MEANING:

The name bank derives from the Italian word banco, desk,
used during the Renaissance by Florentines bankers, who used
to make their transactions above a desk covered by a green
tablecloth
A bank is a commercial or state institution that provides
financial services, including issuing money in various forms,
receiving deposits of money, lending money and processing
transactions and the creating of credit. A commercial bank
accepts deposits from customers and in turn makes loans, even
in excess of the deposits. Some banks (called Banks of issue)
issue banknotes as legal tender. Many banks offer ancillary
financial services to make additional profit; for example, most
banks also rent safe deposit boxes in their branches.
Currently in most jurisdictions commercial banks are
regulated and require permission to operate. Operational
authority is granted by bank a regulatory authority that
provides rights to conduct the most fundamental banking
services such as accepting deposits and making loans. A
commercial bank is usually defined as an institution that both
accepts deposits and makes loans; there are also financial
institutions that provide selected banking services without
meeting the legal definition of a bank. Banks have influenced
economies and politics for centuries. Historically, the primary

purpose of a bank was to provide loans to trading companies.

Banks provided funds to allow businesses to purchase
inventory, and collected those funds back with interest when
the goods were sold. For centuries, the banking industry only
dealt with businesses, not consumers. Commercial lending
today is a very intense activity, with banks carefully analysing
the financial condition of their business clients to determine the
level of risk in each loan transaction. Banking services have
expanded to include services directed at individuals, and risks
in these much smaller transactions are pooled.
A bank generates a profit from the differential between
the level of interest it pays for deposits and other sources of
funds, and the level of interest it charges in its lending
activities. This difference is referred to as the spread between
the cost of funds and the loan interest rate. Historically,
profitability from lending activities has been cyclic and
dependent on the needs and strengths of loan customers. In
recent history, investors have demanded a more stable
revenue stream and banks have therefore placed more
emphasis on transaction fees, primarily loan fees but also
including service charges on array of deposit activities and
ancillary services (international banking, foreign exchange,
insurance, investments, wire transfers, etc.). However, lending
activities still provide the bulk of a commercial bank's income.
CURRENT SCENAREO:
2

Currently (2007), overall, banking in India is considered as

fairly mature in terms of supply, product range and reach-even
though reach in rural India still remains a challenge for the
private sector and foreign banks. Even in terms of quality of
assets and capital adequacy, Indian banks are considered to
have

clean,

strong

and

transparent

balance

sheets-as

compared to other banks in comparable economies in its

region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of
the Bank on the Indian Rupee is to manage volatility-without
any stated exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong
for quite some time-especially in its services sector, the
demand

for

banking

services-especially

retail

banking,

mortgages and investment services are expected to be strong.

M&As, takeovers, asset sales and much more action (as it is
unraveling in China) will happen on this front in India.
In March 2006, the Reserve Bank of India allowed Warburg
Pincus to increase its stake in Kotak Mahindra Bank (a private
sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the
RBI announced norms in 2005 that any stake exceeding 5% in
the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) 28 public sector banks (that is with the Government of India
holding a stake), 29 private banks (these do not have
government stake; they may be publicly listed and traded on
stock exchanges) and 31 foreign banks. They have a combined
network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking
industry, with the private and foreign banks holding 18.2% and
6.5% respectively.

BANKING SERVICES IN INDIA:

With years, banks are adding services to
their customers. The Indian banking industry
is passing through a phase of customers
market. The customers have more choices in
choosing their banks. A competition has been
established within the banks operating in India.
With stiff competition and advancement of technology, the
services provided by banks have become more easy and
convenient. The past days are witness to an hour wait before

withdrawing cash from accounts or a cheque from north of

country being cleared in one month in the south.
This section of banking deals with the latest discovery in the
banking instruments along with polished version of their old
systems.
A bank is a business which provides financial services for
profit. Traditional banking services include receiving deposits of
money, lending money and processing transactions. Some
banks (called Banks of issue) issue banknotes as legal tender.
Many banks offer ancillary financial services to make additional
profit; for example: selling insurance products, investment
products, or stock broking.
Currently in most jurisdictions the business of banking is
regulated and banks require permission to trade. Authorization
to trade is granted by bank regulatory authorities and provides
rights to conduct the most fundamental banking services such
as accepting deposits and making loans. There are also
financial institutions that provide banking services without
meeting the legal definition of a bank.
BANKING IN INDIA:
Banking in India originated in the
first decade of 18th century with The
General Bank of India coming into
existence in 1786. This was followed by
Bank of Hindustan. Both these banks
5

are now defunct. The oldest bank in existence in India is the

State Bank of India being established as "The Bank of Bengal"
in Calcutta in June 1806. At that point of time, Calcutta was the
most active trading port, mainly due to the trade of the British
Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad
Bank, which was established in 1865.By the 1900s, the market
expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in
Mumbai - both of which were founded under private ownership.
The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's
independence in 1947, the Reserve Bank was nationalized and
given broader powers.

OVERVIEW OF DEVELOPMENT BANKING IN INDIA:

The concept of development banking rose only after

Second World War, Successive of
the Great Depression in 1930s.
The demand for reconstruction
funds for the affected nations
compelled
worldwide

in

setting

institution

up
for

reconstructions. As a result the

IBRD was set up in 1945 as a
worldwide institution for development and reconstruction. This
concept has been widened all over the world and resulted in
setting up of large number of banks around the world which
coordinating the developmental activities of different nations
with different objectives among the world.
The course of development of financial institutions and
markets during the post-Independence period was largely
guided by the process of planned development pursued in India
with emphasis on mobilization of savings and canalizing
investment to meet Plan priorities. At the time of Independence
in 1947, India had a fairly well-developed banking system. The
adoption of bank dominated financial development strategy
was aimed at meeting the sectoral credit needs, particularly of
agriculture and industry. Towards this end, the

Reserve Bank concentrated on regulating and developing

mechanisms for institution building. The commercial banking
network was expanded to cater to the requirements of general
banking and for meeting the short-term working capital
requirements

of

industry

and

agriculture.

Specialized

development financial institutions (DFIs) such as the IDBI,

NABARD, NHB and SIDBI, etc., with majority ownership of the
Reserve Bank were set up to meet the long-term financing
requirements of industry and agriculture. To facilitate the
growth

of

these

institutions,

mechanism

to

provide

concessional finance to these institutions was also put in place

by the Reserve Bank. The first development bank In India
incorporated immediately after independence in 1948 under
the

Industrial

Finance

Corporation

Act

as

statutory

corporation to pioneer institutional credit to medium and largescale. Then after in regular intervals the government started
new and different development financial institutions to attain
the different objectives and helpful to five-year plans. The early
history of Indian banking and finance was marked by strong
governmental regulation and control. The roots of the national
system were in the State Bank of India Act of 1955, which
nationalized the former Imperial Bank of India and its seven
associate banks. In the early days, this national system
operated along side of a large private banking system. Banks
were limited in their operational flexibility by the governments
8

desire to maintain employment in the banking system and

were often drawn into troublesome loans in order to further the
governments social goals. The financial institutions in India
were set up under the strong control of both central and state
Governments, and the Government utilized these institutions
for the achievements in planning and development of the
nation as a whole. The all India financial institutions can be
classified under four heads according to their economic
importance that are:
All-India Development Banks
Specialized Financial Institutions
Investment Institutions
State-level institutions
Other institutions
DEVELOPMENT FINANCIAL INSTITUTIONS:
Preface
The emerging economies in post colonial era faced the
difficult choice of appropriate mechanism for
chanalizing resources into the development
effort. Many of them had inherited capital
starved

primitive

financial

systems.

