DEVELOPMENT BANKING

Dr.M.VASANTHA

ASSOCIATE PROFESSOR,

PG AND RESEARCH DEPARTMENT OF COMMERCE,

URUMU DHANALAKSHIMI COLEGE,

KATTUR,TRICHY-19.

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DEVELOPMENT BANKS

Introduction

Development Banks essentially a multi-purpose Financial Institution with a broad

development outlook. A development bank may, thus, be defined as a financial institution

concerned with providing all types of financial assistance (medium as well as long-term) to

business units, in the form of loans, underwriting, investment and guarantee operations, and

promotional activities-economic development in general, and industrial development, in

particular. In short, a development bank is a development-oriented bank; The Development Banks

and their topics Features, Functions, and Objectives below are.

Objectives of Development Banks

The main objectives of the development banks are:

They promote industrial growth.

To develop backward areas.

To create more employment opportunities.

The generate more exports and encourage import substitution.

To encourage modernization and improvement in technology.

To promote more self-employment projects.

The revive sick units.

To improve the management of large industries by providing training.

To remove regional disparities or regional imbalance.

To improve the capital market in the country.

Functions of Development Banks

Development banks have been started with the motive of increasing the pace of

industrialization. The traditional financial institutions could not take up this challenge because of

their limitations. To help all round industrialization development banks were made multipurpose

institutions. Besides financing, they were assigned promotional work also.

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Some important functions of these institutions discuss as follows

Financial Gap Fillers

Development banks do not provide medium-term and long-term loans only but they help

industrial enterprises in many other ways too.These banks subscribe to the bonds and debentures

of the companies, underwrite their shares and debentures and, guarantee the loans raised from

foreign and domestic sources. They also help undertakings to acquire machinery from within and

outside the country.

Undertake Entrepreneurial Role

Developing countries lack entrepreneurs who can take up the job of setting up new

projects. It may be due to a lack of expertise and managerial ability. Development banks were

assigned the job of entrepreneurial gap filling. They undertake the task of discovering investment

projects, promotion of industrial enterprises; provide technical and managerial assistance,

undertaking economic and technical research, conducting surveys, feasibility studies, etc. The

promotional role of the development bank is very significant for increasing the pace of

industrialization.

Commercial Banking Business

Development banks normally provide medium and long-term funds to industrial

enterprises. The working capital needs of the units are met by commercial banks. In developing

countries, commercial banks have not been able to take up this job properly. Their traditional

approach in dealing with lending proposals and assistance on securities has not helped the

industry.Development banks extend financial assistance for meeting working capital needs to their

loan if they fail to arrange such funds from other sources. So far as taking up other functions of

banks such as accepting of deposits, opening letters of credit, discounting of bills, etc. there is no

uniform practice in development banks.

Joint Finance

Another feature of the development bank’s operations is to take up joint financing along

with other financial institutions. There may be constraints of financial resources and legal

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problems (prescribing maximum limits of lending) which may force banks to associate with other

institutions for taking up the financing of some projects jointly.

It may also not be possible to meet all the requirements of concern by one institution, So

more than one institution may join hands. Not only in large projects but also in medium-sized

projects it may be desirable for a concern to have, for instance, the requirements of a foreign loan

in a particular currency, met by one institution and under the writing of securities met by another.

Refinance Facility

Development banks also extend the refinance facility to the lending institutions. In this

scheme, there is no direct lending to the enterprise. The lending institutions are provided funds by

development banks against loans extended’ to industrial concerns.

In this way, the institutions which provide funds to units are refinanced by development

banks. In India, the Industrial Development Bank of India (IDBI) provides reliance against term

loans granted to industrial concerns by state financial corporations. commercial banks and state

co-operative banks.

Credit Guarantee

The small scale sector is not getting proper financial facilities due to the clement of risk

since these units do not have sufficient securities to offer for loans, lending institutions are

hesitant to extend the loans. To overcome this difficulty many countries including India and Japan

have devised the credit guarantee scheme and credit insurance scheme.

In India, a credit guarantee scheme was introduced in 1960 with the object of enlarging the

supply of institutional credit to small industrial units by granting a degree of protection to lending

institutions against possible losses in respect of such advances.

Underwriting of Securities

Development banks acquire securities of industrial units through either direct subscribing

or underwriting or both. The securities may also be acquired through promotion work or by

converting loans into equity shares or preference shares. So, as learn about development banks

may build portfolios of industrial stocks and bonds.These banks do not hold these securities

permanently. They try to disinvest in these securities in a systematic way which should not

influence the market prices of these securities and also should not lose managerial control of the

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units. Development banks have become worldwide phenomena.Their functions depend upon the

requirements of the economy and the state of development of the country.

They have become well-recognized segments of the financial market. They are playing an

important role in the promotion of industries in developing and underdeveloped countries.

The Few important functions of development banks in India are as follows

They promote and develop small-scale industries (SSI) in India.

To finance the development of the housing sector in India.

To facilitate the development of large-scale industries (LSI) in India.

They help in the development of the agricultural sector and rural India.

To enhance the foreign trade of India.

They help to review (cure) sick industrial units.

To encourage the development of Indian entrepreneurs.

To promote economic activities in backward regions of the country.

They contribute to the growth of capital markets.

Now let’s discuss each important function of development banks one by one.

DIFFERENCE BETWEEN COMMERCIAL BANK AND DEVELOPMENT BANK

A bank is a financial institution whose aim is to provide financial services. They largely

contribute to economic development through financial intermediation, money creation, and asset

transformation. They also represent the largest source of financing for businesses by providing

financing directly, extending loans and buying bonds and providing financing for consumers. 

Banks are classified according to Basis of ownership

On this basis, banks are either classified into private and public banks. While a private

bank is owned by one or more individuals, a public bank, which is also referred to as an

incorporated bank is incorporated under an act and are owned by shareholders. 

Basis of function

Since banks carry out different functions, they are classified based on their roles. These

include; commercial banks, development banks, industrial banks, agricultural

banks, exchange banks, savings banks, and central banks. 

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Commercial banks

Commercial banks are financial institutions which accept deposits from the public which

are repayable on demand. These banks also lend the public for short periods. They make a profit

by borrowing money in the form of deposits at a lower interest rate and lend at a higher rate.

Commercial banks are classified into:

Public sector banks- These are banks where the majority of shares are owned by the government. 

Private sector banks- These are banks where the majority of shares are held by individuals and

other private entities. 

Foreign banks- These are banks that are registered outside the host country but still operate in the

host country. 

Development banks

Development banks are financial institutions that provide long-term capital to productive

sectors, often for infrastructure, managerial and technical assistance. These banks are the most

widely used instruments of funding and assistance for projects that require long-term maturity.

Infrastructure in developing countries is a focus not only because they involve higher capital costs

but also are essential for providing ideal conditions for innovation.   

Similarities between commercial banks and development banks

Both offer financial help to the respective customers

Both are financial institutions which contribute to economic growth

Both are regulated by the government

Differences between Commercial banks and Development banks

Purpose of  Commercial and Development banks

The main purpose of commercial banks is making a profit through interest earned by lending

at a high-interest rate. Development banks, on the other hand, aim at achieving social profit,

through effecting developmental projects. 

Process of formation6

While commercial banks are set up as companies under the companies act, development

banks are set up under the special Act passed by the government. 

Target clients

Commercial banks lend to individuals and business entities while development banks lend

to the government. 

Nature

Commercial banks are financial institutions while development banks are multi-purpose

institutions. 

Raising funds

Commercial banks raise funds through public deposits, which are payable on demand.

Development banks on the other hand source funds by selling of securities, borrowing, and

grants. 

Sector targets

Commercial banks target the masses as they have many products to offer. Development

banks, on the contrary targets only the development sector. 

Provision of loans

While commercial banks provide short term and medium term-loans, development banks

provide medium and long term loans. 

Cheque amenities

Commercial banks provide cheque amenities whereby deposits can be made and

withdrawn with cheque. Development banks, on the contrary, do not offer cheque amenities. 

 Commercial banks vs. development banks: Summary 

With the constant evolution of banking and banking services, we have seen many

developments in the industry. Without a doubt, there is no economy that would survive without

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these services. Banks play an important role in the day to day activities of human beings and are

the backbone of all industries. Banks can hence be called the basis of economic progress. Both

commercial banks and development banks play this role, though differently, hence are both

essential for any economy. 

Features of Development Banks

Following are the main characteristics or features of development banks:

It is a specialized financial institution, provides medium and long-term finance to business

units.

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Unlike commercial banks, it does not accept deposits from the public; it is not just a term-

lending institution. It’s a multi-purpose financial institution.

It is essentially a development-oriented bank. Its primary objective is to promote economic

development by promoting investment and entrepreneurial activity in a developing

economy. It encourages new and small entrepreneurs and seeks balanced regional growth.

They provide financial assistance not only to the private sector but also to the public sector

under takings; it aims at promoting the saving and investment habit in the community.

It does not compete with the normal channels of finance, i.e., finance already made

available by the banks and other conventional financial institutions. Its major role is of a

gap-filler, i. e., to fill up the deficiencies of the existing financial facilities.

Its motive is to serve the public interest rather than to make profits. It works in the general

interest of the nation.

Small Scale Industries (SSI)

Development banks play an important role in the promotion and development of the small-

scale sector. The government of India (GOI) started the Small Industries Development Bank of

India (SIDBI) to provide medium and long-term loans to Small Scale Industries (SSI) units.

SIDBI provides direct project finance and equipment finance to SSI units. It also refinances banks

and financial institutions that provide seed capital, equipment finance, etc., to SSI units.

Development of Housing Sector

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Development banks provide finance for the development of the housing sector. GOI

started the National Housing Bank (NHB) in 1988.

NHB promotes the housing sector in the following ways

It promotes and develops housing and financial institutions.

It refinances banks and financial institutions that provide credit to the housing sector.

Large Scale Industries (LSI)

The development bank promotes and develops large-scale industries (LSI). Development

financial institutions like IDBI, IFCI, etc., provide medium and long-term finance to the corporate

sector. They provide merchant banking services, such as preparing project reports, doing

feasibility studies, advising on the location of a project, and so on.

Agriculture and Rural Development

Development banks like the National Bank for Agriculture & Rural Development

(NABARD) helps in the development of agriculture. NABARD started in 1982 to provide

refinance to banks, which provide credit to the agriculture sector and also for rural development

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activities. It coordinates the working of all financial institutions that provide credit to agriculture

and rural development. It also provides training to agricultural banks and helps to conduct

agricultural research.

Enhance Foreign Trade

Development banks help to promote foreign trade. The government of India started the

Export-Import Bank of India (EXIM Bank) in 1982 to provide medium and long-term loans to

exporters and importers from India. It provides Overseas Buyers Credit to buy Indian capital

goods. Also, encourages abroad banks to provide finance to the buyers in their country to buy

capital goods from India.

Review of Sick Units

Development banks help to revive (cure) sick-units. The government of India (GOI)

started the Industrial Investment Bank of India (IIBI) to help sick units. IIBI is the main credit and

reconstruction institution for a revival of sick units. It facilitates modernization, restructuring, and

diversification of sick-units by providing credit and other services.

Entrepreneurship Development

Many development banks facilitate entrepreneurship development. NABARD, State

Industrial Development Banks, and State Finance Corporations provide training to entrepreneurs

in developing leadership and business management skills. They conduct seminars and workshops

for the benefit of entrepreneurs.

Regional Development

The development bank facilitates rural and regional development. They provide finance

for starting companies in backward areas. Also, they help companies in project management in

such less-developed areas.

Contribution to Capital Markets

The development bank contributes to the growth of capital markets. They invest in equity

shares and debentures of various companies listed in India. Also, invest in mutual funds and

facilitate the growth of capital markets in India.

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UNIT – II

Meaning of Development Banks

Development banks are specialized financial institutions. They provide medium and long-

term finance to the industrial and agricultural sector. They provide finance to both private and

public sector. Development banks are multipurpose financial institutions. They do term lending,

investment in securities and other activities. They even promote saving and investment habit in the

public.

Definition of Development Banks

There is no precise definition of the development bank. William Diamond and Shirley

Bosky consider industrial finance and development corporations as ‘development banks’

Fundamentally a development bank is a term lending institution. Development bank is essentially

a multi-purpose financial institution with a broad development outlook. A development bank may,

thus, be defined as a financial institution concerned with providing all types of financial assistance

(medium as well as long-term) to business units, in the form of loans, underwriting, investment

and guarantee operations, and promotional activities — economic development in general, and

industrial development, in particular. “In short, a development bank is a development-oriented

bank.”

The definition of the term ‘development banks’ can be stated as follows:

“Development banks are those financial institutions whose prime goal (motive) is to

finance the primary (basic) needs of the society. Such funding results in the growth and

development of the social and economic sectors of the nation. However, needs of the society vary

from region to region due to differences were seen in its communal structure, economy and other

aspects.”

As per Banking subject (mainly in the Indian context)

“Development banks are financial institutions established to lend (loan) finance (money)

on the subsidized interest rate. Such lending is sanctioned to promote and develop important

sectors like agriculture, industry, import-export, housing, and allied activities.”

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Development Banks in India

India is another example of a country whose development finance institutions have had a

central role in its development strategy. Its first development finance institution was the Industrial

Finance Corporation of India, set up in July 1948 to provide long-term financing for India’s

industries. State financial corporations were then created, coming into effect in 1952, to support

State-level SMEs with industrial credit. In 1955, the Industrial Credit and Investment Corporation

of India was created as the first development finance institution in the private sector, with the

support of the World Bank in the form of a long-term foreign exchange loan and backed by a

similar loan from the Government of the United States of America. The establishment of other

specialized financial institutions followed, including the Agriculture Refinance Corporation,

Rural Electrification Corporation and Housing and Urban Development Corporation. Finally,

IDBI was created in 1964, coming into existence as an apex lending institution, together with the

Unit Trust of India as an investment institution, both starting as subsidiaries of the Reserve Bank

of India.

The build-up of a system of development finance institutions in 1948–1964 can be

characterized as the first phase of development banking in India. Once fully in place, the role of

India’s development finance institutions gradually grew in importance, as providers of long-term

financing to different sectors of the economy of India. In 1970–1971, disbursements by all

development finance institutions amounted to only 2.2 per cent of India’s gross capital formation,

but grew steadily, to reach 10.3 per cent in 1990–1991 and 15.2 per cent in 1993– 1994. This

period, from 1964 to the mid-1990s, can be characterized as the second phase of the evolution of

India’s development banking. In this phase, the number of development finance institutions

further expanded, with the establishment of the Industrial Investment Bank of India in 1971,

National Bank for Agriculture and Rural Development and Export–Import Bank of India in 1982

and Small Industries Development Bank of India in 1990 (Organization for Economic

Cooperation and Development (OECD), 2015). Following the balance of payments crisis in 1991,

India took steps towards the liberalization of the country’s financial sector and external accounts,

starting a third phase in which the importance of development banking declined, particularly after

2000–2001. This occurred as liberalization resulted in the conversion of some development

banking institutions into commercial banks, as well as in the decline of the amount of resources

mobilized by other financial institutions. As a result of this liberalization process, by 2011–2012,

financial assistance disbursed by development finance institutions amounted to only 3.2 per cent

of gross capital formation. As a proportion of the financial system as a whole, between the early

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1970s and late 1980s, their loans accounted for over two thirds of total disbursals. Between

financial liberalization in the early 1990s and early 2000s, this share declined to 30 per cent; after

2004, it declined further, to 1.7 per cent.

Two notable examples of conversion from development finance institutions into

commercial banks have been the Industrial Credit and Investment Corporation of India in 2002

and IDBI in 2004. The counterpart of this process has been the growing role of domestic and

foreign private firms in the financial sector. Following liberalization, they were granted greater

flexibility in mobilizing resources, and in lending and investing resources. At the same time, with

the transformation or closing down of the larger development finance institutions, small

industryfocused financial institutions such as the Small Industries Development Bank of India

have taken on a growing role, along with investment institutions such as the Unit Trust of India.

The importance of development finance institutions in India is clear from the fact that their

contribution to total capital formation has grown significantly over the years, with 70 per cent of

the total directed to the private sector and taking the form of loans, as well of underwriting and

direct subscriptions of shares and debentures. Aggregate disbursals as a ratio of net capital

formation in the private sector rose from 24 per cent in 1970–1971 to 80 per cent directly before

the 1991 crisis. This provision of long-term industrial finance was a major source of support for

investment in the country, and constituted an important method by which to address the

limitations of the financial system that prevailed prior to independence. The sectors that

development finance institutions have targeted over the years are wide ranging, and include

manufacturing, services, agribusiness, construction, energy and infrastructure, in addition to social

sectors such as health and education (OECD, 2015).

Among development finance institutions in India, IDBI has been a leading financial

institution. It has provided finance to all major industries, including manufacturing, energy,

information technology and health, and has played a catalytic role in India’s industrial and

infrastructure development. As an apex institution, it had the role of coordinating the activities of

other development finance institutions, providing an overall strategy and direction to the various

banks supporting the development of Indian industries. Until 1982, when the Export–Import Bank

of India was created, IDBI also had an international finance division to support companies

engaged in foreign trade. In terms of institutional initiatives, IDBI was responsible for setting up 14

the Small Industries Development Bank of India as a subsidiary charged with catering to

smallscale industries, the Export–Import Bank of India and key financial market institutions such

as the Securities and Exchange Board of India and the National Stock Exchange (Pathak, 2009).

IDBI has therefore played a critical role as an institution builder, contributing to the major

transformation of India’s financial landscape. IDBI itself has gone through substantial changes. It

was a subsidiary of the Reserve Bank of India at the time it was created, but became independent

in 1976, when its ownership was transferred to the Government of India. In the 1990s, part of its

ownership was transferred to private owners. Since the early 2000s, it has been transformed into a

universal bank, engaged in both retail and investment bank activities.

Working capital requirements are provided by commercial banks, indigenous bankers, co-

operative banks, money lenders, etc. The money market provides short-term funds which mean

working capital requirements. The long-term requirements of business concerns are provided by

industrial banks and the various long-term lending institutions which are created by the

government. In India, these long-term lending institutions are collectively referred to as

development banks.

They are:

1. Industrial Finance Corporation of India (IFCI), 1948

2. Industrial Credit and Investment Corporation of India (ICICI), 1955

3. Industrial Development of Bank of India (IDBI), 1964

4. State Finance Corporation (SFC), 1951

5. Small Industries Development Bank of India (SIDBI), 1990

6. Export-Import Bank (EXIM)

7. Small Industries Development Corporation (SIDCO)

8. National Bank for Agriculture and Rural Development (NABARD).

9.

In addition to these institutions, there are also institutions such as Life Insurance

Corporation of India, General Insurance Corporation of India, National Housing Bank, Unit Trust

of India, etc., which are providing investment funds.

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Development banks in India are classified into the following four groups

1. Industrial Development Banks: It includes, for example, Industrial Finance

Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small

Industries Development Bank of India (SIDBI).

