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Cooperative Credit / Cooperative Banks
Nature of Development Banking
- Originated with enactment of Cooperative Credit Societies Act 1904. - Establishment of Cooperative Central banks in 1912. - Objective: Attracting deposits from non-agriculturists, Using excess funds of some societies temporarily to make for shortage in other banks, and to supervise and guide the affiliated societies. - State Cooperative Apex Bank was established according to the recommendations of Maclagan Committee.
D F Is (57 DFI as on by the end of 2007 financial year) Developmental Banks All India Level Institutions All India Devpt. Banks IDBI IFCI IIBI SIDBI ICICI Investment Institutions UTI LIC GIC Specialised FIs Exim Bank RCTFC TFCI IDFC NEDFC Refinance Institutions NABARD NHB State Level Institutions Other Institutions
A.All India Level
Industrial Development Bank of India (IDBI) Industrial Finance Corporation of India Ltd (IFCI) Small Industries Development Bank of India (SIDBI) Industrial Credit and Investment Corporation of India Ltd. (ICICI) Life Insurance Corporation of India (LIC) General Insurance Corporation (GIC) Unit Trust of India (UTI) National Housing Bank (NHB) Export –Import Bank of India (EXIM Bank) NAtioanl Bank for Agriculture and Rural Development (NABARD) Industrial Investment Bank of India Ltd. (IIBI), Infrastructure Development Finance Company Co. Ltd (IDFC) Risk Capital and Technology & Information Company of India Ltd. (RCTFC) Technology Development and Information Company of India Ltd. (TDICI) North-eastern Development Finance Corporation (NEDFC) Tourism Finance Corporation of India Ltd. (TFCI) Indian Renewable Energy Development Agency (IREDA)
B. State Level (IDBI is the apex institution which coordinates the activities of all other DFIs at the national and State levels) State Financial Corporations (SFCS: 18 in operation) State Industrial Development Corporation (SIDCs: 28 in operation) Technical Consultancy Organization (TCOs: 17 in operation) C. Others Export Credit Guarantee Corporation (ECGC) Deposit Insurance and Credit Guarantee Corporation (DICGC)
A Project is a proposal for capital investment to develop facilities to provide goods and services. The investment proposal may be for setting up a new unit, expansion or improvement of existing facilities. The project idea can be conceived either from the input or output side.
Input-based projects are identified on the basis of information about agricultural raw materials, forest products, animal husbandry, fishing products, mineral resources, human skills and new technical processes evolved in the country or elsewhere. Out-based projects are identified on the basis of needs of the population as revealed by family budget studies or industrial units as found by market studies and statistics relating to imports and exports.
Contents of Business plan
• • • • • • • • • • Define business clearly Identify target market Understand industry in which product compete Outline management abilities Outline financial frame work Do not consider unrealistic market projections Consider source of risk Length should be 25 to 30 pages Use simple clear language Aim business plan for non-specialists
The Stages of Project Selection
1. Acquiring motivation 2. Identification of various project ideas 3. Preliminary screening 4. Evaluation of project idea:
Market analysis: Financial analysis: Inflow and Outflow; Technical analysis: Economic analysis: Ecological analysis: Social cost benefit analysis.
5. Project report
Step 1 : Acquiring Motivation • Influences
– Culture – Sub-Culture – Family / Peers / Education • Support – Govt. – Financial institutions • Venture Capital/Banks etc.
Step 2 : Identify and Evaluate Opportunity
Opportunity Analysis: It should include A description of the product or service; an assessment of the entrepreneur and the team; specification of all the activities and resources; sources of capital; as well as its growth. The assessment of the opportunity requires answering the following questions:
- What market need does it fill? - What personal observations have you experienced or recorded with regard to that market need? - What social condition underlies this market need? - What market research data can be marshalled to describe.
Is it a good idea? 5 questions to ask • Is the number of potential customers, in other words the market, large and growing? • Who is your customer and what is his or her problem, specifically, that you plan to solve? • How are these people currently solving their problem, that is, what is your competition? • How much better or cheaper are you than your potential customers' current solution, and can you maintain that advantage? • And, most importantly: are you and your team suited to this task - do you have the right knowledge and network in this industry? Are you passionate about the problem or industry?
Created need Solving the problem Creating the problem New application Modification Special Feature Manipulation of Technology (miniature
Garment Mixie Mixie with larger cap Roofing sheets Mixie with top handle Remote Control Roof top Green Houses Foolproof Security Systems Compost from Market Waste High Speed Cooker
Tailor-made Opportunities based on Technologies Waste Utilization Cooking
Criteria – Market Issues – Potential – Profit Margins – Competitors: Barriers to entry – Financial Issues Capital Required Taxation ROI
Market analysis: Target customer, size of market, competition level, product differentiation, durability of competitive advantage Financial analysis: Inflow and Outflow; Project evaluation techniques; Financial analysis-Ratios: Liquidity, Capital; BEP. Technical analysis: Capacity of plant; flexibility of plant; availability of technology; Inputs; Location; layout of project; cost of production; quality testing and improving methods. Economic analysis: Economic effect; and net foreign exchange effect. Ecological analysis: Extent of pollution and expected measures by the firm. Social cost benefit analysis: Benefits and Costs
Step 3 : Develop Business Plan
Business plan is the description of the future direction of the business. • Provides promoters with logical framework within which to plan and pursue a business strategy • Basis for discussion with 3rd parties such as Govt., Banks, Investors • Benchmark against which actual performance can be measured and reviewed.
