[Banking Notes, AHSEC, Class 12, Chapter wise Notes, Non-Banking Financial Institutions (NBFIs), Revised Syllabus]
AHSEC CLASS 12 NOTES FOR 2022 - 23 EXAM
SUBJECT: BANKING
Unit – 4: Non Banking Financial Institutions
Summary chart of various Development banks to ease your study
|
Name |
Full Form |
Established on |
Objective |
Head Office |
|
IFCI |
Industrial Finance Corporation of India |
1-7-1948 |
To provide medium and long term credit to
industries. |
New Delhi |
|
IDBI |
Industrial Development Bank of India |
July, 1964 |
To finance industries and to promote other
financial institutions |
Mumbai |
|
SFCs |
State Financial Corporations |
1953(Punjab) |
To finance industries through subscription
of securities and discounting of bills. |
Every State |
|
NABARD |
National Bank for Agriculture and Rural Development |
July, 1982 |
To provide funds in rural areas. |
Mumbai |
|
SIDCs |
State Industrial Development Corporations |
Not available |
Development of medium and large scale
industries in states. |
Every state |
|
SIDBI |
Small Industries Development Bank of India |
1990 |
To provide funds to small scale units
through SFC, SIDCs and Banks. |
Lucknow |
|
NEDFI |
North Eastern Development Finance
Corporation |
1995 |
To provide funds and other facilities for
promotion, expansion, and modernisation of industries in NE region. |
Guwahati |
|
LICI |
Life Insurance Corporation of India |
1956 |
To promote savings and mobilises funds to
cater the need of the government and industries. |
Mumbai |
|
GICI |
General Insurance Corporation of India |
1972 |
To provide loans and investments in capital
market of the country. |
Mumbai |
|
UTI |
Unit Trust of India |
1963 |
To encourage and mobilise savings and to
channelise it into productive ventures to promote economic development. |
Mumbai |
|
MMMFs |
Money Market Mutual Funds |
1992 |
To invest in money market instruments. |
N/A |
|
IBRD |
International Bank for Reconstruction and
Development (World Bank) |
1945 |
To assist in reconstruction and development
of member countries by investments. |
Washington |
|
IFC |
International Finance Corporation |
1956 |
To provide long term loans in major
currencies to its member company. |
Washington |
|
IDA |
International development Association |
1960 |
To provide soft loan to economically sound
projects which create social capital. |
Washington |
|
IMF |
International Monetary Fund |
1945 |
To promote international co-operation
amongst members on international monetary issues. |
Washington |
|
ADB |
Asian Development Bank |
1966 |
To promote public and private investment for
economic development of Asian region. |
Manila, Philippines |
Q.1. What are development banks.
Mention its features and functions. 2012,
2013, 2016, 2017, 2018
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 pursue them or itself to carry them through
from the ‘conception’ to ‘realisation’.
Features
of Development Bank
a) Development
bank is a specialised financial institution which provides medium and long term
finance to business units.
b) It is a
multi-purpose financial institution and not just a term-lending institution.
c) It does
not accept deposits from the public, unlike commercial banks. A development
bank does not perform ordinary banking functions.
d) Financial
assistance is provided by a development bank not only to the private sector but
also to the public sector undertakings.
e) One of its
major aims is to promote the saving and investment habit in the community.
f) Its major
role is the gap-filler, i.e. to fill up the deficiencies of the existing
financial facilities.
g) Its motive
is to serve the public interest. It works in the general interest of the nation
rather than to make profits. A development bank is motivated by social profits.
Functions
of Development Banks
a) They
provide risk capital.
b) They
provide long-term and medium-term finance to industrial undertakings for
purchase of new plants and machinery, expansion, modernization, etc.
c) They
purchase the shares and debentures of companies and thus provide them long-term
capital.
d) They help
the companies in raising capital from the capital market.
e) They underwrite
the public issues of shares and debentures by the companies.
f) They
provide promotional, technical and managerial services to the industrial
undertakings.
g) They
sponsor programmes for the upgradation of managerial skills and professionalism
of management.
h) They help
in promotion of industrial development programmes in backward areas.
i)
They help foreign investors in finding local
partners.
Q.2. Explain the objectives and significance
of Development banks. 2013
Ans: Objectives and Importance 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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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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Q.3. Distinguish between commercial
bank and development bank.