Such

system could not be relied upon to allocate

resources among competing demands in the economy. The task

of institution building was too important to be left at the mercy

of the market forces at the nascent stage of development. In
such a situation several governments in Continental Europe
and East Asian economies decided to take matters into their
hands and established institutions specifically to cater to the
requirements of financial resources for developmental effort.
Such

institutions

were

called

Development

Financial

Institutions.
Development financing is a risky business. It involves
financing of industrial and infrastructure projects which usually
have long gestation period. The long tenor of such loans has
associated with it uncertainty as to performance of the loan
asset. The repayment of the long term project loans is
dependent on the performance of the project and cash flows
arising from it rather than the realisability of the collaterals.
The project could go wrong for a variety of reasons, such as,
technological obsolescence, market competition, change of
Government policies, natural calamities, poor management
skills, poor infrastructure etc. The markets and banking
institutions were highly averse to such uncertain outcome,
besides not possessing enough information and skills to predict
with any certainty the outcome. There was also the cost
considerations associated with such risky ventures. The long
term loan comes with a higher price tag due to the term
premium loaded into the pricing. In such a situation the long

10

term financing would be scarce as well as costly so as to render

the project financially unviable.
DFIs were established with the Government support for
underwriting their losses as also the commitment for making
available low cost resources for lending at a lower rate of
interest than that demanded by the market for risky projects.
This

arrangement

development.

As

worked
the

well

in

the

infrastructure

initial

years

building

of
and

industrialization got underway the financial system moved

higher on the learning curve and acquired information and
skills necessary for appraisal of long term projects. It also
developed appetite for risk associated with such projects. The
intermediaries

like

banks

and

bond

markets

became

sophisticated in risk management techniques and wanted a

piece of the pie in the long term project financing. These
intermediaries also had certain distinct advantages over the
traditional DFIs such as low cost of funds and benefit of
diversification of loan portfolios. The Government support to
DFIs, in the meanwhile, was also waning either for fiscal
reasons or in favour of building market efficiency. Therefore,
towards the end of twentieth century the heydays of DFIs were
over and they started moving into oblivion. In several
economies, having attained their developmental goals, the DFIs
were both restructured and repositioned or they just faded
away from scene. The Indian experience has also more or less
traversed the same path. Although India cannot said to have

11

achieved the developmental goals yet, the Government's fiscal

imperatives and market dynamics has forced a reappraisal of
the policies and strategy with regard to the role of DFIs in the
system.
EVOLUTION,

OBJECTIVES

AND

FINANCIAL

POSITION

OF

FINANCIAL INSTITUTIONS IN INDIA:

A typical structure of financial system in any economy
consists of financial institutions, financial markets, financial
instruments and financial services. The functional, geographic
and sectoral scope of activity or the types of ownership are
some of the criteria which are often used to classify the large
number and variety of financial institutions which exist in the
economy. In its broadest sense the term financial institution
would include banking institutions and non-banking financial
institutions
1. The banking institutions may have quite a few things in
common with the non-banking ones. However, the distinction
between the two has been highlighted by Sayers, by
characterizing the former as creators of credit, and the latter
as mere purveyors of credit
2. This distinction arises from the fact that banks, which
are part of payment system, can create deposits and credit but
the non-banking institutions, which are not part of payment
system, can lend only out of the resources put at their disposal
by the savers.

12

DEVELOPMENT FINANCE INSTITUTIONS:

An efficient and robust financial system acts as a powerful
engine of economic development by mobilizing resources and
allocating the same to their productive uses. It reduces the
transaction cost of the economy through provision of an
efficient payment mechanism, helps in pooling of risks and
making

available

long-term

capital

through

maturity

transformation. By making funds available for entrepreneurial

activity and through its impact on economic efficiency and
growth, a well functioning financial sector also helps alleviate
poverty both directly and indirectly.
In a developing country, however, financial sectors are
usually incomplete in as much as they lack a full range of
markets and institutions that meet all the financing needs of
the economy. For example, there is generally a lack of
availability of long-term finance for infrastructure and industry,
finance for agriculture and small and medium enterprises (SME)
development and financial products for certain sections of the
people. The role of development finance is to identify the gaps
in institutions and markets in a countrys financial sector and
act as a gap-filler. The principal motivation for developmental
finance is, therefore, to make up for the failure of financial
markets and institutions to provide certain kinds of finance to

13

certain kinds of economic agents. The failure may arise

because the expected return to the provider of finance is lower
than the market-related return (notwithstanding the higher
social return) or the credit risk involved cannot be covered by
high risk premium as economic activity to be financed becomes
unviable at such risk-based price. Development finance is,
thus, targeted at economic activities or agents, which are
rationed out of market. The vehicle for extending development
finance is called development financial institution (DFI) or
development bank.
A DFI is defined as "an institution promoted or assisted by
Government mainly to provide development finance to one or
more sectors or sub-sectors of the economy. The institution
distinguishes

itself

by

judicious

balance

as

between

commercial norms of operation, as adopted by any private

financial

institution,

and

developmental

obligations;

it

emphasizes the "project approach" - meaning the viability of

the project to be financed against the "collateral approach";
apart from provision of long-term loans, equity capital,
guarantees and underwriting functions, a development bank
normally is also expected to upgrade the managerial and the
other operational pre-requisites of the assisted projects. Its
insurance against default is the integrity, competence and
resourcefulness of the management, the commercial and
technical viability of the project and above all the speed of
implementation and efficiency of operations of the assisted

14

projects. Its relationship with its clients is of a continuing nature

and of being a "partner" in the project than that of a mere
"financier
Thus, the basic emphasis of a DFI is on long-term finance
and on assistance for activities or sectors of the economy
where the risks may be higher than that the ordinary financial
system is willing to bear. DFIs may also play a large role in
stimulating equity and debt markets by
(i) Selling their own stocks and bonds;
(ii) Helping the assisted enterprises float or place their
securities an
(iii) Selling from their own portfolio of investments.

EMERGENCE OF FINANCIAL INSTITUTIONS IN INDIA:

As mentioned earlier, DFIs are created in developing
countries to resolve market failures, especially in regard to
financing of long-term investments. The DFIs played a very
significant role in rapid industrialization of the Continental
Europe. Many of the DFIs were sponsored by national
governments and international agencies. The first government
sponsored DFI was created in Netherlands in 1822. In France,
significant developments in long-term financing took place
after establishment of DFIs such as Credit Foncier and Credit
Mobiliser, over the period 1848-1852. In Asia, establishment of
Japan Development Bank and other term-lending institution

15

fostered rapid industrializations of Japan. The success of these

institutions provided strong impetus for creation of DFIs in India
after independence, in the context of the felt need for raising
the investment rate. RBI was entrusted with the task of
developing

an

appropriate

financial

architecture

through

institution building so as to mobilise and direct resources to

preferred sectors as per the plan priorities. While the reach of
the banking system was expanded to mobilise resources and
extend working capital finance on an ever-increasing scale, to
different sectors of the economy, the DFIs were established
mainly to cater to the demand for long-term finance by the
industrial sector. The first DFI established in India in 1948 was
Industrial Finance Corporation of India (IFCI) followed by setting
up of State Financial Corporations (SFCs) at the State level after
passing of the SFCs Act, 1951.