Step 4 : Determine the Resources Required
• Men • Plant & Machines • Land & Building • Materials • Money / Funding Debt: Friends, relatives, indigenous banks, banks, financial institutions, public deposits, debentures, private equity, venture capital. Equity: Equity and own funds
Step 5 : Manage the Enterprise
• Planning – Decision Making/ Operational & Strategic – Budgets, P&L, B/S, Cash flow • Organising – Division of Work/ Org. Structure – Allocating resources • Leading – Delegation / Motivation • Control – Performance Evaluation / Review
- Promoters contribution fixed at 22.5 per cent of the project cost. - Concessional Norms: Available in terms of the location of the project. ‘A’ areas: No industry Districts ‘B’ areas: Districts where industrial activity has started ‘C’ areas: Districts with industries are sufficiently well-developed - Concession in promoters contribution: ‘A’ areas: 17.5 per cent ‘B’ areas: Projects above Rs. 25 crore in ‘B areas – 17.5 per cent ‘C’ areas: 20 per cent
- Concessional norms are allowed purely at the discretion of the financial institutions - Contribution may vary depending up on the risk of the project. - Deserved entrepreneurs who are unable to contribute can avail seed capital assistance from State Financial Corporations (up to specified limit), Industrial Development Bank of India, Risk Capital and Technology Corporation of India Ltd., or Small Industries Development Bank of India (depending up on the size of the project Rs. 10 to Rs.30lakhs). - For the purpose of promoter’s contribution, investments made by mutual funds are considered if they are covered by nondisposal / buy-back clause.
Determination of the Equity Capital to be raised from public
Eg: Project Cost: Rs. 10 crores; Promoters’ contribution is 22.5 per cent; Debt-equity ratio 2:1.
Debt: Rs.1,00,00,000 x 1/3 = Rs.66,66,667 Equity: Rs.1,00,00,000 x 2/3 = Rs.33,33,333 Promoters contribution (Rs.1,00,00,000 x 0.225 ): Rs.22,50,000 Equity to be raised: Equity capital – Promoters contribution Rs.33,33,333 – Rs.22,50,000 = Rs. 10,83,333
Guidelines for Financing
- Priority should be given projects contributing to: Agriculture & rural development Projects locating in rural areas Generation of employment Export oriented Advanced technology New material modernization Infrastructural facilities (including rural areas infrastructure) Export intensive and thrust industries for export development Imports substitution (including requiring additional capacity) Commercially proven indigenous technology Upgradation of technology of existing units Projects involving Energy conservation and utilisation of nonconventional sources of energy Projects by new entrepreneurs Technocrats and non-resident Indians.
- Projects should not fall under negative list: Cigarettes Beer and Alcohol New jute mills Power looms (for mfg of items reserved for handloom) Fan and V Belts LP Gas cylinders HDPE woven socks Bright bars Tin and metal containers Drums and Barrels Playwood Calcium carbide Hamilton poles Tabular poles AAC/CSR conductors Hand operated sewing machines Conveyor belting (rubber and PVC based) Toilet and Cosmetics preparations Commercial and decorative veneers Blackboards and flush doors
Process of Evaluation of Application
- Preliminary meeting should be fixed with the FI - Submit application for term loan
proposal) (if DFI agrees to consider the
- The loan application would require details of promoters’ background, technical skills, relevant experience and financial soundness - The market research study for the project has to establish the contribution of the project to existing and estimated demand. - Aspects of technical, financial, and economic would be covered.
- Cash flow statements for 7 to 10 year period would be required - The land for the project, plans foe building and quotations for the machinery from two manufacturers. - The production process has to be depicted. - Estimated working capital need to be given. - Submit MoU, AoA, Certificate of incorporation, latest annual report and statement of accounts in any have to be filed. - Documents of guarantor company need to be enclosed.
Appraising Term Loans
Financial structure of financing emerges after taking into account: - Promoters’ contribution - Debt equity ratio (3:1 for small industrial units and 2:1 for medium and large firms) Equity: Includes loans from friends, relatives, and capital incentives - Debt service coverage ratio (DSCR): 1.6 to 2 times - Security margin: 25 per cent (Fixed deposits)
Terms and Conditions for Grant of Loans
Clean title of land as security Insurance of assets, building, and machinery separately Scrutiny of AoA (It does not contain covenants of the FIs) Lien on all fixed assets Personal and corporate guarantees of major shareholders and associate concerns Undertaking from promoters to finance shortfalls in funds (cost overrun) Approval of appointment of managerial personnel by DFI Further capital expenditure only on the approval of DFI Payment of dividend and issue of bonus shares subject to the approval period of the FI Undertaking for non-disposal of promoters’ shareholding for a period of 3 years.
