UNIT 8
INDIAN ECONOMY
Finance is taken into account because the life-force of industry. Without getting adequate finance industrial development isn't in the least possible. Thanks to the shortage of adequate finance, industrial development in India couldn't achieve a big position and shape. Industries require both short term, medium term and future finance for meeting their requirements of fixed cost and also to satisfy their capital needs.
Long-Term, Medium-Term and Short-Term Finance:
Long term finance for industries includes those financial resources which are advanced to the industries by the banks for a period of three years and above. Future finance is sort of important for the expansion and modernisation of commercial projects and also to satisfy its fixed cost requirement.
Long term finance is usually available from the sale of shares and debentures, and loan from term lending financial institutions like IDBI, IFCI, ICICI etc. Medium term loan is additionally available from banks and other financial institutions for a period above 1 year and up to three years.
Short-term finance for industries includes those financial resources which are advanced by hanks to the industries for a period varying between 1 month to 12 months. Short-term finance is required to satisfy capital needs and other sundry expenses of the economic projects. Commercial banks offer short term loans on cash-credit basis on the safety or stocks and overdraft facilities to the industries. Industries also can raise short term finance by raising public deposits for one to 3 years.
Sources of commercial Finance:
Following are a number of the main sources from which Indian industries are becoming their necessary finance during a regular manner:
(a) Shares and Debentures: Indian industries are normally raising a serious portion of their capital by selling shares in low denominations of Rs. 10 each. Share could also be a preference share or a standard share. Debentures also are issued within the capital market by the businesses and in recent years convertible debentures are gradually becoming more popular.
(b) Public Deposits:
Another source of commercial finance is that the deposit raised from the general public . Ahmedabad textile industry was primarily established on the idea of public deposit. Besides, Cotton Mills of Mumbai and Sholapur. Tea Gardens of Assam and Bengal have also raised their fixed capital in sufficient quantity through public deposit.
In recent years, many industrial firms have joined hands in inviting deposits from public for one to 3 years by offering attractive rates of interest. The most defect of this source is that these deposits could also be withdrawn at any moment and can't be used for long-term investment projects.
(c) Commercial Banks:
Commercial banks also are offering short-term loans on cash-credit basis on the safety of stock and on the extra guarantee of the managing agent. The commercial banks are generally advancing loan for meeting capital needs of the industries within the sort of advancing loan, overdraft, and cash credit facilities against government securities and pledge of stocks. Commercial Banks, nowadays, are advancing medium term loan to the industries particularly since the establishment of IDBI.
(d) Indigenous Bankers:
In India indigenous bankers are rendering important services to industry in time of their difficulty. In urban areas both the tiny and medium size industries are becoming sufficient finance from indigenous bankers. But these Indigenous bankers normally charge exorbitant rate of interest on such loan.
(e) Term-lending Institutions:
In view of the inadequacy of finance from the above mentioned sources, various term lending institutions are developed to advance loan so as to satisfy financial requirement of those industries. These institutions include Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Industrial Reconstruction Corporation of India (IRCI), State Financial Corporations and State Industrial Development Corporations (in different states). Besides,-Life Insurance Corporation of India (LICI) and unit investment trust of India also are providing an honest amount of loan to Indian industries and emerged as a most vital source of commercial finance in recent years.
(f) Retained Profits:
Retained profits or undistributed profits of the industries also are being ploughed back to the industry for meeting its requirements of replacement, modernisation and expansion.
Finance for little scale and medium sized industries:
The small scale and medium sized industries also are getting their necessary finance from (a) Commercial banks, (b) Credit Guarantee scheme for little scale industries which is cancelled by the govt in recent years and subsequently the work is entrusted with the Deposit Insurance and Credit Guarantee Corporation, (c) National Small Industries Corporation (NISC).
At the top of June 1980, all the Commercial banks advanced loans to the extent of Rs. 3,520 crore. Again the Deposit Insurance and Credit Guarantee Corporation has guaranteed advances to the tiny industries worth Rs. 7,500 crore at the top of June 1986. Further, the NISC has supplied machinery to the tiny scale industries under its hire-purchase schemes to the extent of Rs. 174 crore during the amount 1955 to 1984.
But the system of commercial finance followed in India isn't in the least satisfactory because it suffers from the matter of inadequacy, rigidity, defectiveness, costliness and insignificant attention of State Governments.
