2.0.0

Chapter 2

Institutional Framework of Industrial Financing in India

Introduction

Prior to World War I the major industries in India we~e

cotton and jute textiles confined to a few urban centres.

However, during the interregnum between the two world wars

production of cotton-piece goods, steel ingots, cement and paper

was gaining ground Shipping services, several light

engineering industries , and consumer goods related to sugar,

safety matches, glass, edibl~ dils soap cosmetics ,etc. made

considerable progress during this period. The country became /

self-sufficient in sugar and almost self-sufficient in cement.

The late thirties and early forties' witnessed the growth of new

industr1es like, ferro-alloys, non-ferro metals, diesel engines,

caustic soda, chlorine, soda-ash, textile machinery and machine

tools. In the immediate postwar periods new light eng1neering

industries in the small and medium sectors were set up and the

existing cement, steel, glass and caustic soda units were

expanded.

The industrial development during this period was

influenced more by periodic scarcity situations rather than on a

planned economic philosophy. On independence , the range of

industrial products available in the country was fairly wide

but for a large country endowed with vast resources, the

importance of industry in the occupational structure or the

20

p~oduction pattern was rather low. The share of tactory

establisl1ments was meagre at 6.6 percent of the national income

and the labour force in the modern factory sector was little over

1.6 per cent of the total working population . The electricity

generation capacity installed was around 1.8 mKW. It was

paradoxical that out of a total of 5,66,876 villages about

3,000 , and out of 2,699 towns only 1,010 were electrified.(!) 1~

was in this context that planned economic development in a

democratic framework was adopted . It was realised that, given

the human resources , natural resources and vast domestic

market, the country needed a ~trong capital goods sector.· The

development strategy was based on the concept of a mi~ed economy I

/

through the Industrial Policy Resolution of 1956, which

delineated the spheres of activity of the public and private

sectors and spell out the determinants for rapid industrial

development under the various five-year plans.

Success for planned industrial development depends

mainly on availability of adequate financial resources for a

wide variety of projects. Commercial banks were by and lar·ge

patterned on the British model and confined themselves to

financing working capital requirements of trade and industry.

The need for setting up financial institutions was felt to

ensure adequate and timely flow of assistance to industrial

projects. Thus in 1948 was bor-n the Industrial Finance

Corporation of· India ( IFCI). This was followed by other

financial institutions

21

I

2.1.0 Financial System :An Overview

The close nexus between economic development and

growth and development of financial institutions, is widely

accepted The role of financial system has been fricefully

expressed by Schumpeter (2) in the following quotation:

"The money market is always... the head quarters of the

capitalist system, from which orders go out to its individual

divisions, and that which is debated and decided there is always

in essence the settlement of plans for further development. All

kinds of credit requirements come to this market; all kinds of

economic projects are first brdught into relation with which each

other and contend for their realization in it; a11 kinds of /

purchasing power flow to operations and intermediate manoeuvres

which may easily veil the fundamental thing ... Thus the main

function of the money or capital market is trading in credit for

the purpose of financing development. Development creates and

nourishes this market. In the course of development it becomes

the market for sources of income themselves."

It has been widely accepted that the physical

aspects of econom1c development are not indifferent to the growth

of financial institutions Financial organizations have a

strong influence in terms of change in output through their

influence on savings and investment . Until recently, only banks

were considered financial institutions of special mention by

economists and financial experts. The empirical work of R.W.

Gold Smith (3) and the theoretical work of Gurley and Shaw (4)

have resulted in an increased interest among economists on the

22

a~tivities of the non-banking financial 1ntermediaries. The

theory of finance developed by Gurley and Shaw (5) leads one to

consider the entire financial sector as important to economic

development. They have emphasised on the allocation function of

the financial intermediaries. In India there is ample evidence

to prove the close nexus between the growth of the financial

system and econom1c development .

2.1.1 The Indian System

In India the financial system has distinct

characteristics as evident f~om the progress of time and the I

industrialisation process. A detailed study of ,the Indian I

Financial System is too vast in its scope Hence 1 the attempt

is to focus on a few salient features of the system. A well

regulated good financial system requires four components:

a) Financial Asset/Instruments

b) Financial Intermediaries

c) Financial Market

d) Interest and yields

Financial Assets/Instruments should comprise the traits like

i) security, ii) liquidity, iii) income. I~ lnd1a it consists of:

a) money: i) Coins, Notes, various types of deposits

b) debts: i) debentures, bonds, fixed deposits

ii) cornm~rcial paper

c) stocks/shares: i) preference

ii) Equity

d) other documents: i) like insurance policies etc.

23

Ainancial Intermediaries

Financial Intermediaries consists of

a) Provident Fund

b) Insurance Corpn.

c) Commercial Banking set-up

d) Development Finance Institutions : i) Central level

ii) State level

e) Mutual Funds

In India Financial Market consists of the following

a) Money market - a) organised sector - Commercial Banks ,

b) Unorga~ised sector - Money lenders Chit

Fund /

I

b) Capital Market - a) Primary

b) Secondary.

In India Interest Rates have been administered in the organised

sectors However, it is often said that, in the unorganised

sector; interest rate is much higher. During of the last forty

years, the financial system in India has grown rapidly in size

and complexity. in areas like bank deposits,

insurance premium, small savings. The post -independence

achievement is remarkable that it has surpassed the previous

position and momentum . Along with expansion , diversification

in types of institutions and financial instruments has come

about. The impetu~ given by planning, rapid industrialisation,

decline in the private proprietorship -type of business the

growth in the corporate business, and the growth ot the

Government sector - . all these changes were reflected in ~

growing financial intermediation.

24

' ,.

The structure of financial institut1ons today comprise

RBI, NABARD, Commerciar Banks, Cooperative Banks, Post Office

Saving Organisation, Non-Bank Financial Intermediaries lNFis)

like UTI, LIC, General Insurance companies, Provident Funds,

Investment and Finance companies and Non-bank Statutory Financial

Institutions (NBSFI'S) like IDBI, ICICI, IFCI, SFC's, SIDC's,

ARDC, IRBI etc. These NBSFI's are not really financial

intermediaries it is therefore, necessary to maintain a

distinction between NBSFO's and NBSFI's The NBSFI's are termed

on the basis of their working1

as "development banks". Uut ot

these , old institutions like banks, insurance comparl'ies, small I

I

savings organisation etc. have been consolidated througt1

mergers, integration etc , and have also passed from private

hands to Government. Development bank~ as well as UTI, LIC and

GIC have been created during the post independence period . Also

the real growth of Provident Funds has occurred only during this

period .

New instruments have come into existence , in the form

of innovative deposit schemes of banks, time deposits, recurring

deposits and cumulative time deposits with post offices; public

provident tund accounts, participation ~ertificates, newer

schemes of LIC, convertible debentures, rigl1ts debentur-es,

UTI/Units, rural debentures, special (rural) debentures, National

Development Bonds, Power Bonds or Bonds issued by PSE's

Prior to 1950-51 the Indian Financial System was

somewhat unorganised and there was absence of issuing

institutions. There were no financial institutions to provide

25

lbng term funding , except IFCI.

Many authors have , made logical observations about the

financial markets and their contribution to capital formation.

Van Horne(6) has said : ...... "rhe purpose of tinancial markets 1~

to allocate savings efficiently in an economy to ultimate trser·~

either for investment in real assets or tor consumpt1on''.

According to Christy and Roden(7) "lhe objective of the

financial system is to supply funds to various sectors and

activities of the economy in the ways that promote the tulles!

possible ut.illc::.ation of resources without the destablishing

consequence of rrice level ch~nges or unnecessary interferenrr

with individual desires". In the words ot Gold Sn~i th( 8) /

· r hP

capital market of a modern economy has two basic econom1r

functions: first, the allocation of a periods cur·rent sav1nqs

among users and uses or the supply of financing for the period"",

investment; second the facilitation of the transfer ot existlnq

assets, tangible and intangible, among individual economic units,

groups of them, sectors and countries".

In his classic work Grant(9) defines capital market ir1

a broad sense as "a series of channel~ through which saVI11CJ("'· ot

the community are made available for industrial and commercial

enterprises 'And for public authorities. It embraces r1ot only the

system by which the public takes up long-term securities directly

or through i nterrnediari.es but also the eiC\borate rlet-worl<. of

institutions responsible for short-term and medium-term lending".

