[Banking Solved Question Papers, AHSEC, Class 12, 2019]
BANKING SOLVED QUESTION PAPERS
AHSEC CLASS 12 BANKING' 2019
BANKING
Full Marks: 100
Time: 3 hours
The figures in the margin indicate full marks for the questions.
1. Answer as directed: 1x10=10
(a) In which year Punjab National Bank was established ? 1
Ans: PNB (founded in 1894 in Pakistan)
(b) What do you mean by ‘Group Banking’ ? 1
Ans: Group Bank: Group Bank is a system of banking under which there will be holding company controlling the subsidiary companies which carry out banking business. In some cases, both the holding and subsidiary companies may carry out banking business.
(c) Write the full form of SIDBI. 1
Ans: Small Industries Development Bank of India
(d) Since which year the RBI has been issuing notes based on Minimum Reserve System ? 1
Ans: 1956
(e) NSE was set up in the year 1992/1993/1994/1995. 1
Ans: 1992
(f) Commercial Banks are the main lenders in money market. (State whether True or False) 1
Ans: True
(g) A ‘Not-Negotiable’ crossing cheque can/cannot be transferred. 1
Ans: Cannot be transferred
(h) Give an example of Material Alteration. 1
Ans: Alteration of the date of the cheque.
2. What is Public Sector Bank ? 2
Ans: Public Sector Banks: Public Sector banks are those banks in which the Government has at least 51% shares. Public sector banks are owned and controlled by the Government either directly or indirectly through the RBI. These banks are also known as “National Banks”.
3. Mention two prohibitory functions of RBI. 2
Ans: The prohibitive functions of RBI are:-
1) It can neither participate non-provide any direct financial assistance to any industry, trade or business.
2) It cannot purchase its own shares.
3) It cannot purchase shares of any banking company or of any corporation.
4. State any two functions of Stock Exchange. 2
Ans: Functions of stock exchange
1. Evaluation of securities: Stock exchange helps in determining the prices of various securities that reflect their real worth. The forces of demand and supply act freely in the stock exchange and help in the valuation of securities.
2. Mobilisation of savings: Stock exchange helps in mobilising surplus funds of individuals and institutions for investment in securities. In the absence of facilities for quick and profitable disposal of securities, such funds may remain idle.
5. Who can cross a cheque ? 2
Ans: Drawer, Holder and Banker
6. State the meaning of ‘Bank Draft’. 2
Ans: Bank Draft also known as banker’s cheque which is drawn by one branch after receiving cash from his customer and such payable on demand by another branch of the same bank to the person named in the draft.
7. What is ‘payment in due course’ ? 3
Ans: The payment of a negotiable instrument should be made to the right person by the paying banker or the acceptor of the bill; otherwise the latter shall be responsible for the same. The negotiable instrument Act provides protection to the paying banker or the acceptor of the bill only when payment is made as per the provisions of the Act. Payment of the amount due as per the provisions of the Act is called payment in due course.
According to Section 10 of the Negotiable Instrument Act, 1881, “Payment in due course means payment according to the true intention of the parties and without negligence to any person in possession thereof under circumstances which do not arouse suspicion about his title to possess the instrument and to receive payment.”
8. State any three differences between Promissory Note and Cheque. 3
Ans: Difference between Promissory Note and Cheque:
| Basis | Promissory Note | Cheque |
| Nature | It is an unconditional promise by the maker to pay the money. | It is an unconditional order to the bank to pay certain sum of money. |
| Days of Grace | Three days of grace are allowed for payment. | No days of grace are allowed for payment. |
| Crossing | A promissory note cannot be crossed. | A cheque can be crossed. |
9. Write a note on ‘Scheduled Bank’. 3
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Also Read: AHSEC Class 12 Finance Solved Question Papers
Finance [Banking] Solved Question Paper' 2012
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Ans: Scheduled bank refer to those banking institutions whose names are include in the Second schedule of the RBI Act, 1934. Under Sec. 42 (b) (a) are called scheduled bank. On the following conditions these banks are included in Second Schedule and these banks must have to fulfill these conditions:
a) The bank should have Rs. 5 lakhs as paid up capital and reserve fund.
b) It should be a corporation but must not be a partnership firm or a single owner firm.
c) The bank must have to submit its weekly return to the RBI.
d) Direct control is made providing the following advantages on the scheduled banks and RBI: - (i) Giving direct loans, (ii) Providing transfer facilities, (iii) Clearing house facility.
