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normally called in the financial world are a post World War II phenomenon. Their establishment in Africa, Asia and other developing countries in most cases coincided with the attainment of independence. Their mission being “to expedite the pace of development in accordance with the national priorities and aspirations of the people”. DFI’s fall into two broad categories viz. national DFI’s and regional DFI’s. Most of the national DFI’s in the developing world have been in existence for two to three decades. They were established to serve as handmaidens of their governments in the implementation of their development plans. In places like India, a majority of the applicants for financial assistance from the DFI’s in the initial stages were existing large industrial houses, or Managing agency firms. These institutions had resources of men, material and money and were therefore, able to conceive, plan and implement new or expansion projects successfully. Therefore, there was no problem of arrears. In the wake of socialist policies pursued by these newly independent states, further growth of large industrial houses and managing agency firms through DFI assistance was considered monopolistic and exploitative of the majority by the minority. These were conceived as institution reminiscent of the former British regime. This attitude led to a greater intervention of the state in the regulation and operation of DFI’s, which in almost all cases were state owned. FRESH ORIENTATION IN OPERATIONS
In pursuit of the socialist policies, there was need for a redefinition of guidelines to be followed by DFI’s in extending credit to their clients. The new guidelines placed greater emphasis on encouraging new entrepreneurs, technocrats, educated unemployed, professionals, and smallscale enterprises and above all upon balanced regional development. All these were aimed at fulfilling socially desirable objectives. This was a beginning of a new phase in the operations of DFI’s, and called for fresh orientation. It entailed relaxation in a number of aspects like sponsors’ contribution, security margin, longer gestation period etc. Inadequate resources and absence of any fall back reserves of the new category of sponsors and their insufficient managerial skills were manifest soon. Pursuit of new guidelines exposed DFI’s to greater risks, resulting in widespread sickness of the enterprises. Starting at a moderate level, the problem assumed great dimensions over a period of time, although it did have a spin off in the form of a new breed of successful entrepreneurs. Regional DFI's Regional DFI's were established as part of the economic cooperation of blocks of neighbouring states in Africa. Their main role being to facilitate the process of accelerating regional integration process. These included East African Development Bank (EADB), which was established at the time when the East African Community was one of the strongest unions in the whole of Africa. EADB was set to promote the economic development in the region and to act as a catalyst in
Among the regional DFI's are African Development Bank (ADB), Preferential Trade Area Bank (PTA), Arab Bank for Economic Development of Africa (BADEA) and Islamic Development Bank (IDB). In a bid to strengthen the operations of DFI's, umbrella organisations were created. These include The Association of African Development Finance Institutions (AADFI), established in 1975 in Abidjan (Côte d'Ivoire) under the auspices of the ADB. Its objective being to serve as a medium for technical exchange and cooperation between the continents' DFI's and to promote economic ties between African countries with a view to accelerating the regional integration process. These objectives were to be achieved by the dissemination of technical data through publications, seminars, conferences, round-tables and meetings. The membership of AADFI comprises 84 members including 64 ordinary members (national DFI's), 11 special members and 9 Honorary members. The World Federation of Development Finance Institutions (WFDFI) is an umbrella of sister DFI's from Asia (ADFIAP), Latin -America (ALIDE) and Europe (ADRM). AADFI is also a member of this organisation. The Present Scenario The progressive weakening of the financial position of most of the DFI's and their almost exclusive reliance on subsidised sources of finance, either from the national governments or from the external financiers has led to a rethinking on the operations of DFI's in the present-day world, particularly in market oriented, deregulated economies. This was in light of the fact that, the conventional differences between DFI's and commercial banks has been gradually disappearing. Commercial banks have increasingly undertaken development-financing functions. Also, with development of capital markets and increasing availability of financial instruments to finance modern business, the DFI's realised increasing competition for the provision of financial services. DFI's in response are now diversifying into several fields including merchant and commercial banking either on their own or through their specially created subsidiaries. A Development Bank is a multilateral development finance institution dedicated to improving the social and economic development of its member nations. Its primary emphasis is the welfare of the people. For example the Asian Development Bank's overarching goal is to reduce poverty in Asia and the Pacific. It helps improve the quality of people's lives by providing loans and technical assistance for a broad range of development activities. A development bank's policies or programs center on the following priorities: Economic growth Human development Gender and development Good governance Environmental protection
Private sector development Regional cooperation Given below are the principal functions of a development bank:
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Extend loans and equity investments to its developing member countries (DMCs) for their economic and social development. Provides technical assistance for the planning and execution of development projects and programs and for advisory services. Promotes and facilitates investment of public and private capital for development, and Responds to requests for assistance in coordinating development policies and plans of its developing member countries.