2. Agricultural Development Banks: It includes, for example, National Bank for

Agriculture & Rural Development (NABARD).

3. Export-Import Development Banks: It includes, for example, Export-Import Bank of

India (EXIM Bank).

4. Housing Development Banks: It includes, for example, the National Housing Bank

(NHB).

Commercial banks in the development of agricultural and industry

Besides performing the usual commercial banking functions, banks in developing

countries play an effective role in their economic development. The majority of people in such

countries are poor, unemployed and engaged in traditional agriculture.

There is acute shortage of capital. People lack initiative and enterprise. Means of transport

are undeveloped. Industry is depressed. The commercial banks help in overcoming these obstacles

and promoting economic development. The role of a commercial bank in a developing country is

discussed as under.

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1. Mobilizing Saving for Capital Formation

The commercial banks help in mobilising savings through network of branch banking.

People in developing countries have low incomes but the banks induce them to save by

introducing variety of deposit schemes to suit the needs of individual depositors. They also

mobilise idle savings of the few rich. By mobilising savings, the banks channelise them into

productive investments. Thus they help in the capital formation of a developing country.

2. Financing Industry

The commercial banks finance the industrial sector in a number of ways. They provide

short-term, medium-term and long-term loans to industry. In India they provide short-term loans.

Income of the Latin American countries like Guatemala, they advance medium-term loans for one

to three years. But in Korea, the commercial banks also advance long-term loans to industry.

In India, the commercial banks undertake short-term and medium-term financing of small

scale industries, and also provide hire- purchase finance. Besides, they underwrite the shares and

debentures of large scale industries. Thus they not only provide finance for industry but also help

in developing the capital market which is undeveloped in such countries.

3. Financing Trade

The commercial banks help in financing both internal and external trade. The banks

provide loans to retailers and wholesalers to stock goods in which they deal. They also help in the

movement of goods from one place to another by providing all types of facilities such as

discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc.

Moreover, they finance both exports and imports of developing countries by providing foreign

exchange facilities to importers and exporters of goods

.

4. Financing Agriculture

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The commercial banks help the large agricultural sector in developing countries in a

number of ways. They provide loans to traders in agricultural commodities. They open a network

of branches in rural areas to provide agricultural credit. They provide finance directly to

agriculturists for the marketing of their produce, for the modernisation and mechanisation of their

farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep

breeding, poultry farming, pisciculture and horticulture. The small and marginal farmers and

landless agricultural workers, artisans and petty shopkeepers in rural areas are provided financial

assistance through the regional rural banks in India. These regional rural banks operate under a

commercial bank. Thus the commercial banks meet the credit requirements of all types of rural

people.

5. Financing Consumer Activities

People in underdeveloped countries being poor and having low incomes do not possess

sufficient financial resources to buy durable consumer goods. The commercial banks advance

loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In

this way, they also help in raising the standard of living of the people in developing countries by

providing loans for consumptive activities.

6. Financing Employment Generating Activities

The commercial banks finance employment generating activities in developing countries.

They provide loans for the education of young person’s studying in engineering, medical and

other vocational institutes of higher learning. They advance loans to young entrepreneurs, medical

and engineering graduates, and other technically trained persons in establishing their own

business. Such loan facilities are being provided by a number of commercial banks in India. Thus

the banks not only help inhuman capital formation but also in increasing entrepreneurial activities

in developing countries.

7. Help in Monetary Policy

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The commercial banks help the economic development of a country by faithfully

following the monetary policy of the central bank. In fact, the central bank depends upon the

commercial banks for the success of its policy of monetary management in keeping with

requirements of a developing economy.

Thus the commercial banks contribute much to the growth of a developing economy by

granting loans to agriculture, trade and industry, by helping in physical and human capital

formation and by following the monetary policy of the country.

Role of Commercial Banks in Agricultural Development Financing in India

The role of Commercial Banks in Agricultural Development

Financing in India, could be evaluated from the following dimensions

1) Policies

2) Programmes for Agricultural Development Finance

3) Procedures for Agricultural lending,

4) Performance

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5) Specific issues/problems

In the planned development process, development of agriculture, was given the highest

priority since 1951. This objective continued to be the core of our economy. To develop

agriculture and to serve the rural economy in general, then policies of the Government encouraged

the Co-operative credit institutions only.

Naturally, the co-operative credit institutions, which were purveying short-term, medium

and long term credit needs of the farmers received due support and encouragement from the

Government as well as from the Reserve Bank of India. Though, the commercial banks were then

existing, they were clustered in the major cities and confined lending only to sophisticated classes.

The farming community was out of the purview of their business, as they were performing

traditional business. The Commercial Banks including, Imperial Bank of India, were not equipped

to respond to the emergent needs of economic regeneration of rural areas.

To hasten, the pace of the economic development, soon after the independence, in 1948,

some of the Congress party members raised the demand for nationalization of banks in the

country. Thus the thinking for acquiring some means was there in the minds of politicians and

policy makers. This thinking led to:-

i) The nationalization of the Reserve Bank of India in 1949.

ii) The Banking Companies Act enacted in 1949 and subsequently amended to read as

Banking Regulation Act.

iii) To meet the credit requirements of the farmers, during the First Five Year Plan 1951-56,

State Co-operative Banks (Apex) in the earst while princely states reorganized and where

they did not exist, newly established.

iv) The scheme of Integrated Scheme of Rural Credit was introduced in 1954.

v) Considering 7.3 percent share of institutional agencies (co-operative 3.1 percent and

commercial banks 0.9 percent) in the rural credit in 1951-52, the Imperial Bank of India

was nationalized and the State Bank of India formed in 1955, in order to extend financial

assistance to co-operatives.

vi) The State Government accepted State partnership in co-operatives and started providing

contribution to share capital base of the co-operatives.

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vii) National Agricultural Credit (Long Term operations)

viii) Introduction of the Integrated scheme of Rural Credit, increased the share of co-operative

Credit up to 15.5 percent in 1961-62, however, the share of commercial banks declined to

0.6 percent from 0.9 percent in 1951- 52. The institutional credit was inadequate,

particularly for term finance to investment in agriculture, though demand for that was

increased.

ix) To fill up the void in term finance, Agricultural Refinance corporation was established in

1963 by the Reserve Bank of India, which started providing refinance facilities to co-

operative Land Development Banks and Commercial Banks for the Agricultural

development Schemes financed by them.

x) All these policies did not much improve the share of agricultural advances by the

commercial banks. The New Strategy introduced in agricultural production in 1966-67

increased the demand for term finance for investment in agriculture. However, the share of

agricultural advances in the total advances by the commercial banks was hardly 2.1

percent in 1967. The co-operatives alone were not in position to meet the increased credit

demands.

xi) To promote equality and social justice and stabilize agricultural production, objective of

the Fourth Five Year Plan (1969-70 to 1973-74), it was felt that the policies and practices

of the banking systems in the country, must serve these basic social and economic

objectives. Therefore, a new banking policy was initiated in 1967, described as "social

control of banks" in order to introduce commercial banks in to the field of agricultural

finance, to attained major breakthrough in agricultural production.

xii) With this policy it was thought that the social control alone would effectively serve the

purpose and nationalization of banks would not be needed. For effective implementation of

the social control, the National Credit Council was set up in 1967, basically designed as

instrument of credit planning.

xiii) At the instance of the National Credit Council recommendation in 1968, the Agricultural

Finance Corporation was promoted by the Indian Banks Association to assist commercial

banks in financing agricultural projects.

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xiv) It was also felt that the role of commercial banks should not only supplement the activities

of co-operative sector, but also support and strengthen activities of agricultural credit.

Therefore, National Level Consultation Committee for co-ordination between commercial

and co-operative banks was formed in 1968, and the certain guidelines were framed.

xv) In the context of the estimates of agricultural credit Rs. 2000 crores for short term, Rs. 500

crores for medium term and Rs. 1,500 crores for long term credit during the Fourth Plan

period, the progress made by the commercial banks under the scheme of 'Social Control'

was found inadequate to achieve social goals. As such public ownership of banks was felt

as an inevitable means to reach socialism.

xvi) On July 19, 1969, 14 major commercial banks were nationalized (6 more nationalised in

1980) and brought in the field of agricultural finance, along with the cooperatives.

xvii) Among the commercial banks, the State Bank of India was the first commercial banks,

which commenced financing of Agriculture in 1968.

xviii) Thus, today the commercial banks along with package of services provides long term

credit for investment in agriculture and the sole monopoly of the co-operative Land

Development Banks in the country in financing of long term credit for agriculture was

over.

xix) The separate enactments based on the model Bill recommended by R.K. Talwar

Committee, were passed by the State Governments in order to facilitate commercial banks

to expedite financing of agriculture.

xx) In 1970, with a view to streamlining loaning policies procedures, the Reserve Eank of

India issued standard set of guidelines to commercial banks for making direct and indirect

agricultural advances, and also emphasized adoption of area approach, shift from security

oriented approach to purposive and productive lending by adopting production oriented

system of lending. Financing for small and potentially viable farmers was also emphasised.

xxi) In 1971, the credit guarantee corporation was established by the Reserve Bank of India,

owning its equity alongwith the commercial banks, in order to provide assurance to

cominercial banks to take care of risk in lending in agriculture,

xxii) The Lead Bank Scheme was also introduced in 1969, to entrust the responsibilities of rural

developments on the Commercial banks.23

xxiii) The introduction of Priority Sector lending approach envisaging financing of Agriculture,

industries and other sectors put the commercial banks on the task of overall rural

development.

xxiv) To copeup with the enlarged task, the lending procedures of the commercial banks were

suitably simplified and the National Bank for Agricultural and Rural Development at the

National level was set up in 1982, merging the earstwhile A.R.D.C.

Thus, the above all policies and measures induced the commercial banks in financing of

agriculture and to act as a catalyst in the process of development

IMPLEMENTATION AND SCHEME BY COMMERCIAL BANKS

The previous Chapter had dealt with the critical analysis of various centrally sponsored

employment schemes, the terms and conditions involved in it and the working pattern of the

schemes. It will now be appropriate to deal with the description and salient features of the SEEUY

scheme and the Employment opportunities provided by commercial banks, and other connected

problems in this chapter.

Genesis of the Scheme

24

With a view to reducing the extent of unemployment among educated youth in the country,

Government of India has launched a scheme for providing Self- Employment to Educated Youth

(SEEUY) in 1983-84.The scheme for providing self-employment to Educated Unemployed Youth

(SEEUY) was first announced by the then Prime Minister Smt. Indira Gandhi in her

Independenceday address on 15th August, 1983. Subsequently, the scheme has been formulated

by the Government of India in consultation with the Reserve Bank of India 1 in October, 1983.

The scheme was deferred for implementation by the end of March, 1984.At the end of each year,

the scheme was renewed for further one year and now it is also announced that the scheme would

continue for the rest of the VII Plan i.e. 1987-88, 1988-89 and 1989-90. To implement the scheme

effectively, Reserve Bank of India has assisted the Central Government to frame the rules and

regulations to be followed which financing the educated unemployed youth by banks, including

the follow-up actions thereof.

OBJECTIVES OF THE SCHEME

The main object of the scheme was to encourage the educated unemployed youth to

undertake, self-employment ventures in industry, services and business through provision of a

package of assistance including bank credit. Nevertheless it is necessary to ensure that there is no

overlap between this scheme and the IRDP already in force. As the terms convey, this scheme

known as 'scheme for providing self-employment to Educated unemployed Youth is expected to

throw open ample employment opportunities for the teeming millions of educated unemployed

youth scattered throughout the length and breadth of the country.

TARGET GROUP

The scheme will cover all educated unemployed youth who are matriculates (X .Std.

passed) and above and within the age group of 18 to 35 years. Due consideration/ weightage will

be given to women and technically trained personnel. From 1986-87 a minimum of 30% of the

total sanctions has been reserved for scheduled castes/scheduled tribes candidates. ITI passed

youths are also included in the eligibility list subsequently to set up industry/service ventures.

The scheme was meant for providing self-employment to educated youth who are not able

to raise their own capital. As such, it will not open to educated youths who have alternative

sources of finance. Accordingly w.e.f. 1986-87 a ceiling of Rs.10,000/- per annum per family has

been fixed as a criterion for eligibility under this scheme, so as to prevent the relatively affluent

25

sections of the society cornering the benefits of this scheme. A minimum of 50% ventures should

be pertaining to industry and not more than 30% of the ventures relating to small business.

AREA TO BE COVERED

The scheme will extend to all areas of the country except cities with a population of more

than one million as per 1981 census. All areas covered by separate Municipalities, not forming

parts of the metropolitan cities, with more than one million populations are also eligible for loans

under this scheme. Examples are Thana in Delhi, Poonamallee in Madras etc.,

Implementing Agencies

Nodal Agency

District Industries Centres (DICs) have been assigned operational responsibility of the

scheme at the district level, besides their usual routine.

DICs in consultation with the Lead Banks of the respective areas would function as the

Nodal Agency for formulation of self-employment plans, their implementation and mohitoring

under the overall', guidance of the State Governments. The DICs will formulate locationspecific

plans of action which would be based on realistic demand assessment for various services and

projects and the number of entrepreneurs which each particular line of production and services

would be able to absorb. The concerned Small Industries Service Institutes will assist the DICs in

carrying out surveys, assessment of potentials and preparation of projects.

Implementation

The overall supervision will be provided by Development Commissioner, Small Scale

Industries with the assistance of the Banking Division of the Department of Economic Affairs and

the Industry Department of the State/UT Governments. Implementation of the scheme by DICs

would involve identification of beneficiaries, selection of specific avocations, identification of the

support system required by the beneficiaries, escort services and close liaison with the banks and

other local agencies concerned with Industry, Trade and service sector. Branches of commercial

banks are to provide finance to the identified borrowers.

Task Force Committee

26

There will be a Task Force Committee at the DIC-level consisting of the General Manager

of DIC who will be its Chairman along with Credit Manager of the DIC, a representative from eah

of the Lead Bank and the concerned Small Industries Service Institute and the District

Employment Officer as its members. Of late, representatives of the two important banks (other

than the Lead Bank) were also included in the committee.

The Task 'Force at the DIC level will be responsible for the following:-

1. Motivating and selecting the entrepreneurs,

2. Identifying and preparing the schemes in trade, service establishment and cottage and

small industries.

3. Determining the avocation/activities for each of the entrepreneurs,

4. Recommending loans for the entrepreneurs,

5. Evaluating and recommending the industry, service and trade plans and

6. Getting speedy clearance, as required from the authorities concerned.

Adequate publicity will be given to the scheme by the DIC and applications are invited

directly.

The entrepreneurs will apply to the DIC on a plain paper.

Training Facilities

Many of the educated unemployed youth may have some basic knowledge about financial

management, accounting, inventory, management etc., and training course may not be necessary

except in Industry sector. However, for providing training to those who need some basic training

and advice about selection and use of equipment, the State Government would utilise the services

of the Industrial Training Institutes, Polytechnics, etc., from their own budgets to provide training

to them. District Industries centres and Small Industries Service Institutes will co-ordinate with

the training courses, wherever needed.

Other Inputs

For trade and services, sites may have to be preferentially organized by State/Municipal

authorities.The identified entrepreneurs opting for industrial route are to be given preference by

State Governments in allotment of suitable sheds in Industrial Estates and land wherever needed.

Where machinery and equipment are required, these are to be made available, as far as

practicable, by the National Small Industries Corporation and State Agencies concerned on hire-

27

purchase.Loan installments for land, sheds and machinery would be a component of the capital

input. Similarly, a part of the loan would be available for pre-operative expenses. If any

beneficiary wants to change the nature of this venture he has to seek the permission of the "Task

Force".

Modus Operandi

Selection of beneficiaries

The responsibility of publishing the scheme and inviting applications from the potential

beneficiaries and inspection are to be initiated by the Development Officer, DIC. The Task Force

was to scrutinize the applications and to recommend for giving loans and subsidy to the

beneficiaries. These applications were allocated to the branches of different banks taking into

consideration the area of operation of the Bank branches. The targets for different banks are

decided at the District Level Consultative Committee (DCC) meeting.The banks on their part were

to appraise the applications and get satisfied with the viability of the projects, before sanctioning

loans. The Banks were expected to dispose of the applications, within a period of 14 days. A

separate register should be maintained wherein date of receipt of application from DIC, date of

disposal and date of disbursal of loan should be recorded. Branches will however obtain

application forms duly filled by the applicants depending upon the purpose for which the loan is

required.

In case, banks were not satisfied with the applications, they could return the same to the

DIC with reasons for rejection of applications (In anticipation of rejections due to justifiable

reasons) DIC would recommend a number of applications 10 to 20% higher than the target fixed

for each one of the banks.Flow chart showing a coordinated and improved system for effective

implementation of the SEEUY scheme is given in page 152. If the activities of the agencies/

departments are well coordinated to realize the common objectives but also to utilise the

manpower available at district level more effectively for achieving the national goals.

Ministry of Industry, Government of India has advised the Secretary, Industries

Department of all State Governments/Union Territories that the recommendations of the Task

Force on the applications for Self-employment ventures should be treated as "Confidential" and

that the decisions are to be communicated only after the applications are finally selected and

sanctioned under the scheme.

Amount of Loan28

As per the latest guidelines issued by the RBI2 the maximum permissible amount was

fixed at Rs.35,000/- (As against Rs.25,000 fixed earlier) for a borrower for Industrial ventures. In

the case of service ventures, the limit would remain unchanged at Rs.25,000/-. In the case of

business ventures, the ceiling was reduced to Rs.15,000/-. Initially the loan amount was

considered as a composite loan consisting of the term loan and working capital components. Term

Loan and working capital loan requirements were calculated separately.

Rate of Interest

The rate of Interest for the loan is similar to that of the composite loan scheme announced

by Thambe Committee which is 10% per annum, in backward areas and 12% per annum, in other

areas till the term loan component is repaid. The names of these districts are as indicated in

Appendix II of the booklet entitled 'assistance for development of backward area' published by the

IDBI as given in Appendix-5.When two or more educated unemployed youths want to join

together and set up a unit, and the credit requirements are in excess of Rs.25,000/- they will not be

eligible for composite loan up to Rs.25,000/- in the name of each of the persons. However, there

will be no objection to composite loan not exceeding Rs.25,000/- being given jointly in the names

of two or more persons.

Purpose of Loan

Loans may be granted for acquisition of fixed assets and meeting working capital

required for funding ventures, relating to industry, service and business. It includes loans for

purchasing equipment’s, repairing or renovating existing equipments or repairing business

premises, etc.

Government Assistance and Control

The beneficiaries selected will be eligible for capital subsidy from the Government,

computed at 25% of the total amount of loan (i.e term loans plus working capital) extended by the

bank. The Government of India, in consultation with the Reserve Bank of India have decided that

subsidy under the scheme will be routed through the Reserve Bank of India.This subsidy is

received by the H.O. of a Commercial Bank from Reserve Bank of India, and released through

branches. It is being kept as term deposit in the name of the entrepreneur for a duration coinciding

with the repayment of that portion of term loan component less subsidy. The interest so earned can

be adjusted against the interest payable by the borrower.

