CA Foundation Business & Commercial Knowledge Study Material Chapter 5 Organizations Facilitating Business – Indian Development Banks
A development bank may be defined as “a multipurpose institution which shares entrepreneurial risk, changes its approach in tune with the industrial climate and encourages new industrial projects to bring about speedier economic growth.
The concept of development banking is based on the assumption that mere provision of finance will not bring about entrepreneurial development. Development banks provide a package of financial and non-financial assistance. Their activities include discovery of new projects, preparation of project report, provision of funds, technical assistance and managerial advice. These institutions do not compete with the conventional institutions but supplement them. Therefore, development banks are called ‘gap fillers’. They serve as motive engines of industrial development. As catalysts of economic growth they provide injections of capital, enterprise and management.
The distinctive features of a development bank are as follows:
- It provides medium and long-term finance.
- It is ‘project oriented’ rather than ‘security oriented’.
- It acts as a ‘partner in progress’ by guiding, supervising and advising the entrepreneurs.
- It provides both equity capital and debt capital.
Industrial Finance Corporation of India (IFCI)
The IFCI was set up under the IFCI Act on July 1, 1948. On July 1, 1993 it was converted into a public limited company. This was done to enable the IFCI to reshape its business strategies with greater authority, to tap the Capital market for funds to expand its equity base and to provide better customer services. It is now named IFCI Ltd.
Objects – IFCI has been set up for “making medium and long-term credits more readily available to industrial concerns in India, particularly in circumstances where . normal banking facilities are inappropriate or recourse to capital issue methods is impracticable”. The corporation aims at assisting industrial concerns which have carefully considered schemes for manufacture or for modernisation and expansion of a plant for the purpose of increasing their productive efficiency and capacity. Now, public sector undertakings can also avail of assistance from the corporation.
IFCI provides project finance, merchant banking, suppliers’ credit, equipment leasing, finance to leasing and hire-purchase concerns, etc. and promotional services. The corporation gives priority to development of backward areas, new entrepreneurs and technocrats, indigenous technology, ancillary industries, cooperative sector, import substitution and export promotion.
The focus of IFCI is on providing financial assistance to public companies and cooperative societies engaged in manufacturing, mining, shipping, hotel business, etc.
Functions, Scope and Forms of Assistance
- Granting loans and advances to or subscribing to debentures of industrial concerns.
- Guaranteeing loans raised by industrial concerns from the capital market, scheduled banks or State cooperative banks.
- Providing guarantees in respect of deferred payments for imports of capital goods manufactured in India.
- Guaranteeing with the approval of the Central Government, loans raised from or credit arrangements made by industrial concerns with any bank or financial institution outside India.
- Underwriting the issue of shares and debentures by industrial concerns.
- Subscribing directly to the shares and debentures of industrial concerns.
- Acting as an agent of the Central Government and World Bank in respect of loans sanctioned by them to industrial concerns in India.
- Participating along with other all India term lending institutions, in the administration of the Soft Loan Scheme for modernisation and rehabilitation of sick industries.
- Providing financial assistance on concessional terms for setting up industrial projects in backward areas notified by the Central Government.
- Providing guidance in project planning and implementation through specialised agencies like Technical Consultancy Organisations.
The financial assistance is available for setting up of new projects as well as for the expansion, diversification, and modernisation of existing units. IFCI Ltd. also provides financial assistance to industrial concerns not tied to any project. The following schemes of assistance have been introduced for this purpose: (i) Equipment leasing, (ii) Suppliers’ credit, and (iii) Buyers’ credit. Indirect finance is provided as assistance to leasing companies. Now IFCI also provides short-term loans for working capital purposes.
Industrial Development Bank of India (Now IDBI Ltd.)