Formation of Development banks In India: Development banks were set up in India at various points of time starting from the late 1940s to cater to the medium to long term financing requirements of industry as the capital market in India had not developed sufficiently. The endorsement of planned industrialization at the national level provided the critical inducement for establishment of Development banks at both all-India and state levels. In order to perform their role, DBs were extended funds in the form of Long Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds, which constituted major sources of their funds. Funds from these sources were not only available at concessional rates, but also on a long term basis with their maturity period ranging from 10-15 years. On the asset side, their operations were marked by near absence of competition. A large variety of financial institutions have come into existence over the years to perform a variety of financial activities. While some of them operate at all-India level, others are state level institutions. Besides providing direct loans, financial institutions also extend financial assistance by way of underwriting and direct subscription and by issuing guarantees. Recently, some DBs have started extending short term/working capital finance, although long term lending continues to be their major activity.
Evolution And Growth Of Development Banks In India
Prior to reforms, DBs operated in an over-protected environment with most of the funding coming from assured sources at concessional terms. In the wake of financial sector reforms, the RBI started monitoring the functioning of DBs with a view to impart market orientation to their operations. In tune with the emerging scenario, their access to low cost funds of the RBI was discontinued. On their part, DBs took several steps to reposition themselves and reorient their operations in the new competitive environment. They have diversified their activities into new areas of business such as investment banking , stock broking, and other fee and commission based business. Nevertheless, their business has slowed down and their operations have become less profitable. The Committee on Banking Sector Reforms (Chairman: M. Narsimham), 1998 recommended that DBs should, over a period of time, convert themselves into banks or NBFCs (Non- Banking Financial Institutions). It is noteworthy that ICICI, one of the leading DBs, has merged with the ICICI Bank. Historically, the Reserve Bank of India and the Central Government have played a major role in financing these institutions by subscribing to the share capital , by allowing them to issue Government guaranteed bonds, and by extending long term loans at concessional terms. However, with the financial sector reforms in the nineties, concessional lending by the RBI and the Government was phased out, leaving the financial institutions to rely for financing their needs on the equity capital and the debt markets. Expansion of their equity base through public offers and public issues of long term bonds has become an important element of their market based financing. In order to provide flexibility, the Reserve bank has allowed FIs to raise resources by way of term deposits. Commercial Deposits and borrowings from the money market is allowed within the umbrella limit fixed in terms of net owned funds. In order to expand their scope of business, a large number of them have been entering into various businesses- venture capital, mutual funds, banking and insurance. National Bank of Agriculture and Rural Development (NABARD) was set up on July 12, 1982 under Act of parliament as a central or apex institutions for financing agricultural and rural sectors.
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India. It has been accredited with “matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas in India”. NABARD was established by an act of Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India and Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere agencies to provide credit in rural areas. NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. It provides short term finance assistance for period of 18 months to state co-operative banks, commercial banks, RRBs, and so on for wide range of activities in the areas of production, trading, marketing and storage. It also gives loans up to 20 years of maturity to the state government to enable them to subscribe to the share capital of co-operative credit societies. NABARD serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas. NABARD takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. NABARD co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation and alsoundertakes monitoring and evaluation of projects refinanced by it. NABARD’s refinance is available to State Co-operative Agriculture and Rural Development Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs), Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate
beneficiaries of investment credit can be individuals, partnership concerns, companies, Stateowned corporations or co-operative societies, production credit is generally given to individuals. NABARD provides:
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Long term finance for minor irrigation facilities, plantations, horticulture, land development, farm mechanizations, animal husbandry, fisheries etc. Short term loan assistance fir financing of seasonal agricultural operations, marketing of crops, purchase/procurement/distribution of agricultural inputs etc. Medium loan facilities for approved agricultural purposes; Working capital refinance for handloom weavers Refinance for financing government- sponsored programmes such as IRDP, Rozgar Yogna etc.