29

LENDING POLICIES FOR AGRICULTURE

Initial Period 1969-1980

After induction of the commercial banks in the field of financing agriculture, in 1968-69

the banks were asked to increase their assistance to the agricultural sector by providing Rs. 34 to

40 crores for financing the distribution of fertilisers and other inputs and also for meeting direct

needs of the farmers, in addition to finance provided for marketing of agricultural produce,

plantations and subscription to debentures of the land development banks.

Under the Lead Bank Scheme, the banks were allotted districts, in order to play lead role

by formulating District Credit Plans , Annual Action plans. Under the scheme for financing

agriculturist through Primary Agricultural Credit Societies , in certain selected districts, where the

intermediary link of the co-operative credit structure suffered from inherent weaknesses, the banks

were asked to take over the societies for financing.

The Banks were required to deploy 60% of their total deposits mobilized from rural and

semi urban areas in the respective areas by March 1975. In order to encourage investment in

agriculture by way of medium and long term credit and facilitate the commercial banks to provide

resources, the banks were permitted to exclude their medium and long term loans for agricultural

development refinanced by the A.R.D.C. while calculating norms of 5 percent fixed in respect of

"term loans to deposits". Subsequently, medium term loans with maturity of 5-7 years, capable of

being identifiable, inspected and resulted in creation of tangible assets, though not refinanced by

the A.R.D.C. were also allowed to exempt from the norm of 5 percent term loans to deposits.

Further the banks were also allowed to exempt from the norm, medium and long term loans

extended for Dairy, Poultry, and Fisheries purposes refinanced by the A.R. D.C.

The Reserve Bank of India in 1970 studied the problems and issued a set of guidelines to

commercial banks for financing agriculture and advised to follow the area approach. Since then,

the Bank considered financing of agriculture in the adopted villages or in villages in the

operational area (15 kms. radius) giving priorities to extend credit to beneficiary farmers under the

following national priority Programmes :

30

1) Small farmers, marginal farmers and Agricultural labourers Development Programmes,

centrally sponsored.

2) Credit projects approved by the International Development Association of the World

Bank/Agricultural Refinance & Development Corporation Credit project,

3) Command Area Development Programmes and River Valley projects.

4) District Credit Plans under the Lead Bank Scheme,

5) Drought Prone Areas Programme,

6) Rural Electrification Programmes,

7) Tribal and Scheduled Caste Development Programmes,

8) Integrated Area Development Programmes.

9) Multiple cropping Programmes, sugarcane Development pilot scheme,

10) Under developed areas development programme,

11) Twenty Point Economic Programme,

12) Differential Interest Rate Schemes,

13) Programmes/Schemes sponsored by the State sponsored Boards/Corporations/Federations,

14) Integrated Rural Development Programme,

15) NationalProgramme for Bio-Gas Development,

16) Horticultural Development Programmes,

17) Financing farmers throughF.S.S., LAMPS and PACS, the schemes innovated by the

Banks,

31

UNIT - III

Meaning of NABARD

National Bank for Agriculture and Rural Development (NABARD) is an Apex

Development Financial Institution in India. The Bank has been entrusted with "matters concerning

Policy Planning and Operations in the field of credit for Agriculture and other Economic activities

in rural areas in India".

Orgin of NABARD

NABARD was established on the recommendations of B.Sivaramman Committee, (by Act

61, 1981 of Parliament) on 12 July 1982 to implement the National Bank for Agriculture and

Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and Rural

Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and

Development Corporation (ARDC). It is one of the premier agencies providing developmental

credit in rural areas. NABARD is India's specialised bank for Agriculture and Rural Development

in India.

Definition

NABARD is a Development Bank with a mandate for providing and regulating credit and

other facilities for promotion and development of agriculture ,small scale industries ,cottage and

village industries, handcraft and other rural craft or any economic activity in rural areas with a

view to promote integrated rural development and securing prosperity of rural areas

32

Objectives of NABARD

The NABARD is an apex development bank which provides help for agricultural and rural

development.

It has been established with the following objectives:

To give undivided attention and purposeful direction to integrated rural development.

To act as a centre piece for the entire rural credit system at the national level.

To act as a provider of supplemental funding to rural credit institutions.

To arrange for investment credit to small industries, village and cottage industries,

handicrafts and other rural crafts, artisans, and farmers.

To improve the credit distribution system by institution building, rehabilitation of credit

institutions and training of bank personnel.

To provide refinance facilities to SLDBs, SCBs, RRBs and commercial banks for

development purposes in rural areas.

33

To coordinate the working of different agencies engaged in development work in rural

areas at the regional level, and to have liaison with Government of India, RBI, State

Governments and other policy making institutions at the national level.

To inspect, monitor and evaluate projects getting refinance from the NABARD.

Functions of NABARD

The functions of NABARD have been divided into three categories:

(a) Credit Distribution;

(b) Development, and

(c) Regulatory.

These are discussed as under:

(a) Credit Distribution

The NABARD provides refinance of various types to the following institutions:

(1) Short Term Credit

It provides short term credit to State Cooperative Banks (SCBs), Regional Rural Banks (RRBs),

and other financial institutions approved by the RBI for the following purposes:

i. Seasonal agricultural operations;

ii. Marketing of agricultural produce;

iii. Marketing and distribution of such inputs as pesticides, fertilisers, etc.;

iv. Other activities related to rural/agriculture sector;

v. Real commercial trade activities;

vi. Production and marketing of the following activities: handicrafts, small industries, village

and cottage industries, artisans, silk industry, etc. The duration of short term loans for the

above purposes is up to 15 months.

(2) Medium Term Credit

The NABARD provides medium term credit to SCBs, LDBs, RRBs, and other approved

institutions for a period ranging from 18 months to 7 years. The medium term loans are given for

investment schemes relating to agriculture and rural sector.

34

(3) Long Term Credit

The NABARD provides long term credit to State Land Development Banks, RRBs,

commercial banks, SCBs, and to any approved financial institution. It provides refinance for

investment in the following activities: minor irrigation, land development, soil conservation; dairy

development, sheep rearing, poultry farming, pig rearing, farm mechanisation, afforestation, fish

farming, storage and market yard, agricultural operations through aero plane, biogas and other

alternative sources of energy, silk production, beekeeping, cattle and cattle driven carts, compost

equipment, pump set, and other agricultural and related activities. The duration of the loan is for a

period of 25 years.

(4) Facilities for Changes and Rearrangement

The NABARD provides refinance facilities to SCBs and RRBs in the event of changes and

rearrangement of credits when there is drought, famine or other natural calamities, army

operations, enemy operations, etc. Such facilities are also provided to loans given to artisans,

small industries, etc. The duration of such refinance facilities is not more than 7 years.

(5) Refinancing of Industries in Rural Areas

The NABARD provides refinancing facilities to all small, village and cottage industries in rural

areas.

(b) Developmental Functions

The NABARD performs the following developmental functions:

i. Coordinates the rural credit institutions;

ii. Takes measures towards institution building to improve the capacity of credit delivery

system;

iii. Develops specialisation to solve problems relating to agriculture and villages;

iv. Helps the Government, RBI, and other institutions in their rural development efforts;

v. Acts as an agent of the Government and RBI for monitoring work in agricultural related

areas;

vi. Provides facilities for research and training to the staff of RRBs, SCBs, LDBs, .etc. and

promotes research in agricultural and rural development activities out of its R & D

35

(Research & Development) Fund. To provide training facilities in the fields of rural

banking, and agriculture and rural development, the NABARD has the Banker Rural

Development Institute -and National Bank Staff Colleges at Lucknow, Bolpur and

Mangalore, and College of Agriculture Banking (CAB) at Pune;

vii. Spreads information regarding rural banking and development;

viii. Helps the State Governments so that they may subscribe to the share capital of State

Cooperative Banks;

ix. Provides direct credit in cases approved by the Central Government connected with

agriculture and rural development; and

x. Maintains an Easy Credit Aid Fund out of its profits so that entrepreneurs getting refinance

facilities for village, cottage and very small industries may be provided margin money.

This help is given interest-free and is recovered in yearly installments after the loan is

repaid.

(c) Regulatory Functions

The NABARD also performs the following regulatory functions:

i. It inspects the working of RRBs and cooperative banks of all types except the primary

cooperative banks,

ii. It also inspects apex cooperative marketing federations, state handloom weaving societies,

etc. which are financed on voluntary basis,

iii. All applications for opening of a branch by the RRB or a cooperative bank, other than a

primary cooperative society, are required to be submitted to the RBI through the

NABARD.

iv. All RRBs and cooperative banks submitting returns to the RBI are required to furnish a

copy of returns to the NABARD.

v. It is empowered to obtain any information or statement from the RRBs and cooperative

banks.

(d) Recent Additions to Its Functions

For the last few years a number of additions have been made the functions of NABARD

relating to farm and non-farm sectors in order to make it more broad-based. They are:

(i) Farm Sector:

36

The National Bank has been engaged in reorienting its policies relating to the farm sector

in tune with emerging needs. Accordingly, it has taken some major initiatives for promoting

agriculture and rural development.

These include

1) Refinement and updating of Potential Linked Credit Plans (PLCPs) and their synthesis

with Service Area Plans (S APs);

2) Introduction of full refinance scheme in those districts where such synthesis has taken

place;

3) Rationalization and liberalization of eligibility criteria for refinance of term credit;

4) Introduction of Self Help Groups Scheme for providing institutional credit to weaker

sections;

5) Rationalization of interest rate structure for ultimate borrowers;

6) Issuance of guidelines to banks on new/ innovative schemes for diversification of lending

under agriculture; and

7) Creation of a Cooperative Development Fund to promote institutional strengthening

activities.

(ii) Non-Farm Sector

For accelerating the development of non-farm sector, NABARD has taken the following

initiatives:

1) Introduction of Small Road Transport Scheme for automatic refinance to all banks for

financing transport vehicles to carry farm produce and products of village industries for

marketing;

2) Project finance for commercial banks for financing non-agro small industry units;

3) Assisting Khadi and Village Industries Centres in modifying their schemes so as to

conform them to banking norms and bringing them under automatic refinance facility;

4) Formation of an Advisory Committee for the non-farm sector in its office to guide in the

formulation of policies to promote non-farm sector and to introduce innovative schemes;

5) Appointment of technical experts in non-farm sector at its offices in order to identify,

formulate and appraise schemes and conduct surveys for estimating industrial potential;

6) Formulation of District Rural Industries Project; and

7) Setting up of Agriculture and Rural Enterprises Incubation Fund.

37

Its Resources:

The authorised capital of NABARD has been raised from Rs.500 crores to Rs.5,000crores

effective 1 February, 2001 with equal contributions by the RBI and Government of India. Besides

share capital contribution, the RBI has been providing the NABARD a General Line of Credit

(GLC) I & II to meet the short-term credit requirements of cooperatives and RRBs.

Its other resources consist of National Rural Credit Funds, reserves and surplus, deposits

and borrowings. In addition, the Union Government provides funds received from the World Bank

Group. IF AD, EU and other countries. The aggregate resources mobilised by NABARD through

various sources amounted to Rs.5,786crores during 2002-03.

ItsOrganisation

The NABARD is managed by a 15-member Board of Directors consisting of Chairman,

Managing Director, two experts of rural economies, three experts from cooperative and

commercial banks, three directors from the current directors of the RBI, three directors from the

Government of India, and two directors representing the State Governments.

Achievements of NABARD

The NABARD is an apex institution in the organised rural credit structure. It plays an

important role in reducing regional disparities and helps small farmers, marginal farmers and the

weaker sections of the society. It channelizes its refinance facilities for agricultural and rural

development in the country through major financial intermediaries like SCBs, SLDBs, RRBs,

commercial banks, etc.

1. Short Term Credit

During 2002-03, it sanctioned Rs.8,764crores as short term credit to SCBs and RRBs for

financing seasonal agricultural operations, marketing of crops, purchase and distribution of

fertilisers, and working capital requirements of cooperative sugar factories.

2. Medium Term Credit

The NABARD sanctioned Rs.496 crores in 2002-03 as medium term credit to SCBs and

RRBs for approved agricultural purposes.

3. Long Term Credit38

The NABARD provides long term loans not exceeding 20 years to State Governments to

enable them to contribute to the share capital of the cooperative credit institutions. In 2002-03 it

sanctioned Rs.62 crores to State Governments for this purposes.

4. Schematic Lending

The NABARD provides refinance facilities relating to minor irrigation, land development,

farm mechanisation, plantation, horticulture, poultry, sheep breeding, piggery, fisheries, dairy

development, storage, market yards, IRDP, etc.

5. Assistance to Non-Farm Sector

The NABARD provides financial assistance to the non-farm sector. The ceiling on

individual loans under Composite Loan Scheme is Rs.50,000 and under Integrated Loan Scheme

Rs.7.5 lakhs to enable the financing banks to meet the credit requirements of entrepreneurs for

setting up cottage, tiny, village and small scale industries.

Further, State Cooperative Banks have been permitted to get refinance on an automatic

basis from the NABARD through CCBs for financing industrial cooperative societies up to Rs.

7.5 lakhs. The Integrated Loan Scheme has also been extended to Land Development Banks for

financing non-farm activities up to Rs. 7.5 lakhs.

SCBs have been permitted to draw refinance on automatic basis for loans to industrial

cooperative Societies for modernisation of existing units up to Rs. 7.5 lakhs. With the introduction

of Swarnajayanti Gram SwarozgarYojna from April 1999 in rural areas, the NABARD provides

refinance to commercial banks for loans extended by them under the scheme.

A wide spectrum of activities covering agricultural allied activities, industries, services and

business that are bankable and viable are eligible for refinance.

6. Other Types of Assistance:

The NABARD has started the following types of assistance recently:

a) It undertakes on a modest scale co-financing/direct financing of hi-tech and other special

projects.

39

b) Beginning 1995-96, it has started sanctioning a separate Short Term (Seasonal Agricultural

Operations) Credit limit to each of the SCBs/RRBs operating in the 114 identified districts

in the country.

c) To step up credit flow to weaker sections including SCs/STs, the NABARD has earmarked

a sum of Rs. 150 crores for refinance under the “SC/ST Action Plan” for allocation among

commercial and cooperative banks. The level of refinance is 100 per cent.

7. Institutional Development

One of its important function is institutional development. In addition to inspection of

cooperative banks and RRBs, it helps in their rehabilitation, reorganisation and re-establishment.

8. Cooperative Development Fund (CDF)

NABARD set up CDF in 1993 for strengthening the cooperative credit institutions in the

areas of organisational structure, human resource development, resource mobilisation, recovery

position, etc. The assistance is provided to SCBs, CCBs, etc. by way of a grant or a soft loan or

both. At the end of March 2003, cumulative loans sanctioned from CDF amounted to Rs. 65

crores.

9. Rural Infrastructure Development Fund (RIDF)

KIDF-I was set up in 1995-96 with a corpus of Rs. 2,000 crores for providing funds to

State Governments and State owned corporations to enable them to complete various types of

rural infrastructure projects. This scheme had been continued in subsequent years as RIDP-II with

Rs.2,500 crores in 1996-97, RIDF-III with Rs. 2,500 crores in 1997-98, RIDF-IV with Rs. 3,000

crores in 1998- 99, RIDF-V with Rs. 3,500 crores in 1999-2000, RIDF-VI with Rs. 4,500 crores in

2000-01, RIDF-VIl with Rs. 5,000 crores in 2001-02, RIDF-VIII with Rs. 5,500 crores in 2002-03

and RIDF-IX with Rs. 5,500 crores in 2003-04.

10. Memorandum of Understandings (MOUs)

The NABARD signs MOUs with the’ Cooperative banks and the concerned State

Government for revamping and improving the cooperative credit structure. Similar MOUs exist

between the RRBs and the sponsor banks.

11. Research and Development:

40

It has been providing financial assistance for research and training to the staff of rural

banking structure out of its R & D Fund and for strengthening the technical, monitoring, and

evaluation cells of RRBs. Its three staff colleges, CAB, and Banker Rural Development Institute

have been providing research and training facilities in rural credit and development to the staff of

banks. Despite its manifold achievements, NABARD has yet to become an apex regulator and

development bank for farm lending.

Views of the Khusro Committee

The ACRS or Khusro Committee in its Report published in January 1989 pointed out

certain weaknesses and made suggestions to improve the working of NABARD.

Some of these are as under

1. NABARD’s activities in institutional development are primarily reactive rather than

proactive in nature. It should therefore undertake a more effective role in institutional

development, particularly with regard to cooperative development. Its role should be one

(policy planning and review, besides extension of necessary financial assistance.

2. The inspection function of NABARD is not integrated with refinancing and institutional

development function. It should redefine the purpose and objectives of inspections to

facilitate such integration.

3. The training of NABARD’s staff should be separated from that of client banks.

4. R & D Fund should be used much more aggressively and imaginatively to identify,

evaluate, develop and promote new and practical initiatives in rural development.

5. It has to find resources to meet its client banks’ demand for investment loans which it will

have to provide in an increasing measure in the next 10-12 years. If NABARD has to

expand its operations, either its equity base should be strengthened or low cost borrowings

should be resorted to at a concessional rate of 5.5 percent from GOI/RBI.

6. There is lack of control over NABARD’s member institutions. It should be rectified with

the help of and in coordination with RBI.

The Khusro Committee observed, “If NABARD has to emerge as a strong development bank

of rural regeneration, it has to take certain fresh initiatives. It should concentrate more on building

up of the cooperatives, improve its functional capabilities in project identification, preparation,

appraisal, and monitoring, forge a better linkage between inspection and function, pay greater 41

attention to-the non-farm sector and staff training and extend its network to the district level.

NABARD will have to play its part in open market borrowing also, so that it could meet its

refinance commitments.”

Developmental and Supervisory Role of NABARD

Mission of NABARD is to promote sustainable and equitable agriculture and rural

development through effective credit support, related services, institution building and other

innovative initiatives. For the attainment of this mission, NABARD performs multiple kind of

functions which are as under:

Credit functions

It is the most important function of the bank. It involves preparation of potential-linked

credit plans annually for all districts of the country for identification of credit potential,

monitoring the flow of ground level rural credit, issuing policy and operational guidelines to rural

financing institutions and providing credit facilities to eligible institutions under various programs.

The credit functions include the following:

Framing policy and guidelines for rural financial institutions.

Providing credit facilities to issuing organizations.

Preparation of potential-linked credit plans annually for all districts for identification of

credit potential.

Monitoring the flow of ground level rural credit.

Development and promotional functions :

The bank has also a focus on overall development and income generating interventions

aimed at supplementing the credit functions as well as making credit more productive. These

functions include the following:

Help cooperative banks and Regional Rural Banks to prepare development actions plans

for themselves.

Enter into MOU with state governments and cooperative banks specifying their respective

obligations to improve the affairs of the banks in a stipulated timeframe.

Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying their

respective obligations to improve the affairs of the Regional Rural Banks in a stipulated

timeframe.

