FINANCE INDIA Vol. X No.

3, September 1996 Pages 677-680

Abstract of Doctoral Dissertation

Role of Financial Intermediaries in Industrial Development of India Since 1970*

SAGHIR AHMAD ANSARI** THE TERM FINANCIAL intermediaries is a very wide term and covers a wide range of institutions like mutual savings societies, commercial banks, insurance and investment companies, etc. to specialised financial institutions such as development banks, etc. In the present study entitled Role of Financial Intermediaries in Industrial Development of India Since 1970, the term financial intermediaries has been used in a very restrictive sense viz. specialised financial institutions meeting the term-requirements of the industrial sector. To accelerate the process of industrialisation, immediately after independence, Government of India took appropriate steps to create a network of financial institutions to fill the gaps in the supply of long-term finance to industry. IFCI was the first institution which was set-up in 1948 followed by SFCs established by different States/Union Territories under the SFCs Act.1951. The NIDC (1954), ICICI (1955), NSIC (1955), and RCI (1958) were established. IDBI was established in 1964 as the apex institution in the field of industrial finance. UTI was also established in the same year. LIC came into existence in 1956 and GIC in 1972. SIDCs/SIICs strengthened institutional set-up at regional level. IRCI was set-up in 1971 which was later renamed as IRBI. Reserve Bank has played an important role in creation of all these institutions. Thus, structure of financial institutions in India has become so greatly diversified and strengthened that it has the ability to supply finance to a variety of enterprises in diverse forms. In this thesis, an attempt has been made to analyse the role of specialised financial institutions in meeting the term-requirements of our growing industrial sector. For this purpose, an effort has been made to ascertain the extent and rapidity of financial assistance granted by financial institutions to industrial sector in general and private sector in particular. Apart from analysing purposewise, industrywise and statewise assistance granted by financial institutions, special attention has been given to evaluate their role in removal of regional
* The thesis submitted for the Degree of Philosophy in Economics under the supervision of Prof. (Mrs.) K.S. Khan, Dept. of Economics, AMU, Aligarh in 1993. ** Faculty of Economics at Aligarh Muslim University, Aligarh.

Submitted July 94, Accepted January 96.

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imbalances through provision of finance to projects located in identified backward areas of the country. In order to make an indepth study, three financial institutions of diverse nature namely, IDBI, ICICI and SFCs have been chosen which together provided about two-third of the total financial requirements of the industrial sector. This study is exclusively based on secondary data published by RBI, IDBI, ICICI and Government of India, etc. Main technique used in this study is trend analysis and with the help of time-series data we have analysed the growth and pattern of financing by financial institutions. The whole study consists of eight chapters. First two chapters introduce the subject matter of study. Third chapter deals with the structure of financial intermediaries in India. Contribution of different financial intermediaries in providing industrial finance has also been discussed briefly in this chapter. Chapter four makes an indepth assessment of the operations of IDBI. Chapter reveals that during 1970-90 assistance sanctioned and disbursed by IDBI has increased at an annual average growth rate of 32.3 per cent and 27.7 per cent respectively, which were higher than the growth rate of sanctions and disbursements of all financial institutions. IDBI has granted 37.4 per cent of its total assistance by way of direct assistance and remaining 62.6 per cent indirectly through other financial institutions. Loans were major form of direct assistance with 88.7 per cent share, while refinance of industrial loans with 59.5 per cent share was the major form of indirect assistance. Private sector has been the largest beneficiary of IDBIs assistance followed by public, joint and cooperative sectors. IDBI has taken keen interest in granting finances to small scale sector which received 30 per cent of the total assistance sanctioned by IDBI. More than half of its assistance has gone to basic and capital goods industries while consumer goods and services have got a little more than one-third of total assistance of IDBI. It has paid equal attention to new and existing projects in its financing operations. Though IDBIs assistance is spread over all State and Union Territories, but its substantial proportion is concentrated among few relatively developed and large states. Similarly, a major part of its total assistance granted to projects located in identified backward areas, which formed about two-fifth of its total assistance, has gone to few developed and large states. In chapter five, the contribution of ICICI in meeting the financial requirements of the industrial sector has been analysed. During 1970-90 assistance sanctioned by ICICI increased at a rate of 26.5 per cent per annum while disbursements increased 23.1 per cent. In accordance with its objective, ICICI has sanctioned 35.7 per cent of its total assistance in the form of foreign currency assistance. Rupee loans constituted 37.5 per cent of total assistance sanctioned by ICICI. More than four-fifth of its total assistance has gone to private sector. ICICI has granted greater part of its assistance (61.7 per cent) to existing projects for their expansion, modernisation, etc. while new projects accounted for 38.3 per cent of total assistance. More than

