banking unit iv

8/3/2019 Banking Unit IV

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UNIT IV

Evolution of Institutional Financing in India


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Financial Institutions

Play an indispensable role in development

Act as a channel for the transfer of resources from net

savers to net borrowers Can be broadly classified into :

National level institutions - cater to the diverse financial

requirements of the entrepreneurs

State level institutions - act as a catalyst for promotion

of investment and industrial development in the

respective states


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All India Financial Institutions

Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Export - Import Bank of India (Exim Bank)

Industrial Reconstruction Bank of India (IRBI) now(Industrial Investment Bank of India)

Industrial Credit and Investment Corporation of India(ICICI)

National Bank for Agriculture and Rural Development(NABARD)

National Housing Bank (NHB)


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All India Financial Institutions

Life Insurance Corporation of India (LIC)

General Insurance Corporation of India (GIC)

Unit Trust of India (UTI)

National Industrial Development Corporation (NIDC)

Shipping Credit and Investment Corporation of India

(SCICI)

Infrastructure leasing and Financial Services Ltd.(IL&FS)

Tourism Finance Corporation of India (TFCI)


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Classification of Financial Institutions

National Level Institutions

Development Financial Institutions Investment Institutions

Specialised Financial Institutions

State Level Institutions


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National Level Institutions

Development Financial Institutions

Overview of developmental banking

The concept was adopted after 2nd world war

1945 worldwide institution IBRD was set up forreconstruction and development

Financial development strategy aimed at meeting

sectoral credit needs

1948 First development bank of India was set up -

IFCI


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Features of Development Banks:

Provides medium and long term finance

They do not accept deposits from the public Primary object is promotion of investment and

entrepreneurial activity

Provides financial aid to public and private sector

undertakings

Works in the general interest of the nation


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Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Industrial Investment Bank of India (IIBI)

National Small Industries Corporation (NSIC)

Industrial Credit and Investment Corporation of India

(ICICI)


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National Bank for Agriculture and Rural Development

(NABARD)

National Industrial Development Corporation (NIDC)


(SCICI)

Infrastructure Leasing and Financial Services Ltd. (IL &

FS)


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Industrial Development Bank of India

It was established in 1964 by an Act of Parliament It is an apex institution in the field of industrial finance

Currently the 10th largest development bank in the

world

Is a member of Association of Development & Industrial

Banks in Asia the objective of which is to contribute to

economic development in Asia


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Also extends indirect finance through discounting long

term bills, refinancing term loans & subscribing to

resources of financial institutions such as SFC, IFCI, etc.

Objectives:

To provide credit, term finance & financial services for

new project establishment

To finance expansion, diversification, modernisation &

technology upgradation


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Functions:

Promoting industry by conceiving, preparing and

floating new projects

Co-ordinating functions of other development banks

Underwriting shares/debentures of industrial concerns

Undertaking market research & techno-economicstudies

Guaranteeing deferred payment on loan from

industry


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Post reforms:

E 1991 - It made its first public issue of bondsE It introduced instruments such as floating rate bonds,

flexibonds, and term money bonds to raise resources

E 1993 Introduced the practice of charging variableinterest rate linked to long-term PLR

E 1995 It made its first public issue of equity


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Industrial Finance Corporation of

India

July 1, 1948 IFCI was set up as

the first Development Financial

Institution in the country

Objective to provide medium &

long term credit to large industrialconcerns in the private, public, co-

operative & joint sector.


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Industrial Finance Corporation of India

It provides rupee and foreign currency loans

Aid to industry for modernization, export promotion,renovation, diversification

It has set up several subsidiaries and associates:

IFCI Financial Services

Asset Care Enterprise

IFCI Venture Capital Funds

IFCI Infrastructure Development Limited etc.


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Functions:

n To guarantee loans raised by industry

n To grant loans/advances or subscribe to debentures

of industrial concerns

n To underwrite stocks, shares, bonds, debentures of

industrial concernsn To guarantee deferred payment by importers

n To subscribe directly to shares of industrial concerns


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Post reforms:

F 1993 IFCI was changed from a statutory corporation

to a company under Cos. Act

F 1999 Its name was changed to IFCI Ltd.

F 2003 Principal shareholders were IDBI, Nationalized

banks, SBI & subsidiaries, LIC & GICF 2004 IFCI witnessed crisis and worked on a

restructuring package to prevent further deterioration

of health.