FINANCIAL INSTITUTIONS SET UP BETWEEN 1948 AND 1974

Besides IFCI and SFCs, in the early phase of planned
economic development in India, a number of other financial
institutions were set up, which included the following.
NAME OF THE COMPANY
ICICI Ltd
LIC
16

YEAR OF
ESTABLISHMENT
1955
1956

Refinance Corporation for Industries Ltd

Agriculture Refinance Corporation and

1958
1963

NABARD
UTI and IDBI
Rural Electrification Corporation Ltd. and

1964
1969-70

HUDCO Ltd
Industrial Reconstruction Corporation of

1971

India Ltd.

GIC
1972
It may be noted here that although the powers to regulate
financial institutions had been made available to RBI in 1964
under the newly inserted Chapter IIIB of RBI Act, the definition
of

term

financial

institution

was

made

precise

and

comprehensive by amendment to the RBI Act Section 45-I (c) in

1974.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

PROFILE
Small Industries Development Bank of India
(SIDBI) was established in April 1990 under an Act
of Indian Parliament as a wholly-owned subsidiary
of Industrial Development Bank of India. SIDBI has since
completed 8 years of service to the small scale sector. As at
17

March 31, 1998, SIDBI had total staff strength of 861

comprising of 685 professionals and 176 support staff.
SIDBI's statute provides that it should serve as the principal
financial institution for:
Promotion
Financing and
Development of industry in the small scale sector and
Co-ordinating the functions of other institutions engaged in
similar activities.
SIDBI became operational on April 2, 1990.
The Small Scale Industry (SSI) sector, which is a vibrant
and dynamic sub-sector of the India's industrial economy,
comprises the area of SIDBI's business. The contribution of the
SSIs in terms of production, employment and export earnings
has been significant. The objectives of Government policy have
been to impart vitality and growth impetus to the sector by
removing bottlenecks that affect the growth potential. In the
liberalised era and emerging economic scenario, the sector is
assured of continued support.
ORIGIN & OBJECTIVES
Small Industries Development Bank of
India (SIDBI) was established in April 1990

18

under an Act of Indian Parliament as the principal financial

institution for:
Promotion
Financing
Development of industry in the small scale sector
Co-ordinating the functions of other institutions engaged in
similar activities
Since its inception, SIDBI has been assisting the entire
spectrum of SSI Sector including the tiny, village and cottage
industries through suitable schemes tailored to meet the
requirement

of

setting

up

of

new

projects,

expansion,

diversification, modernization and rehabilitation of existing

units.
Small Industries Development Bank of India [SIDBI] as the
principal financial institution for promotion, financing and
development of industry in the small scale sector, has been
assisting the entire spectrum of the SSI sector, including the
Tiny,

Village

and

Cottage

industries.

During the year 2002-03, the aggregate sanctions and

disbursements of SIDBI amounted to Rs.10904 crores and
Rs.6789 crores respectively. Cumulative assistance, as at the
end of March 2003, surged to Rs.86, 158 crores in terms of
sanctions and at Rs.59, 101 crores of disbursements, thus
recording a compounded annual growth rate of 13.4 % and
19

11.4 % respectively. Net worth of the Bank is Rs.4075 crores as

at the end of March 2003.
FUNCTIONS OF SIDBI:

It refinances loans by the primary lending

institutions to small scale industrial units.

It discounts and rediscounts bills arising out of scale of

machinery to small industrial units or manufactured by
small industrial units.

It extends seed capital/ soft loan assistance under self

employment scheme for ex- servicemen, National Equity
Fund, Mahila Udyog Nidhi, and Mahila Vikas Nidhi
through specified lending agencies. These schemes help
specified groups like women, ex- servicemen etc.

It grants direct assistance as well as refinance loans

extended by primary lending institutions for financing
exports of the products of small industrial units.

It extends loans to State Small Industries Development

Corporations for providing scarce raw materials to small
industrial units and for making their products.

It also provides financial help to National Small Industries

Corporation for providing leasing.

20

MISSION
To empower the Micro, Small and Medium Enterprises
(MSME) sector with a view to contributing to the process of
economic

growth,

employment

generation

and

balanced

regional development
SIDBI Foundation for Micro Credit (SFMC) was launched by
the Bank in January 1999 for channelising funds to the poor in
line with the success of pilot phase of Micro Credit Scheme.
SFMCs mission is to create a national network of strong, viable
and sustainable Micro Finance Institutions (MFIs) from the
informal and formal financial sector to provide micro finance
services to the poor, especially women
OBJECTIVE OF SIDBI:
The preamble to the Small Industries Development Bank of
India Act, 1989 defines the
Objective of SIDBI as:
"The

principal

financial

institution

for

the

promotion,

financing and development of industry in the small scale sector

and to co-ordinate the functions of the institutions engaged in
the promotion and financing or developing the industry in the

21

small scale sector and for the Matters connected therewith or

incidental thereto

In the SIDBI charter, four basic objectives are set out. They
are:
Financing
Promotion
Development
Coordination
For orderly growth of industry in the small scale sector.
CHANNELS OF ASSISTANCE:
SIDBI's financial assistance to small scale sector has three
major dimensions:
1. Indirect assistance to primary lending institutions (PLIs);
2. Direct assistance to small units; and
3. Development and Support Services
SIDBI has bagged the prestigious "ADFIAP Development
Award 2003" for its Rural Industries Programmes designed to

22

give impetus to rural development by creating sustainable

industrial and service enterprises in rural areas.
SUBSIDIARIES
SIDBI Venture Capital Ltd. [SVCL]

a wholly owned

subsidiary of SIDBI acts as the Asset Management Company of

the National Venture Fund for Software and Information
Technology. The fund has a committed corpus of Rs.100 crores
as on March 31, 2003.
SIDBI Trustee Co.Ltd. [STCL] has been set up to carry out
trusteeship functions for Venture Capital Funds. Presently STCL
is acting as Trustee of National Venture Fund for Software and
Information Technology.
Associate Organisations:
Credit Guarantee Fund Trust Scheme for Small Industries
[CGTSI] promoted jointly by Government of India and SIDBI,
was launched by the Hon'ble Prime Minister on August 30,
2000. The credit guarantee scheme of CGTSI aims at helping
the new and existing industrial units in SSI sector, in getting
collateral free credit by way of both term loan and working
capital from eligible member lending institutions. Member
Lending Institutions include scheduled commercial banks,
select Regional Rural Banks and such of the institutions as may
be approved by Government of India.
Technology Bureau for Small Enterprises [TBSE] was set up by
SIDBI in 1995 in collaboration with United Nations Asian &
Pacific Center for Transfer of Technology. The Bureau aims at

23

helping SSI units to attain international competitiveness

through transfer of latest available technologies from both
within and outside the country
DEVELOPMENT AND SUPPORT SERVICES
The Bank extends development and support services in the
form of loans and grants to different agencies working for the
promotion and development of SSIs and tiny industries. Over
the years, the initiatives of SIDBI under promotional and
developmental activities have crystallized into the following
important areas:

Enterprise

Promotion

with

emphasis

on

Rural

Industrialization

Human Resource Development to suit the SSI sector needs

Technology Upgradation

Quality and Environment Management

Marketing and Promotion and

Information Dissemination.