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Monitor implementation of development action plans of banks and fulfillment of

obligations under MOUs.

Provide financial assistance to cooperatives and Regional Rural Banks for establishment of

technical, monitoring and evaluations cells.

Provide organization development intervention (ODI) through reputed training institutes

like Bankers Institute of Rural Development (BIRD), Lucknow, National Bank Staff

College, Lucknow and College of Agriculture Banking, Pune, etc.

Provide financial support for the training institutes of cooperative banks.

Provide training for senior and middle level executives of commercial banks, Regional

Rural Banks and cooperative banks.

Create awareness among the borrowers on ethics of repayment through Vikas Volunteer

Vahini and Farmer’s clubs.

Provide financial assistance to cooperative banks for building improved management

information system, computerization of operations and development of human resources.

Supervisory Functions

NABARD also plays a significant role in proper functioning of cooperative banks and regional

rural banks in the country.

Undertakes inspection of Regional Rural Banks (RRBs) and cooperative banks (other than

urban/primary cooperative banks) under the provisions of Banking Regulation Act, 1949.

Undertakes inspection of State Cooperative Agriculture and Rural Development Banks

(SCARDBs) and apex non-credit cooperative societies on a voluntary basis

Undertakes portfolio inspections, systems study, besides off-site surveillance of

cooperative banks and Regional Rural Banks (RRBs)

Provides recommendations to Reserve Bank of India on opening of new branches by State

Cooperative Banks and Regional Rural Banks (RRBs)

Administering the Credit Monitoring Arrangements in SCBs and CCBs.

Institutional and capacity building functions

To ensure smooth functioning and strengthening of cooperative banks and RRBs,

NABARD has always been instrumental and helping all those financial institutions working

in the field of rural and agriculture credit. Following are the points providing evidence in this

support.

43

Help cooperative banks and RRBs to prepare development actions plans forthemselves.

Help RRBs and the sponsor banks to enter into MOUs specifying their respective

obligations to improve the affairs of the RRBs in a stipulatedtimeframe.

Provide financial assistance to cooperatives and RRBs for establishment of technical,

monitoring and evaluationscells.

Provide organization development intervention (ODI) through reputed training institutes

like Bankers Institute of Rural Development (BIRD), Lucknow, National Bank Staff

College, Lucknow, College of Agriculture Banking, Pune, etc.

Provide training for senior and middle level executives of commercial banks, RRBs and

cooperative banks.

Training functions

Another important area of functions performed well by this bank is to impart with

different kinds of training such as legal, technical, financial and marketing training and

consultancy which is well written in the NABARD Act itself. This can be summarized under

the following points:

Maintain expert staff to study all problems relating to agriculture and rural

development and beavailable for consultation to the Central Government, the Reserve

Bank, the State Governments and the other institutions engaged in the field of

ruraldevelopment.

Providefacilitiesfortraining,fordisseminationofinformationandthepromotionofresearch

including the undertaking of studies, researches, techno-economic and other surveys

in the field of rural banking, agriculture and rural development.

Provide technical, legal, financial, marketing and administrative assistance to any

person engagedin agriculture and rural developmentactivities.

May provide consultancy services in the field of agriculture and rural development

and otherrelated matters in or outside India, on such terms and against such

remuneration, as may be agreedupon.

Miscellaneous other functions are as follows

Conduct inspections of the RRBs and the co-operative societies, without any prejudice

to the authority of theRBI.

All the applications for opening a branch by RRBs or co-operative societies should be

44

forwarded to the RBI through theNABARD.

Copies of all returns submitted by the RRBs and co-operative societies to the RBI

should also be furnished to theNABARD.

NABARD is also empowered to obtain any information or statement from the RRBs

and the co-operative societies.

NABARD should undertake research and training programs. These comprehensive

training programs should be targeted towards NABARD's own staff and the staff of

SCBs and RRBs as well. The R&D department of NABARD should take the lead in

promoting research concerning problems associated with India's agriculture and rural

development and also other allied aspects. For this purpose the NABARD has been

authorized to maintain and R&D fund out of profits earned by it everyyear.

NABARD is responsible for coordinating with the Government of India, the Planning

Commission, State Governments and other agencies concerned with the development of

rural industrialization. It is also responsible for ensuring the implementation of various

policies and programs meant for providing finance to the rural industries.

Overview of major rural infrastructural development programs started byNABARD

Rural Infrastructure DevelopmentFund

Rural Infrastructure Development Fund (RIDF), has emerged as NABARD’s major

partnership with the State Governments over the years. The Fund has continued with yearly

allocations in the successive Union Budgets. It has become a major source of finance which

channelizes the shortfall in the mandatory involvement of commercial banks in the priority

sector lending to the State Governments in the form of loans. With the experience gained, in

addition to its role of managing the RIDF, NABARD has made efforts in looking at rural

infrastructure as an independent discipline for financing and facilitating creation of rural

infrastructure through various other initiatives.

45

UNIT – IV

NATIONAL LEVEL DEVELOPMENT BANKS

An outstanding financial development of the post-independence period has been the rapid

growth of development banks in the country. These banks are specialised financial institutions

which perform the twin functions of providing medium and long-term finance to private

entrepreneurs and of performing various promotional roles conducive to economic development.

As the name clearly suggests, they are development-oriented banks. As banks, they

provide finance. But they are unlike ordinary commercial banks in three ways.

First, they do not seek or accept deposits from the public as ordinary banks do.

Second, they specialize in providing medium-and long- term finance, whereas

commercial banks have specialized in the provision of short-term finance.

Third and most important, they are not mere purveyors of long-term finance like any

ordinary term- lending institution.

As development banks (with emphasis on the word ‘development’) their chief

distinguishing role is the promotion-of economic development by way of promoting investment

and enterprise (the two most scarce inputs in LDCs) in their chosen (or allotted) spheres, whether

manufacturing, agriculture, or some other.

This promotional role may take a variety of forms, like provision of risk capital,

underwriting of new issues, arranging for foreign (exchange) loans, identification of investment

projects, preparation and evaluation of project reports, provision of technical advice, market

information about both domestic and export markets, and management services.

How much of these services a development bank is in a position to render depends upon

the technical expertise it has been able to build up, the competence of its staff and their

experience. The Indian development banks have as yet not developed so much as to be able to

provide a whole gamut of development services. But their contribution in the channeling of

finance has been sizeable and large-scale industry in the private sector has been the main

beneficiary.

46

The financial assistance to industry is given in the following four main forms:

(i) Term loans and advances,

(ii) Subscription to shares and debentures,

(iii) Underwriting of new issues, and

(iv) Guarantees for term loans and deferred payments.

The first two forms place funds directly in the hands of companies as subscriptions to

shares and debentures are subscriptions to new issues. The last two forms facilitate the raising of

funds from other sources. For attracting risk capital into the industry, such underwriting of shares

by development banks is at least as important as the direct subscription to these shares.

Guarantees from development banks assure creditors (banks and others) that their credit

to industry whether in the form of loans or deferred payments is secured. For development

banks, it only involves ‘contingent liabilities,’ that is liabilities which become payable only when

the underlying agreements are not fulfilled. Therefore, such liabilities do not lock up funds of

development banks, but are instrumental in attracting funds from other sources.

The development banks in India are a post-independence phenomenon (except the land

development banks). Their structure is indicated in Figure 8.1. Some of them are for promoting

47

industrial development; some for the development of agriculture; and one for foreign trade.

Some are all-India institutions; others are state or lower level institutions.

At present, at the all-India level, there are five industrial development banks, one

agricultural development bank and one export-import bank. The development banks for the

industry are the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation

of India (IFCI), the Industrial Credit and Investment Corporation of India (ICICI), and the

Industrial Reconstruction Corporation of India (IRCI) for large industries and the National Small

Industries Development Bank of India (SIDBI) for small-scale industries. For agriculture, it is

the National Bank for Agriculture and Rural Development (NABARD).

The National Industrial Development Corporation (NIDC), which was set up by the

Government of India in 1954 for the promotion and development of industries, had also provided

some finance till 1963. But since then it has been acting as only a consulting agency.

The “state level industrial development banks are the State Financial Corporation’s

(SFCs), the State Industrial Development Corporation (SIDCs) and the State Industrial

Investment Corporations (SIICs). For promoting agricultural development, there are main

district-level banks, called land development banks. The present article is devoted to a discussion

of these several development banks.

48

Development Banks are banks that provide financial assistance to business that requires

medium and long-term capital for purchase of machinery and equipment, for using latest

technology, or for expansion and modernization. A development bank is a multipurpose

institution which shares entrepreneurial risk, changes its approach in tune with industrial climate

and encourages new industrial projects to bring about speedier economic growth.

These banks also undertake other development measures like subscribing to the shares

and debentures issued by companies, in case of under subscription of the issue by the public.

There are three important national level development banks. They are:

1. Industrial Development Bank of India (IDBI)

2. Industrial finance Corporation of India (IFCI)

3. Industrial Credit and Investment Corporation of India (ICICI)

1.INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

The IDBI was established on July 1, 1964 under an Act of Parliament. It was set up as the

central co-ordinating agency, leader of development banks and principal financing institution for

49

industrial finance in the country. Originally, IDBI was a wholly owned subsidiary of RBI. But it

was delinked from RBI w.e.f. Feb. 16, 1976.

IDBI is an apex institution to co-ordinate, supplement and integrate the activities of all

existing specialised financial institutions. It is a refinancing and re-discounting institution

operating in the capital market to refinance term loans and export credits. It is in charge of

conducting techno-economic studies. It was expected to fulfil the needs of rapid industrialisation.

The IDBI is empowered to finance all types of concerns engaged or to be engaged in the

manufacture or processing of goods, mining, transport, generation and distribution of power etc.,

both in the public and private sectors.

2. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

The IFCI is the first Development Financial Institution in India. It is a pioneer in

development banking in India. It was established in 1948 under an Act of Parliament. The main

objective of IFCI is to render financial assistance to large scale industrial units, particularly at a

time when the ordinary banks are not forth coming to assist these concerns. Its activities include

project financing, financial services, merchant banking and investment.

Till 1993, IFCI continued to be Developmental Financial Institution. After 1993, it was

changed from a statutory corporation to a company under the Indian Companies Act, 1956 and

was named as IFCI Ltd with effect from October 1999.

3.INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

ICICI was set up in 1955 as a public limited company. It was to be a private sector

development bank in so far as there was no participation by the Government in its share capital.

It is a diversified long term financial institution and provides a comprehensive range of financial

products and services including project and equipment financing, underwriting and direct

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subscription to capital issues, leasing, deferred credit, trusteeship and custodial services, advisory

services and business consultancy.

The main objective of the ICICI was to meet the needs of the industry for long term funds

in the private sector.

Apart from this the Industrial Reconstruction Corporation of India (IRCI) established in

1971 with the main objective of revival and rehabilitation of viable sick units and was converted

in to the Industrial Reconstruction Bank of India (IRBI) in 1985 with more powers

Development banks have been established at the state level too. At present in India, 18

State Financial Corporation’s (SFCs) and 26 State Industrial investment/Development

Corporations (SIDCs) are functioning to look over the development banking in respective

areas /states.

Industrial Finance Corporation of India (IFCI)

Industrial Finance Corporation of India (IFCI) is actually the first financial institute

the government established after independence. The main aim of the incorporation of IFCI was to

provide long-term finance to the manufacturing and industrial sector of the country. Let us study

more about IFCI.

Industrial Finance Corporation of India (IFCI)

Initially established in 1948, the Industrial Finance Corporation of India was converted into

a public company on 1 July 1993 and is now known as Industrial Finance Corporation of India Ltd.

The main aim of setting up this development bank was to provide assistance to the industrial sector

to meet their medium and long-term financial needs.

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The IDBI, scheduled banks, insurance sector, co-op banks are some of the major

stakeholders of the IFCI. The authorized capital of the IFCI is 250 crores and the Central

Government can increase this as and when they wish to do so.

Objectives

The main objective of IFCI is to provide medium and long-term financial assistance to

large scale industrial undertakings, particularly when ordinary bank accommodation does not suit

the undertaking or finance cannot be profitably raised by the concerned issue of shares.

Functions

The functions of the IFCI base are as follows:

The corporation grants loans and advances to industrial concerns.

Granting of loans both in rupees and foreign currencies.

The corporation underwrites the issue of stocks, bonds, shares etc.

The corporation can grant loans only to public limited companies and co-operatives but

not to private limited companies or partnership firms.

Functions of the IFCI

First, the main function of the IFCI is to provide medium and long-term loans and advances

to industrial and manufacturing concerns. It looks into a few factors before granting

any loans. They study the importance of the industry in our national economy, the overall

cost of the project, and finally the quality of the product and the management of the

company. If the above factors have satisfactory results the IFCI will grant the loan.

The Industrial Finance Corporation of India can also subscribe to the debentures that these

companies issue in the market.

The IFCI also provides guarantees to the loans taken by such industrial companies.

52

When a company is issuing shares or debentures the Industrial Finance Corporation of India

can choose to underwrite such securities.

It also guarantees deferred payments in case of loans taken from foreign banks in foreign

currency.

There is a special department the Merchant Banking & Allied Services Department. They

look after matters such as capital restructuring, mergers, amalgamations, loan syndication,

etc.

It the process of promoting industrialization the Industrial Finance Corporation of India has

also promoted three subsidiaries of its own, namely the IFCI Financial Services Ltd, IFCI

Insurance Services Ltd and I-Fin. It looks after the functioning and regulation of these three

companies.

IFCI as a Business Facilitator

In the last few decades, the Industrial Finance Corporation of India has made a significant

contribution to the development of our economy. Also, it is responsible for the growth, expansion,

and modernization of our industrial sector.The Industrial Finance Corporation of India has also been

beneficial for the import and export industry, the cause of pollution control, energy conservation,

import substitution, and many such initiatives and industries. Some sectors, in particular, have seen

a lot of benefits. Some of these are

Agricultural Based Industries like paper, sugar, rubber, etc.

Service Industries like restaurants, hospitals, hotels, etc.

Basic industries in any economy like steel, cement. Chemicals etc.

Capital and goods industries like electronics, fibers, telecom services, etc.

SIDBI – Small Industries Development Bank of India & its Functions

The SIDBI (Small Industries Development Bank of India) is a wholly owned subsidiary

of IDBI (Industrial Development Bank of India), established under the special Act of the

Parliament 1988 which became operative from April 2, 1990.

53

In this article, we cover the following topics:

Finance Facilities Offered by SIDBI

Functions of SIDBI

Benefits of SIDBI

How to apply for the loan through SIDBI

SIDBI was made responsible for administering Small Industries Development Fund and

National Equity Fund that were administered by IDBI before.  SIDBI is the Primary Financial

Institution for promoting, developing and financing MSME (Micro, Small and Medium

Enterprise) sector.

Besides focussing on the development of the Micro, Small and Medium Enterprise sector,

SIDBI also promotes cleaner production and energy efficiency. SIDBI helps MSMEs in

acquiring the funds they require to grow, market, develop and commercialize their technologies

and innovative products. The bank provides several schemes and also offers financial services

and products for meeting the individual’s requirement of various businesses.

OBJECTIVES OF SIDBI

1. To promote marketing of products of small scale sector.

2. To upgrade technology and also undertaking modernization of small scale units.

3. To provide more financial assistance to small scale ancillary and tiny sector.

4. To encourage employment oriented industries.

5. To coordinate all the other institutions involved in the promotion of small scale industries.

Finance Facilities Offered by SIDBI

Small Industries Development Bank of India, offers the following facilities to its

customers:

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1. Direct Finance

SIDBI offers Working Capital Assistance, Term Loan Assistance, Foreign Currency

Loan, Support against Receivables, equity support, Energy Saving scheme for the MSME sector,

etc.

2. Indirect Finance

 SIDBI offers indirect assistance by providing Refinance to PLIs (Primary Lending

Institutions), comprising of banks, State Level Financial Institutions, etc. with an extensive

branch network across the country. The key objective of the refinancing scheme is to raise the

resource position of Primary Lending Institutions that would ultimately enable the flow of credit

to the MSME sector.

3. Micro Finance

Small Industries Development Bank of India offers microfinance to small businessmen

and entrepreneurs for establishing their business.

Functions of SIDBI (Small Industries Development Bank of India)

1. Small Industries Development Bank of India refinances loans that are extended by the

PLIs to the small-scale industrial units and also offers resources assistance to them

2. It discounts and rediscounts bills

3. It also helps in expanding marketing channels for the products of SSI (Small Scale

Industries) sector both in the domestic as well as international markets

4. It offers services like factoring, leasing etc. to the industrial concerns in the small-scale

sector

5. It promotes employment oriented industries particularly in semi-urban areas for creating

employment opportunities and thus checking relocation of people to the urban areas

6. It also initiates steps for modernisation and technological up-gradation of current units

7. It also enables the timely flow of credit for working capital as well as term loans to Small

Scale Industries in cooperation with commercial banks

8. It also co-promotes state level venture funds

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Benefits of SIDBI

1. Custom-made

SIDBI policies loans as per the requirements of your businesses. If your requirement

doesn’t fall into the ordinary and usual category, Small Industries Development Bank of India

would assist funding you in the right way.

2. Dedicated Size

Credit and loans are modified as per the size of the business. So, MSMEs could avail

different types of loans custom-made for suiting their business requirement.

3. Attractive Interest Rates

It has a tie-up with several banks and financial institutions world over and could offer

concessional interest rates. The SIDBI has tie-ups with World Bank and the Japan International

Cooperation Agency.

4. Assistance

It not just give provides a loan, it also offers assistance and much-required advice. It’s

relationship managers assist entrepreneurs in making the right decisions and offering assistance

till loan process ends.

5. Security Free

Businesspersons could get up to INR 100 lakhs without providing security.

6. Capital Growth

Without tempering the ownership of a company, the entrepreneurs could acquire

adequate capital for meeting their growth requirements.

7. Equity and Venture Funding

It has a subsidiary known as SIDBI Venture Capital Limited which is wholly owned that

offers growth capital as equity through the venture capital funds which focusses on MSMEs.

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8. Subsidies

SIDBI offers various schemes which have concessional interest rates and comfortable

terms. SIDBI has an in-depth knowledge and a wider understanding of schemes and loans

available and could help enterprises in making the best decision for their businesses.

9. Transparency

Its processes and the rate structure are transparent. There aren’t any hidden charges.

Functions of SIDBI

Coordinating and financing the various institutions involved in the development of small

industries are undertaken by SIDBI.

Refinance to SSI

Refinancing loans and advances provided by commercial banks to small scale industrial

units. Different types of loans are given to small scale industries and as per the recommendations

of Nayak Committee, additional funds have been given to commercial banks for promoting more

borrowings of small scale industries. In fact, there are commercial banks with separate branches

meant exclusively for small scale industries.

Discounting the bills of SSIs

Apart from discounting the bills of small scale industries, even hurdles arising out of

financing small scale industries are being discounted. The bank credit has gone up to Rs.

