Development Banks in India: Types, Structure, Functions

A farmer in Odisha securing a low-interest loan through a cooperative bank, a small manufacturer in Coimbatore expanding operations with SIDBI-backed credit, and a highway project in Rajasthan being financed through NaBFID — none of these transactions would happen through an ordinary commercial bank, because none of them fit the short-term, deposit-driven model commercial banking runs on. India built an entire parallel system of development banks specifically to fund the sectors markets tend to underserve: agriculture, small industry, housing, exports, and infrastructure. Here’s a complete breakdown of how this system is organised and what each institution actually does.

What Makes a Development Bank Different

Before looking at individual institutions, it’s worth understanding what fundamentally sets development banks apart from the commercial banks most Indians interact with daily.

• A development bank provides medium and long-term financial assistance to business units and priority sectors, rather than short-term deposit-and-loan banking
• Unlike commercial banks focused on retail deposits and short-term lending, development banks fund sectors critical to national development but often underserved by market-driven finance
• Beyond simple lending, they engage in promotional activities including advisory services and industry partnership initiatives
• Development banks in India are collectively known as All-India Financial Institutions, or AIFIs, and are regulated and supervised by the Reserve Bank of India

A Brief History of Development Banking in India

Understanding how this system evolved explains why India ended up with several specialised institutions rather than one general-purpose development bank.

• The Industrial Finance Corporation of India, established in 1948, holds the distinction of being India’s first development bank
• Several institutions, including ICICI and IDBI, were initially set up specifically as development banks before later converting into full universal commercial banks
• The 1980s saw a major expansion of sector-specific development finance, with NABARD and EXIM Bank both established in 1982
• More recent decades brought newer institutions addressing gaps the earlier framework hadn’t covered, most notably NaBFID in 2021 for infrastructure financing

NABARD: The Backbone of Rural and Agricultural Finance

NABARD stands as India’s apex institution specifically for rural development finance, established in July 1982 based on the recommendations of the B. Sivaraman Committee.

• Serves as the centre of India’s rural credit system, refinancing regional rural banks, cooperative banks, and other rural financial institutions
• Implements the Rural Infrastructure Development Fund, alongside the Long-Term Irrigation Fund and NABARD Infrastructure Development Assistance
• Drives developmental initiatives including the Kisan Credit Card scheme, RuPay Kisan Cards, and the SHG-Bank Linkage Programme
• Runs E-Shakti, a digitisation initiative for self-help groups, alongside marketing support programmes for rural artisans

SIDBI: Empowering Micro, Small, and Medium Enterprises

SIDBI was established in 1990 specifically to serve as the principal financial institution for MSME promotion, financing, and development in India.

• Acts as both a lender and a coordinating body for institutions engaged in similar MSME-support activities
• Focuses on technical upgradation and modernisation support for existing small-scale industrial units
• Works to expand marketing channels for small-scale industry products across both domestic and international markets
• Promotes employment-generating industries specifically in semi-urban areas, helping curb migration pressure toward already crowded cities

National Housing Bank: Apex Institution for Housing Finance

NHB, established in 1988, occupies a specific and important niche — ensuring housing finance remains available and affordable across India’s diverse income segments.

• Provides refinancing support to scheduled banks, housing finance companies, and cooperative sector lending bodies
• Offers direct finance for integrated land development and shelter projects undertaken by public agencies
• Plays a central role in ensuring housing finance availability specifically for low-income segments often overlooked by commercial lenders
• Works to develop and strengthen the broader ecosystem of housing finance institutions across the country

EXIM Bank: Financing India’s International Trade

The Export-Import Bank of India, established in 1982 under the Export-Import Bank of India Act 1981, has served as both catalyst and key player in promoting India’s cross-border trade and investment.

• Finances the export and import of goods and services, both for Indian entities and international counterparts
• Provides financing specifically for joint ventures established by Indian companies in foreign countries
• Undertakes merchant banking functions for companies engaged in foreign trade
• Offers technical and administrative assistance to businesses navigating the export and import process

NaBFID: India’s Newest Development Finance Institution

NaBFID, the National Bank for Financing Infrastructure and Development, represents the newest addition to India’s development banking framework, established in 2021.

• Specifically designed to catalyse long-term infrastructure financing in India
• Fills a gap that existing sector-specific institutions like NABARD, SIDBI, and EXIM Bank weren’t structured to address
• Reflects the government’s recognition that infrastructure financing requires its own dedicated, specialised institutional framework
• Complements rather than duplicates the roles of India’s other four major AIFIs, each maintaining a distinct sectoral mandate

Core Functions Shared Across Development Banks

Despite their different sectoral focuses, India’s development banks share a common set of functional characteristics that distinguish them from ordinary commercial banking.

• Provide long-term loans, unlike the short-term lending focus typical of commercial banks
• Accept deposits or receive funding from commercial banks, and Central and State governments
• Extend refinancing support to primary lending institutions rather than always lending directly to end borrowers
• Undertake promotional activities including advisory services, capacity-building, and sector-specific ecosystem development
• Support infrastructure creation through long-term funding that enables critical projects laying the foundation for future economic activity

Frequently Asked Questions

Q1. What’s the main difference between a development bank and a commercial bank in India?

Development banks provide long-term, sector-specific credit to priority areas like agriculture, MSMEs, and infrastructure, while commercial banks focus on short-term deposits and general retail and corporate lending.

Q2. Which is considered India’s first development bank?

The Industrial Finance Corporation of India, established in 1948, holds that distinction, predating NABARD, SIDBI, and the other major institutions by several decades.

Q3. Can an ordinary individual borrow directly from institutions like NABARD or SIDBI?

Generally no, since these institutions primarily refinance and support primary lending institutions like commercial banks and cooperative societies, though SIDBI does offer some direct MSME lending and credit guarantee schemes.

Q4. Why was NaBFID created when NABARD, SIDBI, and other institutions already existed?

NaBFID was specifically established in 2021 to address India’s large-scale infrastructure financing needs, a sector that didn’t fit neatly within the existing agricultural, MSME, housing, or export-focused mandates of the other four AIFIs.