10. What are the various sub-markets of money market? 3
Ans: Following are the important components of the money market:
1. Call Money Market: The call money market refers to the market for extremely short period, say one to seven days. These loans are repayable on demand or control.
2. Collateral loan market: Collateral loans are loans which are offered against collateral securities like stocks and bonds and the market is known as the collateral loan market.
3. Acceptance market: Acceptance market refers to the market for banker’s acceptance involved in trade transactions. This market deals with banker’s acceptance which may be defined as a draft drawn by a business firm upon a bank and accepted by it.
4. Bill Market: It is a market in which short-term papers or bills are bought and sold. The most important types of short-term papers are the bills of exchange and the treasury bills. In bills of exchange market, trade bills and promissory note are traded and in treasury bills market, TBs issued by RBI on behalf of government are traded.
11. What are the main functions of World Bank? 3
Ans: The functions of World Bank are:
a) It grants loans for long and medium term loans which are divided into two ways - Reconstruction loans and development loans. The first is given to countries damaged by the war, the second to all countries who require such loans for development purpose.
b) The quantities of loans, interest rate and terms and conditions are determined by the bank itself.
c) Bank provides loans to private investor of member countries on its own guarantee.
d) The bank gives loans to government and also private borrowers.
e) Loans are granted after preliminary discussions with the parties and a critical examination of the projects.
f) World Bank provides various technical services to the member countries.
Or
Describe briefly about Statutory Liquidity Ratio. 3
Ans: SLR: Statutory liquidity ratio is another reserve requirement used by the RBI to control money supply. In India, besides maintaining the cash reserve, every bank has to maintain a statutory reserve of liquid assets in terms of cash, gold or unencumbered securities. This is termed as statutory liquidity ratio. In increase in the liquidity ratio implies a transfer of banking funds to Government and corresponding reduction in credit available to the borrowers. Present SLR is 19.25%.
12. What are the main achievements of nationalisation of banks in India. 5
Ans: Achievements of nationalisation:
a) Expansion of Bank branches: There has been a rapid increase of bank branches after nationalization. Till the end of March, 2014 number of bank branches increases to 97,010.
b) Growth of deposit: After nationalization the deposit occupied by banks was increased due to various branches in Rural, Semi-urban and urban areas.
c) Advances to priority sectors: Priority sector includes Agriculture, small business, small scale industry etc. There has been greater emphasis on those sectors now.
d) Correction of regional imbalances: After nationalization, steps have been taken to improve banking services in less developed states.
e) Advance to Agriculture: The nationalized banks have given particular importance in providing credit to agriculturists.
f) Investment in Govt. Securities: The nationalized bank has become a major source of finance for the Govt. These banks are required to invest a part of their funds in Govt. securities.
g) Developmental role of banks: Nationalized banks focuses on not only making profit, but also works for the welfare and prosperity of the society.
Or
Write a brief note on State Bank of India. 5
Ans: The State Bank of India was established under the State Bank of India Act, 1955, by nationalizing the Imperial bank of India with the object of extending banking facilities in rural areas. It came into existence on 1st July 1955. Though Imperial Bank was important banking institution in 16th April 1955, SBI bill was passed on 8th May 1955 by the Government of India. SBI was organized depending on the recommendation of All India Rural Credit Survey Committee (AIRCSC) which was appointed by RBI in 1951.
SBI is managed by Central Board of directors. In this Board, there is one chairman, one vice-chairman two managing directors and sixteen directors (Total 20 members). The head quarter of SBI is located at Mumbai and its local offices at Kolkata, Mumbai, Chennai, New Delhi, Lucknow, Ahmadabad, Hyderabad, Bhubaneswar, Bangalore, Guwahati etc. It performed all the functions performed by commercial banks. Besides it, SBI performed as an agent of RBI where there is no branch of RBI
The objectives of establishment of SBI are as follows:
a) To extend banking facilities on a large scale, particularly in the rural urban and semi-urban areas.
b) To promote agricultural finance and remove the defects in the system of agricultural finance.
c) To helps the RBI in implementing its credit policies.
d) To help the Government to pursue its broad economic policies.
e) To held the RBI in regulating other commercial banks
f) To act as an clearing agent of banks
13. What are the different functions performed by RBI as a Banker of Government? 5
Ans: Bankers to Government: The RBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into there capacities:
a) As a bankers.
b) As an agent.
c) As an advisor.
