'DFI, MUTUAL FUNDS, RRB' With You

DEVELOPMENT FINANCIAL INSTITUTIONS
A World Bank survey defines a development bank as ‘a bank or financial

institution with at least 30 per cent State-owned equity that has been given an
explicit legal mandate to reach socioeconomic goals in a region, sector or
particular market segment’. It uses the terms Development Bank and
Development Financial Institution interchangeably.
According to UNCTAD, Development Banks are needed to bridge finance from

end-savers to development projects.
These institutions are meant to provide long term finance to agriculture,

industries, trade, transport, and basic infrastructure.
Role of development financial institutions in the economy

Capital Formation:
The significance of Development Finance Institutions or DFIs lies in their

making available the means to utilize savings generated in the economy, thus
helping in capital formation. Capital formation implies the diversion of the
productive capacity of the economy to the making of capital goods which
increases future productive capacity. The process of Capital Formation
involves three distinct but interdependent activities, viz., saving financial
intermediation and investment.
However, poor country/economy may be, there will be a need for institutions
which allow such savings, as are currently forthcoming, to be invested
conveniently and safely and which ensure that they are channeled into the
most useful purposes. A well-developed financial structure will therefore aid
in the collections and disbursements of investible funds and thereby
contribute to the capital formation of the economy. Indian capital market
although still considered to be underdeveloped has been recording impressive
progress during the post-interdependence period.
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 such as 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 banks in India have launched special

programmes for intensive development of industrially least developed areas,
commonly referred to as the No-industry Districts (NID’s) which do not have
any large-scale or medium-scale industrial project. Institutions have initiated
industrial potential surveys in these areas.
Promotion of New Entrepreneurs
Development banks in India have also achieved a remarkable success in
creating a new class of entrepreneurs and spreading the industrial culture to
newer areas and weaker sections of the society.
Special capital and seed Capital schemes have been introduced to provide
equity type of assistance to new and technically skilled entrepreneurs who lack
financial resources of their own even to provide promoter’s contribution in
view of long-term benefits to the society from the emergence of a new class of
entrepreneurs. Development banks have been actively involved in the
entrepreneurship development programmes and in establishing a set of
institutions which identify and train potential entrepreneurs.
What are mutual funds?
A mutual fund is a company that pools money from many investors and invests
the money in securities such as stocks, bonds, and short-term debt. The
combined holdings of the mutual fund are known as its portfolio. Investors buy
shares in mutual funds. Each share represents an investor’s part ownership in
the fund and the income it generates.
Why do people buy mutual funds?
Mutual funds are a popular choice among investors because they generally offer
the following features:
 Professional Management. The fund managers do the research for you. They
select the securities and monitor the performance.
 Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically
invest in a range of companies and industries. This helps to lower your risk if one
company fails.
 Affordability. Most mutual funds set a relatively low dollar amount for initial
investment and subsequent purchases.
 Liquidity. Mutual fund investors can easily redeem their shares at any time, for the
current net asset value (NAV) plus any redemption fees.
What is a Non-Banking Financial Company (NBFC)?
A non-banking financial company, also known as non-banking financial institutions, are

companies that offer financial services and products but are not officially recognized as
a bank with a full banking license.
of a checking account.
Non-Banking Financial Company Explained
Non-banking financial companies are not subject to banking regulations or the usual

oversight by federal authorities that are usually followed by recognized banks.
Effects of the 2008 Global Financial Crisis
NBFCs before the Dodd-Frank Act were referred to as “shadow banks” to describe them
as the fast-expanding plethora of institutions that contributed to the easy-money
lending environment. The subprime mortgage meltdown and financial crisis that
followed was a direct product of the “shadow banks” becoming too prominent and
lacking enough regulation.
Many very large and prominent investment companies and brokerages were involved
with the activities that led to the financial crisis. After the financial crisis, traditional
banks found themselves under an intense regulatory microscope. It led to a large
contraction of lending activities, as regulations for lending and other credit activities
tightened. However, the demand for borrowing remained the same, and NBFCs were
able to fill the void of funding.
After the 2008 Global Financial Crisis, NBFCs were able to grow very quickly, and in
various industries.
Regional Rural Banks or RRBs are government banks operating at
regional level in different states of India. These are designed to cater the
needs of the rural area people. Regional Rural Banks commercial banks
which helps to bring the financial inclusion in the primary level of the nation.
Ownership of Regional Rural Banks

Regional Rural Banks are owned by three entities:
 Central Government with a share of 50%
 State Government with a share of 15% and
 Sponsor Bank with a share of 35% (Any commercial bank can sponsor
the regional rural banks)
RRBs were created with the following objective in mind:
 To provide banking services to rural and semi-urban areas.
 Locker, debit and credit card facilities to the country side people.
 To enhance employment opportunities by promoting trade and
commenrce in rural areas.
 To support enterpreneurship in rural areas.
 Pension and MGNREGA wages distribution
Organisational Structure of Regional Rural Banks

The structure of RRBs differs from one RRB to the other RRB depanding on
the size and nature of the RRB. The following is the hierarchy of officials in a
Regional Rural Bank.
 Board of Directors
 Chairman & Managing Director
 General Manager
 Assistant General Manager
 Regional Manager/Chief Manager
 Senior Manager
 Manager
 Officer
 Office Assistant
 Office Attendant

'DFI, MUTUAL FUNDS, RRB' With You

Uploaded by

Copyright:

Available Formats

'DFI, MUTUAL FUNDS, RRB' With You

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

'DFI, MUTUAL FUNDS, RRB' With You

Uploaded by

Copyright:

Available Formats

DEVELOPMENT FINANCIAL INSTITUTIONS

A World Bank survey defines a development bank as ‘a bank or financial

According to UNCTAD, Development Banks are needed to bridge finance from

These institutions are meant to provide long term finance to agriculture,

Role of development financial institutions in the economy

The significance of Development Finance Institutions or DFIs lies in their

Hence, the DFIs have to perform financial and development functions on

Such concessions are extended on a graded scale to units in industrially

Moreover, in recent years, development banks in India have launched special

What are mutual funds?

Why do people buy mutual funds?

What is a Non-Banking Financial Company (NBFC)?

A non-banking financial company, also known as non-banking financial institutions, are

Non-Banking Financial Company Explained

Non-banking financial companies are not subject to banking regulations or the usual

Effects of the 2008 Global Financial Crisis

Ownership of Regional Rural Banks

Organisational Structure of Regional Rural Banks

You might also like