Context

Boom in infrastructural investment and requirement for development financing, including climate finance.                                                                                                                                         Revival of interest in development banking                                                                                         Innovative multilateral efforts: NDB and AIIB

Development banks

Present across the world and broadly of two kinds: those that are geared to provide long term finance for development, and those mandated to provide credit to specifically targeted clients like agriculturists or SMEs, to render development more inclusive. The latter, having “an explicit legal mandate to reach socioeconomic goals in a region, sector or particular market segment”, are obviously in the nature of specialized policy banks.

It is important not to conflate the two types. From an industrial policy point of view it is the former type that is of particular interest, though SME development fits in as well.

Why development finance

Late industrialisation requires lumpy investments, with long gestation lags to occur simultaneously in multiple industries.

In most late industrialisers liquidity and maturity mismatches between the expectations of savers and requirements of investors results in the absence of such long –term finance

While government can finance such investments through taxation or borrowing, the private sector often cannot because of the absence of markets for long–term finance.

Besides, if left to markets, some sectors may not be financed because of higher costs or perceptions of risk.

C.P Chandrasekhar

Download full presentation here