Chapter-2 History and development of DFIs

Transcription

1 Chapter-2 History and development of DFIs

2 Chapter-2 History and development of DFIs 2.1 A brief history of DFIs Development financial institutions (DFIs) are financial institutions that were established with a view to provide project appraisal and project finance to the Indian industry. The first DFI to be established was the Industrial Finance Corporation of India in The role of DFIs in industrial financing has been a topic of considerable amount of interest among researchers. A good volume of literary work has been done on the DFIs and their role in financing to the Indian industry. The subject of role of DFIs in credit facilitation to the industrial sector is important. The industrial sector of any country is the backbone of its economy. It is therefore important to keep the health of the industrial sector robust and in good shape. For this, the governing and regulating authorities should ensure that the these financial institutions should not face any bottlenecks in raising funds at cheaper rates since the funds will be further utilized for priority lending and in financing new technologies. Regular banking sector does not facilitate project appraisal and long term finance for regular projects and new technologies. This lacuna gave rise to the establishment of DFIs to cater to the specific needs of the Indian industrial sector so that it can thrive well and make the Indian economy healthy. DFIs are created in developing countries to resolve market failures, especially in regard to financing of long-term investments. The DFIs played a very significant role in rapid industrialization of the Continental Europe. Many of the DFIs were sponsored by national governments and international agencies. The first government sponsored DFI was created in Netherlands in In France, significant developments in long-term

3 History and development of DFIs 53 financing took place after establishment of DFIs such as Credit Foncier and Credit Mobiliser, over the period In Asia, establishment of Japan Development Bank and other term-lending institution fostered rapid industrialization of Japan. The success of these institutions, provided strong impetus for creation of DFIs in India after independence, in the context of the felt need for raising the investment rate. RBI was entrusted with the task of developing an appropriate financial architecture through institution building so as to mobilize and direct resources to preferred sectors as per the plan priorities. While the reach of the banking system was expanded to mobilize resources and extend working capital finance on an ever-increasing scale, to different sectors of the economy, the DFIs were established mainly to cater to the demand for long-term finance by the industrial sector. The first DFI established in India in 1948 was Industrial Finance Corporation of India (IFCI) followed by setting up of State Financial Corporations (SFCs) at the State level after passing of the SFCs Act, Development of DFIs Besides IFCI and State Finance Corporations (SFCs) in the early phase of planned economic development in India, a number of other financial institutions were set up, which included the following. Industrial Credit and Investment Corporation of India Ltd. (ICICI Ltd.) was set up in 1955, Life Insurance Corporation of India (LIC) in 1956, Refinance Corporation for Industries Ltd. in 1958 (later taken over by IDBI), Agriculture Refinance Corporation (precursor of ARDC and NABARD) in 1963, Unit Trust of India (UTI) and Industrial Development Bank of India (IDBI) in 1964, Rural Electrification Corporation Ltd. and Housing and Urban Development Corporation Ltd. (HUDCO Ltd.) in , Industrial Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971 and General Insurance Company (GIC) in 1972.It may be noted here that although the powers to regulate financial institutions had been made available to RBI

4 History and development of DFIs 54 in 1964 under the newly inserted Chapter IIIB of RBI Act, the definition of term financial institution was made precise and comprehensive by amendment to the RBI Act Section 45-I (c) in DFIs set up after 1974 and Notification of certain institutions as Public Financial Institutions Another important change that took place in 1974 was the insertion of Section 4A to the Companies Act, 1956 whereunder certain existing institutions were categorized as Public Financial Institutions (PFI) and the powers of Central Government to notify any other institution as PFI were laid down. In exercise of these powers Government of India (GOI) has been notifying from time to time certain institutions as PFIs.As on date, under the Section 4A, six specified institutions are regarded as PFI and it has been provided that the Securitisation Company or Reconstruction Company which has obtained a certificate of registration under sub-section (4) of Section 3 the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 shall also be regarded as a PFI. Besides these institutions, GOI has been notifying, from time to time, certain other FIs as PFIs and as on date additional 46 institutions have been so notified. Thus, in all 52 institutions have been categorised as PFIs. The FIs set up after 1974 have been as follows. NABARD (National Bank for Agriculture and Rural Development) was set up in 1981, EXIM (Export Import) Bank (functions carved out of IDBI) in 1982, SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later merged into ICICI Ltd. in 1997), PFC (Power Finance Corporation) Ltd. and IRFC (Indian Railways Finance Corporation) Ltd. in 1986, IREDA (Indian Renewable Energy Development Agency)Ltd. in 1987, RCTC (Risk capital and Technology Finance Corporation)Ltd. and TDICI(Technology Development and Information

