Discuss in detail financial institution structure in India?

Ans. The various aspects of financial institutions and their functioning in India, is divided into six sections as follows :

Institutional Structure

Financial assistance : direct and indirect

Special schemes

Term loan procedures

Project appraisal

Key financial indicators

Institutional Structure

The structure of financial institutions in India is as follows :

I. All India institutions

Industrial Finance Corporation of India

Industrial Credit and Investment Corporation of India

Industrial Development Bank of India

Other all-India institutions

II. State-level institutions

State Financial Corporations

State Industrial Development Corporations

Industrial Finance Corporation of India (IFCI)

Industrial Finance Corporation of India (IFCI)- The IFCI is the first industrial financing institution to be Set up in India soon alter independence. It was set up as a statutory corporation in July, 1948 But was later converted in to a Government Company. The IFCI provides financial assistance to any public limited company and co-operative society registered in India. Such units must be engaged in the manufacture, preservation or processing of goods, or in the shipping, mining or hotel industry, or in the generation and distribution of electricity or any other form of power. Public limited companies in the public sector are also eligible to receive assistance from the IFCI. But proprietary concerns, partnership firms and private companies are not eligible for financial assistance from the corporation. The corporation may grant assistance ranging from Rs.30 lakhs to Rs.2 crores to a single enterprise. Assistance may be given in anyone or more of the above forms for a maximum period of 25 years.

State Financial Corporations (SFC’s)- As the Industrial finance Corporation does not provide industrial finance to all types or enterprises, the need was felt for state level financial institutions to finance the needs or non-corporate and other small enterprises. On September 2, 1951, the Parliament passed the State Financial Corporations Act. The Act came in to force with effect from 1st August, 1952. It empowers the State Governments to establish financial institutions for their respective States.

Industrial Credit and Investment Corporation of India (lCICI)

In view of the limited risk capital which IFCI and SFC s provide, need was felt far a more enterprising and flexible institution to facilitate industrial development in the private sector in India. A World Bank-cum-American Investment Mission visited India in 1954 and recommended the establishment or special institution the purpose of assisting industries in the private sector. Accordingly, the ICICI was set up on January 5, 1955 as a public limited company under the Companies Act. The Corporation was set up as a privately owned institution but later on the Life Insurance Corporation of India (a statutory corporation) became its major shareholder.

The lCICI has wide powers. It can provide any amount of financial assistance to any public or private company in the private sector. It can now give assistance to projects in the joint sector and co-operative sector. 11 is authorized to provide foreign currency loans to partnerships and proprietary concerns also. Ordinarily Rs.5 lakhs is the minimum limit and Rs.l crore is the higher limit for financial assistance to a single concern. Loans are given generally for the purpose of buying capital assets like land, buildings and machinery. In fact, the ICICI specializes in providing loans in foreign currency. The Corporation helps in the promotion of new enterprises as well as in the expansion and modernization of existing concerns so as to build up a sound industrial.

Industrial Development Bank of India

The Industrial Development Bank of India was established in 1964 as a subsidiary of the Reserve Bank of India. It is headquartered in Bombay. It is the apex term-lending financial institution in India. It has been designated as the principal financial institution of the country for coordinating, in conformity with national priorities, the working of institutions engaged in financing, promoting, and developing industry. IDBI finances the industry directly and also provides principal support to State Finance Corporations and State Industrial Development Corporations and commercial banks in their financing of industries, through refinancing and bill discounting facilities. The resources of IDBI consist of paid-up capital, reserves repayment of loans, market borrowings both within and outside the country, temporary credit from the Reserve Bank of India, and foreign lines of credit from the World Bank, Asian Development Bank and others.

Life Insurance Corporation of India

The Life Insurance Corporation of India (LIC, hereafter) came into being in 1956 after the nationalization and merger of about 250 independent life insurance societies. It is headquartered in Bombay. The primary activity of LIC is to conduct the life insurance business, but it has gradually developed into an important all-India financial institution which provides substantial support to industry.

General Insurance Corporation

The General Insurance Corporation (GIC, hereafter) was founded when the management of general insurance business in India was taken over by the government in 1971 and subsequently nationalised in 1973. It is headquartered in Bombay. GIC provides substantial assistance to industrial projects be way of term loans, subscription to equity capital and debentures, and underwriting of securities.

Industrial Reconstruction Bank of India

The industrial Reconstruction Bank of India, headquartered in Calcutta, was set up when its precursor, the Industrial Reconstruction Corporation of India, was reconstituted in 1984. IRBI is primarily an agency to help the reconstruction and rehabilitation of industrial units which have closed down or which face the risk of closure. IRBI offers assistance in various forms : (i) financial assistance which is not available from normal channels of finance and banking, (ii) technical assistance and guidance to sick units to revive them, (iii) managerial in the fields of administration, finance, marketing, industrial relations, etc. and (iv) suggestions for reconstruction and rationalization.

State Level Institutions

State Financial Corporations

The State Financial Corporation, set up under the State Financial Corporation Act, 1951, render assistance to medium and small scale industries in their respective states. Their shareholders are the respective state governments, IDBI, insurance companies, credit cooperatives and private shareholders.

State Industrial and Development Corporations

The State Industrial Development Corporation, were set up by the state governments during the 1960s to serve as catalytic agents in the industrialization process of their respective states. Presently almost every state has an SIDC which is fully owned by the respective state government.

Financial Assistance : Direct and Indirect

Direct Financial Assistance

Financial institutions provide direct financial assistance in the following ways :

Rupee term loans

Foreign currency term loans

Subscription to equity shares

Seed capital

Indirect Financial Assistance

Besides providing direct financial assistance, financial institutions extend help to industrial units in obtaining finance/credit through the following ways :

Deferred payment guarantee

Guarantee for foreign currency loans

Underwriting

Deferred Payment Guarantee

Financial institutions issue guarantee on behalf of the buyer of industrial machinery to the supplier offering the facility of deferred payments. Should there be a default by the buyer in the payment of deferred installments, financial institutions make the payment and subsequently recover the amount form the assisted unit. A nominal commission is charged for providing such guarantee.

Guarantee for Foreign Currency Loans

Financial institutions provide guarantee for foreign currency loans obtained by industrial concerns from institutions and banks abroad. A nominal commission is charged to the assisted unit for such guarantee.

Underwriting

As part of the overall financial package, financial institutions generally participate in underwriting equity issues of assisted units. This helps the assisted units in raising funds from the capital market.

Special Schemes

Several special schemes have been designed to serve the varied needs of industry. The important ones are :

Bill rediscounting scheme

Suppliers line of credit

Soft loan scheme

Equipment finance scheme