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Industrial Finance
Industrial Finance
Introduction
Finance is a crucial ingredient for economic growth. The key objective of India's economic reforms initiated in the early 1990s was to accelerate growth. The reform process of the 1990s did help to accelerate overall economic growth over that of the 1980s, but only marginally (RBI, 2003).1 Real gross domestic product (GDP) grew at 5.9 per cent during the reform period (1992-93 to 2002-03), higher than that of 5.6 per cent in the pre-reform period (1981-82 to 1990-91). Growth in both industry and agriculture has been slow after the initial burst in the 1990s, although growth in the tertiary sector has accelerated somewhat.
Reserve Bank of India, (2003a), Report on Currency and Finance 2002-03 Reserve Bank of India.
large-scale industrialisation, in consonance with the contemporary big-push theories of economic development, it was thought that firms lacked the resources to finance such rapid growth. The corporate financing strategy, as it evolved, was, however, inextricably linked to the fiscal position, because of the assumption that public investment would eventually generate surpluses for the social good. As fiscal deficits began to enlarge, the entire financial system began to be geared to funding the Government's budgetary needs. Banks' statutory liquidity ratio, originally a prudential requirement for solvency, was steadily raised to provide a captive market for public debt.
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implementation of the government's industrial policy initiatives. Its contribution to the modernization of Indian Industry, export promotion, import substitution, entrepreneurship development, pollution control, energy conservation and generation of both direct and indirect employment is noteworthy. 1.3.1 Formation of IFCI The IFCI was the 1st specialized financial institution setup in India to provide term finance to large industries in India. It was established on 1st July, 1948 under The Industrial Finance Corporation Act of 1948. In 1993 it was reconstituted as a company to impart higher degree of operational flexibility. 1.3.2 Objectives of IFCI 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 by the issue of shares. 1.3.3 Functions of IFCI 1) For setting up a new industrial undertaking. 2) For expansion and diversification of existing industrial undertaking. 3) For renovation and modernization of existing concerns. 4) For meeting the working capital requirements of industrial concerns in some exceptional cases. 5) Direct financial support (by way of rupee term loans as well as foreign currency loans) to industrial units for under taking new projects, expansion, modernization, diversification etc. 6) Subscription and underwriting of public issues of shares and debentures. 7) Guaranteeing of foreign currency loans and also deferred payment guarantees. 8) Merchant banking, leasing and equipment finance.
FIs to industry has clearly fallen1. The decline has been sharper in recent years because of the conversion of ICICI into a bank as well as the problems besetting Industrial Finance Corporation of India. The main sources of industrial finance in India are following: 1.4.1 Industrial Development Bank of India (IDBI): It provides credit and other facilities for industrial development in the country. It provides long term finance for green field projects, as also for modernization, expansion and diversification. It has structured various product such as equipment finance, asset credit and corporate loans in order to eater to the diverse needs of its corporate clients. 1.4.2 Industrial credit and investment corporation of India Limited (ICICI Ltd.): It played a facilitating role in consolidation in various sectors of the Indian industry, by funding mergers and acquisitions. The ICICI groups financing and banking operations, both whole sale and retail have been integrated into a single company effective from May 2002. 1.4.3 Small Industries Development Bank of India (SIDBI): It offers refinance, bills rediscounting lines of credit and resource support mechanisms to route assistance to SSI sector through a network of banks and state-level financial institutions. It also offers direct finance for meeting specific requirements of SSI sector. 1.4.4 Industrial Finance corporation of India Limited (IFCI Ltd): Its main financing comprises of projects finance, financial services and corporate advisory services. It provides custodial and investor services rating and venture capital services through its subsidiaries and associate companies. 1.4.5 Industrial Investment Bank of India Limited (IIBI Ltd): It offers a variety of financial products such as Project financ, short duration none-project asset-backed financ and working capital and other short term loans to companies. 1.4.6 Infrastructure Development finance company Limited (IDFC Ltd): It was incorporated in 1997 and was conceived as specialized institution to facilitate the flow of private finance to commercially viable infrastructure projects through innovative products and processes. 1.4.7 Industrial Reconstruction Bank of India (IRBI): It has main aim to revive sick industries and make them able to exist and compete in market by assistance. 1.4.8 State financial corporations (SFCs): It provides loans to need industries. They also promote shares and debentures, if required they would provide guarantee for loans of third parties. Apart from these through foreign investments, IPOs, these industries also get financial assistance.
2. Capital Markets
The market for corporate debt is still in the process of development in the Indian economy, as is the case with most developing economies. The private placement market has emerged as an important source of resource mobilisation in the Indian debt market. The first steps in development of the debt market have been taken through development of the government securities market. The issue of government bonds through auction, and their active trading by banks has led to the emergence of a sovereign yield curve. Steps have also been taken, though still in their infancy, to enable active trading of government securities in the stock exchanges. As this market grows and as steps are taken to regulate the private placement market, the corporate bond market will also develop. Creditworthy corporate borrowers will then be able to raise longer term funds for financing their growth.
