Public Development Banks & Would India Benefit
from a Dedicated National Development Bank?

As far as India’s state today is concerned, it is quite obvious that the country has come a long way when it comes to socio-economic development. However, it would also be unwise to ignore social issues like poverty, unemployment, and inequality that still persist despite all the strides the country has made in recent times.

Of all the instruments being leveraged to address these issues once and for all, Public development banks stand out from the rest. There are more than 500 PBD’s across the globe today and they have collectively played a significant role in promoting economic growth and sustainable change.

In this article, we want to take a deeper look into these state-controlled financial institutions, understand India’s state today concerning PBDs, and understand whether India’s socio-economic situation could benefit from the establishment of a dedicated national development bank.

What are Public Development Banks?

Public Development Banks are financial institutions often controlled by a central or local government. These institutions are legally and financially independent. Unlike traditional banks, PBDs aren’t driven by profits. Instead, they operate on a public mandate. Their primary objective is to promote economic progress while ensuring the equitable distribution of resources.

Public Development Banks around the world are responsible for the financing of several small and medium-sized enterprises. They are responsible for allocating crucial resources to housing, small agriculture, and local financial markets in a bid to support the most vulnerable members of society like women and youth.

In hindsight, we would argue that PBDs exist to serve the dual purpose of economic recovery and sustainable change.

The Global Landscape of Public Development Banks

As we mentioned before, there are more than 500 public development banks around the world. According to a report published by the AFD, 23% of the world’s PBDs are located in the Americas whereas 28% are located in Asia.

Together, these banks generate a whopping 10-12% of the amount invested in the world today. This amount is way more than the financing generated by public and private sources combined. Some popular PBDs around the world include the Asian Development Bank, The World Bank Group, and the Grameen Bank in Bangladesh.

Governments around the world have put a lot of trust in these banks. Many see them as important instruments for achieving lasting prosperity. This is perhaps why we are witnessing governments around the world either strengthening these institutions or building new ones.

The Work and Impact of Public Development Banks

Judging by the work that has already been put in by these banks, most experts now look towards PBDs as instruments that could facilitate institutional change that is essential for accomplishing the Sustainable Development Goals laid out by the United Nations.

Over the years, these banks have proven themselves quite effective in addressing social issues while simultaneously boosting social welfare. These banks have provided funds to projects centred on the development of water management systems, transportation networks, and energy facilities. These are all projects essential to accomplish sustainable change.

Moreover, PBDs have been instrumental in providing small and medium-sized enterprises with the financing they need. As such, they’ve played a significant role in creating jobs and uplifting many from the clutches of poverty.

Instead of investing in commercial banking for profits, these banks prioritize their investments in social projects like housing or education. Take the IFAD-launched Grameen Bank in Bangladesh for example.

Since its inception, this bank has provided microfinance to the poor, launched locally sourced drip irrigation systems in India, Madagascar, and Guatemala, and even helped Africa tackle the horrifying plague of cassava mealybugs.

Recently, PBDs have made significant investments in projects that could mitigate the risks of climate change and conserve the environment.

These banks are constantly engaged in projects like these… projects that help improve the standards of living, try to nip inequality in the bud and promote sustained economic change.

India’s State Today with Regards to Public Development Banks

India isn’t new to the concept of Public Development Banks. Since independence, the Indian Government has given birth to numerous development finance institutions (DFIs) with the sole purpose of facilitating inclusive growth and sustainable development.

The National Bank for Agriculture and Rural Development (NABARD), developed in 1982, is perhaps a prominent example of one such institution. NABARD’s primary objective has been to uplift rural livelihood and promote agricultural productivity. It does so by offering finance to farmers and promoting rural entrepreneurship in the process.

We also have the establishment of the Small Industries Development Bank of India (SIDBI) in 1990, which is responsible for the funding and promotion of micro, small, and medium-sized enterprises.

Furthermore, we have the EXIM Bank established in 1982. This is yet another financial institution owned by the GOI, whose primary objective is to fund and promote India’s international trade.

While there isn’t a dearth of such DFI’s in India, most of these institutions haven’t been effective in obtaining their objectives like the Indian government would’ve hoped. India has seen the premature closing of many of its DFIs. Others like the ICICI and IDBI transitioned to commercial banks.

Moreover, some even argue that these DFI’s don’t embody the spirit of public development banks. This has reignited conversations recently on the need for a national development bank.

Will India Benefit from a National Development Bank?

The idea of establishing a national development bank in India isn’t new. This has been a constant subject of debate among policymakers and industry experts for decades now. Those in favor of a national development bank argue that such an institution could streamline developmental efforts across the country and expedite economic growth.

A national development bank does hold the potential of alleviating various issues that have plagued the Indian society and economy since independence. Economists argue that it could accelerate industrialization, lead to critical investment in areas such as energy and transportation, and also promote technological innovation across various industries.

A national development bank could channel resources to communities in India that desperately need them. It could address inequality in the country, and lead to the rise of social entrepreneurship.

On the other hand, critics argue that the establishment of a National Development Bank won’t be without its risks. Some argue that a bank performing the same functions as many of the existing DFI’s could result in unnecessary confusion and fund misallocations.

Moreover, clearly defining the governance structure and accountability mechanism of such a large state-owned institution can be daunting, time-consuming, and resource-intensive.

The Bottom Line

Public development banks serve as invaluable instruments today in the world’s pursuit of lasting economic progress. While India does have institutions that embody the underlying principles of a PBD, it lacks a dedicated national development bank. This has led to many economists and policymakers contemplating what it could mean to establish one today. 

On one hand, we know how effective a dedicated NBD can be when it comes to mobilizing resources and sustainable development. On the other, the challenges that come with forming such an entity can’t be ignored as well.

Ultimately, a national development bank could be the shot in the arm this country needs for a future where everyone thrives.