Besides this pivotal role, NABARD also:
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Acts as a coordinator in the operations of rural credit institutions Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development Offers training and research facilities for banks, cooperatives and organizations working in the field of rural development Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development Acts as regulator for cooperative banks and RRBs
General aspects of NABARD:
NABARD should be a managing agency of Government of India for public investments in rural India. It should be the chief overseer, grand planner for public investment and ensure that each rupee spent in rural India generates a net positive return for rural India. NABARD should not resort to passive funding. NABARD has to make things happen by organizing people and providing knowledge. The strength of NABARD is its good networking capabilities. It can act as a coordinating agency for all the developmental works taking place at the grass roots level. The greatest comparative advantage of NABARD is its ability to decontaminate the effects of subsidy and making public spending more efficient. It is a folly for NABARD to become a Commercial Bank. It is the only institution which can handle public finance better than the government.
The Export-import bank of India (EXIM Bank) was set up in January 1982 as a statutory corporation wholly owned by central government. Its paid up capital in 1988-89 was Rs 220.50 crores. Activities performed by EXIM Bank:
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It grants direct loans in India and outside for the purpose of imports and exports; Refinances loans to banks and other notified financial institutions for the purpose of international trade ; Rediscounts usance export bills for banks; Provide overseas investment finance for Indian companies toward their equity participation in joint venture abroad and guarantees, along with banks, obligations on behalf of project exporters; It is also a co-coordinating agency in the field of international finance and it undertakes development of merchant banking activities in relation to export oriented industries;
Thus it provides fund based as well as non fund based assistance in the foreign trade sector. The main objective of Export-Import Bank (EXIM Bank) is to provide financial assistance to promote the export production in India. The financial assistance provided by the EXIM Bank widely includes the following:
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Direct financial assistance Direct financial assistance Foreign investment finance Term loaning options for export production and export development Pre-shipping credit Buyer’s credit Lines of credit Re-loaning facility Export bills rediscounting Refinance to commercial banks
The Export-Import Bank also provides non-funded facility in the form of guarantees to the Indian exporters.
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Development of export makers Expansion of export production capacity Production for exports Financing post-shipment activities Export of manufactured goods Export of projects Export of technology and software’s
The Small scale Industrial Development Bank of India (SIDBI) was set up in October 1989 under the Act of parliament as a wholly owned subsidiary of the IDBI. It is the central or apex or principal institution which oversees, co-ordinates and further strengthens various arrangements for providing financial and non-financial assistance to small-scale, tiny, and cottage industries. SIDBI objectives are:
To initiate steps for technological up gradation and modernization of existing units
To expand channels for marketing of SSI sector products in India and abroad To promote employment-oriented industries in semi-urban areas and to check migration of population to big cities.
It operates two funds: Small Industries Development Fund and Small Industries Development Assistance Fund. The operation of the former and of National Equity Fund which were earlier looked by IDBI is now handled by the SIDBI. Its financial assistance is channeled through the existing credit delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, cooperative banks and RRBs. The total number of institutions eligible for assistance from SIDBI is 900. It discounts and rediscounts bills arising from the sale of machinery to small units; extends seed capital/soft loan assistance through National Equity Fund and through seed capital schemes of specialized lending institutions; refinance loans; and provide services like factoring, Leasing and so on. The union budget 1996-97 envisaged a number of measures to develop small-scale sector with SIDBI as the focal point. They include:
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SIDBI will now refinance the SFCs and commercial banks for modernization projects up to Rs 50 lakhs from unutilized corpus of about Rs 75 crore; SIDBI’s refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc. for composite loans will be doubled to Rs 100 lakhs SIDBI will participate in venture capital funds set up by public sector institutions as well as private companies up to 50 percent of the total corpus of the fund, provided such fund is dedicated to the financing of small-scale industry; SIDBI will provide refinance lending institutions which are now permitted to lend to SSI units seeking ISO certification of quality.