Term Lending Institutions of India:
After the Second war , there was an excellent need for the expansion of industries in India. Again with the introduction of planned industrial development, the economic finance became inadequate to satisfy the wants of commercial development of the country. Thus in Dominion Day , 1948 the economic Finance Corporation of India (IFCI) was established by the govt under a legislative act .
The prime object of IFCI is to supply medium term and long-term finance to public limited companies and co-operative organisations. The authorized share capital of the IFCI is now raised to Rs. 20 crore. The IDBI, scheduled banks, insurance companies, investment trusts and co-operative banks are the shareholders of the IFCI.
Later, by an amendment to the IFCI Act, private limited companies became eligible to urge financial assistance from IFCI. After the establishment of commercial Development Bank of India (IDBI) in 1964, the IFCI became a subsidiary to the IDBI.
Again on 24th March, 1993 the economic Finance Corporation (Transfer of Undertaking and Repeal) Bill 1993 was passed within the Parliament so as to privatize the IFCI Now IFCI would be liberal to raise resources from the open market and face competition.
The Corporation is permitted to perform the subsequent functions:
(i) Granting loans and advances to industrial concerns and subscribing to the shares and debentures floated by them;
(ii) Underwriting the difficulty of stocks, shares, debentures and bonds of commercial concerns provided these stocks, shares etc., are disposed of by the Corporation within seven years;
(iii) Guarantees loans raised by industrial concerns within the capital market;
(iv) Granting loans in foreign currencies to specified industries; and
(v) Guarantees deferred payments in respect of imports of capital goods made by approved industrial concerns.
The IFCI is permitted to advance long and medium term finance only to those companies which are engaged in manufacturing, mining, shipping and generation and distribution of electricity. Now the Corporation’s capacity to advance loan or to help one concern is restricted to Rs. 1 crore and therefore the period of loans shouldn't exceed 25 years. The corporation is charging rate of interest on loan at the speed of 11.25 per cent on rupee loan and 11.50 per cent on foreign loan.
The corporation is giving more preference in advancing finance to (i) new entrepreneurs, (ii) projects aimed toward exploring new areas of technology, (iii) prospect of the projects in earning exchange , (iv) projects involved for producing inputs for raising agricultural production, (v) projects involved within the production of essential commodity , and (vi) projects located in notified list.
Working:
Since its inception in 1948, the IFCI has sanctioned net financial assistance upto March 1993 to the extent of Rs. 15,430 crore against which the entire disbursement was Rs. 10,380 crore. The industries of high national priority which are receiving financial assistance from IFCI include fertilizers, cement, power generation, paper, industrial machinery etc.
Again, the IFCI has registered a powerful performance by earning a net income of 18.81 per cent, i.e., to the tune of Rs. 217.59 crore during the amount of half year ending on September 30, 1997 as against Rs. 183.14 crore during an equivalent period of the previous year.
In recent years, IFCI has introduced the subsequent new promotional schemes:
(a) Interest subsidy scheme for ladies entrepreneurs,
(b) Consultancy fee subsidy schemes for providing marketing assistance to small scale units,
(c) Encouraging modernisation of small , small and ancillary units,
(d) Controlling pollution of small and medium scale units.
In recent years about 50 per cent of the help has been advanced to industrial projects located in backward districts of country.
However, in recent years, the performance of IFCI isn't in the least satisfactory. Total amount of loan sanctioned by IFCI initially increased from Rs. 3,746 crore in 1993-94 to Rs. 6,580 crore in 1995-96 then it gradually declined to Rs. 1,050.4 crore in 2006-07 then increased to Rs. 4,015 crore in 2008-09. But the entire amount of loan disturbed by the IFCI which initially increased from Rs. 2,163 crore in 1993-94 to Rs. 4,586.5 crore in 1995-96 then drastically fell to Rs. 2,164.7 crore in 2000- 01 then to Rs. 278 crore in 2003-04 then finally to only Rs. 3,311 crore in 2008-09.
Unfortunately, IFCI has been worse affected thanks to its huge non-paying assets, willful defaults etc. the govt of India have also made an effort to rehabilitate IFCI by subscribing Rs. 400 crore through future convertible bonds and also advised IDBI, SBI and LIC for extending assistance worth Rs. 200 crore each.
In order to satisfy its outstanding liabilities the govt of India has provided Rs. 2,096 crore as loan during 2002-03 and 2003-04. Even then the IFCI is gradually becoming sick. The govt of India is now seriously considering to merger IFCI with an outsized PSU bank like Punjab commercial bank .