RANGE OF SERVICES
SIDBI REFINANCES:

24

 Loans granted by PLIs for new SSI projects and for

expansion,

technology

upgradation,

modernisation,

quality promotion.
Loans

sanctioned

by

PLIs

to

small

road

transport

operators, qualified professionals for self-employment,

small hospitals and nursing homes and to promote hotels
and tourism-related activities.
SIDBI DIRECTLY FINANCES:
SSI units for new/expansion/diversification/modernisation
projects.
Marketing development projects which expand the domestic
and international marketability of SSI products.
Existing well-run SSI units and ancillaries/sub-contracting
units/ vendor units for modernisation and technology
upgradation.
Infrastructure

development

agencies

for

developing

industrial areas.
Leasing

and

hire

purchase

companies

for

offering

leasing/hire purchase facilities to SSI units.

Existing export-oriented units to enable them to acquire ISO9000 Series Certification
APPROACH:
SFMC is the apex wholesaler for micro finance in India
providing a complete range of financial and non-financial

25

services such as loan funds, grant support, equity and

institution building support to the retailing Micro Finance
Institutions (MFIs) so as to facilitate their development into
financially sustainable entities, besides developing a network of
service providers for the sector. SFMC is also playing significant
role in advocating appropriate policies and regulations and to
act as a platform for exchange of information across the sector.
The launch of SFMC by SIDBI has been with a clear focus and
strategy to make it as the main purveyor of micro finance in
the country. Operations of SFMC in the next few years, is not
only expected to contribute significantly towards development
of a more formal, extensive and effective micro finance sector
serving the poor in India but also ensure sustainability at all
levels viz. at the apex level (SFMC), at the MFI level and at the
client level to ensure continuance of such arrangement. Most
importantly, SFMC has strived to create a mechanism in which
there should be no barriers to growth. Under the dispensation,
there is a focus on innovation and action research.

RATING OF MFIs:
Most micro finance programmes are being operated by
NGOs and are not subjected to regulation and supervision as
they are registered as Societies or Trusts. Non-regulation of

26

these institutions has worked to their detriment in that these

institutions are not able to have smooth access to funds from
the financial sector which is wary of lending to such entities.
This constraint coupled with the fact that SFMC was launched
with a view to upscale the flow of micro credit with enabling
policy modifications relating to simplification of the procedures
in availment of assistance and substantial relaxation in the
security / collateral requirement posed a difficult challenge.
Therefore,

to

meet

the

requirements

of

the

revised

dispensation which called for selection of suitable micro finance

intermediaries which could be trusted with bulk assistance
without collateral constraints, Capacity Assessment Rating
[CAR] was introduced by SFMC as a supplementary tool to
judge

risk

perception.

On SFMCs initiative, the rating of MFIs has been started by two

agencies.

Till

March

31,

2005

224

ratings

have

been

commissioned to MCRIL/CRISIL. SFMC has also organized two

trainings on CAMEL methodology of ACCION to build the
internal capacity of SFMC officers. In addition to SFMC officers,
officials from CRISIL, IIFM, Sa-Dhan, RBI, FWWB, and AFCL also
attended the above training.
MINIMAL SECURITY REQUIREMENT:
Credit worthiness is based on the rating of the borrowing
institutions

instead

requirements.

Term

of

availability

Deposit

of

Receipts

security/
(TDRs)

collateral
issued

by

Scheduled Commercial Banks for an amount equivalent to

27

10% /5% /2.5% (depending upon geographical area of

operation and duration of partnership with SIDBI).
CAPACITY BUILDING SUPPORT FOR THE SECTOR:
SFMCs capacity building efforts are directed not only
towards MFIs but also towards smaller/ grassroots institutions
engaged in micro finance operations, training, consultancy,
rating and impact assessment etc. and other service providers
in the form of training, seminars, workshops, orientation and
exposure visits. In order to strengthen the supply side of
trained manpower, SIDBI has provided support to premier
management

institutes

for

courseware

development

on

elective in micro finance. The faculty and resource persons

from

selected

institutions

are

regularly

sponsored

for

international exposure visits and training programmes. SIDBI

has also been regularly sponsoring staff of MFIs, consultants
and service providers besides management faculty for short
duration training programmes in various areas of micro finance.
A number of customised training programmes / workshops on
specific areas of micro finance being conducted by reputed
training institutions / technical service providers for the field
and managerial staff of MFIs are also supported from time to
time. Institution building efforts in the area of human resource,
systems, and practices are critical for healthy growth of the
micro finance sector. Therefore, at the level of MFIs, to hasten
up the process of professionalism, SFMC has been providing

28

support for salary of young professionals to be recruited from

reputed management institutions for absorption in MFIs.
INNOVATIONS & ACTION RESEARCH:
SIDBI has taken a number of initiatives in launching /
facilitating introduction / market-making of new concepts in the
sector. The launch of an electronic portal for information
dissemination and knowledge sharing within the sector and
development of MIS software for MFIs are some such initiatives.
It is also working on an MFI standardization programmes on the
lines of the Micro Banking Bulletin (MBB), managed by CGAP.
Other major initiatives include developing a common chart of
accounts for the sector, creating gender and environment
awareness, promoting innovations and action research on
emerging concepts etc.
PROMOTIONAL ACTIVITIES
OBJECTIVE:
As an apex financial institution for promotion, financing
and development of industry in the small scale sector, SIDBI
meets the varied developmental needs of the Indian SSI sector
by its wide-ranging Promotional and development (P&D)
activities.
P&D initiatives of the Bank aim at improving the inherent
strength of small scale sector on one hand as also economic
development of poor through promotion of micro enterprises.

29

In pursuance of its multifaceted P&D activity, synergistic

with its business activities aimed at development of the small
industries, SIDBI looks forward to a partnership with NGOs,
associate

financial

institutions,

corporate

bodies,

R&D

laboratories, marketing agencies, etc., for national level

programmes.
SIDBI has identified the following thrust areas of P&D
activities, which are being undertaken in partnership with
various institutions, agencies, and NGOs.

RURAL INDUSTRIAL PROGRAMME

INTRODUCTION
A unique approach for rural industrialization where the
emphasis

is

on

stimulating

and

helping

the

potential

entrepreneurs to set up small enterprises through consultancy

outfit positioned by SIDBI.
OBJECTIVE:
Development

of

viable

and

self-sustaining

tiny

small

enterprises in rural and semi urban India by harnessing local

entrepreneurial talent. The Programmes attempts to address
the problems such as rural unemployment, urban migration
and under-utilization of local skills and resources, and is
designed as a comprehensive Business Development Services
30

programmes.
The Rural Industries Programmes (RIP) of the Bank provides a
cohesive

and

information,

integrated

motivation,

package
training

of

and

basic

inputs

like

credit,

backed

by

appropriate technology and market linkages for the purpose of

enterprise promotion.
APPROACH:
Development of underdeveloped areas:
Under RIP, an economically underdeveloped district is
identified and an Implementing Agency (IA) Development
professionals, Technical consultancy organisation or NonGovernment

organisation

is

positioned

to

provide

comprehensive and integrated package of inputs and business

development services to potential entrepreneurs. The identified
IA positions a team of professionals at the field level for a
period of five year. IA also provides support during post
implementation period to ensure sustainability of enterprises.
Integrated approach: The package of services provided by IA,
inter

alia,

includes

identifying

and

motivating

rural

entrepreneurs, identification of viable ventures based on local

skills and resources, training, appropriate technology linkages
and finance tie-up with the formal banking sector.

31

Performance Oriented incentives: Enterprises are grounded on

technological and economic considerations. No subsidies or
grants

are

available

to

entrepreneurs.