Since its inception SIDBI has provided assistance to the entire SSIs sector including tiny, village, and cottage industries through suitable schemes tailored to meet the requirement of setting up of new products, expansions, diversifications, modernization, and rehabilitation. It has provided equity capital, domestic and foreign currency term loans, working capital finance, etc. SIDBI has entered into MOU with many banks, governmental agencies, international agencies, R&D institutions, and industry associations for developing SSIs. Industrial Development Bank of India was set up to accelerate the development of the country. A number of financial institutions came into existence after independence and were catering to a variety of needs of the industry. There was a lack of co-ordinating different institutions and it led to overlapping and duplication in their efforts. At the same time some gigantic projects of national importance were not getting required financial assistance. It was in response to this need that the Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned subsidiary of Reserve Bank of India. The bank was to act as an apex institution co-coordinating functions of all the financial institutions into a single integrated movement of development banking and supplementing their resources for industrial financing and as an agency for providing financial support to all worthwhile projects of national importance whose access to existing institutional sources is limited.
The ownership of IDBI was transferred to Central Government on February 16, 1976. It is now working as state owned autonomous corporation. IDBI provides direct financial assistance to industrial units to bridge the gap between supply and demand of medium and long term finance. The IDBI Act was amended, in 1994, to permit public ownership upto 49 percent. In 1995, it raised more than Rs. 20 billion through its first initial public offer (IPO) of equity. It reduced the stake of the government to 72.14 percent. Further, in June 2000, a pan of the equity shareholding of the government was convened into preference share capital which was redeemed in March 2001, resulting into further reduction of government stake to 58.47 percent.
Financial Resources of IDBI
1. Share Capital: IDBI was formed with an authorized capital of Rs. 50 crores which was
raised a number of times. In October, 1994, Government of India’s amended certain provisions of IDBI Act under which its authorised capital has been increased to Rs. 2000 crore which can further be increased to Rs. 5000 crore. A pan of equity capital (Rs. 253 crore) has been convened into preference capital. IDBI has been permitted to issue equity capital to public with a stipulation that at no time Government holding will be less than 51 per cent. As on March 31,2003 the paid up capital of IDBI stood at Rs. 652.8 crores and reserve funds at Rs. 6325.3 crore. 2. Borrowings: The bank is authorised to raise its resources through borrowings from Government of India, Reserve Bank of India and other fmancia1 institutions. On March 31, 2003, the bank had borrowings of Rs. 41798.0 crore by way of bonds and debentures, deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from Government of India and other sources. Management of IDBI
The management of IDBI is vested in a Board of Directors consisting of 22 persons including a full-time Chairman-cum-Managing Director appointed by the Central Government. The other members of the Board comprise of a representative of the RBI, a representative each of the allIndia financial institutions, two officials of the Central Government, three representative search of he public sector banks and SFCs and five representatives having special knowledge and experience of industry; The Board has constituted an Executive Committee consisting of ten directors. Ad-hoc committees of Advisers are also constituted to advise it on specific projects. Recently, Government of India has sought to repeal the IDBI Act, 1964 by introducing The Industrial Development Bank (Transfer of Undertaking and Repeal) Bill 2002 is Lok Sabha. The Bill is aimed at convening IDBI into a company under the Companies Act as also enabling it to undertake banking business. Functions of IDBI The main functions of IDBI are as follows: 1) To co-ordinate the activities of other institutions providing term finance to industry and to act as an apex institution. 2) To provide refinance to financial institutions granting medium and long-term loans to industry. 3) 4) To provide refinance to scheduled banks or co-operative banks. To provide refinance for export credit granted by banks and financial institutions
5) To provide technical and administrative assistance for promotion management or growth of industry. 6) To undertake market surveys and techno-economic studies for the development of industry.