()ccor·din<:-J to Rob1nson and wr-ightsman(JO) "lhe two

functions of financial markets are to provide link between saving

26

:~nd investment for the creation of new we a 1 th and to pe rrn1 t

portfolio adjustment in the composition of the existing wealth''.

From the above expositions of learned authors, it

can be inferred that the prime function of capital markets is the

collection of savings and their distribution for industrial

investment; thus stimulating capital formation, so that the

process of economic growth is accelerated. In other words,

capital formation is sine. ~ D.Q.!l for . I

speedy economic

development. The process of capital formation, is then composed

I

of three distinct, but interrelated , activities:- I

(a) Savings: The effort by which claims to resources

are set aside , and so become available tor

other purposes;

lb) Finance: rhe activity by which claims to resources are

either assembled from those released by

domestic savings , or obtained from abroad, or

specially created usually as bank deposits,

or notes and then placed in the hands of

investors; and

(c) Investment: The activity by which resources are actually

committed to production.

2.1.2 Savings & Investment Phenomenon

The volume of capital formation in any country depends upon two

factors (a) efticiency and (b) effectiveness by which the

activities of savings, financing and investment are carried out.

27

' /

The effective mobilisation of savings, the efficiency ot the

financial organisation . to tap those savings optimally

channel ising these savings for deployment into investible

proposition, and ensuring reasonable return in the hands ot

investor, are conducive to capital formation. lhe better the

efficiency in organising these interrelated activities, the

smoother will be the economic development . Joshi(ll) has tetmed

this relevance of investment process as 'transfer process'.

Saving as the excess of current income over current

expenditure and investment, represent expenditure on durable

' assets. Hence it becomes imperative to have institutional I

/

arrangements to facilitate the transfer of resources from one

sector to another; financial institutions are to work as linl<s

between the savers and investors , so that the flow of savings

are channelised into industrial investment. lhey are very

important in the process of capital formation because, a class

of entrepreneurs who demand funds to create organisation tot·

delivering goods and services to society also , there are a

large number of individuals who have saved , but neither possess

entrepreneurial traits, nor money saved would be adequate to

promote any venture. '

It requires transfer process to really use

the entrepreneurial qualities, and finding their industrial

venture by tapping a large number and segment of savers. This

tapping of saving , and then investment, is done by the financial

system which promotes the process of capital tormatiot1 by

bringing together· the supply of savings and the demand tor

investible funds. How savings and capital tor-mation havn tal<en

28

place Hl J.ndia 1s given below to 1llustraLe the garnut .. 111d

dimension of the savings. and investment process.

29

Tab.l.e 1.0

Domestic Savings & Investment in India

(Rupees 1n crores)

Savings YEARS House- Public Pvt.

hold sector sector

1950-51 484 123 44

1955-56 817 104 61

1960-61 901 .509 114

1965-66 1871 592 101

1970-71 3603 804 210

1975-76 7122 2506 374

1980-81* 21835 4654 2284

1981-82 23918 7254 2496

1982-83 23940 7822 2908

1983-84 31088 6781 3172

1984-85 34677 6533 3991

1985-86 41143 8592 5415

1986-87 50484 8018 4924

Total 1+2+3

651

982

1324

2564

4617

10002

28773

33668

3467.0

41041

45201

55150

63426

Investments % of Household

sector in total sav.

74.34

83.20

68.20

72.97

78.04

71.20

75.89 I

71.04

69.05

75.74

76.71

14.60

79.59

G.C.I.

Total

970

1283

2541

4393

7253

142B7

31016

36672

34377

35191

36670

43'7lt>

419.56 --------------------------------------------------------------------G.C.F. = Gross Capital Formation.

*From 1980-81 to 1986-87 new series with a base year 1980-81

Source: 1. National Accounts Statistics 1980-81 centr.:d Statistical Organisation, Department of Statistics,

' Ministry of Planning, Government of India, 1989.

2. National Accounts Statistics 1970-71 - 1978-79, CSO Jan 1981 qor at 1970-71 prices. for the period 1970-71 and 1975-76.

3. National Accounts Statistics 1960-61 - 1972-73 CSO GOI Jan 1975, for the period 1950-51 to 1965-66 at 1960-61 prices.

30

Till 19!:30-81 savings in the economy remained lower thall

investment or gross capital formation . How has this gap been

met? The difference has been met by through intlow of

funds from abroad which has supplemented savings for investment

in the economy. The data 1981-82 to 1986-87 show that our

savings after 1981-82 has increased compared to capital

formation (gross).

2. 1.3 Channelising Savings or Capital Formation

From table 1.0 it will be observed that household

sector's share in the total sa~ings for the entire period of 50-

51 to 85-86 ranged between 68 to 83 per cent. lhe household I

I

sector covers all the areas of economic activity, except private

corporate sector and public sector. Private corporate sector

comprisas of joint stock companies, co~mercial banks (excluding

public sector), other financial institutions and cooperative

banks. Public sector comprises of public authorities, government

companies and statutory corporations. The household sector saves

in physical and financial assets. Savings in financial assets

comprises currency, net deposits, shares and debentures, net

claims on govr~rnrnent, life insurance funds, provident .-=wd

pensions funds. These funds are channelised through institutions

and investments into the investment sector for deployment as

assets.

The financial system has evolved around the economic

policies of the Government. Hence the organization and

institutions created have been fortified to carry out the policy

goals and directives periodically laid down by the Government.

31

f-)S a result, t.he financing industry was kept well under control

of the government.

below:

Institutions

- Commercial Banks

- Cooperative Banks

- Development Financial Institutions(DFI's)

Small Savings

- Provident Fund

- Insurance

- Unit Trust

The institutional set-up in India is as

Financial System

~1arkets

- Treasury Bill Market

- Call Money Market

- Commercial Bill Market

- Market for Financial Guarantees

- Market for Mortgages

I • • - Government Sacur1t1es Market

- Industrial Securities Market

- Foreign Exchange Market

The main function of this institutional set-up is to

tap savings of different sectors, and then invest ~hem into

different areas of economic activity, keeping in conformity with

the policy objectives of the Government. Besides the above

structure, a prior requirement of any financial system is tile

existence of the organised market. '

2.2.1 The Development Finance Institutions (DFI's)

The development finance institutions (DFls) in India

have been set up by the Central and State Governments These

institutions worl< as suppliers of loanable funds, but they arA

not mobilisers of individual savings like any other institutions.

32

'till recently , they used to obtain resources exclusively frorn

the Government, but recently DFI's of central level are raising

resources from the open and international market. lhese

institutions are also known as development banks. lhough similar

type of institutions exist in other countries, they do

dominate the economic scene in India.

rhese institutions can be grouped into various

categories on the basis of:

- Whether they have b~en set up by the Central or

State Governments;

- Whether they are meant for providing financial

' assistance to medium and large scale units or

/

small scale un1ts.

- Whether they pro~ide assi~tance to industry or

agriculture;

Whether their main function is to provide finance

or some other assistance such as consultancy,

guarantees etc.

C u r r· en t l y there are seven institutions at the ~11

India level. lhey are Industrial Development Bank of India

(IDBI); Industrial Finance Corporation of India (IFCI);

Industrial Credit and Investment Corporation of India (ICICI)

Life Insur·ance Corporation of India (LIC); Unit Trust of lnd1a

(UTI); General Insurance Corporation (GIC); Industrial

Reconstruction Bank of India (IRBI).

33

. I

At the state level, there are 18 State Financial

Corporations (SF-Cs) and 21 State Industrial LJevelopment

Corporations (SlDCs). 'There are organisations li l<e, Niltion;:\l

Industrial Development Corporation (NIDCs), Technical Consultancy

Organisations (TCOs) which may not provide finance, but provides

other types of assistance related to promotion of industries.

There are organisations like Agricultural Refinance and

Development Corporation of India (ARDC) and Agricultural Finance

Corporation (AFC) whose prim~ry work is to finance agricultural

operations. The majority of these development finance

institutions assist the industrial sectot·, whose porttolio is the

focus of this study ; hence elaboration is done on · this issue

only. /

2.2.2 Operations of Financial Institutions

The operations of the all Financial lnsti tut1onc::,

(AFI's) till 31st March 1989 show that, these institutions have

so far sanctioned Rs. 63763.4 crores and have disbursed Rs.

