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After Second world war, the concept of development banking rose, after the Great Depression in 1930s. The demand for funds for restructuring for the nations which are affected forced in setting up a institution for reconstruction worldwide. As a result in 1945 IBRD was set up as a worldwide institution for development and reconstruction. This concept has been spread all over the world which resulted in setting up of large number of banks around the world which helps in coordinating the developmental activities of different nations with different objectives around the world.
The course of developing the financial institutions and markets during the post-Independence period was largely supported by the process of planned development pursued in India with laid stress on mobilisation of savings. With this end, the RBI concentrated on regulating and initializing systems for building institutions. The network of commercial banking was extended to cater to the needs of general banking and for meeting the short-term working capital requirements of industry and agriculture. Specialised development financial institutions such as the IDBI, NABARD, NHB and SIDBI, etc., were established with majority ownership of the Reserve Bank to meet the long term requirements of industry and agriculture. A system to increase the growth of these institutions was created which helped in financing these institutions.
The first development bank In India was established immediately after independence in 1948 under the Industrial Finance Corporation Act as a statutory establishment to meet institutional credit to medium and large-scale. In regular intervals after then the government started to establish new and different financial institutions to achieve the objectives which are helpful in making five year plans.
The financial institutions in India were established under the restrictive control and pressure of both central and state Governments, and the Government used these institutions for planning and developing the nation as a whole. All Indian financial institutions are classified under four heads according to their economic significance which are:
- All-India Development Banks
- Specialized Financial Institutions
- Investment Institutions
- State-level institutions
- Other institutions
INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
The Industrial Development Bank of India (IDBI) was set up on July 1, 1964 under the Act of Parliament as a wholly owned subsidiary of the Reserve Bank of India. On 16 February 1976, the ownership of IDBI was shifted to the Government of India and it was named the principal financial institution for integrating the working activities of institutions indulged in financing and developing the industrial sector in the country as a whole. During the four decades of its existence, IDBI has been contributing not only in making a well developed and effective industrial structure but also adding a qualitative approach to the steps of industrial development in the country. It has played a pioneering role by achieving its mission of promoting industrial growth with the help of financing medium and long-term projects. IDBI provides financial help, both in rupee and foreign currencies, for green-field projects for the purpose of expansion, modernisation and diversification. With liberalisation, IDBI developed a system of fund and fee-based services in order to deliver an expanded solution to meet the entire demand of finance and advisory needs. With the help of refinancing of loans, IDBI also provides indirect financial help to the citizens.
Narsimhan committee suggested that IDBI should remove its direct financing functions and target only in promoting and refinancing functions but later this suggestion was refused by government. Later RBI formed a committee under the chairmanship of S.H.Khan to analyze the concept of development financing in the changing global opportunities. IDBI has diversified its business operations in September 2003 by acquiring the entire shareholding of Tata Finance Limited in Tata Home finance Ltd. Then occurs the formation, incorporation and registration of Industrial Development Bank of India Ltd. as a company under the Companies Act, 1956 and under Banking Regulation Act, 1949 a deemed Banking Company. IDBI Bank, with which the parent IDBI was merged, was a variant new Development Bank.
IDBI holds the highest benchmark of corporate governance in its operations. The board of directors has the entire responsibility for maintaining the standards of corporate governance. Two Committees of the Board i.e. the Executive Committee and the Audit Committee was formed to check the implementation of practices of good corporate governance and providing necessary disclosures under the framework of legal requirements and restrictions and banking regulations. It has been observed that IDBI would continue to deliver the extent products and services as part of the role of development finance role even after when it was converted into Banking company. In addition, the wholesale and retail banking products were provided by the new entity, which was designed to meet the requirements of corporations and individuals. In particular, IDBI would leverage the strong relationships with corporate to offer solutions for all the needs of corporations built up over the years. There was also single-window appraisal for fixed loans and working capital finance, strategy for advisory at the implementation part of projects.