Ans: Differences between Commercial Bank and Development Bank
|
Basis |
Commercial Bank |
Development
Bank |
|
1. Formation |
Commercial banks are generally set up as
companies under the Companies Act. |
Development banks are usually set up under
the special Act passed by the Government. |
|
2. Nature |
Commercial banks are ordinary financial
institution. |
Development banks are specialised multi -
purpose institutions. |
|
3. Raising of Funds |
Commercial banks accept deposits from the
public. These deposits are repayable on demand. |
Development banks do not accept deposits
like commercial banks. Their main sources of funds are borrowing, grants,
selling securities etc. |
|
4.Cheque facility |
There is cheque facility in case of
commercial banks. |
There is so such cheque facility in case of
development banks. |
|
5. Advance |
Commercial banks mainly provide short and
medium term loans. |
Development banks provide medium and
long-term loans. |
|
6. Motive |
The basic motives of commercial banks are to
maximise the profits. |
Development banks are motivated by social
profit i.e. it aims at providing service. |
|
7. Credit creation |
Commercial banks can create credit or
multiple deposits while lending. |
Development banks can’t create credit. |
|
8. Acceptance of liabilities |
The commercial bank’s liabilities are
accepted as means to settle transactions. |
The liabilities of development banks are not
accepted as a means to settle transaction. |
Q.4. Write a brief note on IFCI.
Ans: The Industrial Finance Corporation of India (IFCI) was
established in 1948 under a special Act of Parliament. It was the first development bank
of our country. It was set up to make medium and long term credits to
industrial concerns in India. IFCI grants loan mainly for starting new
ventures, expansion of existing capacity, replacement or renovation. IFCI has
been converted into a public limited company with effect from 1-7-1993 in which
50% shares are held by IDBI and remaining 50% shares are held by commercial
banks, insurance companies and co-operative banks.
Objectives and functions of IFCI:
a) Granting
loans or advances to industrial concerns repayable within a period of 25 years.
b) Underwriting
and direct subscription to the shares of industrial concerns.
c) Financial
assistance to industrial units to backward areas for balanced regional
development.
d) Equipment
financing, equipment leasing and hire purchase services to industrial concerns.
e) Financial
assistance to first generation entrepreneurs, particularly technology oriented
concerns and professionals.
Q.5. Write a brief note on IDBI?
Ans: The full form of IDBI is Industrial Development Bank of
India. It was established in July, 1964. However, in February 1976, the IDBI
was taken over by the government and was made an autonomous institution. It was
established with the object of recognizing and integrating the structure of the
existing financial institution in the country for gearing up the needs of rapid
industrialization.
Features of IDBI:
a) It provides direct loans to the industrial concerns;
b) Extending refinancing facilities for industrial and export credit.
c) Subscribing to and underwriting of the shares, bonds and debentures of the industrial concerns.
d) Acceptance, discounting and rediscounting the commercial bills of the industrial concerns;
The objectives of IDBI are:
a) Planning,
promoting and developing industries to fill the gaps in the industrial
structure in India.
b) Providing
technical and administrative assistance for promotion etc.
The functions of IDBI are:
a) It renders
technical, managerial and administrative assistance for promotion, management
and expansion of industry.
b) It
provides financing facilities to IFCI, SFC and other financial institutions
approved by the Government.
c) It
co-ordinates the activities of other financial institutions for the promotion
and development of industries.
d) By
purchasing and / or underwriting shares and debentures of industrial concerns
it provides capital.
e) It also
provides guarantee for deferred payments due from industrial concerns and for
loans raised by them.
Q.6. Write a brief note on State
Financial Corporations (SFCs).
Ans: In order to provide finance to small and medium scale
industries need for a separate financial institution was felt. Accordingly, the
government of India passed the State Financial Corporation Act in 1951,
enabling the state government to set up State Financial Corporation. As a
result, the first SFC was set up by the Punjab Government in 1953. In Assam,
Assam Finance Corporation was set up in 1954. The SFC meets the financial
requirements of small industrial concerns in private sector.
Objective: The main objective of the SFCs is
to provide financial assistance to medium and small scale industrial concerns.
SFC especially comes into the picture when traditional banking system does not
provide requisite funds. The assistance by SFC is for medium and long term
capital requirements. They help both new as well as existing units for purposes
of establishment, modernization, renovation, expansion and diversification.
Functions
of SFC:
The main function of the SFC’s is to provide loans to small and medium scale industries engaged in the manufacture, preservation or processing of goods, mining, etc., State Financial Corporations are authorised to grant financial assistance in the following forms:
1. Granting of loans or advances to Industrial concerns repayable within a period not exceeding twenty years.
2. Subscribing to the debentures of industrial concerns repayable within a period not exceeding twenty years.
3. Guaranteeing loans raised by industrial concerns repayable within twenty years.
4. Underwriting the issue of stocks, shares, bonds, or debentures by the industrial concerns subject to their being disposed off within seven years.