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Industrial Investment Bank of India

Formerly was IndustrialReconstruction Bank of India

IRBI was set up under IRBI Act,1984, for rehabilitation of sickunits

IIBI was incorporated in 1997under the Companies Act, 1956

This gave operational flexibilityand financial autonomy


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Industrial Investment Bank of India

Functions:

Providing project finance

Providing short term non-project asset-backed

financing

Through underwriting

Through direct subscription Deferred payment guarantee

Providing working capital/short term loans


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National Small Industries Corporation

1955 Established by the GOI

Functions:

Assist SSIs through promotional and financial aid

Procure machinery for SSI on hire-purchase Take part in exhibitions to ensure wider markets for

SSI products


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Functions:

To provide marketing assistance to SSI through

government purchase programme

To provide training in technical trades through its

Prototype Development & Training Centre

To underwrite and guarantee loans to SSI from banks To supply raw material , spares and components to SSI

To provide pre and post shipment finance to Export

Oriented Units


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Post reforms:

1995-96:Total assistance provided = 598 crore of which

Marketing = 579 crore

Equipment leasing = 17 crore Hire purchase = 2 crore


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Industrial Credit & Investment Corporation of India

1955 Established as a private sector developmentbank at the initiative of World Bank.

Functions: Provides consultancy services to units in

private sector

Renders facility such as equipment

leasing, project counselling and merchant

banking for NRIs


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Functions

Provides funds for purchase of capital assets

It provides long & medium term loans in various forms:

& Equity participation

&Contribution to preference shares and debentures

&Guaranteeing loans from other sources

&Underwriting new issues


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Provides financial services through specialised subsidiaries:

ICICI Banking Corporation

ICICI Securities nd Finance Company

ICICI Asset Management Company

ICICI Trust

ICICI Investors Services

ICICI Brokerage Services

ICICI Credit Corporation

ICICI Securities


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Post reforms:

\

1999: ICICI became the first Indian Company to getlisted on NYSE

\ 1998-99: Corporate finance constituted 36% of ICICIs

total lending portfolio

\ 1999-2000: The above percentage rose to 47%

\ 2002: Foreign Institutional Investors owned 38.4% of its

shares


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National Bank for Agricultural and

Rural Development

Set up as apex rural developmental

bank

Aim - to provide credit for

development of:

Agriculture Small Scale Industry

Cottage and village industry


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National Bank for Agricultural and Rural Development

Role:

Providing refinance to lending institutions in rural

areas Evaluating, monitoring and inspecting the client banks

Extends assistance to the government in mattersrelating to rural development

Offers training and research facilities for banksworking in the field of rural development

Helps the state governments in reaching their targetsof rural development


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National Bank for Agricultural and Rural Development

Role:

It provides short term refinance assistance for a period upto 18 months to SCBs, commercial banks, RRBs etc in theareas of production, trading, marketing and storage.

It also give long term loans (up to 25 yrs of maturity) toSCBs, SLDBs, RRBs etc.


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NABARD provides :

Long term refinance for minor irrigation, plantation,horticulture, land development, fisheries etc.

Short term loan assistance for financing of seasonalagricultural operations, marketing of crops, purchase ofagricultural inputs etc

Medium term loan facilities for approved agriculturalpurposes

Working capital refinance for handloom weavers

Refinance for financing government sponsored programs suchas, IRDP, Rozgar yojana etc.


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Resources : Credit from RBI

Loans from central government

World Bank International Development Association (IDA)

Aid agencies

Sale of bonds and debentures

Direct borrowings

Deposits

Gifts

Grants etc.


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National Industrial Development Corporation

1954 NIDC was set up as a statutory corporation owned

by GOI

Functions:

To formulate and execute projects for setting up new

industries

To provide consultancy services

To finance rehabilitation and modernisation.


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National Industrial Development Corporation

Services provided:

Industrial planning and management

Project engineering

Project management

Environmental engineering

Technical and quality audit

Social and industrial infrastructure

Human resource management

Software and IT development


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1986 Incorporated as a public limited company

Capital is contributed by ICICI, IDBI, IFCI, LIC,GIC, SBI etc.Objective:

To be a channel for providing development finance to

oceanic shipping, deep sea fishing, oil exploration, shiprepairing, offshore, coastal and intermediary water

services.


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Resources:

Share issue to public Bond issues

Institutional subscription to share capital

Unsecured loan from the government Long term foreign currency loans


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Infrastructure Leasing & Financial Services Ltd.

1988 IL&FS was set up jointly by :

RBI

UTI

HDFC

International Finance Corporation

ORIX Corporation from Japan Credit Commercial de France

SBI


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Infrastructure Leasing & Financial Services Ltd.

Assistance:

Financing large projects like highways, bridges, etc

Equipments leasing for infrastructure development,

pollution control, transportation and communication

Promotion of mutual funds and extension of venture

capital Participation as a member of stock exchange, focusing

on secondary market development


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Investment Institutions

Popular form of financial intermediaries

Cater to the needs of small savers and investors

Deploy their assets largely in marketable securities

Some of the prominent investment institutions in India

are:

Life Insurance Corporation (LIC)

General Insurance Corporation (GIC) Unit Trust of India (UTI)


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Life Insurance Corporation

1956 LIC was formed by theGovernment taking over all life

insurance companies in India Is an important saving-mobiliser

institution

Caters to the needs of

Government and corporate sector Invests heavily in Government

securities of the corporate sector


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General Insurance Corporation