Household financial savings are the main source of funds in the Indian financial system. Private savings performance, at about 25 per cent of GDP, has been reasonably impressive by international standards, perhaps with the exception of some of the East Asian countries. The present indications are that we can expect this continuing shift to life insurance, pension funds etc, although there could be a return to the capital market if it does well for some time. As regards the other sources of saving, the fiscal deficit continues to act as a drag, leading to negative public sector dissavings, which pull down the overall savings of the country.
2.3.1 Existing Institutional Framework We have already observed that the maturity structure of the liabilities of banks is essentially short-term in nature. On the asset side, they already hold large volumes of longterm government paper, which is in tradable form. The composition of assets suggests that banks are less averse to taking on interest rate risk than credit risk. Given the portfolio choice, it seems to make sense for banks to keep the maturity of their loans short. It is therefore necessary to change the perception of banks regarding credit risk. An added set of institutional sources of finance is emerging with the increasing magnitude of funds flowing to mutual funds, insurance and pension.
2.3.2 Development of the Corporate Debt Market A necessary condition for the process of asset securitisation is the evolution of a deep and liquid corporate debt market. As already mentioned, the corporate debt market has not fully developed in the Indian context, though there is some activity in recent years, especially in the private placement segment. Several pre-conditions for the evolution of a successful corporate debt market are now in place. These include a well-functioning market for government securities, well developed infrastructure for retail
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debt, a liquid money market, an efficient clearing and settlement system, a credible credit rating system and a formal regulatory framework.
2.3.3 Market Based Financing A final set of possibilities hinge around a shift in emphasis towards a market-based approach. At the same time, the continuing increase in the saving rate of households suggests that there is no supply constraint in terms of financial resources available. The challenge is really to harness these savings into risk capital. In a country like India, where a large number of retail investors enter the equity markets directly, there is great potential to develop institutional intermediaries to tap these funds. In contrast, the investor profile in most developed countries is relatively more institutional, with mutual funds and pension funds often accounting for a large proportion of the trade. This effectively means that investors in India bear far more risks than their counterparts in developed economies, who are able to spread their risk profile by say, buying units of a large mutual fund, with the necessary technical expertise of investment management. The expansion of the mutual fund industry thus becomes a target candidate for higher resource mobilisation from the capital markets.
Conclusions
It is now time to take stock of where we stand. While reviewing the trends in industrial finance during the last three decades, certain stylised facts stand out: l Bank credit to industry and agriculture has increased as a proportion of their respective sectoral GDP - but not as much as it might have compared with the size of the reduction in SLR. l Given the current maturity profile of their assets and liabilities and the existing fiscal deficit, banks' ability to lend in the medium- and long-term seems to be limited. l DFIs are not intrinsically uncompetitive but they need to clean up their legacy of bad debts, emphasise their strengths and enhance their market orientation. l Adequate savings are available in the economy. The issue is to channel them for investment for growth. The Indian financial system, thus, needs to look at new ways of doing business, in terms of knowledgebased banking and better management of information. It is necessary to tailor the new institutional funds to longterm investments. Besides, the next stage of industrial financing would depend on an accelerated development of the bond market facilitating the securitisation of corporate lending. In terms of the broad framework of industrial financing, it is clear that there is sufficient room for a greater role for market financing. At the same time, this does not mean that the Indian economy is ready for a shift to a market-based system of finance. The panacea to the present challenges in industrial financing hinges on the ability to design an appropriate mix of the bank- and the marketbased systems of financing.
References
Shankar Acharya, (2002), "Macroeconomic Management in the Nineties." Economic and Political Weekly, 37, No.16. pp. 1515-38. James R. Barth, Gerard Caprio. Jr., and Ross Levine, (2001), The Regulation and Supervision of Banks around the World: A New Database, Washington DC: World Bank. Ian Domowitz, Jack Glen and Ananth Madhavan, (2000), "International Evidence on Aggregate Corporate Financing Decisions". Mimeo, (Washington DC: World Bank). Government of India, (1991), Report of the Committee on the Financial System (Chairman: Shri M. Narasimham), Reserve Bank of India. Government of India, (1998), Report of the Committee on Banking Sector Reforms (Chairman: Shri M.Narasimham), New Delhi. Ross Levine, (1997), "Financial development and economic growth: Views and Agenda". Journal of Economic Literature, Volume 35 pp. 688-726. Rakesh Mohan, (2002), "Small Scale Industrial Policy: A Critical Evaluation", in Economic Policy Reforms and the Indian Economy, ed. Anne Krueger, Oxford University Press, New Delhi. Rakesh Mohan, (2003), "Developing the Corporate Debt Market in India". Presentation at the 3rd Invest India Debt Market Round Table, May 6. available at http://www.rbi.org.in. Reserve Bank of India, (2003a), Report on Currency and Finance 2002-03 Reserve Bank of India. Reserve Bank of India, (2003b), Report of Trend and Progress of Banking in India, various issues Reserve Bank of India. Raghuram Rajan and Luigi Zingales, (2003), Saving Capitalism from the Capitalists NewYork: Crown Business. Industrial Finance Corporation of India and Its Financial Resources http://www.123eng.com/forum/f12/industrial-finance-corporation-india-its-102115/ Main sources of Industrial finance in India http://www.iasplanner.com/civilservices/ias-main/gs-model-answer-sources-of-industrial-finance-inindia-benefits-from-developments#.UhQv-NLTy0s