5. Guaranteeing deferred payment due from and individual concern in connection with purchase of capital goods in India.
6. Acting as an agent of the Central Government or the Industrial Finance Corporation of India in respect of any business with an industrial concern in respect of loans sanctioned to them.
Q.7. Write a brief note on NABARD. 2015, 2017, 2020
Ans: The National Bank For Agriculture and Rural Development
(NABARD), a developing bank, came into existence on July 12, 1982, under an Act
of Parliament with an initial capital of Rs. 100 crores. It is an apex
institution set up for providing and regulating credit and other facilities for
the promotion and development of agriculture, small scale industries, cottage
and village industries, handicrafts and other rural crafts and other allied
economic activities in rural areas. The NABARD has taken over the functions of
ARDC (Agricultural Refinance and Development Corporation) and refinancing
functions of RBI in respect of co-operative banks and the RRBs.
Objectives/Functions
of NABARD
a) Integrated
rural development.
b) To provide
training and Research facilities for rural Development.
c) To keep a
check on all the projects which are refinanced by NABARD; through timely
inspection, monitoring and evaluation.
d) To Act as
a coordinator and regulator for rural credit institutions.
e) Promotion
and development of agriculture, Small Scale industries, cottage and village
industries, handicrafts and other rural crafts.
f) To
formulate rural credit plans on annual basis for all districts in country.
Q.8. Write a brief note on SIDBI.
Ans: Small Industries Development Bank of
India (SIDBI) was established in April 1990 under an Act of parliament. It is a
wholly-owned subsidiary of Industrial Development Bank of India (IDBI). It
serves as the principal financial institution for Promotion, Financing,
Development if industry in the small scale sector and Coordinating the
functions of other institutions engaged in Similar activities. The Small Scale
industry (SSI) sector, which is vibrant and dynamic sub-sector of the India’s
industrial economy, is the prime area of SIDBI’s business.
Q.9. Write a brief note on State
Industrial Development Corporation (SIDCs)
Ans: SIDC: The State Industrial Development Corporation were
incorporated under the Companies Act, 1956 as wholly owned state Govt.
undertaking for promoting industrial development. Their main objective is the development
of medium and large scale industries in their respective states. At present
there are 28 SIDCs in India.
Functions of SIDCs:
a) Providing
term loans to medium and large scale industries.
b) Underwriting
and direct subscription of shares / debentures of industries.
c) Undertaking
Entrepreneurship development programmes in respective states.
d) Administration
of incentive scheme of Central and State Govt.
e) Technical
guidance and assistance in plant location.
Q.10. Write a brief note on North
Eastern Development Finance Corporation (NEFDi)
Ans: NEDFi: The North Eastern Development Finance Corporation was
incorporated under the companies Act, 1956 on
9-8-1995. It registered office was at Guwahati, Assam.
Objectives of NEFDi
a) To provide
credit and other facilities for promotion, expansion and modernization of
industries and infrastructural project in the NER of India.
b) To provide
credit and other facilities for agriculture, poultry, dairy, farming etc. in
NER of India.
Q.11. What are Mutual Funds? Mention
its importance. 2019
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. 2013,
2015, 2017
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.
Q.12.
What is Money Market Mutual Fund?
Ans: Money market Mutual Funds (MMMFs) were introduced in April 1991 to provide an additional short term avenue for investment and bring money market investment within the reach of individuals. These mutual funds would invest exclusively in money market instruments. MMMFs, bridge the gap between small individual investors and the money market MMMFs mobilizes savings from small investors and invest them in short term debt instruments or money market instruments. MMMF’s can be set up by the following:
a) Schedule commercial bank and public financial institutions as defined under sec 4(A) of the Companies Act, 2013.
b) Existing mutual fund/subsidiaries of the above engaged in funds management business.
c) Mutual Fund set up in the Private sector.
