Industrial Finance of India

• Indian industries need three types of finances:

long time, medium term and short term
finances. Long term finances are required to
purchase permanent assets like land, building,
machinery etc. Industrial units also need long
term finances for their extension and re-
establishment. Medium term finance is
generally a part of long term finance
• Besides, industrial unit has to arrange raw
material, intermediate goods and to meet out
daily expenses short term finance is required
for all these purposes. Industrial finance in
India includes the major sources like shares
and debentures, deposits from public, credit
from banks and industrial finance institutions.
The major industrial finance institutions are :
● Industrial Development Bank of India (IDBI)
● Industrial Finance Corporation of India
● Small Industrial Development Bank of India
(SIDBI)
● UTI
● NABARD
● EXIM Bank
● LIC
● GIC
• All these mentioned financial institutions
arrange medium and long term finances for
industrial units. Scheduled commercial banks
play the important role in providing short
term finance to industrial units. Deposits from
public and indigenous bankers are also the
important sources of 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 3 years
and above.
• Medium term loan is also available from banks
and other financial institutions for a period above
1 year and up to 3 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.
• Following are some of the major sources
from which Indian industries are getting their
necessary finance in a regular manner:
• Shares and Debentures
• Public Deposits
• Commercial Banks
• Term-lending Institutions
• In view of the inadequacy of finance from the
above mentioned sources, various term
lending institutions have been developed to
advance loan in order to meet financial
requirement of these 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 (indifferent states).
Besides,-Life Insurance Corporation of India (LICI)
and Unit Trust of India are also providing a good
amount of loan to Indian industries and emerged
as a most important source of industrial finance
in recent years.
Finance for small scale and medium sized
industries: The small scale and medium sized
industries are also getting their necessary finance
from (a) Commercial banks, (b) Credit Guarantee
scheme for small scale industries which is
cancelled by the Government in recent years and
subsequently the work is entrustedwith the
Deposit Insurance and Credit Guarantee
Corporation, (c) National Small Industries
Corporation (NISC).
Term Lending Institutions of India
• Industrial Finance Corporation of India (IFCI):
• After the Second World War, there was a great
need for the expansion of industries in India.
Again with the introduction of planned industrial
development, the industrial finance became
inadequate to meet the requirements of
industrial development of the country. Thus in
July 1, 1948 the Industrial Finance Corporation of
India (IFCI) was established by the Government
under a special Act.
• The prime object of IFCI is to provide medium
term and long-term finance to public limited
companies and co-operative organisations.
• The IDBI, scheduled banks, insurance
companies, investment trusts and co-
operative banks are the shareholders of the
IFCI.
 State Financial Corporations (SFCs)

• As the scope of IFCI was limited, thus it was felt that

financial institutions should also be set up in each state
to provide sufficient finance to medium and small scale
industries for promoting industrial development there.
To meet the requirement, State Financial Corporations
(SFCs) were set up in different states. The Government
of India also passed the State Financial Corporation Act
in 1951 and made it applicable to all states of India.
Gujarat State Financial Corporation (GSFC) is a pioneer
term lending development financial institution in the
State of Gujarat.
 State Industrial Development
Corporations (SIDCs):
• In most of the states of our country State
Industrial Development Corporations have been
established for the rapid industrialization of all
the states. There are 24 such SIDCs working in
different states of the country.
• GIDC is an example.
• These corporations are providing financial
assistance to small entrepreneur and particularly
to those industries which are established in
backward areas
 Industrial Credit and Investment
Corporation of India
(ICICI)
• In January 1955, the Industrial Credit and
Investment Corporation of India was set up
with the sponsorship of the World Bank for
the development of small and medium
industries in the private sector.
 The Industrial Development Bank of
India (IDBI)
• In order to meet the needs of rapid
industrialisation in the country and to
coordinate the activities of all agencies a new
institution with huge financial resources was
necessary. Thus, to fulfill this two-fold
objective, the Government of India has
decided to set up the Industrial Development
Bank of India (IDBI).
• Accordingly in July 1964, the IDBI was set up
formally to provide term finance to industries. Till
1976 this bank was a wholly owned subsidiary of
the Reserve Bank of India. But ill 1976 the IDBI
was delinked from the RBI and was taken over by
the Government of India. Since then IDBI became
an autonomous, corporation. In March 2019, the
Reserve Bank of India categorised IDBI Bank as a
private sector lender following acquisition of
majority stake by LIC.
 Unit Trust of India (UTI)
• To assist the small investors of middle income
group in finding a safe and remunerative
investment, the Unit Trust of India (UTI) was
established in February 1964. The Unit Trust
had an initial capital worth Rs. 5 crore
contributed by RBI, Insurance Companies,
State Bank of India, Scheduled banks and
other financial institutions.
 Classes of Corporate Securities:
Ownership securities and
Creditorship securities
• What Is Security?
• The term "security" is a fungible,
negotiable financial instrument that holds some
type of monetary value. It represents an
ownership position in a publicly-traded
corporation—via stock—a creditor relationship
with a governmental body or a corporation—
represented by owning that entity's bond—or
rights to ownership as represented by an option.
 (1) Ownership Securities-Shares
Issue of share is the best method for the
procurement of fixed capital requirements
because it has not to be paid back to
shareholder within the life time of the
company. Funds raised through the issue of
shares provide a financial floor to the capital
structure of a company.
• “A share is a right to participate in the profits
made by a company while it is a going concern
and in the assets of the company when it is
wound up.” (Bachan Cozdar Vs. Commissioner
of Income tax).
Creditorship Securities or Debentures:

• A company can raise finances by issuing debentures. A

debenture may be defined as the acknowledgement of
debt by a company. Debentures constitute the
borrowed capital of the company and they are known
as creditorship securities because debenture holders
are regarded as the creditors of the company. The
debenture holders are entitled to periodical payment
of interest at a fixed rate and are also entitled to
redemption of their debentures as per the terms and
conditions of the issue. The word debenture is derived
from the Latin word ‘Lebere’ meaning ‘to owe’. In its
simplest sense it means a document which either
creates or acknowledges a debt.
 Debenture V/s Bond
• Debentures are issued by private/public
companies for raising capital from the
investors. Bonds are backed by the asset of
the issuer whereas debentures are not
secured by any of the physical assets or
collateral. Debentures are
issued and purchased only on the
creditworthiness and reputation of the issuing
party
Are you aware of the term ‘Securities’
and ‘Securities Markets’?
• Securities are financial instruments issued to raise
funds. The primary function of the securities markets is
to enable to flow of capital from those that have it to
those that need it. Securities market help in transfer of
resources from those with idle resources to others who
have a productive need for them. Securities markets
provide channels for allocation of savings to
investments and thereby decouple these two activities.
As a result, the savers and investors are not
constrained by their individual abilities, but by the
economy’s abilities to invest and save respectively,
which inevitably enhances savings and investment in
the economy.
 Definition of 'Underwriting'

• Definition: Underwriting is one of the most

important functions in the financial world
wherein an individual or an institution undertakes
the risk associated with a venture, an investment,
or a loan in lieu of a premium. Underwriters are
found in banking, insurance, and stock markets.
The nomenclature ‘underwriting’ came about
from the practice of having risk takers to write
their name below the total risk that s/he
undertakes in return for a specified premium in
the early stages of the industrial revolution
 Underwriting in stock market

• In the securities market, underwriting involves

determining the risk and price of a particular
security. It is a process seen most commonly
during initial public offerings, wherein
investment banks first buy or underwrite the
securities of the issuing entity and
• then sell them in the market. This ensures that
the issuers of the security can raise the full
amount of capital while earning the
underwriters a premium in return for the
service.
• Investors benefit a lot from the underwriting
process as the information provided by an
underwriting agency can help them take a
more informed buying decision. An
underwriter who holds a large chunk of the
securities of a particular company or is the
market maker for such a security provides the
core liquidity for the security and enhances
price stability and distribution.
• To act as an underwriter, a certificate of
registration must be obtained from Securities
and Exchange Board of India (SEBI) . The
certificate is granted by SEBI under the
Securities and Exchanges Board
of India (Underwriters) Regulations, 1993.
 Ploughing back of Profits
The ‘Ploughing Back of Profits’ is management
policy under which all profits are not distributed
amongst the shareholders, but a part of the profit
is ‘Ploughed back’ or retained in the company
These retained earnings are utilised in future for
financing modernization and expansion
programmes and for meeting the fixed or
working capital needs of the company. Since it
means dependence on internal sources for
meeting the financial needs of the company. It is
also called ‘Internal Financing’ or ‘Self Financing’.
 Public Deposits
• The companies always prefer to accept public
deposits for meeting their financial needs,
than approaching banks or other financial
bodies. Companies generally receive public
deposits for different periods ranging from 6
months to 10 years.
• One should be careful before investing in such
deposits.