46055.5 crores (12)*. Of the total sanctions and disbursements

made by the institutions IDBI shares the largest part i.e. Rs.

34400.4 crores of sanction of the total sanction and Rs. 25112.2

crores of disbursement of the total disbursements(l3l.

Assistance ·sanctioned and disbursed by all financial institutions

in the last 18 years is given below:

34

Table 2.0

Assistance sanctioned and disbursed by AFI's

(Rs. illCI018S)

-----------------------------------------------------------------Year Sanctions Growth Rate Disbursements Growth Rate -----------------------------------------------------------------1964-65 118.1 90.5

1970-71 254.2 159.9

1971-72 342.7 34.8 191.4 19. l

1972-73 325.9 (-) 4.9 218.8 14.3

1973-74 446.7 37.1 301.6 37.8

1974-75 549.6 23.0 425.0 40.9

1975-76 648.3 18.0 435.2 2.4

1976-77 976.9 50.7 597.3 I 37.2 I

1977-78 1201.8 23.0 704.0 17.9

1978-79 1361.3 13.3 .930.6 32.2

1979-80 2060.5 51.4 1352.2 45.3

1980-81 2524.3 22.5 1602.9 18.5

1981-82 2746.8 8.8 2064.8 28.8

1982-83 3231.7 17.7 2371.2 14.8

1983-84 4115.6 27.4 2935.7 23.8

1984-85 5535.4 34.5 3501.8 19.3

1985-86 6391.5 15.5 4924.3 40.6

1986-87 7979.6 24.9 5655.6 14.8

1987-88 9171.8 14.9 6778.8 20.0

1988-89 14202.7 54.9 9051.2 33.3

Cumula- 63763.4 46055.5 tive up to 31.3.89 ------------------------------------------- - --. -- --- ----- ~- -· -· - -~ --

*Report on Development Banking in India 1988-89, 1081.

35

The study is confin1ng itself to the activitjns of

central level financial institutions only. Hence de ta 1 J

analysis of every financial institution engaged directly 111

·industrial financing activity (See 2.7.0) has been taken up

The first institution which came into existence 1n the area of

industrial financing immediately after independence was the

Industrial Finance Corporation of India llFCI). Now the

rationale for the creation of these institutions in the Indian

economic set up would be examined

2.2.3 The Rationale for the Creation of Financial Institutions

Prior to independence tile institutional rnochanisrn for

providing credit to industry as we have already expl~ined was not

properly organised and mainly characterised by:

- Ill organised capital mar~et;

- Low formation of Capital;

I I

- Lack of effort to mobilisation of funds.

This necessitated the creation and set-up of these

institutions to promote and sponsor the objectives of :

- Fulfilling the commitment of planned economy;

- Rehabilitation and Renovation of traditional

industrial sector;

- Financing the small business; and

Development of backward areas to remove regional

imbalances.

These necessitated the setting up of these 1nstitut1ons

implying that their task goes far beyond the conventional

function of providing term finance to capable entrepreneurs ;'l.nd

36

mobilising resources through their lending operations. However,

it should not be taken that these institutions themselves could

provide growth, but only supply adequate funds i11 time in

addition to other related information on market, etc. lhe

development banks and financial institutions in our country have

adopted a lending strategy and activities towards the furtllerancP

and realisation of the socio-economic objectives of tt1e country.

Hence very often they face difficulties in trade offs between

various types of choices - i.e. an analysis of costs and benefits

and choose for an optimum mix.to ensure country's economic and 1

social goals, as also that financial objectives of the

organisation are also met. I

I

Besides, the social objectives of the country have to

be turned into performance areas, and development banks have the

responsibility to serve these social needs in addition to

fulfilling the role of a promotional banker. It has become tl1e

responsibility ot the development banker now to conform. to the

principles laid down by the Government, which includes among

other things:

·- r-msur ing more projects in the bacl<.ward reg1orn;

- ensuring more projects coming up in the small

scale sector;

- ensuring more projects promoted by new technlcians/

entt'epreneurs;

- encouraging projects producing goods of mass

consumption;

37

- encouraging and promoting projects ror export ol

goods and those which could substitute imports.

Besides development finance, institutions should also ensur·e that

their lending strategies should be such that it should neither

create inflationary trends nor create idle capacity 111 certa111

sectors and surplus capacity in certain other areas.

The main instrument of development finance institutions

working is to raise fund and disburse fund - scarce resources of

the economy into pre-determined sectors of economic activity, so

that the maximum possible use 1of these funds can be made. lhe

genesis behind the creation of financial institution~. I

and for

that matter development banks, require that institutions should

follow an appropriate disbursement .Policy, so that timely

financing would ensure easy implementation of projects;

appropriate location policy so that geographical dispersal of the

industry is ensured facilitating reduction in regional

imbalances.

Depending upon the kind of entrepreneurs 1t assists, it

could also determine the emerging pattern of ownership of means

of production. There is considerable scope for a development

finance institution in optimizing mix, (a) in b~inging about

industrialisation in backward regions, tb) in preventing

concentration of economic power, and (c) in promoting the

growth of small entrepreneurs in the country. There is thus a

need to make some more conscious efforts by developmetlt banks to

finance economically more desirable projects.

38

2.3.0 Macro-view of the Performance of All India Institutions (AIFI's)

Financial

Central level. financial institutions are IDBl. I FC I ,

ICICI, GIC, LlC, UTI. There are state level Financial

institutions like, SFC's and SIDC's whose gamut of operation 1s

confined within the state territory. As on 31st March 1989 these

six institutions together sanctioned and disbursed Rs. 5910,3.13

crores and Rs. 42112.5 crores respectively (14). Sanction and

disbursement of central level financial institutions h~ve been

given in Table 2.3 below for the period 1970-71 to 1988-89:

39

Year

1970-71

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

1977-78

1978-79

1979-80

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1.986-87

1987-88

1988-89

Cum upto 31.3.89

Table 2.3 Sanctions and Disbursements ot All India Financial Institutions

(Rs. in crores)

Sanctions Disbursements

178.0 11S.3

246.9 136.3

217.6 154.0

308.6 221.3

366.7 310.7

443.4 303.4

727.0 446.2

936.9 533~7

I 1051.51 722.97

1557.29 1017.66

1919.41 1213.46

2367.10 1826.20

2907. 18 2152.20

3721.43 2687.30

5144.02 3180. 12

6164.52 4552.86

7237.62 5203.99

8687.72 6223.70

13722.8 B3 7 lj. -~

59103.8 42112.5

----------------------------------------------------------~-----

Source: ( 15)

40

2.3.1 Pattern and Trend in Financing I

a)Backward Area Uevelopment: Of the total sanction of Rs.

59103.8 crores made upto 31st March 1989, 38.9 percent ot the

total sanction has been deployed in the backward areas: and 38.Q

percent out o·f the total disbursement Rs. 42112.5 crores in the

backward areas.(l61

b) Composition of Loan Portfolio: Of the total sanction made

till 31st March 1988 share of different components were as

below:

Table 2.4: Composition Assistance Sanctioned by AIFI's

(%of the lotal)

Sanction D 1 sbu'r serne n t ------------------------------------------------------~~---------1

Rupee Loan 75.95 77.54

Foreign Currency Loan 9.86' 9.54

Underwriting Direct Subscription 11.75 10.70

Subscription to shares and FI's bonds 1.19 1. 46

Guarantee 1.25 0.7o

Total 100.0 100.0

Source: ( 17)

This shows that Rupee Loan, Foreign Currency Loan and

underwriting and direct subscription are the major heads through

which financial institutions have taken part in industry

financing. Assistance by way of Underwriting and Di t'eCt

Subscription and Guarantee also composes a good portion of the

loan. Rupees and Foreign Currency Loan - these components torrn

nearly 86 percent of sanction and 87 percent of disbut·sements.