As a Government banker the RBI performs the following functions:-
a) It maintains and operates deposit account of the central and state governments.
b) It receives and collects payment on behalf of the Central and state governments.
c) It makes payments on behalf of the central and state governments.
d) It provides short term advances to government for which are called ways and means advances etc.
As a Government agent the RBI perform the followings functions:-
a) Collect tax and other payments on behalf of the government.
b) Raise loan from the public and thus manages public debts.
c) Transfer funds and provide remittances facilities to the government etc.
As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.
14. Show the differences between capital market and money market. 5
Ans: Difference between capital market and money market
| Basis of Distinction | Capital Market | Money Market |
| 1) Period | Capital market is a market for medium and long term funds. | Money market is a market for short term funds. |
| 2) Constituents | These include new issue market, stock market, stock brokers and intermediaries. | These include call money market, bill market and discounting market. |
| 3) Participants | Individual and institutional investors operate in the capital market. | Only the institutional investors operate in the money market. |
| 4) Instruments | The instruments in the capital market include shares, debentures, bonds etc. | Trade bills, certificate of deposits, commercial papers etc. are the instruments of money market. |
| 5) Liquidity | The instruments of capital market always take time to convert into cash. | The instruments of money market have very high degree of liquidity. |
Or
Mention five advantages of Mutual Funds. 5
Ans: Mutual Funds: A mutual fund is an institutional device through which the investors pool their funds to invest in a diversified portfolio of securities. The fund is termed as “Mutual” because all the profit & losses of the fund are shared by the investors in proportion to their investments.
Benefit of Mutual Funds:
a) Professional management of funds by very qualified and full time investment manager.
b) Risk reduction through diversification.
c) Flexibility for investments in variety of schemes.
d) Higher returns on investment as compared to bank deposits.
e) Tax benefits by investing in tax saving funds.
f) Economies of large scale operations.
15. Discuss the advantages of Internet Banking. 5
Ans: Advantages of E-banking or Internet banking
1) Convenience: Banks that offer internet banking are open for business transactions anywhere a client might be as long as there is internet connection.
2) Low cost banking service: E-banking helps in reducing the operational costs of banking services. Better quality services can be ensured at low cost.
3) Higher interest rate: Lower operating cost results in higher interest rates on savings and lower rates on mortgages and loans offers from the banks.
4) Transfer services: Online banking allows automatic funding of accounts from long established bank accounts via electronic funds transfers.
5) Ease of transaction: The speed of transaction is faster relative to use of ATM’s or customary banking.
6) Discounts: The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
16. Explain the position of collecting banker as holder for value. 5
Ans: A collecting banker is one who collects the cheques and other negotiable instruments deposited by his customers and places the amount to the credit of the customers account. A collecting banker acts as an intermediary between the paying banker and his customer in collecting the proceeds of a cheque from the paying banker and crediting the same to the customer’s account. The collecting banker may collect the cheques of his customers either as:
1. A holder for value or,
2. An agent of the customer.
The legal position of the collecting banker depends upon the capacity in which he collects the cheques.
Collecting banker as a holder for value: When to oblige a customer a banker pay the amount of the cheque before the collection of the cheque drawn upon another banker, the collecting banker is deemed to be its holder for value. The collecting banker shall be deemed to be the holder for value:
a) If he pays the amount of cheque in cash or in the account of the customer before it is actually realised,
b) If he lends money on the strength of the cheque,
c) If he accepts the cheque drawn on other bank to reduce the amount of existing debt or
d) If he pays cash over the counter at the time the cheque is paid in for collection.
As a holder for value he bears the liability and enjoys all the rights of a holder in due course. If the cheque is dishonoured, the collecting banker as a holder in due course can sue all the prior parties after giving a notice of dishonour.