After the loan is sanctioned, the requirements to be met are:
- Acceptance of terms and conditions of loans - Deposit of legal charges - Details for plot or land for project - Search report and title seeds for the land - General body resolution for creation of charge over assets - Pollution clearance - Legal documents to create a charge in proposed assets - Personal guarantees and undertakings along with income tax and wealth tax clearance of the promoters and director - Architects and auditor’s certificate for civil construction.
Disbursement of Loan
- Stamp duty and registration fee have to be paid - Subscribed and paid-up capital is to be brought in by the promoters as required by DFI - Creation and registration of charge on the present and future assets of the company After the above requirements are complied with, disbursement made on the basis of assets created at the site. In case of large projects, disbursement are need –based, and promoters have to bring in their entire contribution first. In some case bridge loan is granted against bank guarantee (when there is no physical inspection is possible). Disbursement is made after physical verification of assets created.
SOURCES OF FUNS OF DFIs
- Equity share capital - Preference share capital - Bonds - Government - Refinance facility - Special finance
- Rupee loans
Form of Loans
- Foreign currency loans - Rupee plus foreign currency loans
Operations and Trends
- DFIs can choose become a bank or NBFC - Uniform supervisory regime for banks and NBFCs (onsite and off-site monitoring; and periodic external auditing. - Consolidation
Assistance Sanctioned and Disbursement by DFI
Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00
Cumulative upto end March 2000
Sanctions 191961.0 223148.0 331933.0 409870.0 578324.0 599363.6 501418.2 749355.0 837943.5 1043407.6 6181747.2
Growth Rate (%) 32.8 16.2 48.8 23.5 41.1 3.6 (-) 16.3 49.4 11.8 24.5
Disbursements 128101.0 162729.0 231525.0 266243.0 335772.0 386979.7 429427.4 536560.1 583947.2 684804.2 4354065.1
Growth Rate (%) 32.9 27.0 42.3 15.0 26.1 15.3 11.0 24.9 8.80 17.3
Critical Assessment of DFIs
The role of DFI has been praiseworthy in the following areas: - Promotion of SSIs - Promotion of Entrepreneurs - Development of Backward Areas - Industrial Development - Investment substantial portion of equity - Maintained sound financial position
The weaknesses of DFIs rare many. The major among them are: Low profitability The act like a cartel (with investment banks) More Government control & political influence Shows interest in purchase of shares than providing initial capital or underwriting issue Regional imbalance (huge funds given to in 1994-95:Gujarat, Maharastra, Tamil Nadu, West Bengal) Not able to tackle growing sickness. Seizing assets of borrowers in case of overdue (particularly
Directors (nominees from DFIs) not playing proactive role in running the companies successfully.
Narasimham Committee on DFIs
Submitted report in 1991has both appreciation and criticism: Appreciation: - Successful in meeting their primary objective of providing funds for industrial investment. - Successful in channalizing assistance industrially less developed states and backward areas. - Build image (extent corporate sector relay on DFI) - Increasing their share in equity of the Pvt. Sector - Represented in the Boards of mgt. of companies and played a major role in M&A
Weaknesses - Licensing Policy: DFIs induced to finance unviable projects by entrepreneurs without proven competence, and unwanted relaxation in the appraisal standards. - Govt. Policy: DFIs forced to provide financial support to sick units against their better commercial judgments - State level DFI working as wings of State Governments rather than as autonomous financial institutions - No Competition: Total Absence of Competition to DFIs - Consortium Finance: DFIs have been operating almost like a cartel – since different FIs join together and offer consortium finance
Recommendations - Ownership pattern of DFI should be broad based, like that of ICICI - Government should workout an action plan to be implemented in the next 3 years which would usher in a measure of autonomy of the DFIs in matters of internal consideration - Appointment of Chief Executives of DFIs (banks) should be men of proven professional competence and should be selected on the recommendations of a panel of eminent persons. - The Boards of DFIs should include representatives from the industrial sector.
- Break the between SFCs and state government to improve the efficiency of SFCs (take the only no. of projects that they can efficiently follow up) - DFIs should raise funds from the capital market at the market rates. Also mobalise savings from household sector through introduction of new schemes that should conflict with the commercial banks. - Each DFIs should have the sole responsibility (experts committee) in loan sanctions. And supervise their own loan implementation. - The present system of consortium funding should be given up. - The role of IDBI should be changed. It should retain only its apex refinancing role and its direct lending function should be transferred to a separate institution which would be incorporated as a company. - DFIs should lend support to existing management.
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