Organisational Structure of MMMF’s: The
organisation of MMMF’s can take any of the following forms:
a) MMMFs can be set up in the form of department or division of any of the eligible institutions. In such cases it can appear in the form of Money Deposit Account (MMDA) in the balance sheet of such institutions.
b) In case of MMDA scheme the subscribers may be issued either a Deposit Receipt or a pass book without cheque book facility.
c) MMMF’s can be set up as a separate equity in the form of ‘Trust”. In fact, as per the credit policy announced by the RBI on October 29, 1999. MMMF’s can be established only as trusts for facilitating operations in a more transparent manner and for better control.
d) In case of the “Trust”, the sponsoring institutions have to appoint a Board of trustees for managing MMMF’s. The day-to-day management is to be looked after by a full time Executive Trustee appointed by the Board of Trustees.
e) In case MMMF’s is set up as a division of a bank or financial institution or other eligible institution, a separate Fund Manager is to be appointed for looking after the operations of MMMF’s.
f) MMMF’s can be floated both under open-ended and closed-ended schemes.
g) Subject to the guidelines prescribed by the RBI banks and public financial institutions can formulate special schemes to suit their requirements.
h) At least one month before the launch of any, MMMF scheme, the eligible launching institution has to forwarded to the RBI all necessary details of the scheme including copies of the offer, application form and other terms and conditions.
RESTRICTIONS
ON THE MEMBERS OF THE FUND: The Fund imposes various types of restrictions
on its members to achieve its objectives. The restrictions are as follows:
a) The member countries are required to utilise the loans taken from the fund strictly for those purpose for which they have been granted by the Fund.
b) No member country can affect any change in its monetary policy without the consent of the Fund.
c) All the members’ countries will buy and sell gold at rates determined by the Fund.
d) No member country can impose any restrictions on current international payments without first securing the permission from the fund.
e) Every member country will buy and sell foreign currencies at the rates which have been fixed by the Fund.
Q.13.
Write a brief note on UTI.
Ans: Unit Trust of India (UTI) is India’s first fund organisation.
It is the single largest mutual fund is India. The UTI was established by the
government of India on 1st February, 1964 as a statutory corporation
in the public sector under the UTI Act, 1963. This institution began operations
in July, 1964. The UTI was set up to promote savings and investment in the
country. The UTI not only contributes to the industrial development and
diversification of the economy but also provides the small savers the
opportunity for sharing the benefits of industrial development.
Objectives
of UTI: UTI has been set up for the following objectives:
a) To stimulate and pool the savings of the middle and low income group.
b) To enable unit holders to share the benefits and prosperity of the rapidly growing industrialization in the country.
c) To sell Units among as many investors as possible.
d) To invest the money raised from the sale of units and is own capital in corporate and industrial securities.
e) To pay dividend to the unit holders.
The above objective is achieved by UTI through a threefold approach.
a) By selling units of the Trust among as many investors as possible in the different parts of the country.
b) By investing the sale proceeds of the units and also the initial capital funds in industrial; and corporate securities, and
c) By paying dividends to those who have bought the units of the Trust.
Q.14.
Write a brief note on LICI. 2019
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) Spread Life Insurance much more widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at reasonable cost.
b) Maximize mobilization of peoples savings by making insurance linked saving adequately attractive.
c) Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest on the community as a whole, the funds to be deployed to the best advantage of the investors as well as the community as a whole; keeping in views national priorities and obligations of attractive return.
d) Conduct business with utmost economy and with the full realisation that the money belongs to the policyholders.
e) Act as trustees of the insured public in their individual and collective capacities.
f) Meet the various life insurance needs of the community that would arise in the changing social and economic environment.
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.
Q.15.
Write a brief note on GICI. 2020
Ans: Before independence, the general insurance business in India
was done by foreign companies. After independence, the general insurance
business was completely owned by the government. In 1972, the government
nationalized the general insurance business and 107 insurer were amalgamated
and grouped into four companies, namely The National Insurance Company Limited,
The New India Assurance Company, The Oriental Insurance Company Limited and the
United India Assurance Company Limited. The General Insurance Corporation of
India was setup in 1972 as a holding company of these four general insurance
companies.
General Insurance Corporation of India (GICI)
sell insurance against specific risks, such as loss from fire and accident, to
property of various kinds, such as motor vehicles good, machinery, building
etc. and also against risk of personal Accidents and sickness. The policies of
these companies do not involve savings features. GICI provides loans and
investment in the capital market of the country. GICI invests in shares and
debentures, underwriters and invests in new issues of the corporate sector,
grants loans and advances to companies.
Objective
and Functions of GICI:
a) The carrying on of any part of general insurance business as deemed desirable.
b) Aiding, assisting and advising the companies in the matter of setting up of standard of conduct and sound practice in general insurance business and rendering efficient customer service.
c) Advising the acquiring companies in the matter of controlling the expenses including the payment of commission and other expenses.
d) Advising the acquiring companies in the matter of investment of funds.
e) Issuing directions to acquiring companies in relation to the conduct of general insurance business.