7) To grant direct loans and advances to industrial concerns. IDBI is empowered to finance all types of industrial concerns engaged or proposed to be engaged in the manufacture, preservation or processing of goods, mining, hotel, industry, fishing, shipping transport, generation or distribution of power, etc. The bank can also assist concerns engaged in the setting up of industrial estates or research and development of any process or product or in providing technical knowledge for the promotion of industries. 8) To render financial assistance to industrial concerns. IDBI operates various schemes of assistance. e.g., Direct Assistance Scheme, Soft Loans Scheme, Technical Development Fund Scheme, Refinance Industrial Loans Scheme, Bill Re-discounting Scheme, Seed Capital Assistance Scheme, Overseas Investment Finance Scheme, Development Assistance Fund, etc. Operations of IDBI
Since its inception in 1964, IDBI has extended its operations to various areas of industrial sector. It provides direct as well as indirect financial assistance for increasing the pace of industrial development. The major operations of IDBI are; 1. Direct Assistance Direct financial assistance includes project finance assistal1ce, soft-loan assitace, assistance under technical development fund scheme and rehabilitation assistance for sick units. Various schemes under direct assistance are discussed as follows:a) Project Finance Assistance: - Under project finance scheme. the IDBI extends direct assistance to industrial concerns in the form of : 1. Project loans 2. Subscription to and/or underwriting of issues of shares and debentures. 3. Guarantee for loans and deferred payments. Financial assistance under this scheme is granted for setting up new projects as well as for expansion and Modernization renovation of existing units. IDBI normally extends assistance to public limited companies in the private, public, joint sector and co-operative sectors. Bank’s assistance is sought for projects involving large capital outlay or sophisticated technology. Bank gives preference to units set up by new entrepreneurs or projects located in backward areas. The repayment period is settled by looking at the capacity of the enterprise. Normally, repayment is spread over a period of 8-10 years with a grace period of 2-3 years. These loans are usually secured by a first legal mortgage of the immovable properties of the borrowing concern and floating charge on its other assets, subject to a first charge on raw materials, stocks, etc. for working capital borrowings. The bank does not hold shares & debentures, taken over under legal obligation for underwriting or taken over directly, for a longer period. As a matter of policy, the bank places major emphasis on the long-term economic viability of the projects rather than on the immediate sale ability of their products. In the case of assistance in the form of guarantees of loans and deferred payments, the bank charges a guarantee commission of 1 per cent in normal cases. There has been a constant increase in direct assistance. Upto March, 2003 cumulative assistance in the form of direct loans to industrial concerns and .subscriptions came to Rs. 102601.8 crore. Most of this assistance was in priority sector industries such as basic industrial chemicals, cement, fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and industrial machinery. IDBI introduced special schemes for industrialization of backward areas. In a scheme introduced in 1969 it offered concessional rates of interest, longer grace periods for repayments, etc. These concessions were available to small and medium units having project cost upto Rs. 3 crores. In collaboration With IFCI and ICICI, the bank is also giving concessional rupee assistance upto Rs. 2 crores and underwriting assistance up to Rs.1crore. The assistance to backward areas has also been increasing.
To achieve balanced regional growth and accelerate industrial development IDBI initiated promotion and development activities. In co-operation with other institutions the bank conducted industrial potential surveys in a number of states. b) Soft Loan Scheme IDBI introduced in 1976 the soft loan scheme to provide financial assistance to product units in selected industries viz., cement, cotton, textiles. jute, sugar and certain engineering industries to modernize. Financial replace and renovate their plant and equipment so as to achieve higher and more economic levels of production. This scheme is implemented by IDBI with .financial participation by IFCI and ICICI. The basic criteria for assistance under the scheme are the weakness or non-viability of industrial concerns arising out of mechanical obsolescence. Industrial concerns which are not in a position 10 bear the normal lending rate of interest of the financial institutions are provided on accessional assistance to the full extent of the loan. In other cases the limit of concessional assistance is 66 per cent of the loan. c) Technical Development Fund Scheme The Government of India introduced the Technical Development Fund (TDF) Scheme in March. 