income groups and to enable them to share the benefits and prosperity of the rapidly growing industrialization in the country, one more institution was set up in 1964 which was new and unique in nature known as the Unit Trust of India.

General Insurance Companies (GIC) were also nationalized in the early 1970’s which started functioning as one of the main institutional investors in industrial securities.

In the second half of the 1960s, the State Industrial Development Corporations (SIDC), owned by the State Governments, were established to promote medium scale industrial units. They promoted a number o f projects in the jo in t sector and ‘assisted’ sector and set up some industrial units as fully owned subsidiaries. They not only provided them infrastructural facilit ies but also participated in their equity and provided term-loans and underwriting assistance. In recognition of the crucial role, played by them in the promotion of industries in different states, they were made eligible for IDBI refinance facilities in 1976 and are considered an integral part of the deve lopment banking system of the country.

To cater to the needs of the rehabilitation of sick industrial units, export finance, agriculture and rural development operations, the creation of specialized institutions has been of profound significance. In April 1971, the Government of India has set up the Industrial Reconstruction Corporation of India (IRCI) under the Indian Companies

Act mainly to look after special problems of ‘s ick ’ units and provide assis tance for their speedy reconstruction and rehabilitation, if necessary, by undertaking the management of the units and develop ing infra-structure facilit ies like transport, marketing etc.

The Export Import Bank of India commonly known as the EXIM Bank was set up on Jan 1, 1982 to take over the operations of the international finance wing of the IDBI and to provide financial assis tance to the exporters and importers and to function as the principal financial institution engaged in financing of exports and imports of goods and services. The EXIM Bank provides refinance facilit ies to the commercial banks and financial institutions against their export- import financing activities.

The National Bank for Agriculture and Rural Development (NABARD) was set up in July 1982 with a view to strengthening the institutional network catering to the credit needs of the agriculture and rural sectors. NABARD is responsible for short-term, medium-term and long-term financing of agricultural and allied activities and for oversee ing the rural credit system, which includes cooperative banks and regional rural banks as the primary lending agencies.

The synoptic view of the structure of development banking in India shows that since the inception of the Industrial Finance Corporation of India, the Government has provided necessary impetus to industrial growth by setting up several developmental agencies. But the operation of these institutions has been unsatisfactory in the promotion of backward areas. These institutions also could not abate the regional imbalances. They should undertake faster promotional roles and encourage new and small enterprises. Mere proliferation of deve lopment bank will not suffice for industrialization in India. It is now

required that the development banks should reorient their promotional polic ies and become real creator of resources for industries and in their effort they should be guided by the dedicated efforts of the Central and State Governments. Only then these development banks would achieve the objectives.