Besides

start-up

administrative support, IA is paid performance fee in the range

of Rs. 500 to Rs. 7000 per unit promoted, depending on project
size.
Long term viability and sustainability of the enterprises
promoted is an important aspect of RIP. New enterprises
require continued support, at least for the first year of their
operations. Therefore, an amount of Rs. 1,000 per unit is
payable to the IAs by way of post-sanction incentive over and
above the initial performance fee for providing escort services
to the assisted entrepreneurs and post-sanction work.
A sub-sectoral approach is followed to enable the implementing
agencies to provide necessary backward and forward linkages
to the enterprises.
Marketing support: Entrepreneurs are supported for group
participation in domestic trade fairs and exhibition cum sale.

NATIONAL BANK FOR AGRICULTURE & RURAL DEVELOPMENT

(NABARB)
INTRODUCTION:

32

Recently

announced

National

Strategies

for

accelerating the flow of credit to farm sector include doubling

the flow of agricultural credit in 3 years, increase in
disbursement from Rs.80,000 crores in 2003-04 to Rs.1,05,000
crores in 2004-05, financing of Atleast 100 new farmers and 2-3
new investment projects in various sub-sectors of agriculture
by each of the rural and semi-urban branches of Commercial
Banks.
In the above context, NABARD's strategies, inter alia,
cover formulation and circulation of Model Bankable Schemes
and Location Specific Bankable Schemes to the financing
banks. NABARD also proposes to identify highly potential zones
for undertaking investment activities in various states and
organize interactive workshops in these potential zones.
The Technical Services Department of NABARD is
preparing and bringing model bankable agricultural projects in
the areas of Minor Irrigation, Land Development, Plantation &
Horticulture, Agricultural Engineering, Forestry and Wasteland,
Fisheries , Animal Husbandry and Biotechnology. Besides these
traditional areas, State specific area development projects and
profiles in the emerging thrust areas of Medicinal & Aromatic
Plants, Processing of Fruits & Vegetables have also been
prepared for dissemination among financing banks.

33

GENESIS :

A HIGH LEVEL EXPERT COMMITTEE

(CRAFICARD) SET UP BY RBI IN
1979 RECOMMENDED FORMATION
OF
A
NATIONAL
LEVEL
ORGANISTION FOR AGRICULTURE
AND RURAL DEVELOPMENT.
THUS, NABARD CAME INTO BEING
ON 12 JULY 1982 UNDER AN ACT
OF PARLIAMENT.
TOOK
OVER
FUNCTIONS
OF
AGRICLTURE CREDIT DEPARTMENT
(ACD) AND RURAL PLANNING & CREDIT CELL (RPCC)
OF
RBI
AND
AGRICULTURAL
REFINANCE
AND
DEVELOPMENT CORPORATION (ARDC).
IS THE APEX INSTITUTION DEALING WITH POLICY,
PLANNING AND OPERATIONS IN THE FIELD OF CREDIT
FOR AGRICULTURE AND RURAL DEVELOPMENT.

MISSION
PROMOTE SUSTAINABLE AND EQUITABLE AGRICULTURE AND
RURAL PROSPERITY THROUGH EFFECTIVE CREDIT SUPPORT,
RELATED SERVICES, INSTITUTION DEVELOPMENT AND OTHER
INNOVATIVE INITIATIVES.
OBJECTIVES

FACILITATING CREDIT FLOW FOR AGRICULTURE AND

RURAL DEVELOPMENT.
PROMOTING AND SUPPORTING POLICIES, PRACTICES
AND
INNOVATIONS
CONDUCIVE
TO
RURAL
DEVELOPMENT.
STRENGTHENING RURAL CREDIT DELIVERY SYSTEM
THROUGH INSTITUTIONAL DEVELOPMENT MEASURES.
FOCUSSING
ON
POVERTY
ALLEVIATION
AND
EMPLOYMENT GENERATION.

34

SUPERVISING RURAL FINANCIAL INSTITUTIONS (COOPERATIVE BANKS AND REGIONAL RURAL BANKS).

INSTITUTIONS ELIGIBLE FOR REFINANCE

Commercial Banks, State Agriculture Development
Finance Companies(ADFCs), Primary Urban Cooperative
Banks(PUCBs) and State Governments
ELIGIBLE PURPOSES
Farm Sector Production Credit (Crop Loans) and
Investment Credit
Non-farm Sector Investment activities of Artisans,
Small Scale Industries, Tiny Sector, Village and Cottage
Industries, Handicrafts, Handlooms, etc.
Micro Credit Revolving Fund Assistance to SHGs,
Voluntary Agencies/NGOs.
Loans to State Governments
o
For Infrastructure Development under RIDF
o
For Share Capital Contribution to Cooperative
Credit Institutions
NABARDs
ACTIVITIES

SUPPORT

TO

AGRICULTURE

AND

ALLIED

NABARD Refinance constitutes 28% of the total Ground

Level Credit Flow to Agriculture and Allied Activities.
Minor Irrigation and Forestry forms 21% of the total
refinance to banks/financial institutions.
Aggregate financial support to banks, financial
institutions and State Governments during 2001-02
reached a new height of Rs.21,146 crores.

35

FINANCIAL ASSISTANCE AVAILABLE FROM BANKS/NABARD FOR

DAIRY FARMING.
NABARD is an apex institution for all matters relating to
policy, planning and operation in the field of agricultural
credit. It serves as an apex refinancing agency for the
institutions providing investment and production credit. It
promotes

development

through

formulation

and

appraisal of projects through a well organized Technical

Services Department at the Head Office and Technical
Cells at each of the Regional Offices.
Loan from banks with refinance facility from NABARD is
available for starting dairy farming. For obtaining bank
loan, the farmers should apply to the nearest branch of a
commercial or co-operative Bank in their area in the
prescribed application form which is available in the
branches of financing banks. The Technical Officer
attached to or the Manager of the bank can help/give
guidance to the farmers in preparing the project report to
obtain bank loan.
For dairy schemes with very large outlays, detailed
reports will have to be prepared. The items of finance
would include capital asset items such as purchase of
milk

animals,

construction

of

sheds,

purchase

of

equipments etc. The feeding cost during the initial period

of one/two months is capitalized and given as term loan.

36

Facilities such as cost of land development, fencing, and

digging of well, commissioning of diesel engine/pumpset,
electricity connections, essential servants' quarters,
godown, transport vehicle, milk processing facilities etc.
can be considered for loan. Cost of land is not considered
for loan. However, if land is purchased for setting up a
dairy farm, its cost can be treated as party's margin upto
10% of the total cost of project.
Nabard has been in the forefront of providing financial
succor to the agriculture sector. The emergence of Nabard
as an apex institution has empowered it with all matters
concerning policy, planning and operations in the field of
credit for agriculture and other economic activities in rural
areas. As envisaged, NABARDs mission is rural prosperity
and performs prominently functions such as:
1. financing institutions by providing investment and
production credit support for promoting various
developmental activities in rural areas
2. Providing measures towards institution building for
improving absorptive capacity of the credit delivery
system, including monitoring, formulation of schemes for
restructuring of credit institutions and training of
personnel

37

3. Co-ordinating rural financing activities of institutions

engaged in developmental work at the field level and
maintains liaison with state governments, Reserve Bank of
India (RBI) and other institutions concerned with policy
formulation
4. Undertaking monitoring and evaluation of projects
supported by it.
This article briefly discusses the credit as well as noncredit based activities of the organization which helps in
improving the effectiveness of credit functions.