1976 for issue of import licenses for import of small value balancing equipment, technical know how, foreign consultancy services and drawings and designs by industrial units to enable them to achieve fuller capacity utilization, technological up gradation and higher exports. Some industrial units found it difficult to take advantage of the import license issued under this scheme for want of rupee resources. In January, 1977, IDBI introduced a scheme for providing matching rupee loans to industrial units to enable them to utilize import licenses issued under TDF scheme. The scheme which was started for six specified industries now covers all industries as also import of any other input needed by the industrial units for improving export capabilities. This scheme of the bank has not been successful as only one-fourth of the units sought this assistance. Rehabilitation Assistance to Sick Units The problem of growing industrial sickness in India is a cause of worry. It adversely affects production, employment, generation of income and utilization of productive resources. With a view to combat sickness, IDBI has devised the Refinance Scheme for Industrial Rehabilitation. The units which have been assisted by State Financial Corporation or State Industrial Development Corporations and are classified as sick are eligible under this scheme. There should be a possibility of the unit being revived in a reasonable time. The bank provides for capital expenditure required for restarting the unit on viable level. The need for margin money for additional term-loan and working Capital, working capital term loan, payment of statutory liabilities, cash losses during rehabilitation period etc. are met by the bank. The bank has also been trying to bring merger of sick units with healthy units. 2. Indirect Assistance
IDBI cannot provide direct financial assistance to various industrial units situated in different parts of tile country. It has adopted a strategy under which it extends financial assistance directly to large and complicated industrial units involving large capital outlays and sophisticated technology. It helps small scale in industries indirectly through providing assistance to other financial institutions which, in turn, help these industries. The indirect help of IDBI takes the form of refinancing of industrial loans, rediscounting of bills, seed capital assistance and financial support to 6ther institutions by way of subscribing to their shares, debentures, bonds etc. a) Refinance of Industrial Loans IDBI provides refinance facility against term loans granted by the eligible credit institutions to industrial concerns for setting up of industrial projects as also for their expansion, modernization and diversification. IDBI provides refinance to commercial banks, regional rural banks, state, cooperative banks, state financial corporations, state industrial development corporations or other institutions extending term loan assistance to industrial units. Industrial units seeking term loan approach the eligible financial institutions which, after sanctioning the loans, approach the IDBI for refinance facility. The appraisal of loan application is done by primary institution by keeping in view the guidelines issued by central government and the IDBI. The bank relies in the appraisal done by the primary lending institutions that have to bear primary responsibility for the loans granted by them. IDBI sanctioned a sum of Rs. 20712.3 crores upto March 2003 under refinance of industrial loans. Since 1967, IDBI has been extending indirect financial help to small scale sector principally through its schemes of refinance of industrial loans and bills discounting. b) Rediscounting of Bills
IDBI introduced another indirect financing scheme in 1965, whereby rediscounting facility of machinery bills was, introduced. This scheme was to help indigenous machinery manufacturers and their purchases. The purchaser of machinery accepts bills of exchange or promissory notes of the seller and undertakes to take the payment in installments. The seller gets the bills discounted with his banker who in turn rediscounts these bills with min. The buyer is enabled to acquire the machinery on deferred payment terms without going through the usual procedures involved in obtaining a project loan. The usual deferred period is 5 years but in deserving cases it can be extended upto 7 years. The scheme has been extended for expansion and diversification of existing units also. The rediscounting facility has been made available to imported machinery also where bills will be required to be drawn by local agents of foreign firms. c) Seed Capital Assistance:With a view to help first generation entrepreneurs who have the skills but lack financial resources, IDBI started seed capital assistance scheme in September, 1976. Under the first scheme, Financial Corporations provide seed capital assistance to projects in small scale sector from their special class of share capital contributed by IDBI and the state government. The maximum amount of assistance under this scheme is to meet the gap in the equity contribution which is 20 per cent of the cost of the project.
At the same time raw industrial units were to be set up for industrializing the country. Government of India came forward to set up the Industrial Finance Corporation of India (IFCI) in July 1948 under a Special Act. The Industrial Development Bank of India, scheduled banks, insurance companies, investment trusts and co-operative banks are the shareholders of IFCI. The Government of India has guaranteed the repayment of capital and the payment of a minimum annual dividend. Since July I, 1993, the corporation has been converted into a company and it has been given the status of a Ltd. Company with the name Industrial Finance Corporations of India Ltd. IFCI has got itself registered with Companies Act, 1956. Before July I, 1993, general public was not permitted to hold shares of IFCI, only Government of India, RBI, Scheduled Banks, Insurance Companies and Co-operative Societies were holding the shares of IFCI.