Q.16. Write a brief note on ‘World
Bank’ or IBRD 2012,
2014, 2016, 2018, 2019
Ans: The International Bank for Reconstruction and development
(IBRD) generally known as the ‘World Bank’. This bank was established as a
result of the deliberations at the economic conference held at Breton Woods in
July 1944. This bank began its operations in June 1946. The World Bank was
established with the object of reconstructing the economies of the war
devastated countries, economic development of the member countries and to raise
the standard of living of the people of the world. Initially, only nations that
were member of the IMF could be members of the World Bank. But now any country
can become the member of the World Bank.
The objectives of World Bank are:
a)
To provide long-run capital to the member
countries for reconstruction and development.
b)
To promote private capital investment by
providing guarantee on private loans and capital investment.
c)
To maintain equilibrium in balance of payments
and balanced development of international trade.
d) When
private capital is not available on reasonable terms, to supplement private
investment by providing finance for productive purpose on suitable conditions.
e)
To encourage the development of productive
facilities and resources in less developed countries.
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.
Q.17. Write a brief note on
International Monetary Fund (IMF). 2013,
2015, 2017
Ans: The IMF is an international monetary institution established
by 44 nations under the Bretton woods agreement of July 1944. It came into
existence in December 1945 and started functioning in March, 1947. It is an
autonomous organization and is affiliated to the U.N.O. It has its main office
in Washington. Initially, the IMF had 30 countries as its members. At the end
of 2000, the membership of the IMF was 183. It was established to promote
economic and financial co-operation amongst member countries.
The
objectives of I.M.F are:
a) To promote
international economic and financial co-operation amongst member
countries.
b) To promote
exchange stability and avoid currency devaluation.
c) To promote
the international trade by removing all obstacles.
d) To promote
investment of capital in backward and undeveloped countries.
e) To make
financial resources available to members.
f) To seek
reduction on payment imbalances.
g) To
elimination or reduction of existing exchange control.
The functions of IMF are:
a) It
functions as a short credit institution.
b) It
provides machinery for the orderly adjustments of exchange rates.
c) It keeps
reserves of the currencies of all member countries.
d) It lends
to the borrowing countries in the currencies which they require.
e) It
promotes the expansion of International Trade for the mutual benefits of member
countries.
The management of the IMF is composed of the
following:
a) Board of
Governors: The board of governors has the responsibility of formulating the
general policies of the fund.
b) Board of
Executive Directors: The board of executive directors controls the day-to-day
activities of the fund.
c) Managing
Director: The managing director is the chairman of the board of executive
directors.
d) Interim
committee: It main function is to advice Board of Governors for the improvement
of supervision, management and adaptation of international monetary system from
time to time.
e) Development
committee: It consists of 22 members. The main function of the committee is to
prepare reports, advice the Board of Governors regarding all the aspects of the
transfer of resources to the developing countries as required by them and to
make important suggestions for its implementation.
Q.18. Write a brief note on Asian
Development Bank (ADB).
Ans: The full form of ADB is Asian Development Bank. It is a
multinational regional development bank. Its purposes are lending funds,
promoting investment, providing technical assistance to the developing member countries.
The ADB came into existence and was formally opened for business on 19th
December 1966 at Manila.
The main objectives of ADB are:
a) To promote
investment in the ECAFE (Economic Commission for Asia and Far East) region of
public and private capital for regional development.
b) To utilize
the available resources for the financing of economic development, especially
of the smaller and less developed members of the region.
c) To provide
technical assistance in the execution and development of projects.
d) Undertaking
of such other activities which may help to achieve its main objectives.
e) To help
the regional members in the co-ordination of their plans and policies for
economic development.
The ADB is managed by a president,
vice-president and a board of governors along with and administrative staff.
The president is the administrative head of ADB. It started its operations with
an authorized capital of $ 2.9 billion which was raised to $ 25 billion in
1992.
Lending
Procedure:The lending operations of the ADB may be classified into two
categories: (a) ordinary operations, (b) special operations.
1. Ordinary Operations: Ordinary Operations refer to those lending activities which are financed out of ordinary capital resources of the Bank. The loans under this category are provided in two forms: (a) in the form of foreign currencies, and (b) in the form of national currency of the borrower. The Bank also lends funds to the central bank of a member country, which then re-lends them to the specific institutions for the specific projects.