The Industrial Development Bank of India (IDBI) was set up as an apex institution and it started its operations with effect from July 1, 1964. It was set up as a statutory corporation under Industrial Development Bank of India Act, 1964. The needs of rapid industrialisation, long-term financial needs of heavy industry beyond the resources of the then existing institutions, absence of a central agency to coordinate the activities of other financial institutions and gaps in the financial and promotional services were the main causes behind the establishment of the IDBI. The Bank represents an attempt to combine in a single institution the requirements of an expanding economy and need for a coordinated approach to industrial financing. The setting up of the IDBI is thus an important landmark in the history of institutional financing in the country IDBI was established as a wholly owned subsidiary of the Reserve Bank of India. But in 1976 the ownership of IDBI was transferred to the Central Government.
In March, 1994 the IDBI Act was amended to permit the Bank to issue equity- shares in the capital market. The majority of its shares are still owned by the Government.
Objects – The objectives of the IDBI are to:
- co-ordinate, regulate and supervise the activities of all financial institutions providing term finance to industry;
- enlarge the usefulness of these institutions by supplementing their resources and by widening the scope of their assistance;
- provide direct finance to industry to bridge the gap between demand and supply of long-term and medium-term finance
- to industrial concerns in both public and private sectors;
- locate and fill up gaps in the industrial structure of the country;
- adopt and enforce a system of priorities so as to diversify and speed up the process of industrial growth. The Bank has been conceived of as a development agency that will ultimately be concerned with all questions or problems relating to industrial finance in the country.
Functions – The main functions of the IDBI are as follows:
- subscribing to the shares and bonds of financial institutions and guaranteeing their under¬writing obligations;
- refinancing term loans and export credits extended by other financial institutions;
- granting loans and advances directly to industrial concerns;
- guaranteeing deferred payments due from and loans raised by industrial concerns;
- subscribing to and underwriting shares and debentures of industrial concerns;
- accepting, discounting and rediscounting bona fide commercial bills or promissory notes of industrial concerns including bills arising out of sale of indigenous machinery on deferred payment basis;
- financing turnkey projects by Indians outside India and providing credit to foreigners for buying capital goods from India;
- planning, promoting and developing industries to fill gaps in the industrial structure of the country. The Bank may undertake promotional activities like marketing and investment research, techno-economic surveys, etc.;
- providing technical and managerial assistance for promotion and expansion of industrial
- coordinating and regulating the activities of other financial institutions.
Besides providing assistance to industry directly, IDBI also provides assistance to industries through other financial institutions and banks. IDBI provides project finance for new projects and for expansion, diversification and modernisation of existing projects. IDBI also provides equipment finance, asset credit, corporate loans, working capital loans, refinance, rediscounting, and fee based services (e.g., merchant banking, mortgage, trusteeship, forex services).
Thus, the Bank performs financial, promotional and coordinating functions. As an apex institution in the field of development banking, the IDBI supplements and coordinates the activities of various National and State level financial institutions in the country.
The IDBI has been given wide powers and it enjoys full operational autonomy. The Bank can provide financial assistance directly as well as through other institutions to all types of industrial concerns irrespective of their size or form of ownership. There are no maximum or minimum limits on the amount of assistance or security. The Bank has the freedom to deal with any problem relating to industrial development in general and industrial finance in particular.
The IDBI has created a special fund known as Development Assistance Fund to assist industrial concerns which are not able to get assistance from normal sources. It makes available foreign funds to industrial concerns.
Small Industries Development Bank of India (SIDBI)
SIDBI was set up on April 2, 1990 under a special Act of Parliament, as a wholly owned subsidiary of the IDBI. SIDBI took over the outstanding portfolio of IDBI relating to the small scale sector worth over Rs. 4,000 crores. It has taken over the responsibility of administering Small Industries Development Fund and National Equity Fund which were earlier administered by IDBI. SIDBI was delinked from the IDBI through the SIDBI (Amendment) Act, 2000 with effect from March 27, 2000. Its management vests with an elected Board of Directors.
Objectives – SIDBI was envisaged’as “the principal financial institution for the promotion, financing and development of industry in the small scale sector and to coordinate the functions of other institutions engaged in the promotion, financing and developing industry in the small scale sector and for matters connected therewith or incidental thereto”.
Thus, financing, promotion, development, and coordination are the basic objectives of SIDBI.