41

c~lndustr·y-wlse F•or·ttolic

M1scellaneous-chem1cals. tert1l1sers. text1les.

electric1ty generation, basic metals. and services indu~.t.rll~~.

were the major rec1p1ents of assistance sanctioned by All India

Financial Institutions. lhese six industries together accounted

for 57.1% of the total assistance sanctioned (18).

d)Sector-wise Assistance

fill 31st March 1989, All India Financial Institutions

have sanctioned 72.99 percent of the total assistance to private

sector,as against public sector accounts for 16.75 percent

joint sector accounts for ;7.23 percent of sanction and

cooperative sector accounts for 3.03 percent of sanction. In I

' terms of disbursements various sectors accounted for 73.32

percent, l6.S7 percent, 6.68 per·cent and 3.43 percent

respectively. (19)

2.3.2 An overview of AIFI'S Performance

Over· the years, DFI's have occupied a place ot

importance in the planning and promotion of industries 1n tho

country. Responding to the emerging requirements of industrial

and economic growth, they have not only increased the flow of

assistance, but also developed a co-ordinated approach towards

industrial financing. In the last forty years a wide network of

development ·financing institutions has been established, with

some of them specialising in particular areas of ..

development

finance.

Below attempt has been made to review the organisation and

per-formance of the all, India Financial Institutions. More stres::.

has been g1ven to IFCI, lDBI & IC!Cl ~...,hicll are leading

42

inst1tut1ons. J.tld ::He engaged 1n direct project lendltHJ .:lcttvlty.

Other development banks ~r financial institutions like LIC, Gll

and urr are onq<1ged w1th the leadlJlg developmBnt banking

1nstitutions 1n project lending activity. They do not take lead

in project financing activity.

2.4.1 Industrial Finance Corporation of India (IFCI)

Industrial Finance Corporation ot India llFCl) was

established in 1948, soon after independence, by an Act ot

Parliament Today it ranks as one of the oldest and most

experienced public financial in'ptitutions in India.

2.4.1. Scope of Operations ' i

Over the years, IFCI has expanded the scope of its

activities in keeping with the changing needs of the industrial

sector. It provides financial assistance to large-scale

industrial concerns, particularly in circumstances where normal

banking accommodation is inappropriate, or recourse to capital

issue method is difficult Besides providing financial

assistance of 1ndustrial units, IFCI is engaged 1n vatious

promotional activities singly , and in conjunction wi tl1 other

terrn J.endi.nq ill'3LJ.tutions. fhe pollcies of lFCI are int.egtated

with the objectives of the five year plans of the country and

broad national policies enunciated by Government from time to

time. It is guided by the priorities laid down by the • Central

Government in consultation with the Plann1ng Commiss1on. It

gives attention to the need for dispersal of industry, industrial

development ot relatively less developed areas of the country

and growth of industries in the cooperative sector. 1 t. oives

43

particular attention to the following categories ot pr'o_iects:

- pr-ojects promoted by techn1cal entrepreneur or·

new entrepreneur;

- projects located in the backward areas/districts;

or areas identified as less developed;

- projects based on indigenous technology and/or

aimed at exploring new areas of technology;

- proJects having potential of earning foreign

exchange or which would result in substitution oi

imports;

- projects providing inputs for increasing the

agricultural production as fertilizers, ,pesticides. I

agricultural machinery etc.

- projects fulfilling the increased demand for

essential consumer goods l1ke textiles, sugar

which meet the basic needs of the people.

All industrial concerns set up either in the corporate or

co-operative sector, including shipping, mining, generation ot

energy, transport, development of industr1al estates, fishing,

repair and testing services, medical health and allied ser-vices,

providing services relating to information technology, tele-

communications, electronics, leasing or sub-leasing, hotels etc.

are eligible for financial assistance from IFCI. In January 1989

IFCI along with AIFI's and banks promoted the Tourism Finance

Corporation of India lTFCI) as a public limited company under the

Companies Act, 1956., for providing financial assistance for

development of tourism related activities, facilities and

44

•

services.

2.4.2 Forms of Assistance

The facilities prov1ded by lFCl today cover principally

- project finance for new, expansion, diversification

and modern1sation projects/schemes.

- Equipment Financing

- Equipment Leasing

- 1'1erchant Banking and Other Financial Services

- Promotional Services in the form of Technical

Consultancy Support, Risk Capital Assistance,

·leclillology Developm.f:3nt and Finance, Upgradation

o·f t1anagerial Skills, Entrepreneurship L>ev'elopmen t, /

Science and Technology Entrepreneurs Parks, Research

in Development Banking and Development Economics, etc.

- Subsidy support through promotional schemes of IFCI

to help the entrepreneurs and enterprises 1n the

rural, cottage, tiny, small and ancillary industries

etc.

2.4.3 Resources

The main source of the fund ot the Corporation. other

than its own capital is repayment of loans and retained earnings.

Besides, 1t raises funds from the market by 1ssuing bonds as well

as draws loan trom the Central Government. Leaving aside these

two main sources , in recent years, it is also raising tunds from

EuroCurrency Market in terms of dollar and from Japanese capital

market in terms of Japanese yen. The Corporation also borrows

from IDBI against securities of Central and State Governments.

It is also authorized to accept deposits from the public.

45

2~4.4 Review of Operations IFCI

~~s on 31st March l990. IFCI has completed tort.yho.Jo

years of its working. During this period, as a pionAer in tile

field of long-term industrial financing it has played its

appropriate role. Cumulative sanctions rose from Rs. 8.13 crores

during period prior to the first plan (i.e. 1949-51) to Rs.

8712.98 crores to 3564 projects as on 31st March 1990.

Disbursement for the corresponding period rose from Rs. 5.79

crores to Rs. 5474.64 crores(20). Rupees and foreign currency

loans have been sanctioned to the tune of Rs. 6276.18 crores and

Rs.1540.22 crores and had baen disbursed to the tune of Rs.

4286.30 crores and Rs. 814.10 crores. The balance amount l1as I

i

been sanctioned and disbursed for underwriting guarantees and

direct subscription. The loan component forms 90 percent of the

amount sanctioned and 93 percent of the amount disbursed so far

( 20A).

The regional spread of the portfolio shows that, for

the same period, more than 68 percent of the cumulative

assistance sanctioned amounting to Rs. 5985.94 crores accrued to

2433 units located in the seven states of Andhra Pradesh,

Karnataka, Gujarat, Maharashtra, Tamil Nadu, West Bengal and

Uttar Pradesh. (For details of territorial distribution of an

portfolio see Appendix 1 A) The corporation has sanctioned 55.33

percent of its cumulative assistance i.e. Rs. 4821.12 crores to

sugar, text1les, cement, synthetics, iron and steel, electrical

machinery and basic chemicals & fertiliser industries (Fot

details see Appendix. 1 8). The insti tut1onal scllerne ot the

incentives formulated by the Central Government in 1983, has been

46

f,J..ithfully irnplernented by the Corporation. the corporation has

sanctioned and disburse~ , upto 31st March 1990 financial

assistance aggregating Rs. 4269.53 crores and Rs. 2749.00 crores

respectively to 1650 projects located in the notified backward

districts/areas, which constitute 49 percent of the total net

cumulative sanctions and 50 percent of net cumulative

disbursements. (211

Sector-wise classification of the assistance sanctioned

and disbursed upto 31st March 1990, show that the private sector

has been sanct1oned Rs. 6293 .• 6 crores and had beer1 disbursed

Rs.3830.64 crores. The joint sector has been I

/

sanctioned

Hs.ll62.63 crores and had been disbursed Rs. 675.04 crores. lhe

public sector has received sanctions of Rs. 725.18 crores and

disbursement ot Hs. 523.07 crores and co-operative sector has

received Rs. 531.51 crores of. sanction and disbursed Rs. 445.89

crores ( 22).

The Corporation has made considerable progress In

implementation of the plan targets of the Government. the

performance and achievements of IFCI over these years, bear

adequate testimony to its dynamism and adaptability to the

chang1ng socio-economic environment, and above all synchronizing

its lending and investment policies with the goals, objectives

and targets of the economic plans of the country.