Management of IFCI The corporation has 13 members Board of Directors, including Chairman. The Chairman is appointed by Government of India after consulting Industrial Development Bank of India. He works on a whole time basis and has tenure of 3 years. Out of the 12 directors, four are nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other financial institutions like insurance companies, investment trusts, etc. IDBI normally nominates three outside persons as directors who are experts in the fields of industry, labour and economics, the fourth nominee is the Central Manager of IDBI. The Board meets once in a month. It frames policies by keeping in view the interests of industry, commerce and general public. The Board acts as per the instructions received from the government and IDBI. The Central Government reserves the power up to the Board and appoints a new one in its place. The Board is assisted by the Central Committee which consists of the chairman, two directors elected by nominated directors and the Board of directors elected by the elected directors. This committee assists the Board in discharge of its functions. It .can act on all matters under the competence of the Board, So this committee practically transacts the entire business of the corporation. IFCI also has Standing Advisory Committees one each for textile, sugar, jute,
hotels, engineering and chemical processes and allied industries. The experts in different fields appointed on Advisory Committees. The chairman is the ex-officio member of all Advisory Committees. All applications for assistance are first discussed by Advisory Committees before they go to Central Committees. Financial Resources of IFCI The financial resources of the corporation consist of share capital bonds and debentures and borrowings. a) Share Capital: The IFCI was set up with an authorized capital of Rs. 10crores consisting of 20,000 shares of Rs. 5,000 each. This capital was later on increased at different times and by March, 2003 it was Rs. 1068 crores. The capital was subscribed by Central Government, Reserve Bank of India, scheduled banks, Life Insurance Corporation, investment trusts, co-operative banks are other financial institutions. In 1964, the share capital held by the central government and RBI was transferred to the Industrial Development Bank. The corporation thus became a subsidiary of IDBI. The central government had guaranteed the shares of the corporation both for repayment of the principal and for the payment of a dividend at 2.5 per cent on the original issue and 4 per cent on the additional issues. However, since July , 1993 IFCI has been converted into a limited company. b) Bonds and Debentures: The corporation is authorized to issue bonds and debentures to supplement its resources but these should not exceed ten times of paid-up capital and reserve fund. The bonds and debentures stood at a figure of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on 31st March 2003. The bonds and debentures are also guaranteed by the central government for both payment of interest at such rates as may be fixed at the time the bonds and debentures are issued. c) Borrowings: The corporation is authorized to borrow from government IDBI and financial institutions. Its borrowings from IDBI and Govt. of India were Rs. 975.6 crore on March 31, 2003. Total assets of IFCI as on March 31, 2003 aggregated Rs. 22866 crore including investments of Rs. 3820.3 crore and loans and advances of Rs. 13212.8crore. Priority Criterion for Investment IFCI plans its financing policies as per the priorities set by the government through Industrial Policy Statements. The Industries which are in high priority are given more importance. Following considerations are taken into account while selecting a financial proposal: 1. Importance of the project for national economy. 2. Employment-oriented and labour-intensive nature of the project.
3. 4. 5. 6.
Export potential of the unit, Projects located in backward areas or ‘no industry districts. Projects initiated by new or technician entrepreneurs. Projects which will harness indigellously available technology, technical know how and raw materials. 7. Projects which will help rural areas. 8. Projects which help in conserving energy or which manufacture renewable energy systems or devices. 9. Projects to be set up in co-operative sector. Eligibility for Assistance under Direct Financing Following types of industrial concerns are eligible for direct finance under IFCI Act, amended from time to time: 1. Limited companies incorporated in India, in private, public or joint Sector 2. Co-operative societies registered in India, which are engaged or propose to engage in any of the activities related to o Manufacture, preservation or processing of goods o Shipping o Mining o Hotel industry o Generation or distribution of electricity or any other form of power o Transport of passengers or goods. o Maintenance, repair or servicing of machinery or vehicles. o Assembling, repairing or packing of articles. o Development of contiguous area of land as an industrial estate. o Fishing or providing shore facilities for fishing. o Providing special or technical knowledge or other services for promotion of industrial growth. o Research and Development of any process or product in relation to any of the matters aforesaid. Purpose of Direct Assistance: IFCI provides direct financial assistance for the following causes: 1. Setting up of new industrial projects. 2. Expansion of existing units or for diversification into new lines of activity. 3. For renovation and modernization of existing units. IFCI does not ordinarily provide funds for working capital purpose as this function is left to commercial banks. It does not allow utilizing its assistance for meeting existing liabilities of the industrial concerns. Similarly, foreign currency loans can be used for purchasing capital goods only and not of raw material.