SCHEME FORMULATION FOR BANK LOAN.

A Scheme can be prepared by a beneficiary after
consulting local technical persons of State animal husbandry
department,

DRDA,

SLPP

etc.,

dairy

co-operative

society/union/federation/commercial dairy farmers. If possible,

the beneficiaries should also visit progressive dairy farmers and
government/military/agricultural university dairy farm in the
vicinity and discuss the profitability of dairy farming. A good
practical training and experience in dairy farming will be highly
desirable. The dairy co-operative societies established in the
villages as a result of efforts by the Dairy Development
Department

of

State

Government

and

National

Dairy

Development Board would provide all supporting facilities

38

particularly marketing of fluid milk. Nearness of dairy farm to

such a society, veterinary aid centre, artificial insemination
centre should be ensured. There is a good demand for milk, if
the dairy farm is located near urban centre.
The scheme should include information on land, livestock
markets, availability of water, feeds, fodders, veterinary aid,
breeding

facilities,

marketing

aspects,

training

facilities,

experience of the farmer and the type of assistance available

from State Government, dairy society/union/federation.
The scheme should also include information on the
number of and types of animals to be purchased, their breeds,
production performance, cost and other relevant input and
output costs with their description. Based on this, the total cost
of the project, margin money to be provided by the beneficiary,
requirement of bank loan, estimated annual expenditure,
income, profit and loss statement, repayment period, etc. can
be worked out and shown in the Project report.
ANNEXURE-I
PRICE STABILISATION FUND SCHEME
Background
Deeply concerned with the problems being faced by the
growers of coffee, tea, rubber and tobacco due to continued
low prices of these commodities for quite some time,
Government of India (GoI) has taken a series of measures to
ameliorate the hardships being faced by the growers of
39

these crops. The Price Stabilization Fund Scheme is yet

another step in the direction of the GoI to demonstrate its
commitment to safeguard the interests of these growers.
Objective of the Scheme
The PSFS aims at providing financial relief to the growers
when prices of these commodities fall below a specified level
without resorting to the practice of procurement operations
by the Government agencies.
Duration of the Scheme
The Scheme will be operational for a period of ten years
subject to a review after five years.
Mode of Intervention
Under the Scheme, a fund called the Price Stabilisation Fund
will be established with contributions from the GoI and entry
fee @ Rs.500/- from each grower desirous of participating in
the Scheme. The corpus of the Fund shall remain
undisturbed and interest earnings alone will be utilized for
operational sing the PSFS.

Who can participate in the Scheme?

Initially, the Scheme will be open to growers of tea, coffee,
rubber and tobacco having operational holdings of 4
hectares or less. Subsequently, coverage of other growers
could be considered.
How to become a member
Growers of aforementioned commodities desirous of
participating in the Scheme shall apply to the respective

40

Commodity Board in the prescribed form within the date

stipulated therefore.
The Commodity Boards shall select the members on first
come first serve basis with preference being given to the
members with the least holding size.
The Commodity Boards shall thereafter enroll the eligible
grower as member who will be required to deposit an
amount of Rs.500/- with the Commodity Board.
Opening and maintenance of bank account
The member would be provided with an application form to
enable him/her to open the PSF account with the
designated bank branch.
The Commodity Board shall also inform the concerned bank
branch for opening the account in the name of the member.
The account will be maintained as Savings Bank Account and
would be entitled for payment of interest at rates applicable
for Savings Bank Account. No service charges of any kind
would be levied.
Members have to deposit their annual contributions to the
account by 31 March every year.
GoI contributions to the account would be made not later
than 31st May every year.
At the end of the duration of the Scheme the entire balance
in the account would be payable to the member.
ANNEXURE-II
Price stabilization fund account guidelines for opening &
maintenance of account by banks:

41

The account will be opened by designated bank

branches based on a Certificate of Eligibility issued by
the concerned Commodity Board.
The banks would not insist on introduction of the
account holder and would rely on the Certificate issued
by the Commodity Board.
The accounts would be opened with the deposit of
Rs.100/- which will be the minimum balance in respect
of these accounts. The accounts would be designated
as PSF Accounts.
The account would be maintained as Savings Bank
Account and would be entitled for payment of interest
at the rates applicable for SB Account.
No service charges of any kind would be leviable.
In accordance with the terms and conditions of the
scheme, deposits will be made by the account holders
or by the Government of India through the concerned
Commodity Board which would be credited to the
account.
Drawls would be allowed from the account only on
receipt of specific advice from the concerned
Commodity Board in any particular year. The advice
would indicate the extent of drawl that could be allowed
to the member.
Members have to deposit their annual contributions to
the account by a prescribed due date which is presently
set as 31st March.
The government contributions would be made not later
than 31 May every year.
When the grower fails to contribute his share to the
account by the due date, he will be deemed to be a
defaulter.
Once the account is in default i.e. if the contribution
due from the member is not made by the prescribed
due date i.e. by 31 March, the account would be closed.
No further deposits of the grower members should be
accepted for credit of a defaulters account.
No government contributions could be credited to the
defaulters account.
42

At the request of the grower member, the balance in

the defaulters account could be repaid to the extent of
the members contribution with interest thereon.
No part of governments contributions and interest
thereon should be paid to the defaulter grower
members.
After payment of the dues to the defaulter the balance
representing governments contributions and interest
thereof in such account should be remitted back to the
Price Stabilization Fund Trust through the concerned
Commodity Board.
Banks have to provide an annual return to the
concerned Commodity Board indicating the number of
accounts maintained the balance therein and the list of
accounts to which government contributions were
credited during the year and also a list of accounts
which have turned into default with details of accounts
closed on account of default. Further details of
payments made to the defaulting member as well as
amount remitted to the government from the defaulting
account, on its closure should also be sent to the
Commodity Board every year. The format of these
statements would be provided to the banks.
At the end of 10 years, the entire balance in the
account is payable to the grower members.
Performa of application forms for enrolment of
members by the Commodity Boards and opening of
bank accounts under the PSFS are enclosed.
In case of any doubts, clarifications could be obtained
from the Price Stabilization Fund Trust / concerned
Commodity Board.

43

ENCLOSURE 1
APPLICATION
FOR
ENROLMENT
OF
GROWER
MEMBERS IN THE PRICE STABILISATION FUND SCHEME
To
The_________
________Board
____________
Sir,
I wish to enroll as a Grower Member in the Price Stabilization
Fund Scheme introduced by the Government of India. My
details are as under:
1. Name:
2. Fathers Name:
3. Full address:
4. Regn. No. with the Board as a: grower (TBRG NO.)
5. Particulars of holdings of: agriculture lands (in hecters)
a) name of the village, taluka/mandal, district & state where
the land ids situated.
b) Survey No.
c) Holding of Agri. Land (Hect.)
6. Name & address of the: bank with account No.
7. Remarks:
44

8. Details of entry fee of Rs.500/- by way of cash/D.D.:

I do solemnly declare that to the best of my knowledge and
belief, the above stated information is true, complete and
correct. Further, I have read, understood and hereby agree
to the terms and conditions of the Price Stabilization Fund
Scheme.
Signature of the applicant
Place:
Date:
FOR OFFICE USE ONLY
WHETHER ELIGIBLE FOR JOINING PSF SCHEME YES/NO
IF YES, ENROLMENT NO.