17. Distinguish between Endorsement in Blank and Special Endorsement. 5
Ans: Blank or General Endorsement: An endorsement is said to be blank or general, if the endorser sings on the back or on the face of the instrument without specifying the name of any endorsee. The effect of his endorsement makes the instrument payment to bearer even though originally it was payable to order. For example, a cheque payable to Mr. X or order and Mr. X endorse the cheque to Mr. Y by simply affixing his signature. The effect of this endorsement makes the instrument payable to bearer even though originally it was payable to order.
Full or Special Endorsement: If an endorser signs his name and adds a direction to pay the amount mentioned in the instrument to or to the order of a specified persons, such an endorsement is said to be a full or special endorsement. For example, “Pay to Mr. X or order” S/d Mr. Y is an example of full endorsement. Here Mr. Y is the endorser and he has mentioned the name of the endorsee – Mr. X.
Difference between blank and special endorsement
| Basis | General/Blank endorsement | Special Endorsement |
| 1. Name of the endorsee | The name of the endorsee is not mentioned. | The name of the endorsee is mentioned. |
| 2. Nature | It is a bearer instruments | It is an order instrument or payable on order. |
| 3. Conversion | General endorsement can be converted into special endorsement. | Special endorsement cannot be converted into general endorsement. |
Or
Write a note on Non-Banking Financial Institutions. 5
Ans: Non-Banking Financial Institutions (NBFI’s): NBFI’s include such institution such as life-insurance companies, mutual savings bank, pension funds, building societies etc. which are doing diverse business. These financial institutions are thus a heterogeneous group of financial institutions other than commercial banks and co-operative societies. They include a wide variety of financial institutions, which raise funds from the public, directly or indirectly, to lend them to ultimate spenders. The growth of NBFI’s has been much faster than that of commercial banks. The main reason for this is that, in comparison to commercial banks, NBFI’s pay higher interest ratio to the depositors and change lower interest rate from the borrowers. Thus, they are competing with the commercial bank for public savings and as sources of Loanable funds.
Broadly NBFI’s in India are classified into two groups:
(i) Organised NBFI’s
(ii) Unorganised NBFI’s
(i) Organised NBFI’s: The organised NBFI’s include development banks and other specialised institutions. Development banks are further divided into Industrial Development banks and Agricultural Development banks:
Industrial Development banks are the following: (i) Industrial Development banks of India (IDBI). (ii) Industrial Credit and Investment Co-operations of India (ICICI). (iii) Industrial Development banks of India (IDBI). (iv) Life Insurance corporation (LIC). (v) Unit Trust of India (UTI). (vi) General Insurance Corporations (GIC).
Agricultural Development banks are the following: (i) National bank for agricultural and rural development (NABARD). (ii) Land Development Bank (LDB) (ii) Unorganised NBFI’s: A number of unorganised NBF’s also operate in the country. They are known as loan companies, higher purchase finance companies, chit funds etc.
(ii) Unorganised NBFIs: The unorganised non-banking financial institutions include merchant banking companies, credit rating agencies, factoring companies, leasing companies etc.
18. Discuss the objectives and functions of LICI. 5
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Also Read:
1. HS 12 Banking Chapter wise Notes
2. AHSEC Class 12 Banking Question Papers From 2012 Till Date
3. AHSEC Class 12 Banking Solved Question Papers From 2012 Till Date
4. Banking Chapter wise MCQs
5. Class 12 Banking Important Questions and Question Bank
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Ans: Life Insurance Corporation of India (LICI) was set up in September 1, 1956, under the LICI Act, 1956 by nationalizing 245 life insurance companies. The LICI mobilize the community’s savings and makes them available to industrial concerns in both public and private sectors. Since its inception, it has been playing a key role in the capital market by underwriting and subscribing to industrial securities. It provides long term and medium term loans in the form of direct loans.
Objectives of LICI:
a) To mobilise maximum savings of the people by making insured savings more attractive.
b) To ensure effective and economic use of funds collected from policyholders.
c) To improve social security by meeting various life insurance needs of the society.
Functions of LICI:
a) To invests the funds of the corporation in such a manner that will give maximum return.
b) To acquire, hold and dispose of any property for the purpose of its business.
c) To advance or lend money upon the security of any movable or immovable property or otherwise.
