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Unit 2: Role of Banks in the Development of Economy

precondition to the effective implementation of monetary policy. Underdeveloped Notes
countries cannot afford to ignore this fact.

!

Caution A fine, an efficient and comprehensive banking system is a crucial factor of the
developmental process.

Support to the Capital Market: The basic purpose of DFIs particularly in the context of a
developing economy, is to accelerate the pace of economic development by increasing
capital formation, inducing investors and entrepreneurs, sealing the leakages of material
and human resources by careful allocation thereof, undertaking development activities,
including promotion of industrial units to fill the gaps in the industrial structure and by
ensuring that no healthy projects suffer for want of finance and/or technical services.
Hence, the DFIs have to perform financial and development functions on finance functions,
there is a provision of adequate term finance and in development functions there include
providing of foreign currency loans, underwriting of shares and debentures of industrial
concerns, direct subscription to equity and preference share capital, guaranteeing of
deferred payments, conducting techno-economic surveys, market and investment research
and rendering of technical and administrative guidance to the entrepreneurs.

Rupee Loans: Rupee loans constitute more than 90 per cent of the total assistance sanctioned
and disbursed. This speaks eloquently on DFI’s obsession with term loans to the neglect of
other forms of assistance which are equally important. Term loans unsupplemented by
other forms of assistance had naturally put the borrowers, most of whom are small
entrepreneurs, on to a heavy burden of debt-servicing. Since term finance is just one of the
inputs but not everything for the entrepreneurs, they had to search for other sources and
their abortive efforts to secure other forms of assistance led to sickness in industrial units
in many cases.
Foreign Currency Loans: Foreign currency loans are meant for setting up of new industrial
projects as also for expansion, diversification, modernization or renovation of existing
units in cases where a portion of the loan was for financing import of equipment from
abroad and/or technical know-how, in special cases.

Subscription to Debentures and Guarantees: Regarding guarantees, it is well-known that
when an entrepreneur purchases some machinery or fixed assets or capital goods on
credit, the supplier usually asks him to furnish some guarantee to ensure payment of
installments by the purchaser at regular intervals. In such a case, DFIs can act as guarantors
for prompt of installments to the supplier of such machinery or capital under a scheme
called ‘Deferred Payments Guarantee’.

Assistance to Backward Areas: Operations of DFI’s in India have been primarily guided
by priorities as spelt out in the Five-Year Plans. This is reflected in the lending portfolio
and pattern of financial assistance of development financial institutions under different
schemes of financing. Institutional finance to projects in backward areas is extended on
concessional terms.

Example: Lower interest rate, longer moratorium period, extended repayment schedule
and relaxed norms in respect of promoters’ contribution and debt-equity ratio.
Such concessions are extended on a graded scale to units in industrially backward districts,
classified into the three categories of A, B and C depending upon the degree of their
backwardness. Besides, institutions have introduced schemes for extending term loans for
project/area-specific infrastructure development. Moreover, in recent years, development

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