5 History and development of DFIs 55 Company of India) Ltd. (later known as IFCI Venture Capital Funds Ltd. and ICICI Venture Funds Management Ltd.) in 1988, National Housing Board (NHB) in 1988,Tourism Finance Corporation of India Ltd.(TFCI Ltd.) (set up by IFCI) in 1989, Small Industries Development Bank of India (SIDBI) (functions carved out of IDBI) in 1989, North Eastern Development Finance Corporation Ltd.(NEDFi Ltd.) in 1995 and Industrial Development Finance Company Ltd. (IDFC Ltd.) in As may be observed from the foregoing, over the years, a wide variety of DFIs have come into existence and they perform the developmental role in their respective sectors. Apart from the fact that they cater to the financial needs of different sectors, there are some significant differences among them. While most of them extend direct finance, some extend indirect finance and are mainly refinancing institutions viz., SIDBI, NABARD and NHB which also have a regulatory / supervisory role. DFIs can be broadly categorized as all-india or state / regional level institutions depending on their geographical coverage of operation. Functionally, all-india institutions can be classified as (i) term-lending institutions (IFCI Ltd., IDBI, IDFC Ltd., IIBI Ltd.) extending long-term finance to different industrial sectors, (ii) refinancing institutions (NABARD, SIDBI, NHB)extending refinance to banking as well as non-banking intermediaries for finance to agriculture, SSIs and housing sectors, (iii) sector-specific / specialized institutions (EXIM Bank, TFCI Ltd., REC Ltd., HUDCO Ltd., IREDA Ltd., PFC Ltd., IRFC Ltd.), and (iv) investment institutions (LIC, UTI, GIC, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management Co Ltd.). State/regional level institutions are a distinct group and comprise various SFCs, SIDCs and NEDFi Ltd. 1 1 Report of the Working Group on Development Financial Institutions, RBI, Department of Banking Supervision, Financial Institutions Division, May 2004.

6 History and development of DFIs A brief profile of the units under study Industrial Development Bank of India (now IDBI Bank) IDBI was set up in1964 under an Act of Parliament as a wholly owned subsidiary of the RBI. In 1976, the IDBI was made the main coordinating institution for coordinating the functions of institutions involved in giving credit and helping the development of the Indian industries. In the same year, the ownership of the IDBI was transferred to the Government of India. In 1995, after the public issue government s holdings in IDBI came down to percent. 2 IDBI provides financial assistance, both in rupee and foreign currencies, for green-field projects as also for expansion, modernisation and diversification purposes. In the wake of financial sector reforms unveiled by the government since 1992, IDBI also provides indirect financial assistance by way of refinancing of loans extended by State-level financial institutions and banks and by way of rediscounting of bills of exchange arising out of sale of indigenous machinery on deferred payment terms. 2 IDBI Bank Ltd. is today one of India's largest commercial Banks. For over 40 years, IDBI Bank has essayed a key nation-building role, first as the apex Development Financial Institution (DFI) (July 1, 1964 to September 30, 2004) in the realm of industry and thereafter as a full-service commercial Bank (October 1, 2004 onwards). As a DFI, the erstwhile IDBI stretched its canvas beyond mere project financing to cover an array of services that contributed towards balanced geographical spread of industries, development of identified backward areas, emergence of a new spirit of enterprise and evolution of a deep and vibrant capital market. 3 Products and Services offered by IDBI Bank Deposits Loans Net Banking

7 History and development of DFIs 57 Online Tax Payments RTGS / Fund Transfer Phone Banking Mobile Banking Debit Cards SME Finance Agriculture Finance Industrial Finance Corporation of India (IFCI) The IFCI was the first DFI of India. It was established on 1 st July 1948 under the ambit of Industrial Finance Corporation Act as a statutory corporation. The purpose of setting IFCI was to extend institutional credit to medium and large scale industries. The IFCI status was changed to a public limited company on1st July 1993 with an objective to provide it more freedom and flexibility in terms of operations. It is a company and is governed by a board and its board of directors are elected by its shareholders. IFCI s activities are classified in to two headings i.e. financial and promotional activities. Financing Activities 1. Project Financing: It is the core business of IFCI. The main objective behind the incorporation of the DFI was to fund green field projects. Financial assistance is provided by way of medium or long term credit for setting up new projects, expansion or diversification schemes, modernization/balancing schemes of existing projects. Financial assistance is provided in the form of rupee loans, foreign currencies, underwriting and subscription of shares and debentures and providing guarantee for deferred payments and loans.