2. Special Operations: Special operations refer to those lending activities which are financed out of the special funds of the Bank, such as, multi-purpose special funds, the Asian development fund, agricultural special funds, technical assistance special fund, etc. the loans provide out of the special funds are on liberal terms; they carry low interest rates and for longer duration.
Q.19. Write a brief note on
International Finance Corporation (IFC).
Ans: The IFC is a member of World Bank Group and was established
in July 1956 to provide finance to the private sector. The IFC was established
with the specific purpose of providing risk capital to the private enterprises
in the less developed countries without government guarantee.
The main objectives of IFC are:
a) To serve
as a clearing house to bring together investment opportunities, private capital
of both foreign and domestic origin and experienced management.
b) To help in
stimulating the productive investment of private capital, both domestic and
foreign etc.
The main functions of IFC are:
a) It offers
long-term loans in major currencies at fixed or variable rates.
b) It brings
together investment opportunities, private capital of both foreign and domestic
origin and experienced management.
c)
It assists the growth of capital market in
less developed countries.
Investment Policy of IFC: The following
are the main features of the investment policy of the IFC:
a) The IFC considers only those enterprises which are predominantly industrial and contribute to economic development of the country.
b) The project to be financed by the IFC must be in the private sector and must be productive in nature.
c) Before making any investment, the Corporation satisfies itself that the enterprise has experienced and competent management.
d) The IFC’s loan will not be more than half of the capital needed for an enterprise.
e) The minimum investment to be made by the IFC to a single enterprise is fixed at $ 100,000: no upper limit is fixed.
f) The rate of interest for the IFC loan is determined by mutual negotiation, depending upon the degree of risk involved and other terms of investment.
g) The IFC’s loans are disbursed in lump-sum or in installments and are repayable in a period of 5 to 15 years.
Q.20. Write a brief note on International
Development Association (IDA).
Ans: The International Development Association is an affiliate of
IBRD. It was establishment in 1960 to provide soft loans to less developed
member countries for the purpose of slum clearance, construction of roads and
bridges etc.
Objectives and functions of IDA:
a) To promote
economic and infrastructural development of poor member countries.
b) To provide
finance to less developed countries on easy and flexible terms.
c) To
supplement the objectives and functions of World Bank.
d) To provide
interest free credit.
Lending Procedure: The World Bank provides financial assistance in the following three forms:
1. Loans out of Own Funds: The World Bank can grant direct loans out of its own funds up to the 20% of the total subscribed capital. The Bank’s own funds consist of the contributions made by the members and the accumulated profits.
2. Loans out of Borrowed Capital: The World Bank also provides direct loans out of its borrowed funds on the approval of the country from which the funds have been borrowed.
3. Guarantee of Loans: The World Bank lends indirectly by guaranteeing loans made by private investors. Thus, the Bank acts as guarantor between the lender and the borrower. In case of default by the borrower, the Bank may call up its uncalled reserves to cover the default. The ultimate limit to the Bank’s lending operation is that the total outstanding loans and guarantees must not exceed the Bank’s total subscribed capital resources and surplus.
Conditions for Loans: Before the World bank provides a loan, either directly or indirectly through guarantee, certain conditions must be fulfilled. These Conditions, as stated in the Article III of the Articles of Agreements, require that:
a) The World Bank lends only to governments or have guarantee of the government in whose territory the borrower is located as to the repayment of the principal and the payment of the interest and other charges.
b) The competent committee of the World Bank reports favourable on the project.
c) The World Bank is satisfied that the borrower is unable to obtain the loan otherwise on reasonable terms.
d) In the opinion of the World Bank, the rate of interest and other charges are reasonable and such rate, charges and the schedule for repayment of principal are appropriate to the project.
e) In guaranteeing a loan made by other investors, the World Bank receives suitable compensation for its risk.
Financing
Procedure of IDA: The IDA loans are different from the conventional loans.
The following are the distinctive features of the financing policy of the IDA:
a) The IDA grants loans for protects whether they are directly productive or not.
b) The IDA loans are interest free; only a nominal annual rate of 3.4% on the amounts withdrawn and outstanding is charged to meet the administrative expenses.
c) The IDA loans are for long periods, i.e., for 50 years.
d) There is a 10 years of grace and no amount is repayable during this period of grace. After this only 1% of the principal is to be repaid annually for 10 years and 3% annually for the remaining 30 years.
e) IDA loans are generally repayable in foreign exchange.
f) IDA loans are granted to the government of the country concerned.