Or
Discuss various sources of bank’s own fund. 5
19. Discuss the General utility services rendered by commercial banks. 8
Ans: Modern banks not only deal in money and credit creation, other useful functions management of foreign trade, finance etc. The meaning of modern banks is used in narrow sense of the term as commercial banks.SBI as a commercial bank renders the following functions under Section 33 of the Act:
A) Primary Functions:
I. Accepting deposits
II. Advancing loans
III. Investments of funds
IV. Credit creation
B) Secondary Functions:
I. Agency functions
II. General utility functions
General Utility Services: A modern bank now a days serves its customers in many other ways:
a) Locker facility: Banks provides locker facility to their customers. The customers can keep their valuables and important documents in these lockers for safe custody.
b) Traveler’s cheques: Bank issue travelers cheques to help their customers to travel without the fear of theft or loss of money.
c) Gift cheque: Some banks issue cheques of various denominators to be used on auspicious occasions. These are known as “gift cheques” as they are gifted to others.
d) Letter of Credit: Letter of credit is issued by the banks to their customers certifying their credit worthiness. Letter of credit is very useful in foreign trade.
e) Foreign Exchange Business: Banks also deal in the business of foreign currencies. Again, they may finance foreign trade by discounting foreign bills of exchange.
f) Collection of Statistics: Banks collects statistics giving important information relating to industry, trade and commerce, money and banking. They also publish journals and bulletins containing research articles on economic and financial matters.
Or
Write the distinction between RBI and Commercial Bank. 8
Ans: Central Bank: The central bank is the supreme monetary institution of any country. It is a national bank which provides banking services to the government and commercial banks. It also helps in implementing monetary policy of the government and issuing currency. It is established, owned, controlled and financed by the govt. of the country.
In the words of R.S. Sayers, “It is a bank which controls the commercial banks in such a way as to promote the general monetary policy of the country.” India’s central bank is called the Reserve Bank of India. It is the apex monetary institution of India (2017).
In simple words, a commercial bank is a financial institution that undertakes the banking activity i.e.it accepts deposits and then lends the same to earn certain profit. The features of a Bank are: A Bank is a profit seeking commercial enterprises, It deals in money, i.e., it accepts deposits from the public and advances loans to the needy borrowers.
There are some fundamental differences between them:
1) Profit making is not the objective of central banks, although, they do earn profits. But, the principle aim of a commercial bank is to make large amounts of profits.
2) The central bank is owned any controlled by the Government. But A commercial bank is generally owned, managed and controlled by private citizens.
3) There is only one central bank in a country. But, There are commercial banks operating in a country on a competitive basis.
4) The central bank is the only agency in a country entrusted with the power of issuance of notes. But, The commercial banks do not have the power of issuing notes.
5) The central bank s the lender of the money market. But, The commercial banks are just its sub-ordinates.
20. Discuss the circumstances under which the paying banker can refuse payment of customer’s cheque. 8
Ans: The bank may dishonour a cheque for the following cases.
a) When the cheque is post dated and it is presented for payment before the date it bears.
b) When there are insufficient funds to the credit of the drawer.
c) When the cheque is presented for payment at branch where the drawer of the cheque has no account.
d) When a cheque is not duly, presented, as for example a cheque presented outside banking hours.
e) When the cheque is ambiguous, mutilated, materially altered or irregular.
f) When the cheque has become stale, that is it is not presented within six months of the issue of the cheque.
g) When the signatures of the drawer of a cheque do not tally with the specimen signatures in the records of the bank.
h) When the amount in figures and in words is not the same in a cheque.
i) When the cheque is crossed and it is not presented through a bank.
j) Where the bank receives a notice of the insolvency or insanity of the customer.
21. Discuss the principles followed by banks in granting loans and advances. 8
Ans: The principles of sound lending by commercial banks are:
1) Safety of principal: The most important rule for lending/granting loans is the safety of funds. This is so because the banks earn income through these loans and advances. In case the bank does not get back the loans granted by it, it might fail. A bank cannot and must not sacrifice the safety of its funds to get higher rate of interest. Banks must ensure the creditworthiness of the borrower before lending.
2) Marketability or liquidity: The second important principle of granting loan is liquidity. Liquidity means possibility of converting loans and advances into cash without loss of time and money. Banks are essentially dealers in short term funds and therefore, they lend money mainly for short term period. The banker should see that the borrower is able to repay the loan on demand or within a short notice.