IDBI's conversion into a commercial bank would provide a way to Current and Savings bank deposits which are low-cost deposits. This would result on the Bank's overall cost of finance and improve lending at more compromising rates to their clients. In the emerging trend, the new IDBI is expecting to realize the mission of positioning itself as a most adopted brand which will provide total financial and banking solutions to corporates and individuals.
In terms of development, Industrial Development Bank of India (IDBI) is the tenth largest development bank in the world. IDBI has built some of the institutions like: The National Stock exchange (NSE), The National Securities Depository Services Ltd. (NSDL), Stock Holding Corporation of India (SHCIL).
The main objective of IDBI is to operate as an apex institution to finance for the industries in India. Its objectives includes:
MAIN FUNCTIONS OF IDBI:
- IDBI correlates with various financial institutions which are highly involved in providing financial help, promoting, and developing various industrial parts.
- IDBI is also indulged in various promotional activities like development programs for the new entrepreneurs, consultancy services planning for both the small scale units and the medium sized industrial units.
- For economic development, IDBI works for the commercializing the technology and other welfare schemes and its advancement.
- In various industrial development programs IDBI act as an catalyst.
- IDBI provides financial help to all types of industrial units which comes under the regulations of the IDBI Act.
- IDBI has served various industrial units in India for almost three years and has shown its growth in its size and operating units.
IDBI's ROLE AS CATALYSTS:
IDBI's role as a catalyst to industrial development has shown through a wide line of activities. IDBI helps in financing those units which comes under IDBI act. By providing the services to the Indian industry with more than three decades, IDBI has grown tremendously in terms of size of operations and portfolio.
DEVELOPMENTAL ACTIVITIES OF IDBI:
The bank is still performing a huge range of activities of promotion like development programmes for small entrepreneurs, consultancy services for small and medium units in order to fulfill its development role. These include developing the entrepreneurship skils, self-employment and wage employment for the sick units or weaker sections in the industrial sector. This was done with the help of agencies established.
TECHNICAL CONSULTANCY ORGANISATIONS:
TECHNICAL CONSULTANCY ORGANISATION was established in collaboration with other financial institutions with a view to provide the services available at a reasonable cost, like consultancy and advisory services to entrepreneurs, particularly to new and small entrepreneurs.
PRESENT SCENARIO OF INDUSTRIAL SECTOR
Industry holds for 27.6% of the GDP and hires 17% of the total workforce labor. However, about one-third of the industrial labour force is indulged in manufacturing of households. In terms of factory output, India is 16th in the world. India's small industry develops 5% carbon dioxide emissions in the world
Foreign competition is brought by economic reforms, which led to privatisation of certain public sector industries, opened the sectors which are reserved for the public sector and with this the production of fast moving consumer goods was expanding. After liberalisation, the Indian private sector, which was mainly run by old family organisations and which required political connections to interact faced with foreign competition, which included the threat of cheaper imports of China. It has then tackled the change by lowering costs, restructuring management, focusing on new designed products and trusting on low labour costs and technology.
The India's IT industry's share to the country's GDP has increased from 4.8% in 2005-06 to 7% in 2008. In 2009, among the top 15 technology outsourcing based companies in the world, seven Indian firms were listed. In March 2009, annual revenues from these operations in India has came to US$60 billion and this is expected to increase to US$225 billion by 2020.
This graph shows that even with the global crisis in 2008-09 the investments have not decreased as expected because at that time most of FIIs were withdrawing from the market but still investments have not decreased much as shown in the graph.
ROLE OF "IDBI" IN INDUSTRIAL DEVELOPMENT
IDBI -A CATALYST TO INDUSTRIAL DEVELOPMENT
After IDBI's reconstitution and its transfer of ownership to government, various responsibilities were handled by IDBI. .After the amendment to IDBI Act in 1995, initial public offering of equity shares was made by IDBI in July 1995 which reduces Government holding to 72.14%. The another aim was also to provide greater operational flexibility to IDBI. This would help it in responding to the challenging needs of the industrial sector in a much more quick and decisive manner.