State Financial Corporations (SFCs):
As the scope of IFCI was limited, thus it had been felt that financial institutions should even be found out in each state to supply sufficient finance to medium and little scale industries for promoting industrial development there. To satisfy the need , State Financial Corporations (SFCs) were found out in several states.
The Government of India also passed the State Financial Corporation Act in 1951 and made it applicable to all or any states of India. The authorized capital of such corporation can vary within the utmost and minimum limit of Rs. 50 lakh and Rs. 5 crore.
The sum is split into shares of equal value of which 25 per cent of the shares are often held by public and therefore the remaining 75 per cent of the shares are normally held by government , the Federal Reserve Bank , the scheduled banks, insurance companies, investment trusts, co-operative banks and other financial institutions. The corporation can raise capital by selling bonds and debentures and may also accept deposit from public for five years. The management of SFC is analogous thereto of IFCI.
Functions:
Following are a number of the important functions of State Financial Corporations:
(a) to ensure loans raised by industrial units which are repayable within 20 years;
(b) To grant loans and advances to industrial units for a period not exceeding 20 years;
(c) To underwrite the difficulty of stocks, shares, bonds or debentures of commercial concerns; and
(d) To subscribe debentures floated by industrial concerns,
In India, there are at the present 18 State Financial Corporations working in several States of
India. Total amount of assistance advanced by of these corporations between the amount 1971 to 1993 was to the tune of Rs. 15,630 crore. Total amount of loan sanctioned by SFCs which was to the tune of Rs. 2,790.7 crore in 2000-01 then declined to Rs. 1,134 crore in 2003-04.
In order to satisfy the requirements of rapid industrialisation within the country and to coordinate the activities of all agencies a replacement institution with huge financial resources was necessary. Thus, to satisfy this two-fold objective, the govt of India has decided to line up the economic Development Bank of India (IDBI).
Accordingly in July 1964, the IDBI was found out formally to supply term finance to industries. Till 1976 this bank was an entirely owned subsidiary of the Federal Reserve Bank of India. But ill 1976 the IDBI was delinked from the RBI and was appropriated by the govt of India. Since then IDBI became an autonomous, corporation.
Functions
Following are the person functions of IDBI:
(i) Coordinating Agency:
The first important function of IDBI is to co-ordinate the activities of all other institutions which are connected with the financing of commercial development. Thus to determine a harmonious relationship among the term lending institutions IDBI is functioning as a central coordinating agency.
(ii) Direct Financial Assistance:
The IDBI provides direct financial assistance and thus works as a development financing institution.
Thus, the Bank:
(a) Directly grant loans and advances to industrial units,
(b) Subscribes, purchases or underwrites shares, debentures, bonds and stocks,
(c) Has the choice hospitable convert its loans, advances into equity shares, of the concerned industries units, and
(d) Guarantees loans taken by industrial units from scheduled co-operative banks.
(iii) Refinancing:
The IDBI is additionally helping the economic units indirectly. The Bank (a) refinances future loans repayable within 3 to 25 years given by IFCI, SFC and other financial institutions, (b) refinances medium term loan repayable within 3 to 10 years advanced by scheduled banks and State Co-operative banks, (c) refinances credit given by scheduled banks and therefore the State co-operative banks.
(iv) Special Assistance:
The IDBI has created a special fund referred to as “Development Association Fund” for assisting those industrial units which aren't during a position to secure fund in normal course thanks to its low rate of return.
(v) Promotional Agency:
The bank is undertaking promotional activities like marketing, investment research surveys, techno-economic studies and providing technical and administrative guidance to any industrial unit for its promotion, management and expansion.
Till the top of March 1997, the IDBI had sanctioned financial assistance to the extent of Rs. 81,857 crore out of which Rs. 48,094 crore was disbursed.
In recent years, the business of IDBI increased considerably. Total loan sanctioned by IDBI increased from Rs. 12,086 crore in 1993-94 to Rs. 27,442 crore in 2005-06 and therefore the volume of disbursement during an equivalent period increased from Rs. 8,096 crore to Rs. 12,984 crore.
References
1. Indian Economy - Rudra Dutt & Sundarram
2. Bhartiya Arthashastra – L. M. Roy
3. Indian Economy – Uma & Kapila