3) Return or Profitability: Return or profitability is another important principle. The funds of the bank should be invested in securities to earn highest return, so that it may pay a reasonable rate of interest to its customers on their deposits, reasonably good salaries to its employees and a good return to its shareholders. However, a bank should not sacrifice either safety or liquidity to earn a high rate of interest.
4) Purpose of the loan: Before granting loans, the banker should examine the purpose for which the loan is demanded. If the loan is granted for productive purpose, thereby the borrower will make much profit and he will be able to pay back the loan. In no case, loan is granted for unproductive purpose.
5) Diversification: ‘One should not put all his eggs in one basket’ is an old proverb which very clearly explains this principle. A bank should not invest all its funds in one industry. In case that industry fails, the banker will not be able to recover his loans. Hence, the bank may also fail. According to the principle of diversification, the bank should diversify its investments in different industries and should give loans to different borrowers in one industry. It is less probable that all the borrowers and industries will fail at one and the same time.
6) Security: A banker should grant secured loans only. In case the borrower fails to return the loan, the banker may recover his loan after realizing from the sale of security. In case of unsecured loans, the chances of bad debts will be very high. Security conditions are different in different banks.
7) Margin Money: The banker must properly value the security against which loan is granted. There must be sufficient margin between the amount of the loan and the value of the security. If adequate margin is not maintained , the loan might be unsecured in case the borrower fails to pays the principle and the amount of the interest.
8) National policies: Banks have certain social responsibilities towards society also. The banks have to take into account the economic and social priorities of the country beside safety, liquidity and profitability. While formulating the lending policy, the banks are guided by the government policies in relation to disbursal of credit. Thus, national interest and policies are influence the lending decisions of banks.
In conclusion, it may be said that due consideration of all the principles are necessary, while evaluating a loan proposal.
22. What are the different types of Financial market ? Write a brief note on Foreign Exchange Market. 3+5=8
Ans: Meaning of Financial Market: Financial market is simply a link between the savers and borrowers. It can be defined as an institution that facilitates exchange of financial instruments and credit instruments such as cheques, bills, deposits, loans, corporate stocks, government bonds, etc. The main participants of financial markets are financial institutions, agents, dealers, brokers, borrowers and savers.
Types of Financial Markets (sub-markets)
Every firms, individuals and institutions need finance for its expansion and day to day operating activities. Financial needs may be of two types – short term or long term. Based on these needs, financial markets are divided into two categories:
a) Money market – Market for short term funds
b) Capital market - Market for long term funds
Foreign Exchange Market
International transactions involve payments or receipts in currencies other than home currency of the trading countries. This results in the necessity for buying and selling of foreign exchange. The market in which currencies of different countries are bought and sold for one another is called the foreign exchange market. In other words, foreign exchange market is a market in which foreign exchange transactions take place. According to Kindle berger, “Foreign exchange market it a place where foreign money are bought and sold”. 08, 09,12
Features of Foreign Exchange Market
a. Foreign exchange market has no geographical location.
b. It is electronically linked network.
c. The trading in the foreign exchange market is done usually 24 hours a day by telephone, display monitors, telex, fax machines and other means of communication.
d. The exchange dealers are bound by an informal code of moral conduct.
e. More transactions are based on oral communications to start with; the written documents follow later on.
TYPES OF FOREIGN EXCHANGE MARKET
There are two foreign exchange markets:
a) Retail market: In this foreign exchange market, the individuals and firms who require foreign currency can buy it and those who have acquired foreign currency can sell it.
b) Interbank market: In this foreign exchange market, banks who require foreign currency can buy it and those who have acquired foreign currency can sell it.
Or
What is Development Bank ? Explain the functions of Development Banks. 2+6=8
Ans: Ans: Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.
According to William Diamond, “A Development Bank has the opportunity to promote enterprises i.e. to conceive investment proposal and to stimulate others to persue them or itself to carry them through from the ‘conception’ to ‘realisation’.
Functions of Development Banks
The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:
a) Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
b) Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.
c) Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.
d) Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
e) Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.
f) Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
g) Management consultancy: Financial institutions provide technical and management consultancy to industrial units.
h) Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.
i) Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.
j) Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.
k) Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.
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