The main aim of IDBI is to provide financial help for the establishment of new projects as well as for expansion, diversification, modernisation and technology advancements of existing industrial units. IDBI is engaged with the responsibility of integrating the working of institutions indulged in financing, promoting and developing industries. For this purpose, IDBI has emerged with an appropriate mechanism. Various promotional activities including entrepreneurship development programmes for emerging entrepreneurs, providing consultancy services for small and medium enterprises, advancing the technology and programmes for economic development of the underprivileged were undertaken by IDBI in collaboration with various other institution. IDBI's role as a catalyst to industrial development emerged with a wide range of activities.Products
A wide variety of financial products were offered by IDBI. With the introduction of new innovative products, and expanding the existing products IDBI is constantly making efforts to respond to the financial needs of the industry.Project finance
This is one of the activity being done by IDBI in developing the industry sector. For setting up of new projects as well as for expansion, diversification, modernisation and technology advancement of existing units PROJECT FINANCING is done by IDBI.
IDBI provides help to industries in the form of fixed loans, both in Indian rupees and foreign currencies, it may be due to underwriting/direct subscription to debt instruments/equity and also guarantees are offered in respect of the term obligations of industrial units.
IDBI produces special products for advancement of technology, conserving energy and controlling pollution. Venture capital financing is also provided for the development and use of indigenous technology and adaptation of imported technology.
The option of both fixed and variable interest rates are offered to the borrowers of IDBI which are based on IDBI's risk perception and credit worthiness of the personsNon-project Finance
Various diversified financial products are also provided by IDBI which are non project in nature i.e. non finance project in order to meet the specific needs of existing firms having good performance record and sound financial position.
For the purpose of acquisition of new machinery or equipment, IDBI provides asset credit in the form of line of credit for. It also provides credit to industrial firms for financing their normal capital expenditure over a specified period of time.Equipment Leasing:
Both indigenous and imported machinery/equipment is offered by IDBI in the form of full pay-out financial lease which results in the developing the industrial sector.Corporate Loans:
For meeting long term working capital requirements and for capital expenditures made by the firms, IDBI provides corporate loansBill finance:
Rediscounting of bills of exchange and promissory notes of industrial units was provided by IDBI that arises out of the sale and purchase of indigenous machinery and capital equipment on deferred payment basis and was made discounted by institutions approved by IDBI. Not only this it also discounts the bills of machinery manufactured.
Apart from these IDBI is also providing various services like:Merchant banking:
This service i.e merchant banking operations of IDBI deals with professional advice and services to industry for management issue, loan projection, project financing, corporate advice, project appraisal, capital restructuring and mergers & acquisitions.Forex services:
Various foreign exchange services are provided by IDBI such as spot and forward purchases of currencies for letters of credit and debt servicing, placement of deposits outside countries, swaps, forward rate agreements and products of derivatives.Subsidiary of small scale sector:
IDBI is providing considerable help to the small scale sector. For this, IDBI has set up a wholly-owned subsidiary, the Small Industries Development Bank of India (SIDBI), as the principal financial institution for promoting, financing and developing the industries in the small scale sector.
"IDBI BANK LTD. AND CHEVROLET SALES INDIA PVT. LTD.(CSIPL) SIGN MoU FOR VEHICLE LOAN FINANCING "
IDBI and CHEVROLET SALES pvt. Ltd. entered into Memorandum of Understanding on September 2009 for providing Auto Finance to their customers. This will help the customers to avail the loan and help them in purchasing the asset for them. With this the bank has contributed in developing the economy as a whole.
IDBI'S CONTRIBUTION IN SUSTAINABLE DEVELOPMENT
IDBI has evolved itself in continuously supporting the industrial sector in terms of financial assistance for addressing the environmental issues faced by them. To become supportive with this respect, IDBI in collaboration with various institutions like WORLD BANK, ASIAN DEVELOPMENT BANK is developing various schemes. These include pollution control scheme, ozone depleting substances, green house gas pollution prevention etc.