2,18,219crores. The percentage of bank credit to SSI has gone up to 17.5.

SIDBI offers assistance to exports

Direct assistance to export oriented units and also to import substituting units in the small

scale sector is given the highest priority. There has been a simplified procedure for the exports of

small scale industries. Products of SSI exporters are displayed in international exhibitions with

the help of SIDBI. Other export related expenditures are borne by SIDBI. Latest packing

standards and training programmes on packing for exports are also financed by SIDBI. Trade

delegations and sales and study teams are sponsored for small scale sector under Marketing

Development Assistance scheme.

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Seed capital and also soft loan Assistance

Seed capital is provided for starting of SSI units. Under this, the initial expenditure in

starting the small scale units are being met by SIDBI. In addition to that, SIDBI, under this

scheme, undertakes the following activities:

Identification of potential entrepreneurs in the district.

Providing training facility for these entrepreneurs.

Linkage with banks for financial assistance

Follow-up and monitoring the progress

Under soft loan, SIDBI provides long-term loan repayable in a period of 15 to 20 years

with a very low rate of interest.

Non finance services

Under this scheme, SIDBI undertakes with the help of other institutions marketing survey

and the potentialities of small scale industries in the particular area. Wherever possible, it helps

in the procurement raw materials.

Factoring, Leasing and HP finance

In factoring services, SIDBI finances 80% of the bills to the seller and after obtaining the

remaining 20% balance, it repays to the seller and for this service it obtains a factoring

commission.

Leasing

After the increase in the fixed capital limit of Rs. 1 crore to SSI, there has been increasing

demand for leasing equipment. The small scale industries have expanded their activities as lease

finance institutions have enabled them to obtain costly equipment which are otherwise, not

possible within the purview of small scale industries, In fact, this has helped them in

modernizing their industry.

HP finance

Hire purchase financing has also helped small scale industries in acquiring machinery of

a higher value. In fact, certain machinery are even imported from foreign countries on a deferred

payment basis.

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Assistance to other financial institutions

In every State, State Finance Corporations have been promoted for financing small scale

industries. They are under the control of respective state governments. At the national level, a

separate corporation is promoted for financing small scale industries called National Small Scale

Industries Corporation. This was started in 1995 to promote, aid and ensure faster growth in

small scale industries.

Automatic finance scheme

Refinance facilities under automatic finance scheme is also provided which was initially

for Rs. 50 lakhs. Now with the increase in the capital limit of small scale industries, this finance

scheme has also increased its limit to Rs. 2 crores.

Modernization

The technology development which has taken place in various industries has also spread

to small scale industries and to meet the requirements of technology upgradation, a separate fund

has been set up by SIDBI, through which it provides Technology upgradation equipment finance.

Venture capital

Venture capital fund for the promotion of new entrepreneurs has been set up. For this

purpose, IDBI, the holding company of SIDBI provides funds. New ventures in different areas

with high technical knowhow is encouraged under the scheme. Though this scheme is in the

initial stage, this will promote more new small scale industries.

Single window scheme

This scheme was introduced by SIDBI for providing finance to commercial banks which

in turn will give all kinds of assistance to small scale industries. That is, from registration units to

marketing of products will be undertaken under this scheme.

The creation of SIDBI has certainly improved the growth of small scale industries in the

country. Apart from financing, banks have identified the weak areas of small scale industries and

have attempted to improve the same. This will go a long way in not only strengthening SSI units

but also in the creation of employment opportunities in rural areas.

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Export and Import Bank of India (EXIM)

Once our economy opened up post liberalization and globalization, the import and export

industry became a huge sector in our economy. Even today India is one of the largest exporters of

agricultural goods. So to provide financial support to importers and exporters the government set up

the EXIM Bank. Let us take a look.

Objectives

1. providing financial assistance to exporters and importers, and ... functioning as the

principal financial institution for coordinating the working of institutions engaged in

financing export and import of goods and services with a view to promoting the country's

international trade...

2. Act on business principles with due regard to public interest.

Export and Import Bank of India (EXIM)

The Export and Import Bank of India, popularly known as the EXIM Bank was set up in

1982. It is the principal financial institution in India for foreign and international trade. It was

previously a branch of the IDBI, but as the foreign trade sector grew, it was made into an

independent body.

The main function of the Export and Import Bank of India is to provide financial and other

assistance to importers and exporters of the country. And it oversees and coordinates the working of

other institutions that work in the import-export sector. The ultimate aim is to promote foreign

trade activities in the country.

The management of the EXIM bank is done by a board, headed by the Managing Director.

There are 17 other Directors on the board. The whole paid-up capital of the bank (100 crores

currently) is subscribed by the Central Government exclusively.

Functions of the EXIM Bank

Let us take a look at some of the main functions of Export and Import Bank of India bank:

1. Finances import and export of goods and services from India

2. It also finances the import and export of goods and services from countries other than

India.

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3. It finances the import or export of machines and machinery on lease or hires purchase

basis as well.

4. Provides refinancing services to banks and other financial institutes for their financing of

foreign trade

5. EXIM bank will also provide financial assistance to businesses joining a joint venture in a

foreign country.

6. The bank also provides technical and other assistance to importers and exporters.

Depending n the country of origin there are a lot of processes and procedures involved in

the import-export of goods. The EXIM bank will provide guidance and assistance in

administrative matters as well.

7. Undertakes functions of a merchant bank for the importer or exporter in transactions of

foreign trade.

8. Will also underwrite shares/debentures/stocks/bonds of companies engaged in foreign

trade.

9. Will offer short-term loans or lines of credit to foreign banks and governments.

10. EXIM bank can also provide business advisory services and expert knowledge to Indian

exporters in respect of multi-funded projects in foreign countries

Importance of the EXIM Bank

Other than providing financial assistance, the Export and Import Bank of India bank is

always looking for ways to promote the foreign trade sector in India. In the early 1990s, EXIM

introduced a program in India known as the Clusters of Excellence.

The aim was to improve the quality standards of our imports and exports. It also has a tie-up

with the European Bank for Reconstruction and Development. It has agreed to co-finance programs

with them in eastern Europe.

In order to promote exports EXIM bank also has schemes such as production equipment

finance program, export marketing finance, vendor development finance, etc.

National Housing Bank

National Housing Bank (NHB), a Government of India owned entity,[3][4] was set up on

9 July 1988 under the National Housing Bank Act, 1987. NHB is an apex financial institution for

housing. NHB has been established with an objective to operate as a principal agency to promote

61

housing finance institutions both at local and regional levels and to provide financial and other

support incidental to such institutions and for matters connected therewith.The Finance Act,2019

has amended National Housing Bank Act,1987. The amendment confers the powers of regulation

of housing finance companies to central bank of India.

NHB registers and supervises Housing Finance Company (HFCs), keeps surveillance

through On-site & Off-site Mechanisms and co-ordinates with other Regulators.

Objectives of National Housing Bank (NHB)

a) To promote a sound, healthy viable and cost effective housing finance system to cater to all

segments of the population and to integrate the housing finance system with the overall

financial system.

b) To promote a network of dedicated housing finance institutions to adequately serve various

regions and different income groups.

c) To augment resources for the sector and channelise them for housing.

d) To make housing credit more affordable.

e) To regulate the activities of housing finance companies based on regulatory and supervisory

authority derived under the Act.

f) To encourage augmentation of supply of buildable land and also building materials for

housing and to upgrade the housing stock in the country.

g) To encourage public agencies to emerge as facilitators and suppliers of serviced land, for

housing.

The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985–90) identified

the non-availability of long-term finance to individual households on any significant scale as a

major lacuna impeding progress of the housing sector and recommended the setting up of a

national level institution.

The Committee of Secretaries considered' the recommendation and set up the High Level

Group under the Chairmanship of Dr. C. Rangarajan, the then Deputy Governor, RBI to examine

the proposal and recommended the setting up of National Housing Bank as an autonomous

housing finance institution. The recommendations of the High Level Group were accepted by the

Government of India.

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The Hon’ble Prime Minister of India, while presenting the Union Budget for 1987-88 on

28 February 1987 announced the decision to establish the National Housing Bank (NHB) as an

apex level institution for housing finance. Following that, the National Housing Bank Bill (53 of

1987) providing the legislative framework for the establishment of NHB was passed by

Parliament in the winter session of 1987 and with the assent of the Hon’ble President of India on

23 December 1987, became an Act of Parliament.

The National Housing Policy, 1988 envisaged the setting up of NHB as the Apex level

institution for housing.

In pursuance of the above, NHB was set up on 9 July 1988 under the National Housing

Bank Act, 1987. NHB is wholly owned by Govt. of India as after 24 April 2019 notification of

RBI, which contributed the entire paid-up capital. The general superintendence, direction and

management of the affairs and business of NHB vest, under the Act, in a Board of Directors. The

Head office of NHB is at New Delhi.

Functions of National Housing Bank (NHB)

i. The National Housing Bank has the following functions:

ii. To promote and develop specialised housing finance institutions for mobilising resources

and extending credit for housing

iii. To provide refinance facilities to housing finance institutions and scheduled banks

iv. To provide guarantee and underwriting facilities to housing finance institutions

v. To formulate schemes for mobilisation of resources and extension of credit for housing,

especially catering to the needs of economically weaker sections of society

vi. To provide guidelines to housing finance institutions to ensure their healthy growth

vii. To co-ordinate the working of all agencies connected with housing

According to the National Housing Bank Act, the NHB is empowered to raise funds through

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i. The issue of bonds and debentures

ii. Borrowings from the Central Government and other institutions approved by the Central

Government

iii. Acceptance of deposits of long-term duration

iv. Short-term accommodation from the Reserve Bank

v. Long-term loans out of the National Credit (Long-Term Operations) Fund to be established

by the RBI for supporting the business of NHB

vi. Borrowings in foreign currency from banks or financial institutions in India or abroad.

The NHB has a 15-member Board of Directors, who are experts in the fields of housing,

architecture, engineering, sociology, finance, law, management and corporate planning, financing

institutions involved in housing finance, officials of the Central/State Governments and the Central

Board of Directors of the RBI.

Till June 1990, the NHB has disbursed refinance amounting to nearly Rs. 132 crores. It has

cleared 56 project proposals for land development and shelter construction involving a total outlay

of Rs. 414 crores. This is just a beginning. The NHB has to accelerate its activities to solve the

housing problem of the vast country like India. During 1995-96, the NHB formulated a refinance

scheme for RRBs to augment the flow of credit for housing activities.

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UNIT – V

Development banks in India: 1. Industrial Finance Corporation of India (IFCI) 2. State

Finance Corporations (SFCs) 3.Industrial Development Bank of India (IDBI) 4.Industrial Credit

and Investment Corporation of India (ICICI) 5.Unit Trust of India (UTI) 6.Industrial

Reconstruction Bank of India (IRBI)/ Industrial Investment Bank of India (IIBI) 7.Export-Import

(EXIM) Bank of India and a Few Others.

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STATE FINANCE CORPORATION

At the time of setting up of the Industrial Finance Corporation of India, the necessity of

establishing similar other institutions at the state level for assisting the smaller industrial concern

had not been recognised because it was not possible for a single institution to satisfy the capital

needs of smaller concerns spreaded all over the country. In 1951, the State Financial Corporation

was passed by the Central Government to create a separate financial corporation for the states.

The S.F.C. meets the financial requirements of small industrial concerns in the private sectors.

At present in India, there are 18 state finance corporations (out of which 17 SFCs were

established under the SFC Act 1951). Tamil Nadu Industrial Investment Corporation Ltd. which is

established under the Company Act, 1949, is also working as state finance corporation.

The State Finance Corporations (SFCs) are an integral part of institutional finance structure

of a country. Where SEC promotes small and medium industries of the states. Besides, SFC helps in

ensuring balanced regional development, higher investment, more employment generation and

broad ownership of various industries.

Organization and Management

A Board of ten directors manages the State Finance Corporations. The State Government

appoints the managing director generally in consultation with the RBI and nominates the name of

three other directors. All insurance companies, scheduled banks, investment trusts, co-operative

banks, and other financial institutions elect three directors.

Thus, the state government and quasi-government institutions nominate the majority of

the directors.

Objectives and Scopes

      The main objectives of the S.F.C are to provide financial assistance to medium and small

scale industries which are outside the scope of I.F.C.I. The main function of S.F.C. is limited

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within its states. It covers not only public limited companies but also private limited companies,

partnership firms and proprietary concerns.

Functions of State Finance Corporations

The main functions of S.F.C. are as follows:

1. It grants loan and advances to industrial concerns that are repayable within the maximum

period of 20 years.

2. It subscribes the shares and debentures of industrial concerns.

3. It underwrites the shares and debentures of the industrial concerns.

4. It guarantees loans raised by the industrial concerns repayable within 20 years.

5. Guarantees deferred payments for purchase of capital goods with India.

6. It acts as an agent of the State and central Government.

According to section 2(C) of the SFC Act 1951 as amended in 1961, the SFC can assist an

industrial concern that is engaged in any of the following activities:

1. Manufacture, preservation or processing of goods

2. Hotel Industries

3. Road Transport

4. Generation or distribution of electricity or any other form of power

5. Development of any area of land as industrial estate.

6. Fishing or providing facilities for fishing or manufacture of fish products.

7. Providing special or technical knowledge or other services for the promotion of industrial

growth.

SFC provides foreign exchange loans under World Bank schemes.

The SFC occupies an important place as an institution for industrial development in the

country. The major beneficiaries of the SFC are assistances are the following industries:

1. Food Processing

2. Textile Chemical and Chemical Products

3. Metal Production

4. Cement.

The various important functions of State Finance Corporations are:

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i. The SFCs provides loans mainly for the acquisition of fixed assets like land, building, plant,

and machinery.

ii. The SFCs help financial assistance to industrial units whose paid-up capital and reserves do

not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crores as may be notified by the

central government).

iii. The SFCs underwrite new stocks, shares, debentures etc., of industrial units.

iv. The SFCs grant guarantee loans raised in the capital market by scheduled banks, industrial

concerns, and state co-operative banks to be repayable within 20 years.

 Working of SFCs

The Indian government passed the State Financial Corporation Act in 1951. It is applicable

to all the States. The authorized Capital of a State Financial Corporation should be within the

minimum and maximum limits of Rs. 50 lakhs and Rs. 5 crores which are fixed by the State

government. It is divided into shares of equal value which were acquired by the respective State

Governments, the Reserve Bank of India, scheduled banks, co-operative banks, other financial

institutions such as insurance companies, investment trusts, and private parties. The State

Government guarantees the shares of SFCs. The SFCs can augment its fund through issue and sale

of bonds and debentures also, which should not exceed five times the capital and reserves at Rs. 10

Lakh.

Problems of State Financial Corporations

No Independent Organization

All SFCs are dependent upon the rules and regulations made by the state government.

SFCs’ problem is that all decision of these institutions is dependent on the political

environment of the state.

Due to this, the loan is not available at the right time for the right person.

Corruption

Like other government offices of our country, we can also see the evil of corruption in state

financial corporation.

Hoarding of wealth and money, SFCs’ officer object has become to earn by a good or bad

way.

That is the problem that these institutions have no proper transparency like banks.

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Effect of the World Bank and WTO Policies

Approx. all SFCs in India is tied up with World Bank and WTO agreement.

Due to this, these institutions’ decisions are influenced by the World Bank and WTO

policies.

World Bank can easily pressurize for accepting his policies. It may also influence the Indian

small scale industry adversely.

SMALL INDUSTRIES DEVELOPMENT CORPORATION (SIDCO)

In many state governments, for the promotion of small scale industries, a separate

corporation has been set up which is known as Small Industries Development Corporation. They

undertake all kinds of activities for the promotion of small scale industries. Right from the stage of

installation, to the stage of commencing production, these Corporations help small scale industries

(SSI) in many ways. In short, they provide infrastructure facilities to small scale industries. Due to

the assistance provided by SIDCO, many backward areas in most of the states have been developed.

So, SIDCO has also been responsible in spreading the industrial activity throughout several states.

In Tamilnadu India, Small Industries Development Corporation (SIDCO) was set up in

1971. The prime function of SIDCO was to identify potential growth centers in various parts of

Tamilnadu. There is a network of 76 industrial estates in the State which are maintained by SIDCO.

32 of these were formed by the government initially and subsequently handed over to SIDCO. The

remaining 44 estates were set up by SIDCO itself. Source (SIDCO – TAMILNADU SMALL

INDUSTRIES DEVELOPMENT CORPORATION LIMITED) It has set up these estates in rural

and most backward areas to ensure balanced industrial development.

Objectives of SIDCO

The main objective of SIDCO is

To stimulate the growth of industries in the small scale sector

To provide infrastructure facilities like roads, drainage, electricity, water supply, etc is one

of the primary objectives of SIDCO.

To promote industrial estates which will provide industrial sheds of different sizes with all

basic infrastructure facilities.

To provide technical assistance through training facilities to the entrepreneurs.

To promote skilled labor through the setting up of industrial training institutes.

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Functions of SIDCO

SIDCO supplies scarce raw materials:

Some of the scarce raw materials are procured by the corporation either from the domestic

market or from abroad and are provided to the needy small scale industries. For this purpose,

SIDCO has a number of raw material depots and these depots are procuring various scarce raw

materials, as per the requirements of small scale industries in the state.

SIDCO provides marketing assistance

In order to provide an efficient marketing support to small scale industries, the corporation

has taken up various schemes. In fact, the corporation participates in the tenders floated by the state

government departments and also with the DGS & D (Director General of Supplies and Disposal).

SIDCO makes advance payments for obtaining orders and distribute them among the various small

scale units. SIDCO also arranges for buyer — seller meets frequently.

SIDCO assists in Bills discounting

When small scale units supply goods to government departments, there is a delay in

receiving payments. In such a situation, the bills drawn on government departments will be

discounted by SIDCO and upto 80% of the bill value is given to the supplier. This helps the SSI

units in solving their working capital crisis.

SIDCO provides Export marketing assistance

To promote export marketing among the small scale industries, SIDCO has developed

websites because of which it is able to display the products of the small scale industries in foreign

markets and obtain export orders. Once an export order is obtained, the Common export manager of

SIDCO will make arrangements for extending various services for export of the product. SIDCO

also helps in the small scale units taking part in the international trade fair at New Delhi,

PragatiMaidan so that the products of small scale industries of Tamilnadu are displayed.

SIDCO set up Captive power plants

In order to provide uninterrupted and good quality power supply, SIDCO has taken up a

plan to set up captive power plants in major industrial estates. It is now planning to set up these

plants in 10 industrial estates.

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SIDCO promotes skill development centers

In an effort to supply skilled laborers to various small scale industries, skill development

centres are being set up in various industrial estates which will be training workers in varied

industrial activities and they will be trained in modern skill.

SIDCO promotes women entrepreneurs

In addition to the above, in order to promote women entrepreneurs, a separate industrial

estate for women has been set up at Tirumullaivoyal, near Chennai, where women entrepreneurs are

trained in various fields of small scale industries.

