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.
- 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.
How are they different from commercial banks?
- 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.
Why in News?
- 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.
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