Development banks

What are development banks?

Development banks are financial institutions that provide long-term credit for capital-intensive investments spread over a long period and yielding low rates of return, such as urban infrastructure, mining and heavy industry, and irrigation systems.
Such banks often lend at low and stable rates of interest to promote long-term investments with considerable social benefits.

Funding mechanism:

To lend for long term, development banks require correspondingly long-term sources of finance, usually obtained by issuing long-dated securities in the capital market, subscribed by long-term savings institutions such as pension and life insurance funds and post office deposits.
Considering the social benefits of such investments, and uncertainties associated with them, development banks are often supported by governments or international institutions.

Development banks are different from commercial banks which mobilise short- to medium-term deposits and lend for similar maturities to avoid a maturity mismatch.

The Industrial Finance Corporation of India was set up in 1949 as India’s first development bank for financing industrial investments.
In 1964, Industrial Development Bank of India (IDBI) was set up as an apex body of all development finance institutions.

However, development banks got discredited for mounting non-performing assets and inadequate professionalism in assessing investment projects for economic, technical and financial viability.
After 1991, following the Narasimham Committee reports on financial sector reforms, development finance institutions were disbanded and got converted to commercial banks.

The Association of Power Producers (APP), a think tank in the power sector, has demanded setting up of a development bank to meet the long-term and low-cost funding needs of infrastructure sectors such as power, that are reeling under stress due to the COVID-19 pandemic.
Last year, the Finance Minister announced that the government would set up development banks to fund infrastructure projects in the country.

Reference:

https://www.thehindu.com/business/development-bank-needed-to-support-low-cost-funding-app/article31798166.ece

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