SIGNATURE OF THE AUCTION SUPERINTENDENT

45

ENCLOSURE II
APPLICATION FOR OPENING OF BANK ACCOUNT UNDER
PRICE STABILISATION FUND SCHEME
To
THE MANAGER
(Name of the Branch) Passport size photograph
(Name of the Bank) with signature/thumb impression
________________
Date:
Sir
I wish to apply for opening of a bank account in your branch
under the Price Stabilization fund Scheme. My details are as
under:
1. Name:
2. Fathers Name:
3. Date of Birth:
4. Address:
5. Telephone No. :
6. Registration No. with the: commodity board
7. Name and address of nominee:

46

8. Relationship with Nominee:

9. Details of existing bank account, if any:
I have been enrolled as a member under the Price
Stabilization Fund Scheme by the __________ Board (Name of
the Commodity Board). I have read, understood and hereby
agree to the terms and conditions of the Price Stabilization
Fund Scheme. Further all the particulars and information
given above are true, correct, and complete and upto date in
all respect.
SIGNATURE OF THE APPLICANT
Certificate by the _____________ Board
Date:
We certify that Shri/Smt. has been enrolled as a member
under the Price Stabilization Fund Scheme and he/she has
paid the entrance fee. He/she may be allowed to open a
bank account under the Price Stabilization Fund Scheme in
your branch.

SIGNATURE OF THE AUTHORISED

47

DEVELOPMENT AND PROMOTIONAL FUNCTIONS:

Credit

is

critical

factor

in

development

of

agriculture and rural sector as it enables investment in capital

formation and technological upgradation. Hence strengthening
of rural financial institutions, which deliver credit to the sector,
has been identified by NABARD as a thrust area. Various
initiatives have been taken to strengthen the cooperative credit
structure and the regional rural banks, so that adequate and
timely credit is made available to the needy.
In order to reinforce the credit functions and to make credit
more productive, NABARD has been undertaking a number of
developmental and promotional activities such as:o Help cooperative banks and Regional Rural Banks to prepare
development actions plans for themselves.
o Enter into MoU with state governments and cooperative
banks specifying their respective obligations to improve the
affairs of the banks in a stipulated timeframe.

48

o Help Regional Rural Banks and the sponsor banks to enter

into MoUs specifying their respective obligations to improve
the affairs of the Regional Rural Banks in a stipulated
timeframe.
o Monitor implementation of development action plans of
banks and fulfillment of obligations under MoUs.
o Provide financial assistance to cooperatives and Regional
Rural Banks for establishment of technical, monitoring and
evaluations cells.
o Provide organisation development intervention (ODI) through
reputed training institutes like Bankers Institute of Rural
Development (BIRD), Lucknow www.birdindia.com, National
Bank Staff College, and Lucknow. www.nbsc.in and College of
Agriculture Banking, Pune, etc.
o Provide financial support for the training institutes of
cooperative banks.
o Provide training for senior and middle level executives of
commercial banks, Regional Rural Banks and cooperative
banks.
o Create awareness among the borrowers on ethics of
repayment through Vikas Volunteer Vahini and Farmers
clubs.
o Provide financial assistance to cooperative banks for building
improved management information system, computerisation
of operations and development of human resources.

49

BIOTECHNOLOGY:
INTRODUCTION
The success of Horticulture development hinges on
selection of desired types of plants and their multiplications.
Selection of desired types is based on evaluation of the
quantitative and qualitative performance of plants and also in
some cases their aesthetic appeal. Over the years, the
horticulturists have developed various techniques for selection
of desired types of plants and their multiplication. Recently
interesting developments have taken place in the field of plant
multiplication which involves culture of cells or tissues in
laboratory.
Traditionally, horticultural plants are multiplied by means
of seeds (sexual propagation) or organs other than seeds
(asexual or vegetative propagation). These organs are usually
stems, leaves or roots. Though multiplication by seeds is the
cheapest method, it suffers form certain disadvantages. Plants
raised from seeds may not repeat good performance of mother
plants. Many horticultural plants take a long time to produce
seeds/fruits and many of them do not produce viable seeds or
desired quality of seeds. Plants propagated vegetative do not
suffer

from

these

disadvantages.

However,

vegetative

propagation is rather a slow, time and space consuming

process. Besides, it is usually infected with latent diseases.

50

Some plants are also not amenable to vegetative method of

propagation, for example, coconut, papaya, oil palm, clove etc.
Therefore, scientists started a quest for an alternative
method of plant propagation which could overcome the
disadvantages of both the methods described above. After
many trials and errors in the sixties, plant propagation by
tissue culture method, which could overcome disadvantages of
propagation by seeds or vegetative organs, was found
commercially successful in the case of orchids. Subsequently,
the method has been perfected for many other plants
(Annexure A). The method (also known as micro-propagation)
involves the culture of whole organism from cells or tissues or
plant parts in glass (in vitro) on a defined medium under germ
free conditions (sterile or aseptic), whereas conventional
method

of

vegetative

propagation

(macro-propagation)

involves culture of parts into whole organisms in natural

conditions (in vitro).

51

The

Industrial

Development

Bank

of

India

Limited

commonly known by its acronym IDBI is one

of India's leading private banks. It was
established in 1964 by an Act of Parliament
to provide credit and other facilities for the
development of the fledgling Indian industry.
It is currently the tenth largest development bank in the world.
Some of the institutions built by IDBI are The National Stock
Exchange of India (NSE), The National Securities Depository
Services Ltd. (NSDL) and the Stock Holding Corporation of India
(SHCIL)
The Industrial Development Bank of India (IDBI) was
established on July 1, 1964 under an Act of Parliament as a
wholly owned subsidiary of the Reserve Bank of India. In
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 IDBIs public issue in July 1995, the
former continues to be the major shareholder (current
shareholding:

58.47%).

During

the

four

decades

of

its

existence, IDBI has been instrumental not only in establishing a

well-developed,

diversified

and
52

efficient

industrial

and

institutional structure but also adding a qualitative dimension

to the process of industrial development in the country. IDBI
has played a pioneering role in fulfilling its mission of
promoting industrial growth through financing of medium and
long-term projects, in consonance with national plans and
priorities. Over the years, IDBI has enlarged its basket of
products and services, covering almost the entire spectrum of
industrial activities, including manufacturing and services. IDBI
provides financial assistance, both in rupee and foreign
currencies, for green-field projects as also for expansion,
modernization and diversification purposes. In the wake of
financial sector reforms unveiled by the Government since
1992, IDBI evolved an array of fund and fee-based services
with a view to providing an integrated
solution to meet the entire demand of
financial

and

requirements

of

corporate
its

clients.

advisory
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 prereform era (1964-91),in catalyzing broad based industrial
development in the country in keeping with its Governmentordained development banking charter. In pursuance of this
53

mandate, IDBIs activities transcended the confines of pure

long-term lending to industry and encompassed, among others,
balanced industrial growth through development of backward
areas,

modernization

of

specific

industries,

employment

generation, entrepreneurship development along with support

services for creating a deep and vibrant domestic capital
market,

including

development

of

apposite

institutional

framework.
In September 2003, IDBI diversified its business domain
further by acquiring the entire shareholding of Tata Finance
Limited in Tata Home finance Ltd., signaling IDBIs foray into
the retail finance sector. The fully-owned housing finance
subsidiary has since been renamed IDBI Home finance
Limited. In view of the signal changes in the operating
environment, following initiation of reforms since the early
nineties, Government of India has decided to transform IDBI
into

commercial

bank

without

eschewing

its

secular

development finance obligations. The migration to the new

business model of commercial banking, with its gateway to lowcost current, savings bank deposits, would help overcome most
of the limitations of the current business model of development
finance while simultaneously enabling it to diversify its client/
asset base. Towards this end, the IDB (Transfer of Undertaking
and Repeal) Act 2003 was passed by Parliament in December
2003. The Act provides for repeal of IDBI Act, corporatisation of
IDBI (with majority Government holding; current share: 58.47%)
54

and transformation into a commercial bank. The provisions of

the Act have come into force from July 2, 2004 in terms of a
Government

Notification

to

this

effect.