In addition to SIDCO, there are various corporations that assists in the promotion of small

scale industries such as, Small Industries Promotion Corporation of Tamilnadu (SIPCOT),

Tamilnadu Small Industries Corporation (TANSI), Industrial and Technical Consultancy

Organisation of Tamilnadu (ITCOT) and Tamilnadu Industries Investment Corporation (TIIC).

TIIC (TAMILNADU INDUSTRIAL AND INVESTMENT CORPORATION LTD)

The Tamil Nadu Industrial Investment Corporation was set up as a public joint-stock

company on March 26, 1949 under the Indian Companies Act, 1949. It obtained the certificate of

commencement of business on April 19, 1949 and the office began to function from September

1, 1949.1 The original name of the Corporation was the “Madras State Financial Corporation”.

Later, this was changed to “Madras Industrial Investment Corporation”. In 1970, this was again

changed as Tamil Nadu Industrial Investment Corporation (TIIC).2 At present the area of

operations of TIIC are limited to the state of Tamil Nadu and the Union Territory of Pondicherry.

Objectives of TIIC

The main objectives of TIIC are

a) To assist the development of existing and new industries in Tamil Nadu and Pondicherry.

b) To provide long-term and medium-term loans to the industrial units for the purpose of

creating fixed assets in the shape of land, building, machinery and the like.

c) To provide guarantee for foreign exchange loans.

d) To underwrite the public share capital issue.

e) To provide assistance for the development of small-scale industries and for helping

technocrats.

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f) To provide financial assistance for rural medical practitioners to set up independent

practice.

g) To provide assistance in the form of both Indian rupee and foreign currency under the

World Bank line of credit and

h) To provide financial assistance on concessional terms to set up industrial projects in

notified backward areas.

TIIC performs the following functions.

TIIC offers medium and short-term financial assistance to SSI and SRTO.

It guarantees loans raised by industrial units on certain conditions.

It underwrites or subscribes to the issue of shares and debentures of assisted industries.

It implements the subsidy schemes of the central and state governments.

It guarantees payments on behalf of the industrialists on the purchase of equipment on a

deferred payment basis to firms and suppliers within India.

It makes efforts to rehabilitate sick units.

It channelises ADB line of credit.

It obtains foreign exchange loans for industries from the World Bank

through IDBI by line of credit to import machinery and technical know - how.

It makes loans and advances to industries in collaboration with Central Financial

Institutions like IDBI, ITC and ICICI.

It acts as an agent of the slate and central governments for promoting industrial ventures,

Management of TIIC

TIIC is managed by a Board of Directors. The Board consists of 15 directors as stated below.

i) Six directors are nominated by the Tamil Nadu State Government.

ii) One director is nominated by the Reserve Bank of India.

iii) One director is nominated by the Industrial Development Bank of India.

iv) One director is nominated by the Small Industries Development Bank of India (SIDBI).

v) Four directors are selected by the financial institutions like Small Industrial Development

Corporation (SIDCO), State Industrial Promotion Corporation of Tamil Nadu (SIPCOT),

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Electronics Corporation of Tamil Nadu (ELCOT) and Tamil Nadu State Industrial Association

(TANSTIA).

vi) The Chairman

vii) The Managing Director.

A team of managerial and administrative staff assists the board of directors. The total number of

directors should not exceed fifteen and should not be less than nine, inclusive of the ex-officio

directors.4 The board is the supreme authority on all policy decisions of the corporation. The

chairman is the head of the board and he is nominated by Government of Tamil Nadu. The

Chairman holds office for a period of two years and is eligible for renomination. The Chairman

is a non-executive office bearer of the corporation. The Managing Director manages the day-to-

day affairs of TIIC. The Managing Director is appointed on a full-time basis by the Government

of Tamil Nadu in consultation with the Industrial Development Bank of India (IDBI) and the

Board of Directors. The tenure of his appointment is four years and he is also eligible for

reappointment. To assist the Board of Directors of TIIC, there is a Chairman and a Managing

Director. The Head Office of TIIC is in Chennai. The day-to-day administration is done by the

Managing Director. Under the control of TIIC, there are eight Regional offices and 36 branches.

Each regional office is headed by a Regional Manager and each branch is headed by a Branch

Manager.

Financial Resources of TIIC

Financial resources of TIIC consist of

i) Share Capital

ii) Reserve Funds and

iii) Borrowings

Share Capital

On March 31, 2001, the authorised capital of TIIC was Rs.100 crores. The paid-up share

capital of the TIIC was subscribed by the Government of Tamil Nadu (58.9 per cent) and the

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Industrial Development Bank of India (40 per cent). The Government of Pondicherry (0.3 per

cent) the General Insurance Corporation of India and its Subsidiaries (0.2 per cent), Life

Insurance Corporation of India (0.1 per cent) and the other banks including co-operative banks

contribute 0.5 per cent. The share capital of TIIC is guaranteed by the Government of Tamil

Nadu for repayment of principal and annual dividend.

Since 1976, TIIC has been raising special capital contributed in equal proportion by the

IDBI and the Government of Tamil Nadu. It does not carry any obligations to ‘minimum

dividend’. This is a special category of capital used by TIIC to provide equity type of support on

soft-term loans to entrepreneurs for bridging the gap in equity and promoter’s contribution. At

present the capital of TIIC is of two types such as, (i) General Capital and (ii) Special Capital.

Table 3.1 shows the paid-up capital of TIIC during the study period.

Reserves

The reserves maintained by TIIC consist of

a) Reserve Fund

b) Reserve for Bad and Doubtful Debts

Though the reserve fund is not an important source of fund for the TIIC, its share in the

overall financial resource cannot be ignored. The reserve fund is created by transferring the

undistributed profits. Table 3.2 shows the details of reserve funds of TIIC during the period

under study.

Borrowings Since 1971, TIIC has been borrowing from various sources to meet the loan

requirements of existing and newly-started small-scale industries, technicians, entrepreneurs,

small road transport operators and the like.

Sources of borrowings of TIIC include

a) Borrowings from RBI

b) Borrowings from IDBI/SIDBI

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c) Borrowings from the Government of Tamil Nadu

d) Issue of bonds and debentures

e) Fixed deposits

f) Loan in lieu of capital

g) Loans from IRBI and

h) Loans from other sources

There is a statutory limit for the total borrowings of a financial institution. According to

State Financial Corporations Act, 1951 the total amount of bonds and debentures (issued and

outstanding), medium-term loans from RBI, loans from State Government together with its

contingent liabilities arising from guarantees or underwriting should not exceed ten times of the

paid-up capital and reserves of the SFCs.

Area of Operation TIIC was originally incorporated for providing financial assistance to

its clients confined to the then Madras State. But, after the creation of Kerala Financial

Corporation in 1953, Andhra Pradesh State Financial Corporation in 1955 and Karnataka State

Financial Corporation in 1959, the operations of TIIC have been confined to the State of Tamil

Nadu and the Union Territory of Pondicherry. Even after the commencement of Pondicherry

Industrial Promotion Development and Investment Corporation Limited, the TIIC has been

continuously assisting industries and tiny sector units in Pondicherrry.

Types of Assistance

TIIC provides long and medium-term financial assistance in the following forms:

i) Term loans (long term and medium-term loans) ii) Providing term loans and working capital

assistance simultaneously under single window scheme. i) Lease financing for machinery or

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equipments. ii) Hire purchase financing for machinery or equipments. iii) Merchant banking

services.

Eligible Activities for Financial Assistance from TIIC Assistance is available to industrial

concerns engaged in or proposing to engage in the following activities.

a) Manufacturing, processing or preservation of goods.

b) Mining including development of mines.

c) Generation of electricity or any other form of energy including wined mills.

d) Setting up of nursing homes and purchase of electro medical equipments by doctors and non-

medical persons.

e) Maintenance, repair, testing, servicing of machinery or any types of vehicle, vessels, motor

boats, trailers or tractors.

f) Assembling, repairing or packaging of articles with the aid of machinery or power.

g) Hotels, motels and restaurants.

h) Purchase of vehicles for transport of goods and passengers.

i) Facilities for fishermen for fishing and preservation of fish including cold storage.

j) Research and development of any process or product in relation to any of the industrial

activities eligible for financial assistance form TIIC.

k) Borewell rigs or road laying equipments or earth excavators.

l) Business enterprises set up by qualified professionals in management.

Activities not Eligible for Financial Assistance from TIIC

Assistance is not provided for the following activities:

a) Concerns engaged in trading activity.

b) Developing of poultry farms, dairy farms and the like and

c) The items or industries banned by the Government

Limits of Sanctions and Disbursements

A TIIC branch office is empowered to sanction loans up to Rs.30 lakhs. Loans above

Rs.30 lakhs and upto Rs.800 lakhs will be sanctioned by the head office of TIIC. However

documentation, disbursement and monitoring in all cases are done by the respective branch

office.

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In TIIC’s operation, a prime place is occupied by small-scale industries which generate

more employment with little investment. Of the total applications sanctioned by TIIC during the

year 2000-2001, SSI sector constitutes 99 per cent.5 This shows the place of pride of SSI in the

operation of TIIC.

Schemes of Assistance

Tamil Nadu Industrial Investment Corporation offers financial assistance to various industries

through different schemes. The important features of those schemes of assistance provided by

TIIC are as follows.

General Scheme

Under this scheme financial assistance is provided for starting new industrial units and

for the expansion, modernisation and diversification of existing units whose project cost does not

exceed Rs.12 crores. Financial assistance is available only to small-scale and medium-scale

industrial units falling under the category of sole trading concerns, partnership firms, public

limited companies and private limited companies.

To get financial assistance under this scheme, the promoter’s contribution is mandatory.

The share of promoter’s contribution to total project cost varies between 12.5 per cent and 22.5

per cent. It is fixed by TIIC on the basis of place of operation of the units like backward areas

and non-backward areas.

Under this scheme, loans are granted to the beneficiaries against collateral security. For

the industrial units approaching TIIC for a second loan, the condition for collateral security is

relaxed based on the prompt repayment of earlier loan.

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Under this scheme, TIIC offers both term-loan and working-capital loan. The maximum

period allowed for the term-loan repayment is ten years with initial mortorium period of not

more than two years. Working capital loan is sanctioned just before the commencement of

production, which should be repaid within a year. TIIC charges interest at the rate of 13 per cent

for the loan and 16 per cent for the loan exceeding Rs.2 lakhs.

Soft Loan and Seed Capital Loan

The soft loan scheme is intended to help new technically qualified or experienced

entrepreneurs to get up small-scale industrial units. This scheme helps these entrepreneurs by

way of bridging the short fall in their capital. Under this scheme, TIIC provides both term-loan

and seed capital loan. Seed capital loan is provided to small and tiny units which come under

sole-proprietor concern and partnership firm.

The quantum of soft loan is subject to a maximum of 20 per cent of the project cost of

Rs.4 lakhs whichever is less. In the case of entrepreneurs who are unable to provide the

stipulated promoter’s contribution, the quantum of the soft loan is the gap between minimum

promoter’s contribution stipulated and the actual amount contributed. Under this scheme debt-

equity ratio is worked out by loan should be 2:1 for a loan above Rs.10 lakhs and 3:1 for a loan

less than Rs.10 lakhs. A separate collateral security is not insisted upon for soft loans. The soft

loans are repayable along with term-loan.

TIIC collects one per cent of the loan sanctioned as its service charges. It charges a

higher rate of service charges for profitable deserving units. The soft loan will be repayable

along with the term-loan payment. For such loans, the repayment period shall not exceed the

repayment period fixed for the term-loan.

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Transport Vehicle Scheme

TIIC offers financial assistance for the purchase of transport vehicles such as tricks and

lorries, tankers, trailers, tippers, passenger buses, trucker’s tailers for non-agricultural purpose, to

be used as public carrier, tourist taxis, delivery and pick-up vans, tempos and autorickshaws.

The vehicle loan is provided for a maximum of 20 vehicles per borrower. The financial

assistance provided in this case includes the cost of chassis, body building, road tax, insurance

premium, spare, tyre and tube and the like.

In order to receive a vehicle loan, the following conditions should be fulfilled:

1. The vehicles should be registered in the State of Tamil Nadu as ‘public carrier’.

2. No vehicle loan will be provided to be operated as ‘contract carriage’.

3. Individual, sole-trading concern, partnership firm, private limited company and public limited

company are entitled to get the vehicle loan from TIIC.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

Industrial Finance Corporation is the first industrial development bank set up by the

Government of India in July 1948. It was established with a view to provide medium and long-

term credit to the eligible industrial units in the country.

It extends financial assistance to large and medium sized industrial units in both private

and public sectors and also to cooperatives. As a development bank, the IFCI also undertakes a

number of promotional activities, some on its own and others jointly with other All- India

financial institutions.

FUNCTIONS:

The IFCI provides assistance in the following forms:

(i) It grants loans and advances to industrial concerns both in rupees and foreign currency

repayable within 25 years. The limit of assistance to any single concern now is Rs. 1 crore.

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Under special circumstances, the limit of assistance can be raised with the permission of the

government.

(ii) It subscribes to the shares and debentures issued by the industrial concerns.

(iii) It underwrites the issues of stocks, shares, bonds, debentures of the industrial

concerns subject to the condition that such stocks, shares, etc., are disposed of by the

Corporation within a period of 7 years from the time of acquisition.

(iv) It guarantees- (a) rupees loans raised from scheduled banks or state cooperative

banks by the industrial concerns, (b) foreign currency loans raised from foreign institutions, and

(c) deferred payments in respect of machinery imported from abroad or purchased from within

the country

(v) In recent years, the Corporation has started taking interest in the promotional

activities such as organising techno-economic surveys, setting up of technical consultancy

organisations etc.

LENDING CRITERIA:

While granting a loan, the Corporation takes into consideration- (a) the importance of the

industry to the national economy; (b) the cost and the feasibility of the scheme for which loan is

required; (c) the managerial competence; (d) the availability of the adequate raw materials and

technical personnel; (e) the quality of and the country’s demand for the product to be

manufactured.

To start with, the Corporation was expected to provide financial assistance only to the

industrial units in the private and cooperative sectors, but now public sector and joint sector units

have also become eligible for assistance.

The assistance is available both for new industrial projects, and for the renovation,

modernisation, expansion or diversification of the existing units. Generally loans are provided

for the purchase of plant and machinery, construction of factory building, purchase of land for

the factory etc. Corporation funds are not available for the payment of existing loans or for

raising working capital (e.g., purchasing raw material).

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CAPITAL:

The capital resources of the IFCI comprise of- (a) share capital and reserves, (b) bonds

and debentures, (c) public deposits, and (d) other borrowings. The Corporation started with the

authorised capital of Rs. 10 crore and now it is Rs. 50 crore. The paid-up capital was Rs. 5 crore

to start with; on June 1986, it was Rs. 45 crore.

The Industrial Development Bank of India (IDBI) accounts for 50 per cent of the share

capital of the Corporation. The remaining part is contributed by the scheduled commercial banks,

insurance companies, investment trust and cooperative banks. The Government of India has

guaranteed the payment of its capital and a minimum annual dividend of 2 per cent.

The Corporation has also built up sizable reserves. It is also authorised to raise funds by

issuing bonds and debentures. It can also accept deposits from the public. It is also authorised to

borrow from the government, the Reserve Bank, the Industrial Development Bank of India, and

the foreign loans.

IFCIL:

For ensuring greater flexibility and an ability to respond to the needs of the changing

financial system, the Industrial Finance Corporation of India Limited (IFCIL) was incorporated

as a company under the Companies Act, 1956 on 21 May 1993. Thus, IFCI became the first

institution in the financial sector in India to be converted from a statutory corporation into a

company.

FINANCIAL ASSISTANCE:

Over the years, the IFCI has been playing an important role in financing the industries.

The financial assistance sanctioned by the Corporation has increased considerably from Rs. 26.7

crore in 1961-62 to Rs. 32.3 crore in 1970-71 and further to Rs. 798.8 crore in 2001-02.

The amount of assistance disbursed in 1961-62 was Rs. 8.3 crore; it raised to Rs. 17.4

crore in 1970-71 and to Rs. 1083.8 crore in 2001-02. Since its inception in 1948, the cumulative

finance sanctioned and disbursed upto December 1992 aggregated to Rs. 14609 crore and Rs.

9756 crore respectively.

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Features:

Important features of the working of the IFCI are as follows:

(i) The Corporation is expected to give special attention to the following categories of projects:

(a) The projects promoted by new entrepreneurs and technologists;

(b) The projects located in the less developed areas;

(c) The projects based on indigenous technology or aimed at exploring new areas of

technology;

(d) The projects having prospects of earning foreign exchange or import substitution;

(e) The projects providing inputs for increasing agricultural production; and

(f) The projects fulfilling the increased demand for consumer goods.

(ii) While granting finance, greater emphasis is on the setting up of the new projects; over the

years, new projects have accounted for about two-third of the total assistance.

(iii) The major beneficiaries of the financial assistance from the IFCI are the private corporate

sector and the cooperative sector. In the cooperative sector, the loans sanctioned to sugar

industry are more significant.

(iv) Industry-wise distribution of the assistance shows that, more than three-fourth of the

aggregate assistance was sanctioned to sugar, chemicals, non-ferrous metals, engineering,

fertilisers, textiles and paper industries.

(v) Larger proportion of assistance has been extended to the developed regions of the country.

For example, more than 50 per cent of the total financial assistance is received by the four

industrially advanced states of Maharashtra, Gujarat, Tamil Nadu and West Bengal.

(vi) The Corporation participates in the Soft Loan Scheme introduced by the Industrial

Development Bank.

(vii) The IFCI sponsored the Risk Capital Foundation in order to provide assistance to new

entrepreneurs including, technologists and professionals. The Foundation, which started its

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operations in 1976, provides loans to such entrepreneurs free of interest or at nominal interest

rate.

(viii) The Corporation sponsored the Management Development Institute which has been

established to promote management education in the country.

(ix) The Corporation has also sponsored Technical Consultancy Organisation in Himachal

Pradesh, Rajasthan and Madhya Pradesh to meet the consultancy needs to new entrepreneurs and

technologists.

(x) Recently, the Corporation has started four new promotional schemes:

(a) Interest subsidy schemes for women entrepreneurs;

(b) Consultancy fee subsidy schemes for providing marketing assistance to small-scale

units;

(c) Encouraging the modernisation of tiny, small-scale and ancillary units;

(d) Controlling pollution in small and medium-scale units.

Criticism:

In spite of the notable progress made by IFCI over the years, its functioning has been

criticised on the following grounds:

(i) The IFCI has adopted a discriminatory lending policy to the disadvantage of the small

and medium- sized industrial units. Its assistance is particularly biased in favour of cotton

textiles and sugar industry.

(ii) The IFCI has not helped much in removing regional inequalities. Less developed

states are the least beneficiaries.

(iii) In many cases, the loans have been granted to those industrial units which could

easily raise resources from the capital market.

(iv) The Corporation’s insistence on the personal guarantee of directors in addition to the

mortgage of property shows that it gives more importance to the status of the directors rather

than to the soundness of the project.