2.5.0 Industrial Development Bank of India

1:-_stabllshed on July l, 1964, IOI:H has beBn oper.:~Lltl<J

for nearly two and a half decades as an apex nationaJ

47

dt9vel.opment bani< in the field of 1ndustr 1ai t 1 nance tn IndL.:l.. liH?

main purpose behind the set-up of ll>Bl was to bring 1nto

existence an cipex 1nstitution to coordinate tile C\ctivit]ee. ot

other financial institutions,including banks providing term

finance to industry as well as to provide direct financial

assistance to industrial units to bridge the gap between the

supply and demand for medium and long-term finance. lhe role at

IDBI has been conceived not merely as one of enlarging the

usefulness of' the existing financial institutions by

supplementing their resources and widening the scope ot their

assistance tor financing of in~ustrial development and exp.:H1s1on.

Upto February 1976, it was a wholly-owned subsidiary 'of Reserve I

/

Bank of India, after which it was made an autonomous Corporat1on

fully owned by the Government of India.

2.5.1 Scope of Operations

The scope of operation of lOBI is wide rang1ng as well

as operationally flexible. It finances all types of industrial

concerns engaged in the manufacture or processing ot goods,

mining, transport generation and distribution of power etc., both

in the public and private sectors. Though, at present, the IDBI

proposes to restrict itself to the financing of large private

sector enterprises, there are no restrictions as regards the

nature and type of security that would be accepted trorn

industr1al concerna. There is also no m~ximurn lim1t prescr1bed

either for assistance to a concern or for the size ot the concern

itself.

48

2r5.2 Forms of Assistance

The oper· •. ~tlotiS of 1D81 could broadly be categorized 1nto:

a) assistance to other financial institutions:

b) direct assistance to 1ndustr1al concerns either

on its own or in consortium with other

institutions.

Assistance to other financial institutions cover such activities

as, refinancing of loans given by other institutions specified in

the Act and subscribing to their shares and bonds as well ~s

guarantee their underwriting obligations in connection with tl18

share and bond issues of industrial concertlS. I he lUH l r•t IW tdPS

refinance in respect of term loans to industrial co_!?icPI"IY'". aiven

by the IFCI and SFC's, other financial 1nst1tutions not1f ted by

the Gove rnrnent of India (like ICIC I ) ,. scheduled banl<s and S ta t.e

Cooperative f:lanl<s. Besides. export c red 1 ts q ran ted by any ot the

above mentioned institutions. for periods between 6 months <lnd 1('

years arn eliqJble, for refinance. lDB I tool< ove 1 the bus 1 noss

of the refinance corporation for industry on 1st September 196~.

as empowered by the Act, and the schemes of refinance and export

credits are also operated by it.

lhP other area of operation bein<;J, to provide dltect.

assistance to industrial concerns, ei thet· on its own or in

p a r t i c i p a t 1 on w 1 t h o t he r i n s t i t u t ions i n a. s i m 1 J a t ~" ,, y 1 n w h i c h

other tinanc1aJ insti.tutions perform. lhese are, 9ra11tinq nt

loans and ,;~dv,:wces or by subscribing to. purchas1na or

underwriting the issue of stocks, shares. bonds 01 debentures.

Such lo,"\nc:.. <'ldva.nces and debentures can. :1t the or>t ton nt the

49

I t 1 s empm\)r>.r nd

to quarant.ee dt-~ferred payrnonts due from industrtal concerns,

loans ra1sed by t·hern Hl publlC man~et or trom scheduled ban\\s.

It cD.n take underwriting obligations and accept, discount or

rediscount bon~ftde commercial bills o~ promissory notes of

industrial concerns.

2.5.2 Resources

It's initial capital was provided by the Government of

India, which is now Rs. 637 crores ( issued and paid up

capital) while authorized capital is Rs. 1001.10 crores. Besides I

, it raises loans through issue of Bonds and Debentures in India

and abroad. /

ro bring about better regional distr1but1on ln

indu·strial development, IDBI started in 1970 schemes of

concessional, direct and refinance assistance applicable to un1ts

in specified backward.districts. Under the direct assistance

scheme, the concessions 1nclude, lower rates of interest. longer

moratorium and repayment pe~iods, larger subscription to risk

capital, etc. Refinance· assistance is extended at a low rate ot

interest to small and medium units located in specified backward

districts.

IllBl 11,15 also launched, during the last ten years , its

innovational and ,promotional activities. T l1e promotional

activities aim at'achieving its socially desirable distr1bution

both among regions as well as among small and new entrepreneurs.

The broad objective is to help bring about regional balance by

promoting industries in less-developed regions.

50

U ll~"'r.~ tried to till up vit.::\1 lnlorm,:\tlol\ gaps about

the backward regions and. make an evaluation of industrial growtl1

potential of these reg1ons. In collaboration with other

financial institutions, IDBI initiated in 1970 surveys of what

have been descr·1bed as backward regions. By now surveys ot all

these backward regions have been completed. Also ,severaJ

project ideas with the concerned State-level aqenc1es to

transform them into concrete projects have taken place .

2.5.3 Review of Operations of IDBI

IDBI's schemes of assistance,can be classified under two broad

heads: (a) schemes of direct assistance consisting of proJect I

I

finance schemes and technical development fund, lb) schemes ot

indirect ass1stance covering re-flnance of industrial loans,

bills re-discounting scheme, and seed capital assistance.

As on 31st March 1990, IDBI has completed twentysix years ot

its working. So far IDBI has sanctioned Rs. 42167.2 crores to

931527 units and had disbursed Rs.30173.0 crores l23J Of this

amount project loan was to the extent ot Hs.l3995.9 crores of

sanct1on and Rs.9221.1 crores of disbursements. Of the total

assistance sane tioned and disbursed, foreign

currency loan was Rs. 1632.60 crores of sanct1on and Rs. 745.56

crores of disbursement. (24)

Regional spread of the portfolio shows that, for the same

period more than 61percent of the total sanction, i . e. ,

Rs.24528.00 crores has been given to six states only, namely

Andhra Pradesh, Gujarat, Maharashtra, Rajasthan, lamil Nadu and

Uttar Pradesh. (For details see Appendix 1 C).

51

The development bank has sanctioned Rs. 2490-.5.60 crores

to six types of industries namely, Food Products, lextiles,

Fertilisers, chemicals, Electricity and

services, which constitutes 59 percent of the sanctioned amount

till 31st March 1990. lFor details see Appendix 1 0). The

development bank has sanctioned upto the end of March 1990.

sanctions to backward areas stood at Rs.16705.6 crores,

accounting for 41.60 percent share in the total sanctions. (25)

Sector-wise classification of the assistance sanctioned and

disbursed upto 31st March 1990,: show that the private sector was I

sanctioned Rs. 29828.7 crores, .the Joint sector , has been

sanctioned Rs. 2539.3 crores, the public sector I Rs. I

6972.8

crore~ and co-operative sector Rs. 805.0 crores. (25 A)

over the period of 2 1/2 decades of operation lOBI, has

grown enormously and has proved itself as an important agent of

change in the Indian industry, keeping in view the initiatives

taken by it 1n the recent past. Several measures have been

initiated linked with it's role of a development banker.lh1s

will have far reaching influence and Importance like

establishment of lextile Modernisation Fund, Venture capital Fund

and Investment Oeposit Scheme. Kuchhal (26) advocates "Its

performance has to be viewed against the new emphasis on movinq

away from its traditional beneficiaries which are now being asked

to go direct to the capital market".

52

?.6.0 The Industrial Credit and Investment Corporation of India

"The Industrial Credit & Investment Corporation was

incorporated on January 5, 1955, with its headquarters at 8ombay

for the specific purpose of assisting the industrial enterprises

within the private sector. The original idea of forming the

Corporation· sprang from conversation between the Government of

India and the World Bank and certain American financiers. lhe

Government of India had certain funds created out of the

financial ass1stance which the Fore1gn Aid Department of the

State Department of United States had contributed in the form of

mater.ials. I

A suggestion was made that this fund mig~t be called

the counterpart of dollar assistance and be vtilised for

promoting the Corporation." (27)

2.6.1 Scope of Operations

The aim of the ICICI is to stimulate the promotion of new

industries; to assist the expansion and modernisation of existing

industries and , to furnish technical and managerial aid to

increase production and afford employment opportunities. lhe

Corporation grants long-term and medium-term loans, participates

in equity capital, underwrites new issues of shares and

debentures, guarantees loans from other private investment

sources and provides managerial, technical and administrative

advice.