The

Notification

facilitated formation, incorporation and registration of Industrial

Development Bank of India Ltd. as a company under the
Companies Act, 1956 and a deemed Banking Company under
the Banking Regulation Act 1949 and helped in obtaining
requisite regulatory and statutory clearances, including those
from

RBI.

IDBI

would

commence

banking

business

in

accordance with the provisions of the new Act in addition to the

business being transacted under IDBI Act, 1964 from October 1,
2004, the Appointed Date notified by the Central Government.
IDBI has firmed up the infrastructure, technology platform and
reorientation of its human capital to achieve a smooth
transition.

On July 29, 2004, the Board of Directors of IDBI

and IDBI Bank accorded in principle approval to the merger of

IDBI Bank with the Industrial Development Bank of India Ltd. to
be formed incorporated under the Companies Act, 1956
pursuant to the IDB (Transfer of Undertaking and Repeal) Act,
2003 (53 of 2003), subject to the approval of shareholders and
other regulatory and statutory approvals. A mutually gainful
proposition with positive implications for all stakeholders and
clients, the merger process is expected to be completed during
the current financial year ending March 31, 2005.
IDBI would continue to provide the extant products and
services as part of its development finance role even after its
55

conversion into a banking company. In addition, the new entity

would also provide an array of wholesale and retail banking
products, designed to suit the specific needs cash flow
requirements of corporate and individuals. In particular, IDBI
would leverage the strong corporate relationships built up over
the years to offer customised and total financial solutions for all
corporate business needs, single-window appraisal for term
loans and working capital finance, strategic advisory and
hand-holding support at the implementation phase of
projects, among others.
IDBIs transformation into a commercial bank would
provide a gateway to low-cost deposits like Current and Savings
Bank Deposits. This would have a positive impact on the Banks
overall cost of funds and facilitate lending at more competitive
rates to its clients. The new entity would offer various retail
products, leveraging upon its existing relationship with retail
investors under its existing Suvidha Flexi-bond schemes. In the
emerging scenario, the new IDBI hopes to realize its mission of
positioning itself as a one stop super-shop and most preferred
brand for providing total financial and banking solutions to
corporates

and

individuals,

capitalising

on

its

intimate

knowledge of the Indian industry and client requirements and

large retail base on the liability side.
IDBI

upholds

the

highest

standards

of

corporate

governance in its operations. The responsibility for maintaining

56

these high standards of governance lies with its Board of

Directors. Two Committees of the Board viz. the Executive
Committee

and

the

Audit

Committee

are

adequately

empowered to monitor implementation of good corporate

governance practices and making necessary disclosures within
the framework of legal provisions and banking conventions.
Industrial Development Bank of India (IDBI) is the tenth
largest bank in the world in terms of development. The National
Stock Exchange (NSE), The National Securities Depository
Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL)
is some of the institutions which have been built by IDBI. IDBI is
a strategic investor in a plethora of institutions which have
revolutionized the
Indian Financial Markets.
IDBI Bank, promoted by IDBI Group started in November 1995
with a branch at Indore with an equity capital base of Rs. 1000
million.

MAIN FUNCTIONS

OF IDBI:

IDBI is vested with the responsibility of co-ordinating the

working of institutions engaged in financing, promoting and

57

developing

industries.

It

has

evolved

an

appropriate

mechanism for this purpose. IDBI also undertakes/supports

wide-ranging promotional activities including entrepreneurship
development programmes for new entrepreneurs, provision of
consultancy services for small and medium enterprises, up
gradation

of

technology

and

programmes

for

economic

upliftment of the underprivileged.

IDBIs ROLE AS A CATALYST:
IDBI's role as a catalyst to industrial development
encompasses a wide spectrum of activities. IDBI can finance all
types of industrial concerns covered under the provisions of the
IDBI Act. With over three decades of service to the Indian
industry, IDBI has grown substantially in terms of size of
operations and portfolio.
DEVELOPMENTAL ACTIVITIES OF IDBI:
PROMOTIONAL ACTIVITIES:
In fulfillment of its developmental role, the Bank
continues to perform a wide range of promotional activities
relating to developmental programmes for new entrepreneurs,
consultancy services for small and medium enterprises and
programmes designed for accredited voluntary agencies for the
economic upliftment of the underprivileged. These include
entrepreneurship development, self-employment and wage

58

employment in the industrial sector for the weaker sections of

society through voluntary agencies, support to Science and
Technology

Entrepreneurs'

Parks,

Energy

Conservation,

Common Quality Testing Centers for small industries.

TECHNICAL CONSULTANCY ORGANIZATIONS:
With a view to making available at a reasonable cost,
consultancy
particularly

and
to

advisory

new

and

services
small

to

entrepreneurs,

entrepreneurs,

IDBI,

in

collaboration with other All-India Financial Institutions, has set

up a network of Technical Consultancy Organizations (TCOs)
covering the entire country. TCOs offer diversified services to
small and medium enterprises in the selection, formulation and
appraisal of projects, their implementation and review.
ENTERPRENEURSHIP DEVELOPMENT INSTITUTE:
Realising that entrepreneurship development is the key to
industrial development; IDBI played a prime role in setting up
of the Entrepreneurship Development Institute of India for
fostering

entrepreneurship

in

the

country.

It

has

also

established similar institutes in Bihar, Orissa, Madhya Pradesh

and Uttar Pradesh. IDBI also extends financial support to
various organisations in conducting studies or surveys of
relevance to industrial development.

59

RECENT DEVELOPMENTS:
To meet emerging challenger and to keep up with reforms in
financial sector, IDBI has taken steps to reshape its role from a
development finance institution to a commercial institution.
With Industrial Development Bank (Transfer of Undertaking
and Repeal) Act, 2003, IDBI attained the status of a limited
company viz. "Industrial Development Bank of India Limited"
(IDBIL).

Subsequently,

the

Central

Government

notified

October 1, 2004 as the 'Appointed Date' and RBI issued the

requisite notification on September 30, 2004 incorporating
IDBI Ltd. as a 'scheduled bank' under the RBI Act, 1934.
Consequently, IDBI, the erstwhile Development Financial
Institution of the country, formally entered the portals of
banking business as IDBIL from October 1, 2004, over and
above the business currently being transacted. As of July,
2006 the employees association of the IFCI have sought its
merger with the Bank.

60

QUESTIONAIRE

How does the development bank help in development

of country?

How the working of development bank different from

commercial & co operative banks?

What is the role of RBI & Government in development

banking sector?
What are your achievements after liberalization?
Future prospects in post liberalization period
Which sector do you finance?
Do u undertake commercial activities?

61

 Changes that took place after the merger of IDBI?

BIBLIOGRAPHY

www.Google.com
www.Sidbi.com
www.idbi.com
www.nabard.com
www.wekipedia.com
Visit to IDBI BANK.

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63