ANALYSIS OF AN ARTICLE
THE HINDU BUSINESS
EX. 1: "PIVOTAL ROLE OF IDBI IN INDUSTRIAL DEVELOPMENT"
By Oommen A. Ninan, Mumbai, October 2009
The article starts with emphasizing the role which IDBI has played in developing the industries. It says that since 1964, The Industrial Development Bank of India (IDBI), which is the premier developmental financial institution has played a significant role in the country's industrial development. The Government has put to relief all the complexities over its future by restructuring it as the lead development finance institution in the latest interim budget declared. It has been stated by the author that development finance has become vital for the economy as a whole. Not only industries are targeted but the entire economy is positively affected by the development finance institutions.
He says that IDBI has continuously playing a significant role in developing the industries.
It developed financial institutions such as Export-Import Bank of India, Small Industries Bank of India, North-Eastern Development Finance Corporation and Asset Reconstruction Company (India) Ltd etc.
It also played a role in developing various capital market related agencies like SEBI, NSE, NSDL, etc. IDBI's role is not only confined to long term financing but also socially related activities. The author at the last says that in the past IDBI has to suffer a lot of political interference but still it tackles the problem and continue with developing the industries.
EX. 2: IDBI TO FUND FILM INDUSTRY SOON
MUMBAI, OUR BUREAU
In this article the author says that how IDBI is contributing towards developing the industries like film industry also. He says that it has announced a scheme for the development.
FOREIGN DIRECT INVESTMENT IN INDIA
India is a preferred destination for foreign direct investments as the third-largest economy in the world in PPP terms. India has positive points in information technology and other important areas like auto parts, apparels, chemicals, pharmaceuticals, jewellery and so forth. Although India always had promise for investors globally, but a hindrance to this context was its rigid FDI policies. India has positioned itself as one of the runners in Asia due to or with the result of a series of positive economic reforms focussed at liberalizing the economy and encouraging foreign investment. India has the availability of skilled managerial and technical expertise.
100% FDI stake has been permitted in ventures because of India's recently liberalised FDI policy. The reforms of Industrial policy has reduced all the industrial licensing requirements, removed prohibitions on expansion and encouraged easy reach to foreign technology and FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. In most of the sectors, number of changes were got the approval to remove the restrictions which was related to FDI policy. There had been the relaxations on the restrictions in sectors as diverse as civil aviation, construction development, industrial parks, commodity exchanges, petroleum, etc. But this still leaves an unfinished quorum of allowing greater foreign investment in insurance and retailing.
EXPECTATIONS FOR 2010:
By 2010. GDP investments are expected to increase from current 5% to 35%. There is no doubt that India has huge potential to attract USD 50 billion FDI in the next 5 years. It is little contradictory to say with so much of visibility of MNCs, JVs, foreign investors etc that the current flow of foreign direct investment in India has been only 0.8% of GDP as compared to other nations where it is 3% of GDP. It is expected that with more liberalization and opening of other sectors in the economy where there are relaxations in real estate or direct foreign investment in real estate India etc, FDI will increase by at least 1.6% of GDP in the next 5 years.
FOREIGN DIRECT INVESTMENT- CONCEPT & POLICY
Foreign direct investment is an investment made by a foreign individual or company in another country. It is the movement of capital across national boundaries in a way that grants the investor control over the acquired asset.
Foreign direct investment (FDI) has become one of the national development strategies to expand globally for almost all the nations. Its global importance and positive result in development of domestic capital, productivity and employment; has made it an significant tool for encouraging economic growth for countries.
India is recognizing as one of the 'most favored destination' for FDI in Asia .After China India has replaced US as the second-most favored destination for FDI .
FDI in India has contributed effectively to the overall growth of the economy in the recent times. With the help of FDI inflows India has been able to transfer the new technology and creative ideas; improving infrastructure, which resulted in making a competitive business environment.