As a consequence, IClCI is not only regarded as a mere

provider of finance, but also as a companion, which advises

and assists, at all stages, in the plann1ng and execution ot

invest~ent proposal. In the last 34 years the Corporation has

53

13Stabllshed i t.s own niche 1n the development financing

institutional scenario ~n India. It has played an important role

in the development ot industries in the private sector by

providing not only loans, but also risk capital through direct

participation 1n share capital and underwriting ot capital

issues. It has also earned the distinction of being a pionee1

institution in India to provide financial assistance 111 tore1gn

currency.

2.6.2 Resources

lCICI started with in~tial resources of about Rs. 11.5

crores - Rs. 12.50 crores in rupees (comprising Rs.' 5.0 crores /

share cap1tal and Rs. 7.50 crores Government advance), and $ 10

million in foreign currencies being the first World Bank Loan.

At the end of March 1990 the paid-up capital of the Co1·poration

amounted to Rs.91.55 crores , while reserves and surplus were at

Rs. 385.52 crores. Borrowings of the Corporation at the end ot

March 1990 aggregated to Rs. 5160.59 crores. Out of these

borrowings, foreign currency borrowings were Rs. ~082.bl crores

(40 per cent of the total borrowings), debentur·es accounted for

33 per cent and borrowings from lOBI and Government were 9 per

cent.

2.6.3 Review of Operations

8y the end of March, 1990, the total sanct1ons of the

Corporation amounted to Rs. 10222.47 crores to 6409 projects and

amount disbursed were Rs.6895.62 crores. Ot this amount a

substantial part is given in foreign currency loan wl1ich was Rs.

54

4456.89 crores. Assistance was g1ven to 3023 companies for 6409

projects. (27 A) The quantum of foreign curr·ency loan in the

total assistance sanct'ioned worked out to 37.43 percent. till

March 1989. It has been a significant feature of the

Corporat1on's operations. (28)

As on 31st March 1989 a substantial part ot the

Corporation's assistance has gone to the private sector, i.e. 82

per cent, as against 12 per cent to joint sector, 4 per cent to

co-operat1ve sector, and 2 per cent to public sector. (29)

A region-wise class;1ticat1on of assistance Ull 31st

March 1989 shows concentration of Corporation's operations in I

I

Western and Southern regions in the states of Andhra Pradesh,

Gujarat, Karnataka, Maharashtra, Punjab, Tamil Nadu and Uttar

Pradesh accounting for nearly 74.3 per cent of the total

assistance. In the cumulative disbursements upto end-March 1990,

Maharashtra accounted for the highest share of 26 percent

followed by Gujarat (15 percent), Tamil Nadu (10 percent) and

Andhra Pradesh ( 7 percent). The share ot assistance to bacl<ward

areas upto end-March 1990 amounted to 43 per cent in cumulative

sanctions and 39 per cent in cumulative disbursements. (For

details see Appendix 1 E)

Industry-wise ·asslstance 1n terms of cumulative

sanctions upto end-March 1987 indicates that textile industry

accounted tor the highest share (11.5 percent) followed by

miscellaneous chemicals (12.1percent), basic metals (10 percent),

cement (8.2 percent) and basic chemicals (7.8 percent). (l-or

details see Appendix 1 F)

55

2,. 6. 4 Impact

Quantitatively speak1ng, the lClCl has made a sign1ticant

impact on industrial tinance in the country. However, tho

importance of this institution should not be measured in

quantitative terms alone. What is more important is the nature

of its operations ; also whether it fills a need not met by the

conventional sources of finance. The Corporation has kept in

view a broader objective, namely, to foster the growth of a

healthy capital market in India. The Corporation has emerged

as one of the mcist important underwriting institut1ons in lnd1a.

Secondly, the Corporation is ~orking in co-operation with other·

finance inst1tut.1ons l1ke Industrial Finance corporation of I

!

India, State Bank of India, Life Insurance Corporat:lon of lnd1a,

State Financial Corporations, and commercial banks. Thus

advantages ot consortium underwriting is possible without having

formal organisation ot this nature. The corporat1on has also

built up contacts abroad, particularly with International Finance

Corporation, Commonwealth Development Finance Company and some

leading investment concerns and banks in the United States, the

U.K. and West Germany. Thirdly, the Corporation has assumed an

important role as a supplier of foreign credit. It has also done

joint financing in respect ot foreign exchange loans, thereby

augmenting the foreign exchange resources available to the

country. FinaJ.ly, the Corporation has succeeded in taking up the

establishment of an Investment Centre to encourage and promote

participation of private foreign capital.

56

rhe ICICI 1s an institution which specialjzas Jn

securing assistance for Indian industries tram foreign countr·ies.

It has reJat1vely large tore1gn exchange 1 esout ces at1d st1ll

larger foreign connections. It's association with the World

Bank, foreign commercial banks and investment banks has enabled

it to get more funds from abroad.

lhe corporation is an important hand-maid of tl1e

private enterprise. Having been set up at a very important and

crucial stage in the industrial development of the count1y, it is

trying to do what a capital, market in highly industrial1zod 1

countr1es has learnt to do after many decades ot experience

gained through trial and error. Besides fi~ancing, the

Corporation has devoted its attention to ancillary serv1ces

directed towards working out plans for individual projects and

advise the entrepreneurs coming from various fields trading,

management, engineering and other professions. The Corporation

devoting special attention to financing of riskier non-

traditional industries, particularly metal-based and· chemical

industries, and fulfillment of the planning requirements of the

Indian economy. There is another aspect of the perspective from

which to examine the functioning of ICICI, i.e., the promot1on ot

new enterprises and entrepreneurs. The ICICI has made effor·ts to

promote both.

rhe working ot the corporation has to be exarn1 ned Hl

the context of difficulties which industries had to face

recently. At the then,environment of stagnant capital mar·ket. 1t

was difficult to raise share capital even for worthwhile and

57

economically v1able projects. Share capital had, therefore, to

be underwritten, which only means that underwriters were left to

hold the sh~re cap1tal. Capital costs of proJects always

exceeded original estimates, however carefully these were made.

The more recent factor respons1ble for this has been the frequent

increases in import duty. This involved for the entrepreneur the

problem of raising additional funds in a none-too-favourable

capital market. Finally, when a unit goes into production, it is

faced with difficulties of obtaining imported raw materials. ~11

these problems affected the working of rcrcr. I

While the last few years in India have I

seen I

/

varying

conditions in the capital market, ranging from an under-developed

capital market to a foreign exchange crisis and to unprecedented

apathy, industrial investment has more or less continued to

increase. One of the factors responsible for such increase is

the functioning of institutions like ICICI to insulate the

entrepreneurs from the vicissitudes of the capital market.

lhe Cor-poration has not always given all the financial.

assistance requJ ted by a company, but has sougld; to llldUc.A

promoters to bring in additional funds and to encourage them to

obtain funds from other sources. Its assistance is only one

element in the total financing of a project;however, it is an

essential component in the complete financing arranged tor a

project.

lhe lCICl has built up a large portfolio ot projects in

diverse industries, mainly non-traditional. In the sphere ot

58

e n q i nee t' i n g , 1t llas 'tinanced foundries to make cast1ng, various

machine shops to use suc.h casting for making machine tools and

equ1prnent.s, te~ .. t oJ.lers to convert billets 1nLo various snct.lOW'·

and forge shops to make specific products tor

automobile and other industries. ICICI's tert1lizer proJects I

making nitrogenous, phosphatic and mixed fertilizers and PI'OJects

for the manufacture of power tillers and tractors will help 1n

raising agricultural production. In the electricity field, ICICJ.

has financed electricity companies to generate power, industrial

units to produce transmission ~owers, power cables, transformers, I

and electric meters. ICICI has financed units making var1ous

items of textile machinery and manufacture Qf ma~erials likA

dyes. It has financed the manufacture of hardboard, PVC,

reclaimed rubbers and calcined petroleu~ coke.

The Corporation, along with the other t1nance

institutions, took an active part in carrying out surveys to

determine industrial potential in various states.· It has

announced certain concessional terms as regards the rate of

interest, period of loans, and security coverage for proJects in

backward areas.

rhe Corporat1on, which had so tar prov1ded finance only

to joint stock companies, extended its operations. by providing

foreign exchange td proprietary and partnership concerns. This

is an important and growing segment of our economy , and it is

·appropriate that the Corporation seeks to meet its needs.