Functions of IFCI IFCI is authorized to render financial assistance in one or more of the following forms: 1. Granting loans or advances to or subscribing to debentures of industrial concerns repayable within 25 years. Also it can convert part of such loans or debentures into equity share capital at its option. 2. Underwriting the issue of industrial securities i.e. shares, stock, bonds, 0r debentures to be disposed off within 7 years. 3. Subscribing directly to the shares and debentures of public limited companies. 4. Guaranteeing of deferred payments for the purchase of capital goods from abroad or within India. 5. Guaranteeing of loans raised by industrial concerns from scheduled balls or state cooperative banks. 6. Acting as an agent of the Central Government or the World Bank in respect of loans sanctioned to the industrial concerns. IFCI provides financial assistance to eligible industrial concerns regardless of their size. However, now-a-days, it entertains applications from those industrial concerns whose project cost is about Rs. 2 crores because upto project cost of Rs. 2 crores various state level institutions (such as Financial Corporations, SIDCs and banks) are expected to meet the financial requirements of viable concerns. While approving a loan application, IFCI gives due consideration to the feasibility of the project, its importance to the nation, development of the backward areas, social and economic viability, etc. The most of the assistance sanctioned by IFCI has gone to industries of national priority such as fertilizers, cement, power generation, paper, industrial machinery etc. The corporation is giving a special consideration to the less developed areas and assistance to them has been stepped up. It has sanctioned nearly 49 per cent of its assistance for projects in backward districts. The corporation has recently been participating in soft loan schemes under which loans on confessional rates are given to units in selected industries. Such assistance is given for modernization, replacement and renovation of plant and equipment. IFCI introduced a scheme for sick units also. The scheme was for the revival of sick units in the tiny and small scale sectors. Another scheme was framed for the self-employment of unemployed young persons. The corporation has diversified not merchant banking also. Financing of leasing and hire purchase companies, hospitals, equipment leasing etc. were the other new activities of the corporation in the last few years. Promotional Activities The IFCI has been playing very important role as a financial institution in providing financial assistance to eligible industrial concerns. However, no less important is its promotional role whereby it has been creating industrial opportunities also. It has been taking up directly as well as indirectly; such steps and activities are regarded necessary for the acceleration of the process of industrialization in the country.
The promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure for the promotion and growth of industries, or in the provision of the much needed guidance in project intensification, formulation, implementation and operation, etc. to the new tiny, smallscale or medium scale entrepreneurs or in the efforts at improving the productivity of human and material resources. (a) Development of Backward Areas: – The main thrust of all financial institutions has been to remover regional imbalances by promoting industrialization of backward areas. IFCI introduce a scheme of confessional finance for projects set up in backward areas. The backward-districts were divided into three categories depending upon the state of development there. All these categories were eligible for concessional finance. Nearly 50 per cent of total lending of IFCI has been to develop backward areas. (b) Promotional Schemes:- IFCI has been operating six promotional schemes with the object of helping entrepreneurs to set up new units, broadening the entrepreneurial base, encouraging the adoption of new technology, tackling ‘the problem of sickness and promoting opportunities for self development and . self employment of unemployed persons etc. These schemes are as such:
1. Subsidy for Adopting Indigenous Technology:- The projects which use indigenously
developed technology are entitled to a concession in the form of subsidy covering interest payments due to IFCI during the first three years of operations, extendable to five years. Meeting Cost of Market Studies: - The entrepreneurs setting up medium sized industrial projects for the first time can avail 75 per cent of the cost of market survey/study subject to a ceiling of Rs. 15,000 provided it is handled by Technical Consultancy Organization. . Meeting Cost of Feasibility Studies: – IFCI provides subsidy for the fees paid for consultancy assignments relating to feasibility, project reports etc. The amount allowable is 80 per cent of the fees of Rs. 7,500 whichever is less. This limit is Rs. 8,500 or 100 per cent of the total fees whichever is less for handicapped or scheduled caste persons. Promoting Small Scale and Ancillary Industries: – For the identification of products suitable for ancillary or further processing in small scale sector and preparation of feasibility reports a subsidy of Rs.0.1 million per annum for technical consultancy organization is allowed. Revival of Sick Units: – There is a subsidy to the extent of 80 per cent or Rs. 5,000 (whichever is less) for the fees charged by a technical consultancy organization for carrying out a diagnostic study or for the implementation of rehabilitation programme. This facility is allowed to tiny units or units in small scale sector.’
Self-development and Self employment Scheme: - An unemployed person in the age group of 21 to 35 years may be allowed a soft loan for providing margin money for getting a loan from a bank or a financial institution. The soft loan at interest free rate in first year and has confessional interest later on. The amount available under this scheme is 25% of margin money subject to Rs. 5000.
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