While reviewing FDI policy on an ongoing basis certain measures for its further liberalization were taken. Not only this there was a certain change in sectoral policy/sectoral equity capital is analysed from time to time through Press Notes.
Only 100% was permitted in the FDI Policy from foreign/NRI investor which was without before approval in many of the sectors which includes the services sector under automotive role. It was not necessary to take the approval from the government or RBI in sectors or activities related to automotive role. For inward remittances the investors are required to concern the Regional office which is related to RBI within 30 days of such receipt and will have to file the necessary documents with the same office within 30 days after issue of shares to foreign investors.
TRENDS OF FOREIGN INVESTMENTS IN INDIA TILL 2009
India's FDI flows has increased to US$25 billion during 2008-09 even after the global financial crisis. The advantage of country's increasingly growing consumer market have been taken by various Multinational firms. With rapidly growing assets abroad, Indian multinational companies have also become the important investors in global markets.
POSITIVE IMPACT ON DEVELOPMENT
Much of the FDI in the financial and infrastructure sectors yielded little impact, this was believed by many observers, and because of this perception many analysts does not stand for long. By analyzing all the studies it was found that in almost all cases FDI had a significantly positive impact on productivity which is the key criterion for assessing long-term economic performance and on the service coverage. But poor designed liberalisation processes, contracts, and restrictions have resulted in poor returns on investments or, in some cases, to more returns. The financial and infrastructure sectors are complicated to regulate as manipulated monopolies, but it was analyzed that FDI is not responsible to blame for government shortcomings. FDI has much more positive impact in sectors where competition is stronger. There was a study which showed that the removal of FDI restrictions in the automotive sector has led to competition and investments that resulted in a tremendous increase in productivity with which there was increase in output due to falling prices. With this employment also increased.
ROLE OF IDBI IN FOREIGN INVESTMENTS
(ANALYSIS THROUGH TREND OF FDI'S AND IDBI'S CONTRIBUTION)
- The main role of the IDBI in India with respect to foreign investments is to attract foreign investors in investment related activities in India. There are two forms of funds from outside countries: Foreign direct Investments and Joint Ventures with Indian companies. Approval related to foreign direct investments inflows are made through automatic route or through government route. There are certain units that require government approvals to acquire funds that require the approval of FIPB. But on the other hand there are certain routes that does not require FIPB approval and they are foreign direct investment through automatic route. All these distribution of financial help to various industrial firms in India are supported by the financial institutions establishments in various parts of India.
- IDBI works through automatic route and government route in distributing funds in various sectors of the industries of India. Its compulsory to get the approval from RBI for all the foreign investors in order to carry out investment activities in the industrial firms in India. The allotment is allowed up to 100 percent under automatic route which does not require approval from FIPB.
- IDBI acts as a financial development institution which provides financial help to the industrial sector related to manufacturing or processing of goods, mining, transport generation and distribution of power both in private and public sectors. Till February 1976, Industrial Development Bank of India (IDBI) has been a fully owned subsidiary bank of the Reserve Bank of India after which it was disconnected from RBI.
- IDBI has been recognized as a best development institution as it offers a wide range of services to its customers. IDBI bank offers a wide line of banking products and financial development services to corporate and retail customers through various delivery channels, specialized subsidiaries and affiliated firms, venture capital units, non-life insurance sectors, and so on.
The entire term paper explains the role that IDBI has played in industrial development and foreign investments in India. To conclude it can be said that IDBI is one of the development finance institution that helped not only in long term activities but also the societal and short term activities. It has opened variety of institutions for promoting and developing the industries and economy as a whole. It has done various developmental and promotional activities like technical assistance, financial assistance etc. On the part of Foreign investments it can be said that despite the global crisis the FDI flows has been increasing and IDBI has contributed for the same. That means it has made an inflows for the manufacturing and processing industries. It has been approved by the government to invest 100% by foreign investors that helped in more financial assistance for the industries.
At the end it can be said that IDBI has contributed its huge part for developing the economy as a whole.