Functions – SIDBI’s main functions are:
- Refinancing loans and advances extended by primary lending institutions to small scale industrial units.
- Discounting and rediscounting bills arising from sale of machinery to or manufactured by industrial units in the small scale sector.
- Extending need capital soft loan assistance under National Equity Fund, Mahila Udyam Nidhi, Mahila Vikas Nidhi and through specified agencies.
- Granting direct assistance and refinance for financing exports of products manufactured in small scale sector.
- Extending support to State Small Industries Development Corporations (SSIDCs) for providing scarce raw materials to and marketing the end products of industrial units in the small scale sector.
- Providing financial support to National Small Industries Corporation (NSIC) for providing leasing, hire-purchase and marketing support to industrial units in the small scale sector.
Export-Import (EXIM) Bank of India
Two major institutions which provide finance to exporters are the Export-Import Bank of India, and the Export Credit Guarantee Corporation.
The Export-Import Bank of India was established on January 1,1982 under an Act of Parliament for the purpose of financing, facilitating and promoting India’s foreign trade. It is the principal financial institution for coordinating the working of institutions engaged in financing exports and imports.
Mission – The mission of Exim Bank is “to develop commercially viable relationships with externally oriented companies by offering them a comprehensive range of products and services to enhance their internationalisation efforts”.
Objectives – The main objectives of the Exim Bank are as follows:
- To translate India’s foreign trade policies into concrete action plans.
- To assist exporters to become internationally competitive by providing them alternate financing solutions.
- To develop mutually beneficial relationships with international financial community. .
- To forge close working relationships with other export financing agencies, multilateral funding agencies and investment promotion agencies.
- To initiate and participate in debates on issues central to India’s international trade.
- To anticipate and absorb new developments in banking, export financing and information technology.
- To be responsive to export problems of Indian exporters and pursue policy resolutions.
Exim Bank concentrates on medium and long-term financing, leaving the short-term financing to commercial banks. The Bank has developed a global network through strategic linkages with World Bank, Asian Development Bank and other agencies
The Exim Bank provides a wide range of financial facilities and services. Some of these are summarised below:
1. Pre-Shipment Credit: This credit is provided to buy raw materials and other inputs required to produce capital goods meant for exports. It meets temporary funding requirement of export contracts. Exim Bank offers pre-shipment credit for periods, exceeding 180 days. Exporters can also avail of pre-shipment credit in foreign currency for imports of inputs needed for manufacture of export products.
2. Supplier’s Credit: Exim Bank offers supplier’s credit in rupees or foreign currency at post-shipment stage to finance exports of eligible goods and services on deferred payment terms. Supplier’s credit’s available both for supply contracts and project exports which includes construction, turnkey or consultancy contracts undertaken overseas.
3. Finance for Exports of Consultancy and Technology Services: A special credit facility is avail¬able to exporters of consultancy and technology services on deferred payment terms. The services include transfer of technology/know-how, preparation of project feasibility reports, providing personnel for rendering technical services, maintenance and management contracts, etc. .
4. Finance for Project Export Contracts: This scheme is meant to finance rupee expenditure for execution of overseas project export contracts such as for acquisition of materials and equipment, mobilisation of personnel, payments to be made to staff, sub-contractors, and to meet project related overheads. The amount involved is usually in excess of Rs. 50 lakhs and the maximum period of loan is four years.
5. Credit to Overseas Entities: Overseas buyers can avail of Buyer’s Credit for importing eligible goods from India on deferred payment basis. Exim Bank also extends Lines of credit to overseas financial institutions, foreign governments and their agencies for enabling them to provide term loans for importing eligible goods from India.
6. Finance for Export-Oriented Units: Exim Bank offers several facilities to export-oriented units (EOUs). Some of these are:
- Project Finance – Exim Bank offers term loans for setting up new units and for modernization expansion of existing units. The Bank also extends 100 per cent refinance to commercial banks for term loans sanctioned to an EOU.