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two-third of ICICIs assistance has gone to non-traditional growth oriented industries like chemicals and chemical products, Iron and Steel, Machinery, etc. Assistance of ICICI is basically concentrated among few relatively developed states despite some reduction during eighties. Over the years, ICICI has been granting an increasing proportion of its total assistance to backward areas of the country, but its major part has gone to backward areas of few developed states. Household sector has contributed an increasing share in the total financial resources of ICICI, while governments share has declined. Chapter six deals with SFCs which are state level development banks set-up for financing small and medium scale industries in their respective states. Till about 1970, operations of all SFCs grew at a slow pace but during seventies there was rapid growth in their operations and the pace has been sustained during eighties also. During 1970-90 sanctions of SFCs increased at a rate of 20.5 per cent per annum while disbursements increased by a marginally higher rate of 21.2 per cent. Performance of different SFCs has varied from one another and from year to year. In accordance with their basic objective, 76.1 per cent of total assistance sanctioned and 91.4 per cent of the total number of units assisted by SFCs were in the small scale sector. Services have been the largest beneficiary of SFCs assistance followed by chemicals and chemical products, food products, textiles, etc. SFCs have, by and large, confined their assistance to new projects which accounted 84.4 per cent of total assistance. SFCs have granted more than half of their assistance to projects located in identified backward areas of their respective states. An important feature is that SFCs of relatively backward states have performed better in this regard than that of developed states. However, SFCs depend heavily on government sources for their financial requirements. Chapter seven brings out the aggregative role of all financial institutions in the industrial development of the country. It clearly reveals that industrial concerns in India depend more on financial institutions to finance their ventures than raising funds directly from the capital market. Conclusions of this study have been given in the last chapter. Major findings of this study are summarised below: 1. During the last twenty years assistance granted by financial institutions has increased at a significantly high rate leading industrial concerns to depend more and more on them. 2. In terms of growth rate of sanctions, IDBI and ICICI have outstripped the average growth rate of sanctions of all financial institutions, but SFCs have fallen behind this trend. 3. The gap between assistance sanctioned and disbursed is more pronounced in case of IDBI and ICICI but it is relatively narrower in case of SFCs. 4. Private sector has been the largest beneficiary of assistance of financial institutions followed by public sector. Proportion of investment-savings gap filled up by financial institutions has increased in private and public sector

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5. Financial institutions have provided assistance to new as well as existing projects. However, SFCs have confined their financing operations basically to new projects. 6. IDBI and ICICI have granted major part of their assistance to basic and capital goods industries but SFCs have paid greater attention on consumer goods industries. 7. Statewise break-up of assistance provided by financial institutions reveals considerable concentration among few developed and large states despite some reduction during eighties. North-Eastern states have been almost completely neglected by all financial institutions. 8. A significant part of the total assistance granted by financial institutions has gone to projects located in identified backward areas of the country, but its statewise distribution has helped to reduce intra-state disparities in industrial development and increased inter-state disparities between developed and backward states. 9. Finally, IDBI and ICICI have generated a significant part of their resources from the household sector but SFCs are largely dependent upon the government sources.