\ Provides loans and invesment in the

capital market of the country

\ Invests in shares and debentures of

the corporate sector

\ Underwrites new issues of companies

\ Grants loans and advances to

corporates


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Unit Trust of India

1984 UTI was set up as a subsidiary

of RBI

Mobilises savings of low and middle

income groups

Invests such savings in equity and

preference shares and debentures

People induced to buy units due to

tax concession


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They are established as government undertakings

with majority ownership of RBI

Set up to serve the increasing financial needs of

commerce and trade; and overall development

Ensure overall development of the Indian financial

market

Set up with the exclusive objective of providing credit

to various sectors


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Important Specialized financial institutions in India are :

& Export Import Bank of India (EXIM)

& National Housing Bank (NHB)

& Board for Industrial and Financial Reconstruction (BIFR)

& Small Industries Development bank of India (SIDBI)


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Export Import Bank of India

1981 Set up according to an Act ofParliament

Is ranked highest among specialisedfinancial institutions of the country

Plays a key role in the promotion ofcross border trade

Coordinates the working ofinstitutions engaged in financinginternational trade


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Offers financial assistance to sectors like agriculture,

export, import, and film industry

Agriculture unique financial programmes like termfunding and shipment credit

Export Import - warehousing finance, funded (long term

working capital) and non-funded scheme (letter of

credit and guarantee)

Film Industry cash flow financing for production &

funds for exhibition in overseas markets


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EXIMBanks functions are segmented into small operating groups

like :

Corporate Banking Group handles a variety of financing

programmes for Export Oriented Units (EOUs), Importers, and

overseas investment by Indian companies.

Project Finance / Trade Finance Group handles the entire range of

export credit services such as supplier's credit, pre-shipment credit,

buyer's credit, finance for export of projects & consultancy services,guarantees, forfeiting, etc.

Lines of Credit (LOC) is a financing mechanism for the agricultural

sector.


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Small and Medium Enterprises Group : The group handles credit

proposals from SMEs under various lending programmes of the

Bank.

Export Services Group offers variety of advisory and value-

added information services aimed at investment promotion

Fee based Export Marketing Services Bank offers assistance to

Corporate Affairs.


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National Housing Bank

1988 NHB was established as

per guidelines of NHB Act, 1987

Objective: To accelerate the

growth of the Housing Financing

Institutions by providing them

with financial and otherassistance


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National Housing Bank

Functions:

= To promote a sound, healthy, viable and cost effective

housing finance system

= To promote a network of dedicated housing finance

institutions

= To make housing credit more affordable

= To encourage public agencies to emerge as

facilitators for housing


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Board for Industrial and Financial

Reconstruction

1987 BIFR was set up to advice for the

upgradation of sick units Sick Industrial Companies (Special

Provisions) Act, 1985 guides the activities

of the board

Board assesses the type of sickness

Eligibility criteria- Companies registered

under Companies Act 1956


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Small Industries Development Bank of

India

1990 SIDBI was set up to develop the

small scale industry in India

The bank offers financial assistance to

the small and medium scale industries

and coordinates the functioning of theother financial institutions that caters to

the need of the agro-industries in India.


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Small Industries Development Bank of

India

SIDBI offers financial assistance for

significant issues like infrastructuredevelopment, rehabilitation for sick

industrial units.

For the upgradation of the standard of

Indian women the bank offers twospecialized financial programs named as

marketing fund for the products

manufactured by women entrepreneurs

and Mahila Udhyam Nidhi


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Some of the institutions working at the State leveltowards development are;

State Finance Corporation (SFC)

State Industrial Development Corporation (SIDC)

State Industrial Investment Corporation (SIIC)

State Land Development Banks (SLDB) State Small Industries Development Corporation

(SSIDC)


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State Finance Corporation

o 1952 Under the provisions of SFC Act, SFCs were

set up in different states

o Their functions are similar to that of IFCI

o They provide term finance to small and medium scale

industries

o They are advised to take care towards dispersal of

industries

o They should support self-employment schemes


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State Industrial Development Corporation/StateIndustrial Investment Corporation

o They have been set up by state governments as

counterparts of NIDC

o They provide assistance in the form of;

Venture capital

Infrastructure development Consultancy services

Project management


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Functions:

Long term financial assistance towards industrialisation

To arrange for land

To put up industrial estates

To construct roads

To arrange for supply of water and electric power

To arrange for industrial licences

Deficiencies:

Insufficient and untrained staff

Default in payment of dues


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State Land Development Banks

o They provide long term resources for Farm

Mechanisation, land development, horticulture,

wasteland management, Rural housing, etc.

o They raise resources through floatation of debentures

o Such debentures are subscribed to by NABARD, the

concerned State Governments, GOI and other

financial institutions


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State Small Industries Development Corporation

1956 - Established in various states as state government

undertakings

Aim: to develop small, tiny and village industries

Functions: To provide seed capital assistance

& To produce and distribute scarce/imported raw material

& To supply machinery on hire-purchase& To construct and manage industrial estate

& To provide management & marketing assistance

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