59

The corporation has been examining, tor sorne tirne , its

role in broadening the financial facilities available in the

t::lconomy. It has made ·a small investment in a llire -purct1ase

t1nance company to gain first-had experience of such work. lt

had been seeking to take a more active interest in housing

finance. The Corporation started a separate Merchant Banking

Section in 1972.

During the last 35 years of its operat1on lClCl has

passed through different phases. It has mobilized and

channelised funds i.nto diverse activities. It has taken a long

view and encouraged investm~nt in new projects, and in the

process built up the capital market. ro meet ttw incre.1c:;1nq I

demand for funds, ICICI has responded by diversifying and

augmenting its own sources of funds. In this, the biggest source

of loan capital for lCICI has been the International Bank for

reconstruction and Development, KFW (West Germany) and other

1nternationa1 agencies which, year after year, provided funds

with the result that ICICI received credit for a total· ot Hs.

2082.67 ct"ores.

2.7.0 Development Bank: Strict Sense of the Term

In 2.2.1 various institutions have been categorised a •7: _,

development banks which included LIC, GIC and Ull. Str1ctly

speaking, thougll they are participating in consortium loans, they

really do not perform the work of development banks. Here the

stt·ess on 'development bank' is given as they perform much

important and wider activity than financing and investmer1t.

60

[[) U L i 11 t. hen r (~ nn u a 1 He p o r t , ( S 0 ) has 1 r co q 11 1 "'· P d t 11 1 s I ,:u . I

and classified f1nancial institutions as -

a ) (:) F J ) c; w h i c: II r e t e ,. t 0 n J 1 F 1 n a n c ] a 1 1 I ) c:; I j I. u t i () I I""· ( ( ) Ill p I 1 c·. i I ) q

AliJB's, I1westment Institutions, IRBJ, SFc's, ~3lllt's.

b) (UUU 's which refer to All lnd1a Development

compt ising IIJBI, IFCl and ICICI.

c) Investment Institutions COillPtlSlllg I i 1 e lnc,tlt ,"\I)CI'

Corporation of India, Unit Trust of I nd i a and r:;e rw r a I

liJ<=,tJt ."'\liCe c;orporat1on.

(.~bOVB 111 2.4.0 to 2.6.4 detail dlSCU<::.SlOn lt."\Vr:l brn11 dC)f)O

about the Joa11 portfolio of the all India f1na.ncial

engaged in industrial financing development '"""d activity i11 the strict sense of the term. I hi ......

PI ()fn() I I 01)

i tldtt-=-.1 I 1.11

financing development and promotion act i vi t.y is 11 so knmo.Jrt ."\''3

development banking activity.

Bosky l30).

It has been very i'lptJy put. by

"This combination oi' banl<ing and developmental ct 1 t.et 1;:1. 111

investment dP.cisions is the distinguishing mat k o1 ;:~. dnvelopl11"111

bank."

2.8.0 The Indian Scenario

cet1Lral level tinanc1al i n s l 1 t. u t 1 u 11 "· t l1or,p

p e r· t o r m i n g the role of development banker ate, as rnenrioned

ear·Jier lfCI, IUI:H and lClCl. 1 t may be quns 1 1 n11erl Lo.Jil.ll

development oriented industrial financinq? J t. has been c I p.-. 1 I v

ex p r e s s e d by l. e s 1 1 e a n d H e 1 rn e r s ( 3 1 ) · I f i L 1 "'· ·"'~ c c r> p t e cl 1 ll ;"' 1 '" 1

industrial development bank has a developmental t~sl< to 1 tt I t 1 I I

and that, i.n order to do so, it needs to ernploy dr.vr"'l<lPillPill,"\1

criter·ia 111 it.= . .lending operations, tl1e11 tlw QUP"".I inn ·" iec",n"". of

61

ttJilat t·hese en Leria should be. Since tl1oy a1 e to br> del 1 ved from

t he n a t I on a l cl eve l o p me~~ t a l go a 1 s , i t w i ll be use t u I to 1 P v 1 P LoJ

what is now generally perceived to be obJeCtive ot development. ..

If the poor are to have a productive, good, full lite t/1e1l

char1ty is not the answer, and a reorientation of i11vestrnent

towards increasing the incomes of the poor through the creation

of good, productive ernployrlent becomes mandatory e 1 emen t o t· allY

development s t r·a tegy".

2.8.1 Development Criteria in Lending Operations

ln ·India cnntral level d~velopment financial inst1 t.utio1y·.

apply and use development criteria In lending operations. Lonq

back, when IFCI started following development orie11ted lend1ng it

got internationally acknowledged, Bosky (32) writes

"At least one bank applies the profit test inversely. lhP

Industrial Finance Corporation of . India, which 1ns1sts on

rigorous tests and requires that projects be self-liquidating,

tends to reject very profitable enterprises if it seems likely

that those could probably obtain all the requisite finance ftolll

other sources if they really tried. It is a primary purpose of

Uns bank to assist enterprises which cannot turn else wlle1 n: lll

the language ot" its charter-, to make credits iiVall<1ble t.o

i n d us t r i a l con c e 1· n s . . . particularly in circumstances wherP

normal. ba.nl<ln~ accommodation is inappropriatR or 1 ecmrr·ce tn

capital issue methods is impracticable".

True to their traditions as referred 1n the prev1otrs

paragraphs, the financial institutions, IfCl, IDRl and ICICI arr

continuing Wl th concessional and promot.1on;"l. sr.hernes .'\lorlqt<Ji til

62

tndustrJ.c\J llil·11K:ing activit.y. Some oi tltem h,,c::; bot~ll lllf'llllOI1f'd

below (33)

2.8.2 Promotional Services - A Review

lhe promotional services rendered by 1r·c1 are basically 1n

the nature of supportive measures and cover the following:

- Support to Village and Small Industries (VSI) Secto1

through specially designed Promotional Schemes.

- Support tor consultancy services through tile

i n s t rumen t a J. i t y o f r e c h n i c a 1 cons u 1 tan c y 0 t g a rn sa t 1 o 11 s

( TCOs).

I - Support t·or Industrial Potential ~urveys.

- Support tor Management Development. /

- Supper t tor fHsk cap I tal, Venture cap1 ta.l a11d I eclmoloqy

Finance.

- Support for Tourism and 1our1sm related act1vi t1es,

facilities and services.

- Support tor development of securities market and

investor protection.

- Support for Science & Technology E.ntrepreneurs' Pat l.;s

( S T E F's) .

- Suppo1·t for research in various disciplines and othet

research-oriented activities.

1FC1 r(3alt-::.ed, from its experience, that Villaqe and ~~m,111

industries Sector equally needed expert advice, consultancy tmd

extension services as the other Industrial sectors 111 tlto

economy. Hence these schemes have been instrumental, to 0

cons1derabJ.e extnnt, in providing and maint..:'lllllng de-::atf~d 1.111 ,,,..,!

63

I in areas in which the VIllage and Small Industries (VSI) Sector

needs low cost but quality consultancy and related extensiot1

services:

-·scheme of Subsidy to Small Entrepreneurs in the Rural,

Cottage, Tiny and Small Scale Sectors for meeting Cost

of Feasibility Studies, etc.

- Scheme of Subsidy for Consultancy to Industries relatina

to Animal Husbandry, Dairy Farming, Poultry Farming and

Fishing.

- Scheme ot Subsidy for Consultancy to Industries based on

d . I . l ~ or relate to Agriculture, Horticulture, Ser1cu ture anrJ

Pisciculture. /

- Scheme of Subsidy to New Entrepreneurs for Meetir1g cost

of Market Research/Surveys.

- Scheme at Subsidy for Providing Marketing ()ssistance to

Small Scale Units.

- Scheme o·t Subsidy for Consul tanr::y on Use ot Hor1·

Conventional Sources of Energy and Energy Conservation

Measures.

- SchE11tto of Subsidy for Control of Pollution in Lim

Village and Small Industries (VSI) Sector.

-Scheme of Subsidy for Promotion of Ancillary and Small

Scale Industries.

Similarly, IUI-31 and lClci are also conti.nui.tlg with various

concessional and development oriented schemes.