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(v) The Corporation has failed to exercise control over the defaulting borrowers who

have not utilised loans for the purposes for which they have been granted.

(vi) The Corporation has provided greater assistance to the consumer goods industries

and only a meagre assistance to the basic and capital goods industries.

(vii) The Corporation has also been criticised on the charges of indulging in nepotism and

favouritism while granting loans.

(viii) The Corporation has been charging very high interest rates.

2. STATE FINANCE CORPORATIONS (SFCS)

The Industrial Finance Corporation provides financial assistance to large public limited

companies and cooperative societies and does not cover the small and medium-sized industries.

In order to meet the varied financial needs of small and medium sized industries, the

Government of India passed the State Finance Corporations Act in 1951, which empowers the

state governments to establish such Corporations in their states. The first State Finance

Corporation was set up in Punjab in 1953. At present, there are 18 SFCs operating in the country.

Functions:

Various functions of and types of financial assistance to be provided by the SFCs are

given below:

(i) The SFCs have been established to provide long-term finance to small-scale and

medium-sized industrial concerns organised as public or private companies, corporations,

partnership or proprietary concerns.

(ii) The SFCs extend loans and advances to the industrial concerns repayable within a

period of 20 years.

(iii) The SFCs guarantee loans raised by the industrial concerns in the market or from

scheduled or cooperative banks and repayable within 20 years.

(iv) The SFCs subscribe to the debentures of the industrial concerns repayable within a

period of 20 years.

(v) The SFCs guarantee loans raised by the industrial concerns from scheduled or

cooperative banks and repayable within 20 years.

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(vi) The SFCs underwrite the issue of stocks, shares, bonds and debentures by industrial

concerns.

(vii) The SFCs guarantee the deferred payments for the purchase of plant, machinery, etc.

within the country.

(viii) The SFCs are prohibited from subscribing directly to the shares or stock of any

company having limited liability, except for under-writing purposes, and granting any loan or

advance on the security of own shares.

(ix) The SFCs can act as agent of the Central or State governments or some industrial

financing institution for sanctioning and disbursing loans to small industries.

Capital:

The capital resources of the SFCs include- (a) share capital and reserves, (b) bonds and

debentures, (c) borrowing from the Reserve Bank, the state governments, (d) finance from

Industrial Development Bank of India, and (e) deposits.

The share capital of a SFC is to be fixed by the concerned state government subject to the

limits between Rs. 50 lakh and Rs. 5 crore. The shares of the SFCs can be subscribed by the state

governments, the Reserve Bank, commercial banks, cooperative banks, other financial

institutions and the public.

The shares of the Corporation are to be regarded as trustee securities under the Indian

Trusts Act, and as approved securities for purposes of the Banking Companies Act. The SFCs

can also raise funds by issuing bonds and debentures.

Bonds and debentures issued by the Corporation are guaranteed by the respected state

governments and mostly subscribed by the commercial banks and other financial institutions.

Financial Assistance:

At present, there are 18 SFCs in the country. In 2001-02, the loans sanctioned by the

SFCs amounted to Rs. 2076 crore as against Rs. 13.3 crore in 1961-62 and Rs. 49.6 crore in

1970-71. Loans disbursed in 2001-02 were Rs. 1763 crore as against Rs. 9 crore in 1961-62 and

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Rs. 33.5 crore in 1970-71. Cumulative assistance sanctioned and disbursed upto March 1991 was

Rs, 11944 crore and Rs. 8800 crore.

Features:

Important features of the working of SFCs are as given below:

(i) The SFCs were set up with the objective of providing financial assistance to small as

well as medium industrial concerns. Though there has been a notable rise in the overall financial

assistance, the performance of individual Corporations differed largely due to the attitudes and

motivations of the local entrepreneurs in different states.

(ii) Prior to 1966, the SFCs showed preference for medium industries. But, now there has

been a marked shift in their lending policies in favour of the small units. In 1985-86, the share of

small units in the total loans sanctioned was 82 per cent.

(iii) Major beneficiaries of the financial assistance of the SFCs have been the food

processing industries, services (mainly road transport), chemicals, textiles, metal products,

machinery and transport equipment industries.

(iv) A special feature of the lending operations of SFCs has been the provision of finance

to industrial concerns of backward areas. In 1985-86, the share of backward areas in the total

assistance a sanctioned by the SFCs was 53 per cent.

(v) The SFCs provide concessional assistance to the industrial units located in backward

areas in terms of soft loans at concessional rates, lower margins, reduced service charges, etc.

(vi) In order to encourage self-employment, the SFCs have formulated schemes of

assistance to technician- entrepreneurs.

Criticism:

The actual performance of the SFCs has been criticised mainly because of the following

defects and inadequacies:

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(i) The financial resources of the SFCs are inadequate. Moreover, they face the difficulty

of finding additional funds.

(ii) The SFCs have not been able to provide adequate financial assistance to meet the

requirements of small and medium industries.

(iii) The SFCs charge very high interest rates on all the loans other than the soft loans.

Moreover, the terms and conditions of assistance are also hard.

(iv) The SFCs also face the serious problem of increasing magnitude of overdues. The

main reasons for overdues are: delays in the implementation of projects and industrial sickness.

(v) The SFCs provide finance against adequate security. But many industrial units,

particularly the proprietary and partnership concerns find it difficult to offer adequate security

for their loans mainly because of the defects in title to ownership and difficulties of evaluating

the fixed assets.

(vi) The SFCs lack self-sufficient organisational set up along with adequate specialised

and trained staff for ensuring their efficient functioning.

(vii) There is also a shortage of technical personnel for judging the soundness of the

proposed schemes of the borrowing units.

(viii) Many difficulties are faced by the SFCs while extending financial assistance to the

small industrial units.

3. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

The Industrial Development Bank of India is the apex financial institution in the field of

development banking in the country. It was established in July, 1964 with the twin objectives of-

(a) meeting the growing financial needs of rapid industrialisation in the country, and (b)

coordinating the activities and assisting the growth of all institutions engaged in financing

industries.

It is an organisation with sufficiently large financial resources which not only provides

direct financial assistance to the large and medium-large industrial units, but also helps the small

and medium industries indirectly by extending refinancing and rediscounting facilities to other

industrial financing institutions.

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Thus, the primary aim of the IDBI has been to integrate the structure of industrial

financing institutions and to fill the gap between demand and supply of term finance in the

country. Initially, the IDBI was set up as a wholly owned subsidiary of the Reserve Bank of

India, but, in 1976, it was taken over by the Government of India and was made an autonomous

institution.

FUNCTIONS:

Various functions of or types of assistance to be provided by the IDBI are as follows:

(i) Direct Financial Assistance:

The IDBI provides direct financial assistance to the industrial concerns in the form of- (a)

granting loans and advances; and (b) subscribing to, purchasing or underwriting the issues of

stocks, bonds or debentures.

(ii) Indirect Financial Assistance:

The IDBI provides indirect financial assistance to the small and medium industrial

concerns through other financial institution, such as, State Finance Corporations, State Industrial

Development Corporations, Cooperative banks, regional rural banks, commercial banks. The

Assistance to these institutions include- (a) refinancing of loans given by the institutions;

subscribing to their shares and bonds; (b) rediscounting of bills.

(iii) Development Assistance:

The creation of the Development Assistance Fund is the special feature of the IDBI. The

Fund is used to provide assistance to those industries which are not able to obtain funds in the

normal course mainly because of heavy investment involved or low expected rate of returns.

The financial resources of the Fund mainly come from contributions made by the

government in the form of loans, gifts, donations, etc; and from other sources. Assistance from

the Fund requires the prior approval by the government.

(iv) Promotional Function:

Besides providing financial assistance, the IDBI also undertakes various promotional

activities such as marketing and investment research, techno- economic surveys. It provides

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technical and administrative advice for promotion, expansion and better management of the

industrial concerns.

Capital:

Initially, the authorised capital of the IDBI was Rs.50 crore. Now it has been raised to

Rs.500 crore; it can further be raised to the amount not exceeding Rs.2000 crore. The major

sources of finance of the Bank are share capital, reserves, borrowings from the Reserve Bank and

the government, and bonds and debentures. Funds are also raised through deposits from

companies and through investments.

Financial Assistance:

The IDBI has been playing the leading role in providing direct loans to the industrial

concerns; extending refinancing facilities for industrial and export credit; subscribing to and

underwriting of the shares, bonds and debentures of the industrial concerns; and accepting,

discounting and rediscounting the commercial bills of the industrial concerns.

Over the year, there has been a considerable increase in the financial assistance provided

by the IDBI. It has sanctioned financial assistance worth Rs.73.3 crore in 1970- 71 and Rs.

16034 crore in 2001-02.

The amount actually disbursed was Rs. 58.8 crore in 1970-71 and Rs. 11158 crore in

2001-02. Cumulatively, at the end of March 1991, the IDBI has sanctioned financial assistance

aggregating Rs. 48560 crore and disbursed Rs. 34656 crore.

Features:

Other features of the assistance extended by the IDBI are as given below:

(I) Direct Assistance:

The direct assistance to the industrial concerns over the years has accounted for about one

third of the total assistance. In 1985-86, the IDBI sanctioned direct assistance of Rs.1120 crore

which included project loans, soft loans, underwriting of and direct subscription to share, bonds

and debentures of industrial concerns. Loans form the major portion of the IDBI’s direct

assistance.

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(II) Refinance of Loans:

The IDBI has been providing refinance facilities in three ways- (a) by refinancing term

loans to industry and export trade; (b) by subscribing to the shares and bonds of the financial

institutions; and (c) by rediscounting the bills of exchange.

The IDBI took over the business of the Refinance Corporation of India and started

providing refinance facilities to the industrial concerns through member banks.

Cumulatively, the refinance of industrial loans sanctioned by IDBI aggregated to Rs.

7225 croreupto March 1986. Since 1967, the scheme for refinancing medium-term export loans

has been adopted in order to encourage credit facilities to the export sector.

Since 1966, the IDBI is also operating a scheme of participation is risk sharing with other

financial institutions in loans and guarantees as a measure to supplement the refinancing

operations.

(III) Assistance to Small Scale Industries:

The IDBI has shown special interest in extending assistance to the small scale industries

through its refinance schemes. In May 1986, the IDBI has set up a separate fund called Small

Industries Development Fund (S1DF) to facilitate development, expansion, modernisation,

diversification and rehabilitation of small industries.

The IDBI has also introduced the ‘Integrated Term loan’ facility for the new small

projects. After the establishment of small Industries Development Board of India (SIDBI), the

entire portfolio of IDBI relating to small and tiny sector has been transferred to SIDBI from

April 1990.

(IV) Assistance to Backward Areas:

The IDBI has been providing financial as well as non-financial assistance to promote

industries in the backward regions of the country. The financial assistance includes- (a) direct

loans at concessional rates, longer initial grace period, etc.; (b) concessional refinance facilities

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to the industries in the backward areas; and (c) special concessions to the projects in the north-

eastern regions under the bill rediscounting scheme.

The non-financial assistance is in the form of identification and formulation of variable

projects, the provision of technical assistance etc. During 1990-91, IDBI provided 43% of its

total assistance to backward areas.

(V) Soft Loan Scheme:

In 1976, the IDBI introduced the soft loan scheme for providing concessional finance to

the selected industries. This facility is available to the cement, sugar, jute, cotton textiles and

certain engineering industries for modernising, replacing and renovating their plants and

equipment. The concessional rate of interest is 7.5 per cent and the period of loan is 12 to 15

years.

(VI) Scheme for No-Industry Districts:

The IDBI has introduced a special scheme for no-industry districts with a view to develop

industries in these districts by providing financial, technical and administrative assistance and

arranging training for potential entrepreneurs. The IDBI conducts surveys to study the industrial

potential of no-industry districts.

(VII) Technical Consultancy Organisation:

The IDBI has also initiated the Technical Consultancy Organisation (TCO). The main

objective of this Organisation is to organise feasibility studies, project appraisals, industrial and

market potential surveys and training programmes for new entrepreneurs.

Restructuring of IDBI:

As a subsidiary institution to the Reserve Bank of India, the IDBI was not able to perform

its functions as the apex development bank effectively. It was made the slave of procedures and,

it could not operate freely and independently.

Thus, with a view to broaden its role as the apex financial institution and to achieve more

effective coordination among all the financial institutions, and thus to adequately assist the

process of industrialisation in the country, the IDBI was delinked from the Reserve Bank of India

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with effect from February 16, 1976 and made an autonomous corporation completely owned by

the Government of India.

With this restructuring, the following changes occurred:

(i) A separate and independent board of directors has been set up for the IDBI.

(ii) The IDBI has acquired the shares holding of the Reserve Bank in the State Finance

Corporation and has taken over its supervisory functions with respect to the SFCs.

(iii) The initial capital of Unit Trust of India and the powers relating to the appointment

of the chairman, executive trustees and nomination of four trustees have been transferred from

the Reserve Bank to the IDBI.

(iv) The IDBI has been given representation on the board and investment committee of

the Life Insurance Corporation.

(v) The internal structure of the IDBI was also reorganised. Its main functions and

objectives were entrusted to two separate wings- (a) the Domestic Finance Wing, and (b)

International Finance Wing.

Criticism:

The IDBI, as the leading development bank, has made a significant contribution to

accelerate the industrialisation process in the country .The amount, range and pattern of

assistance provided by the IDBI has grown over the years. But, still there exist certain drawbacks

because of which the IDBI has not been able to develop itself as a development bank in the true

sense of the term.

The important drawbacks of the IDBI are given below:

(i) It had confined itself to providing direct loans to the industrial concerns and has

treated the underwriting of the shares and debentures of industrial concerns as a less important

activity. In this way, the IDBI has failed to develop the capital market in the country.

(ii) The IDBI has not been able to contribute much to promote balanced development of

industrially backward areas in the country. During the period of 1970-83, 48.5 percent of the

total assistance to backward areas has been cornered by the 5 industrially advanced states.

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(iii) Similarly, in spite of repeated emphasis to assist the small scale sector, the larger

portion of the assistance has been received by the big industrial concerns.

(iv) The IDBI has largely concentrated on providing financial assistance to the industries

and has given less importance to promotional and consultancy functions.

(v) The IDBI’s lack of proper supervision of the SFCs has been largely responsible for

the alarming increase in overdues.

4. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

The Industrial Credit and Investment Corporation of India was registered as a private

limited company in 1955. It was set up as a private sector development bank to assist and

promote private industrial concerns in the country.

Broad objectives of the ICICI are:

(a) To assist in the creation, expansion and modernisation of private concerns;

(b) To encourage the participation of internal and external capital in the private concerns;

(c) To encourage private ownership of industrial investment.

Functions:

The ICICI performs the following functions:

(i) It provides long-term and medium-term loans in rupees and foreign currencies.

(ii) It participates in the equity capital of the industrial concerns.

(iii) It underwrites new issues of shares and debentures.

(iv) It guarantees loans raised by private concerns from other sources.

(v) It provides technical managerial and administrative assistance to industrial concerns.

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Capital:

Initially, the Corporation started with the authorised capital of Rs. 25 crore. At the end of

June 1986, the authorised capital was Rs. 100 crore and the paid-up capital was 49.5 crore.

Various sources of financial resources of the Corporation are Indian banks, insurance companies

and foreign institutions, including the World Bank, and the public. The government and the IDBI

have also provided loans to the Corporation.

Financial Assistance:

The performance of the ICICI in the field of financial assistance provided to the industrial

concerns has been quite satisfactory. Over the years, the assistance sanctioned by the

Corporation has grown from Rs.14.8 crore in 1961-62 to Rs. 43.0 crore in 1970-71 and Rs.

36229 crore in 2001-02.

Similarly the amount disbursed has increased from Rs.8.6 crore in 1961-62 to Rs.29.8

crore in 1970-71 and to Rs. 25831 in 2001-02. Cumulatively, at the end of March 1996, the

ICICI has sanctioned and disbursed financial assistance aggregating Rs. 66169 crore and Rs.

36591 crore respectively.

Features:

The important features of the functioning of the ICICI are as given below:

(i) The financial assistance as provided by the ICICI includes rupee loans, foreign

currency loans, guarantees, underwriting of shares and debentures, and direct subscription to

shares and debentures.

(ii) Originally, the ICICI was established to provide financial assistance to industrial

concerns in the private sector. But, recently, its scope has been widened by including industrial

concerns in the public, joint and cooperative sectors.

(iii) ICICI has been providing special attention to financing riskier and non-traditional

industries, such as chemicals, petrochemicals, heavy engineering and metal products. These four

categories of industries have accounted for more than half of the total assistance.

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(iv) Of late, the ICICI has also been providing assistance to the small scale industries and

the projects in backward areas.

(v) Along with other financial institutions, the ICICI has actively participated in

conducting surveys to examine industrial potential in various states.

(vi) In 1977, the ICICI promoted the Housing Development Finance Corporation Ltd. to

grant term loans for the construction and purchase of residential houses.

(vii) Since 1983, the ICICI has been providing leasing assistance for computerisation,

modernisation and replacement schemes; for energy conservator; for export orientation; for

pollution control; for balancing and expansion, etc.

(viii) The ICICI has not contributed much to reduce regional disparities. About three-fifth

of the total assistance given by the ICICI has been received by the advanced states of

Maharashtra, Gujrat and Tamil Nadu.

(ix) With effect from April 1, 1996, Shipping Credit and Investment Company of India

ltd. (SCICI) was merged with ICICI.

(x) The ICICI Ltd. was merged with ICICI Bank Ltd. effective from May, 3, 2002.

5. UNIT TRUST OF INDIA (UTI)

The Unit Trust of India was established in 1964 as a public sector investment institution.

The main objective of the UTI is to mobilise the savings of the small and medium income groups

and channeling them into productive investment.

It thus, the on one hand, contributes to the industrial development and diversification of

the economy, on and the other hand, provides the small savers the opportunity for sharing the

benefits of industrial development by utilising their savings in profitable and less risky

investments.

Functions:

The UTI achieves its objectives by performing the following functions:

(a) It sells its units to the investors in small and medium income groups,

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(b) It invests the funds so collected through the sale of units in industrial and corporate

securities,

(c) It distributes the annual gross income among the unit-holders in the form of

dividends.

Capital:

There are two main sources of finance of the UTI- (a) the initial capital, and (b) unit

capital. The initial capital of the Unit Trust was Rs. 5 crore; Rs. 2.5 crore were contributed by the

Reserve Bank and the rest was subscribed by the State Bank of India (Rs. 75 lakh), the Life

Insurance Corporation (Rs. 75 lakh), commercial banks and other institutions (Rs. 1 crore). Unit

Capital is raised by the sale of units.

The overall management of the Unit Trust is under the control of the Board of Trustees,

comprising a Chairman and nine other Trustees:

Progress:

Over the years, the UTI has achieved considerable progress in mobilising savings through

the sale of units and investing its funds profitably. During the first year of its establishment, i.e.,

1964, the sales of the units were of Rs. 19.1 crore. Today as on 31 March 2000 UTI has become

a trust of over 4 crore unit holders and manages over Rs. 72487 crore.