- Equipment Finance – Exim Bank offers a line of credit for Indian/foreign production equipment, including equipment for packaging, pollution control, etc. It also provides term loans to vendors of EOUs to enable them to acquire plant and machinery and other assets required for increasing export capability. Such finance is given for non-project related capital expenditure of EOUs.
- Working Capital Finance – Exim Bank provides term loans both in rupees and foreign currency to help EOUs meet their working capital requirements. Short-term working capital finance is provided for imports of eligible inputs.
- R&D Finance – Exim Bank offers term loans to EOUs for development of new technology as well as to develop and/or commercialise new product process applications.
- Import Finance – Term loans in Indian rupees/foreign currency are available to Indian manufacturing companies for import of consumable inputs, canalised items, capital goods, plant and machinery, technology and know-how.
- Export Facilitation – Exim Bank offers term finance and non-funded facilities to Indian companies to create infrastructure facilities for developing Indian’s foreign trade and thereby enhance their export capability. Software exporters can get term loans to set up/expand software training institutes and software technology parks. This facility is ‘ also available to Indian companies involved in development of ports and port related services.
- Export Marketing Finance – Term loans are offered to assist the firms in export marketing and development efforts. Desk/field research, overseas travel, quality certification, product launch are the typical activities eligible for finance under this schemes. Finance is also given to support export product development plans with focus on industrialised market.
- Underwriting – Exim Bank extends underwriting facility to help the firms raise finance from capital markets. It also issues guarantees to facilitate export contracts and import transactions.
7. Finance for Joint Ventures Abroad
- Overseas Investment Finance – Any Indian promoter making equity investment abroad in an existing company or in a new project is eligible for finance under the scheme. Assistance is provided both in terms of loans and guarantees.
- Asian Countries Investment Partners Programme – This programme seeks to promote joint ventures in India between Indian companies and companies from other Asian countries. Finance is provided at various stages of project cycle, viz., sector study, project identification, feasibility study, proto-type development, setting up project, and technical and managerial assistance.
Exim Bank also offers a wide range of information, advisory and support services which help exporters to evaluate international risks, exploit export opportunities and improve competitiveness.
National Bank for Agriculture and Rural Development (NABARD)
NABARD was established on December 15, 1981 under the NABARD Act. It started functioning on July 1, 1982. It was set up to provide credit for the promotion of agriculture, cottage and village industries, handicrafts and other rural crafts and other economic activities in rural areas with a view to promote Integrated Rural Development Program (IRDP) and to secure prosperity in rural areas.
- to serve as a financing institution for institutional credit (both long term and short term) for promoting economic activities in rural areas.
- to provide direct lending to any institution as approved by the Central Government.
1. CREDIT FUNCTIONS:
- providing short term credit to State Cooperative Banks, Regional Rural Banks and other RBI approved financial institutions for the following activities:
- Seasonal agricultural operations
- marketing of crops
- pisciculture activities
- production/procurement and marketing of co-operative weavers and rural artisans, i.e. individuals and societies.
- production and marketing activities of industrial co-operations.
- providing medium term credit to State Cooperative Banks, State Land Development Banks, Regional Rural Banks and other RBI approved financial institutions for converting short-term agricultural purposes.
- Providing long term credit to State Land Development Banks, Regional Rural Banks, Commercial Banks, State cooperative Banks and other approved financial institutions.
- refinancing cottage/village and small scale industries located in rural areas.
2. DEVELOPMENT FUNCTIONS:
- Co-coordinating the operations of rural credit institutions
- developing expertise to deal with agricultural and rural development efforts
- acting as an agent to the Government and RBI for business transactions in relevant areas and provide facilities for training, research and dissemination of information in rural banking and development
- contributing to the share capital of eligible institutions (e) providing direct loans to centrally approved cases.
3. REGULATORY FUNCTIONS:
- inspecting Regional Rural Banks and Cooperative Banks other than the Primary cooperative Banks
- recommending for RBI approval opening of a new branch by Regional Rural Banks or Cooperative Banks
- asking Regional Rural Banks and Cooperative Banks to file returns and documents.