64

2.19. 0 How to Evaluate the Loan Portfolio

Above (2.4.4 to 2.6.3) It has surveyed how development

banks over time, has created a sizeable number of loan

portfolio, i.e., where term loan has been sanctioned keeping In

view the development policies of the government, i.e., a blend ot

financing activity with a development orientation. [)evelopment

banks create two types of portfolios (a) where it sanctions tern1

loan and assumes a much larger responsibility of guiding,

monitoring the activity of industrialisation process in

conformity with the specific goals laid down by the Government

known as loan portfolio; (b) wh~re it invests money in securities

' and bonds and takes part In investing activity keeping in view I

the optimum or maximum rate of return from the investment made

known as investment portfolio. The dilemma which one very often

faces- can both the portfolio's be evaluated on the basis ot tho

same parameter? Should investment activity be treated at par

with the develOpment financing activity? As Diamond (35) has put

the role of development financing agencies ... "has been providing

medium and long term financing for productive investment and

reaching decislons with respect to such investment, not on the

basis of the security that can be offered by the client, but.

rather on the basis of the long-range economic viability of the

enterprise being financed."

From the above, we find that investment 1s made 1n projects

to ensure "long-range economic viability of the enterprise".

Hence should we evaluate the performance of the enterprises or ~

group of enterprises in one industry financed by the development

finance institut1ons, on so called set-parameters ot contmetcial

65

prot1t.Z1bility a.ppnJach as appJ.1ed by t11e investment JnstJtutJons

to evaluate thei ,. investf!1ent portfolio or should we look tor "'

bette,. too 1. to evaluate the qual1ty of portfolio on ,, 111UC1l

broader economic parameter?. Diamond (36) has properly put this

dilemma in the proper perspect1ve when he says - 'government and

external financiers expected not only sound loans and equity

investment in growing volume, but 1nvestments that helped

accomplish certain broad economic goals ... one might suggest tl1at.

the maintenance of financial viability (protitabllity) itselt was

rarely the goal of the development bank".

It would be appropr1ate to explore how these I oatt I

I

.portfolio's have contributed to the economy in terms of its

economic viability as well as international competitiveness. One

can certainly measure, with a certain degree of success, how

these enterprises are performing in terms of international

comparability, and then comment on the quality of loan pot tfolio:

Keeping in the broad objectives ot the development banks this

type of evaluation of portfolio will also reflect how tllfl

financial institutions have chosen a particular line of Industry

to build up its portfolio and how it has really performed?

2.10.0 Conclusion

The organisation and structure of the lndian F1t1anc1al

System has a great impact upon the industrialization pr·ocess ot

the country. ln the financial system, financial 1ns t i t.u t1 ons

play a ct·ucial role. These financial institutions have avowed

policy of industry financing, along with developmental

66

oq]ectives. I llBY were expectea not only r.o prov1ae 1ong·r;erm

t1nance, but also to play a catalytic promot1onal role - indeod

a developmental role -1h sett1ng 1n motion a viable, dyfl.lfll] (

w1dely diffused process of industrialization. In India lFLl,

IDBI and lClCl leading development banking institutions have

created a large number of loan portfolio. lhe point at 1ssue

here how should we evaluate the quality of these loan portfolios,

where the very basis of financing is not security-oriented

financing, but development oriented financing? Should we follow

the so-called commercial profitability or rate of return approach

Ot' shoul.d we Axplore alternativ~ ways? Economic ratA of retur11,

international comparison of the performance could·· also be I

I

thought of. rhese are then the questions simmering on.the surface

which should be critically analysed.

67

References

( 1) Development Banking 1n India - published by lndustnal Development ~ank of India, Bombay 1984, P 5.

(2) Schumpeter, J.A., The Theory of Economic L>evelooment. Oxford University Press, London, 1934, P 102.

(3) Gold Srn1th, R.W., Financial Structure and lJevelopment!. Yale Un1versity Press, London, 1969.

(4) Gurley, John. G. and Shaw, Edwards. - ljp~ i_n ~- Jlle.QJ:.:Z::. Ql. Ejnance, The Brookings Institutions, Washington, 1960.

(5) Op. CLt.

(6) Van Horne, James C - Financial Market Hates !k l'lows_._ Prentice Hall Inc. El")glewood Cliffs, Newgerry, 1990, P 3. I

I

(7) Christy, G.A. and Roden, P.F., Finance: t:.nv1ronme:wl 0JJq Decisions, 1973, P. 138. I

(8) Gold Smith R.W., The Flow of Capital ~unds in .t.!J.~ Post War Economy, 1965, P. 28.

(9) Grant, A. T.K., B. Study of Capital Market ill Post-War Britain,_ 1937, Page 119.

(10) Robinson, R.I. and Wrightman, D.,Financial Markets: fhq ~~cuffi~~~tion and Allocation QL Wealth. 1974, P. ~-

(11) Joshi, M.S. Financial Intermediaries in. lnd1a, 1965, r-•. 11.

(12) Report on IJevelopment Banking in lnd1a 1_9!::18-·l::l:t . .L

Industl'l.al Development Bank of Indla, Bombay, 19U'I r. L).

(13) Ibid - f' 17.

(14) Ibid - P 11 (The consol1dated data is ava1lable upto this period).

(15) a) Heport Q.!l Currency and Finance Volume ll, Reserve Bank ot lridia 1973-74, 1974-75, 19/5-/6, 1'111-IH. 19/'-1-80, 1980-81, 1981-82.

b) Report on Development Banking ill l.n.Qi~_._ !D~.l 1981-82, 1984-85, 1985-86, 1986-87, 1987-88, 1Q88-89.

(16) Repo.J.:..t_ Q.!l Development Banking ill India:, IIJBI, 1988-89, Bombay, P. 14.

68

1( 17) Ibid P 86, understanding.

percentages computed tot 8Z\'30 ot

(18) Ibid P 13.

(19) Ibid P 90.

(20) Annual Report Q.[ Industrial F1nance Corporation of lndiA, IFCI, 1989-90, New Delhi,·P. 51.

(20-A) lbid P. 15.

(21) Annual Report of IFCL. 1989-90, P. 87

(22) Ib1d, P. 82 (IFCI)

(23) AnnL!Al Report of Industr1al Development Bank ot Ind1a (Bombavt 1989-90 P. 28.

(24) Ibid P. 32.

(25) lbid P. 32.

(25-A)

(26)

(27)

(27-A)

(28)

(29)

(30)

(31)

(32)

I / Ibid P. 34.

Kuchhal, Problems p 394.

S.C. - Corporation Finance; Principles and Chaitanya Publishing House; Ahmedabad, 1989,

Ibid P 382-383.

Annual Report of Indu~trial credit and Investment Corporation of India, 1989-90, P. 1S.

Report on Development Banking in Ind1a, IDBT, . 19BB-tn, Bombay P. 28.

lb1d P. 30

Bosky, Shirley, :Problems and Practices of l.JeveloQ!!Le..!l.t ~3<:!.!.lli2..;_ Selection ot E.nterprises. lBHD, The Johns Hopk1ns Press , Baltimore, 1964, P so.

r. Leslie, C.H.Helmers: Aspects Qf. Q_~_y_elQQ.fD~llt Baoh. tl.9l.l§...9.ement...;_ Industrial Development Bank and Social Beneti t -(-)nalysi.s., IBRD, The Johns Hopkins University J-'ress, 8altimot London, 1982, P. 83-84.

Bosky, Shirley: Problems and practices l..!J. l.Jevelopment Batll'~~ Selection of Enterprises. IBHD, fhe Johns Hopl<ins 1 Baltimore, 1964, P. 54.

(33) Annual Report of IFCI, 1989-90, P. 119-12~.

(34) Project Finance Scheme - lOBI Handout.

69

(_154-A) .l..!2.!;LL ;>chernes JJJ.9_LLS t r.J.:..tl

of essistaoce f9J:_ ~mg.j._J_ ;>c:J.l{2 Sector under (Sl!JFJ 9Jl<l otl1er lncJ..\,LSLLHt!.

I DB I P ( i ) ( i i ) ..

(35) 01amond, William and Raghvan V.~.(ed1t), Ast:~ficLs of Uevf2Jopmeot Bank Management EDI, World Bank, The Johns

Hopkins University Press, 1982, P. 37.

(36) Ibid Pg. 38.

70

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