Financial assistance sanctioned by the UTI, which was Rs. 2.1 crore in 1965- 66,

increased to Rs. 9.2 crore in 1970-71 and further to Rs. 6844.9 crore in 1999-2000. Similarly, the

assistance disbursed amounted to Rs. 1.7 crore in 1965-66, Rs. 5.1 crore in 1970-71 and Rs. 5162

crore in 1999-2000.

Features:

The salient features of the working of the UTI are as given below:

(i) The UTI sells the units issued by it in the denomination of Rs.10 or Rs.100 to the

investing public.

(ii) It has formulated various Schemes to cater the specific investment needs of different

types of investors. So far, UTI has introduced 66 schemes for mobilising savings. Its main

scheme is unit Scheme 1964. It has also started specific saving plans linked with the unit

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schemes; they are: Reinvestment plan 1966, Children’s Gift Plan 1970 and Unit Linked

Insurance Plan 1971.

(iii) The UTI, in association with Merrill Lynch has initiated the ‘India Fund’ in U.K.

(1986) and ‘India Growth Fund’ in U.S.A. (1988) for providing opportunity for non-resident

Indians and persons of Indian origin residing abroad and other person’s resident outside India to

invest in the securities market of India through the special unit scheme.

(iv) In 1986, the UTI also set up a ‘Mutual Fund’ under which ‘Master Shares’ have been

offered for public subscription. The Mutual Fund provides an outlet for small investors for

investing in shares quoted in the stock exchanges.

(v) The UTI has also introduced new scheme i.e., Housing Development Fund-Units

Scheme.

(vi) The UTI has been paying dividend to the purchasers of the units at a progressively

increasing rate.

(vii) The UTI has drawn up its investment policy on the principle of maximisation of

earnings consistent with safety of capital. It has become the single largest investor in the Indian

stock markets and is the provider of large amounts of resources to Indian Industry.

(viii) To encourage the small investors to purchase units, the Government of India has

granted tax concessions.

(ix) Recently, UTI promoted a new venture, i.e., Unit Trust Management of Sri Lanka.

Apart from U.T.I., Bank of Ceylone, Warleys and Carson Cumberbatch, Sri Lanka are also

participating in this venture.

Associate Companies. In order to diversify its financial business and meet investors’

varying needs. UTI has set up a number of associate companies in the field of banking, securities

trading, investor servicing, investment advice and training.

The companies and organisations in the UTI group are- (a) UTI Investment Advisory

Services (1988); (b) UTI Institute of Capital Markets (1989); (c) UTI Investor Services Limited

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(1993) ; (d) UTI Securities Exchange Limited (1994); (e) UTI Bank Limited (1994); (f) UTI

(International) Limited, located in London and Dubai.

Bail-Out Package for UTI:

In a major initiative to overcome its recent financial crisis and restore investor confidence

in the beleaguered UTI, the central government announced a number of measures on August 31,

2002.

These measures are as follows:

(i) Repealing of the UTI Act through an Ordinance.

(ii) Bifurcation of the UTI, the largest mutual fund of the country, into UTI-I and UTI-II.

(iii) UTI-I will remain under the control of the government.

(iv) The control of UTI-II will be given to the professionals for the time-being.

(v) UTI-I will handle US-64 and 21 other assured return schemes and the government

will continue to provide support to the fund subscribed by small investors, including pensioners

and the salaried class.

(vi) UTI-II will handle all net-asset value schemes and the government will not provide

any support to this fund. The fund will also be placed under SEBI scrutiny like other mutual

funds.

(vii) Eventually, the UTI-II will be privatised.

6. INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)/ INDUSTRIAL

INVESTMENT BANK OF INDIA (IIBI):

Growing industrial sickness has been a serious problem of some major industries of the

country, such as, textiles, engineering, mining, etc. In recent years, a number of industrial units

have been experiencing sickness due to variety of reasons, such as, lack of demand for the

products, shortage of raw materials, labour problems, financial difficulties, managerial

inefficiency, etc. Closing down of industrial units is a great set-back for the economy; it reduces

production and creates un-employment.

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INDUSTRIAL RECONSTRUCTION CORPORATION OF INDIA (IRCI):

Considering the seriousness of the problem of industrial sickness, the Government of

India established the Industrial Reconstruction Corporation of India in April 1973. The main

purpose of the IRCI was to prevent and cure the problem of industrial sickness. It was expected

to provide assistance to the sick units for their rehabilitation and reconstruction. The IRCI was

set up with an authorised capital of Rs. 25 crore, issued capital of Rs.10 crore and paid-up capital

of Rs. 2.5 crore. The resources of the Corporation have been subscribed by Industrial

Development Bank of India (IDBI).

Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment

Corporation of India (ICICI), Life Insurance Corporation (LIC), State Bank of India (SBI) and

the nationalised banks.

The Government of India has granted an interest- free loan of Rs. 10 crore to the

Corporation, upto the end of March 1984, the IRCI has sanctioned financial assistance of Rs. 266

crore and disbursed Rs. 185 crore to 242 sick or closed industrial units.

INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI):

By a special Act passed in March 1985, the Government converted the IRCI into the

IRBI. The IRBI has been set up as a statutory corporation with the objective of functioning as the

principal institution for providing financial assistance needed for rehabilitation of sick industrial

concerns.

The authorised capital of the IRBI is Rs. 200 crore and paid-up capital as on March, 31,

1989 was Rs. 112.5 crore. During 1993-94 the IRBI sanctioned financial assistance of Rs. 425.8

crore of which Rs. 188.6 crore disbursed. At the end of June 1991, the cumulative financial

assistance sanctioned and disbursed stood at Rs. 1244 and Rs. 919 crore respectively.

IRBI has been converted into a full-fledged development financial institution with a new

name Industrial Investment Bank of India Ltd. (IIBI) with effect from March 27, 1997. During

2001-02, IIBI sanctioned financial assistance of Rs. 1321 crore and disbursed Rs. 1070 crore.

7. EXPORT-IMPORT (EXIM) BANK OF INDIA

The Export-Import (EXIM) Bank of India is the principal financial institution in India for

coordinating the working of institutions engaged in financing export and import trade. It is a

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statutory corporation wholly owned by the Government of India. It was established on January 1,

1982 for the purpose of financing, facilitating and promoting foreign trade of India.

Capital. The authorised capital of the EXIM Bank is Rs. 200 crore and paid up capital is

Rs. 100 crore, wholly subscribed by the Central Government.

The bank can raise additional resources through:

(i) Loans/grants from Central Government and Reserve Bank of India;

(ii) Lines of credit from institutions abroad;

(iii) Funds raised from Euro Currency markets;

(iv) Bonds issued in India.

FUNCTIONS:

The main functions of the EXIM Bank are as follows:

(i) Financing of exports and imports of goods and services, not only of India but also of

the third world countries;

(ii) Financing of exports and imports of machinery and equipment on lease basis;

(iii) Financing of joint ventures in foreign countries;

(iv) Providing loans to Indian parties to enable them to contribute to the share capital of

joint ventures in foreign countries;

(v) To undertake limited merchant banking functions such as underwriting of stocks,

shares, bonds or debentures of Indian companies engaged in export or import; and

(vi) To provide technical, administrative and financial assistance to parties in connection

with export and import.

LENDING OPERATIONS:

The EXIM Bank undertakes its lending operations under the following three broad categories:

(i) Loans to commercial banks in India include:

(a) Export bills re-discounting scheme (short-term bills); and

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(b) Refinance of export capital.

(ii) Loan to Indian companies include:

(a) Direct financial assistance to exporters;

(b) Technology and consultancy services;

(c) Overseas investment financing for equity participation by an Indian company in the

joint ventures abroad; and

(d) Pre-shipment credit in case of export contract for capital goods.

(iii) Loans to foreign governments, companies and financial institutions include:

(a) Overseas buyer’s credit scheme;

(b) Lines of credit to foreign governments; and

(c) Relending facility to banks overseas.

Recent Developments:

In order to promote exports, the EXIM Bank has developed the following schemes in

recent years:

(i) Production Equipment Finance Programme:

This offers rupee term finance to eligible export-oriented units for acquisition of

equipment.

(ii) Export Marketing Finance:

This helps Indian manufacturing companies to undertake strategic export marketing

activities based on long-term and structured export plans with advanced country markets.

(iii) Export Vendor Development Finance:

This provides integrated financing packages to manufacturer- exporters and

export/trading houses to prepare and implement strategic vendor development plans.

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ASSISTANCE:

The total financial assistance provided by the EXIM Bank and outstanding at the end of

March 1991 was about Rs. 2000 crore. During 1992-93, the bank sanctioned loans of Rs. 1590

crore registering an increase of 40% over the previous year.

Disbursement stood at Rs. 1296 crore, an increase of 17% over the previous year. During

2001-02, Exim Bank sanctioned loans of Rs. 4241 crore, while disbursed Rs. 3453 crore.

8. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI):

Small Industries Development Bank of India (SIDBI) was established as wholly owned

subsidiary of Industrial Development Bank of India (IDBI) under the small Industries

Development of India Act 1989. It is the principal institution for promotion, financing and

development of industries in the small scale sector.

It also coordinates the functions of institutions engaged in similar activities. For this

purpose, SIDBI has taken over the responsibility of administrating Small Industries Development

Fund and National Equity Fund from IDBI.

CAPITAL:

SIDBI started its operations from April 1990 with an initial authorised capital of Rs. 250

crore, which could be increased to Rs. 1000 crore. It also took over the outstanding portfolio of

IDBI relating to small scale sector held under Small Industries Development Fund as on March

31, 1990 worth over Rs. 4000 crore.

OBJECTIVES:

In the setting up of SIDBI, the main purpose of the government was to ensure larger flow

of assistance to the small scale units.

To meet this objective, the immediate thrust of the SIDBI was on the following measures:

(i) Initiating steps for technological upgradation and modernisation of existing units;

(ii) Expanding the channels for marketing the products of the small scale sector; and

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(iii) Promotion of employment-oriented industries, especially in semi- urban areas to

create more employment opportunities and thereby checking migration of population to urban

areas.

FUNCTIONS:

SIDBI provides assistance to the small scale industries sector in the country through the

existing banking and other financial institutions, such as, State Financial Corporations, State

Industrial Development Corporations, commercial banks, cooperative banks and RRBs. etc.

The major functions of SIDBI are given below:

(i) It refinances loans and advances provided by the existing lending institutions to the

small scale units.

(ii) It discounts and rediscounts bills arising from sale of machinery to and manufactured

by small scale industrial units.

(iii) It extends seed capital/soft loan assistance under National Equity Fund,

MahilaUdyamNidhi and MahilaVikasNidhi and seed capital schemes.

(iv) It grants direct assistance and refinance loans extended by primary lending

institutions for financing exports of products manufactured by small scale units.

(v) It provides services like factoring, leasing, etc. to small units.

(vi) It extends financial support to State Small Industries Corporations for providing

scarce raw materials to and marketing the products of the small scale units.

(vii) It provides financial support to National Small Industries Corporation for providing,

leasing, hire-purchase and marketing help to the small scale units.

During 1990-91, SIDBI sanctioned financial assistance worth Rs. 2409 crore, which

increased to Rs. 4785.7 crore in 2001-02. Similarly, the assistance disbursed increased from Rs.

1839 crore in 1990-91 to Rs. 3369.2 crore in 2001-02.

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9. NATIONAL HOUSING BANK (NHB)

In consonance with the national housing policy which aimed at the development of a

viable and accessible institutional framework for providing housing finance, National Housing

Bank (NHB) was set up on July 9, 1988. NHB is an apex institution for housing finance. Its

entire initial share capital of Rs. 100 crore was subscribed by the RBI. As on 30 June 1999, the

paid up capital of NHB stood at Rs. 350 crore.

A major activity of National Housing Bank (NHB) includes extending financial

assistance to various eligible institutions in the housing sector by way of- (a) refinance (b) direct

finance.

(a) REFINANCE

NHB extends refinance assistance to the various eligible primary lending institutions,

such as, scheduled banks, housing finance companies (HFCs) and cooperative sector institutions.

Refinance assistance is extended to these institutions in respect of housing loans provided by

them to the individuals as well as public and private agencies for the purpose of land

development and shelter projects.

The cumulative refinance assistance provided by NHB to the primary lending institutions

stood at 4961.48 croreupto end March 2000.

(b) DIRECT FINANCE

NHB provides direct finance for integrated land development and shelter projects of

public agencies in respect of Land Development and Shelter Projects (LDSPs), Slum

Redevelopment Projects (SRPs) and Housing Infrastructure Projects (HIPs). An amount of Rs.

61.86 crore has been disbursed so far (End March 2000) under the direct financing window.

As per the Voluntary Deposit (Immunities and Exemptions) Act 1991, a special fund has

been created in NHB for financing slum redevelopment programme. Recognising the needs of

the Non-resident Indians for housing, the Government of India has formulated a scheme for the

NRI investment in housing and real estate within the overall liberalised framework. The scheme

seeks to promote NRI investment in a large number of ventures relating to housing and real

estate development.

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These include development of serviced plots, construction of built-up residential and

commercial premises development of townships, urban infrastructure manufacturing of building

material, and participation in housing finance companies. As a part of this scheme, a nodal cell

has been set up in NHB for coordination decisions on policy and procedures relating to the

scheme.

In its efforts to increase the flow of funds particularly in rural areas and its easy

accessibility to the needy rural population, the NHB till the end of April 1996 has subscribed to

the Special Rural Housing Debentures (SRHDs) of state level cooperative Land Development

Banks (LDBs) to the tune of Rs. 180.91 crore.

Recognising the importance of providing housing finance to women, particularly those

belonging to the vulnerable sections, NHB have announced a Direct Financing Scheme for

Housing for Women. Under this scheme, NHB will directly finance the projects of public

agencies and local bodies for the benefit of women belonging to the economically weaker

sections (EWS) and low income group (LIG) categories.

10. LIFE INSURANCE CORPORATION (LIC) OF INDIA

Life Insurance Corporation of India (LIC) was established in 1956 to spread the massage

of life insurance in the country and to mobilise people’s savings for nation-building activities.

Main features of LIC are given below:

I. Saving Institution:

Life insurance both promotes and mobilises saving in the country. The income tax

concession provides further incentive to higher income persons to save through LIC policies.

The total volume of insurance business has also been growing with the spread of

insurance-consciousness in the country. The total new business of LIC during 1995-96 was Rs.

51815 crore sum assured under 10.20 lakh policies.

The LIC business can grow at still faster speed if the following improvements are made:

(i) The organisational and operational efficiency of the LIC should be increased.

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(ii) New types of insurance covers should be introduced.

(iii) The services of LIC should be extended to smaller places.

(iv) The message of life insurance should be made more popular.

(v) The general price level should be kept stable so that the insuring public does not get

cheated of a large amount of the real value of its long-term saying through inflation.

II. Term Financing Institution:

LIC also functions as a large term financing institution (or a capital market) in the

country. The annual net accrual of investible funds from life insurance business (after making all

kinds of payments liabilities to the policy holders) and net income from its vast investment are

quite large.

During 1994-95, LIC’s total income was Rs. 18,102.92 crore, consisting of premium

income of Rs. 1152.80 crore investment income of Rs. 6336.19 crore, and miscellaneous income

of Rs. 238.33 crore.

III. Investment Institutions:

LIC is a big investor of funds in government securities. Under the law, LIC is required to

invest at least 50% of its accruals in the form of premium income in government and other

approved securities.

LIC funds are also made available directly to the private sector through investment in

shares, debentures, and loans. LIC also plays a significant role in developing the business of

underwriting of new issues.

IV. Stabiliser in Share Market:

LIC acts as a downward stabiliser in the share market. The continuous inflow of new

funds enables LIC to buy shares when the market is weak. But, the LIC does not usually sell

shares when the market is overshot. This is partly due to the continuous pressure for investing

new funds and partly due to the disincentive of the capital gains tax.

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V. Progress of LIC:

Since its establishment, the LIC has made a notable progress. With the central office in

Mumbai and seven zonal offices at Mumbai, Calcutta, Delhi, Chennai, Hyderabad, Kanpur and

Bhopal, the LIC operates through 100 divisional offices in important cities and 2021 branch

offices from 1363 centers.

LIC has 5.49 lakh active agents spread over the country. The corporation also transacts

business abroad and has offices in Fiji, Mauritius and United Kingdom. The total new business

of the corporation during 1999-2000 was Rs. 186600 crore under 218.47 lakh polices.

The loans sanctioned by LIC have increased from Rs. 70 crore in 1980-81 to Rs. 1515

crore in 1991-92 and to Rs. 6742 crore in 2001-02. Similarly, the loans disbursed by LIC have

increased from Rs. 66 crore in 1980-81 to Rs. 1022 crore in 1991-92 and to Rs. 8915 crore in

2001-02.

11. General Insurance Corporation (GIC) of India:

General Insurance companies sell insurance against specific risks, such as of loss from

fire and accident, to property of various kinds, such as motor vehicles, goods, machinery,

buildings, etc., and also against risk of personal accidents and Sickness. The policies of these

companies do not involve saving feature.

The purchaser of general insurance simply buys a service and not any financial asset. In

this way, general insurance companies cannot be considered as financial intermediaries in the

true sense. However, they do accumulate large amounts of funds from premiums and investment

income and thus manage portfolios of assets like other financial initiations.

The general insurance industry in India was nationalised and a government company

known as General Insurance Corporation (GIC) of India was formed in November 1972.

With effect from January 1, 1973, the erstwhile 107 Indian and foreign companies which

were operating in the country prior to nationalisation, were regrouped into four subsidiaries of

GIC, namely- (a) National Insurance Company Limited, (b) New India Insurance Company

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Limited, (c) Oriental Insurance Company Limited, and (d) United India Insurance Company

Limited.

All these four subsidiaries of GIC operate all over the country competing with one

another and undertake various types of general insurance business.

After nationalisation, the GIC and its subsidiaries have made great progress. They have

also become important sources of funds to both the government and the private sector. By law,

they are required to invest at least 35% of their invertible funds in government and other

approved securities, with a minimum of 25% in central government securities.

During 1998-99, the net premium income of the general insurance industry was Rs. 7732

crore and the net profits were Rs. 1077 crore. Loans sanctioned by GIC increased from Rs. 30.8

crore in 1980-81 to Rs. 2983 crore in 2001-02. Similarly, the loans disbursed increased from Rs.

44.0 crore in 1980-81 to Rs. 2809 crore in 2001-02.

As on 31st March 1999, the general insurance network consisted of 4166 offices as

compared to 799 offices in 1973. Besides the domestic market, the industry is presently

operating in 17 countries directly through branches or agencies and in 14 countries through

subsidiaries and associate companies.

The wholy-owned subsidiary of GIC known as ‘India International Insurance Private

Limited’ set up in 1988 in Singapore has grown into a leading company in the Singapore market.

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