8 History and development of DFIs Financial Services: IFCI provides tailor made assistance to meet specific needs of corporates through specifically designed schemes. The various fund based products offered are equipment finance, equipment credit, equipment leasing, supplier s/ buyer s credit, leasing and hire purchase issues, working capital term loans, short term loans, equipment procurement, instalment credit and others. 3. Corporate Advisory Services: IFCI provides advisory services in the areas of projects, infrastructure, corporate finance, investment banking and corporate restructuring. It provides customized services in areas of investment appraisals, corporatization, disinvestments, business restructuring, bid process management and formation of joint ventures. It also acts as a catalyst in channelising foreign direct investments and provides a range of services to prospective foreign investors. IFCI also provides consultancy services on certain policy related technical and financial matters to regulatory agencies in different infrastructure sectors namely electricity, telecom, oil and gas, insurance and education. 4. Corporate Advisory Services to Foreign Investors: IFCI provides a whole range of services to prospective foreign investors, namely facilitating the foreign business entities through information services, necessary office infrastructure for the startup operations of the organization, coordination for obtaining the required approval/ clearances from government departments and agencies, inputs on markets, materials and manpower available in the country, inputs on available manufacturing facilities, syndication services for obtaining the required capital, research inputs and information regarding tax incentives, tariff protections, and opportunities available for acquisitions, mergers and amalgamations. 4 4 Pathak Bharti V. (2011), Indian Financial System, Third Edition, Pearson, New Delhi, p. 387.

9 History and development of DFIs 59 Promotional Activities IFCI has set up many services to promote the capital market and make the investment environment conducive in India such as investor services, custodial services, rating services, corporate advisory services, venture capital services, etc. Financial products offered by IFCI IFCI offers a wide range of products to the target customer segments to satisfy their specific financial needs. The product mix offering varies from one business/industry segment to another. IFCI customizes the product-mix to maximize customer satisfaction. Its domain knowledge and innovativeness make the product-mix a key differentiator for building, enduring and sustaining relationship with the borrowers. Debt Segment IFCI structures its Debt products based on the specific requirements of the corporate. Some of the products are: Short Term loans of less than 3 years duration to meet the immediate requirements of corporates for meeting temporary gaps in working capital, mismatch in cash flow, short term miscellaneous requirements, investment requirement in group companies and subsidiaries, subscribing warrants, Rights issues, Initial Public Offerings, acquisitions, refinancing of existing debt, preoperative expenses of projects etc. Corporate Loans of 3-5 years duration to meet all types of requirements for the corporate, group companies, subsidiary companies, investment companies etc. other than project finance requirements. Project loans of 5-15 years duration to meet the fund requirements of Greenfield projects expansions/modernization projects etc. across all industry and infrastructure sectors. Different types of guarantees and Non-fund based facilities.

10 History and development of DFIs 60 Equity Segment Investment in IPO, Right issue, Qualified Institutional Placement (QIP), Warrants etc. as well as in the secondary markets for listed companies. Strategic investment in unlisted companies. Trading in the secondary market including equity derivatives. Targeted Business Segments Traditionally, IFCI has been meeting the changing requirements of the clients by endeavoring to devise various schemes and financial products for multiple industry sectors. Major financing schemes of IFCI included Project Financing and Financial Services mainly to the manufacturing industry along with a diversified industrial portfolio. 1. Public Sector Undertakings 2. Manufacturing industry 3. Infrastructure projects o o o o o Power Airports (brownfield) Ports Hotels Urban infrastructure projects 4. NBFCs 5. Participation in Private Equity 6. Promoter funding Small Industries Development Bank of India (SIDBI) The Small Industries Development Bank of India (SIDBI) was established in the year 1990 under the Parliament Act the SIDBI Act, The charter of the Act envisioned SIDBI to be the principal financial 5

11 History and development of DFIs 61 institution for promoting financing and developing industries in the small scale sector and to coordinate the functions of other institutions engaged in similar activities. SIDBI started its operations on April 2, 1990 by taking over the outstanding portfolio and activities of IDBI related with the small scale sector. In pursuance of the SIDBI (Amendment) Act 2000, and as approved by the Government of India, 51.1 per cent equity shares of SIDBI held by IDBI have been transferred to public sector banks, LIC, GIC and other institutions owned and controlled by the central government. Presently, SIDBI has 35 banks, insurance companies, investment and financial institutions as its shareholders in addition to IDBI, which continues to hold 49 per cent share in SIDBI. Objectives of SIDBI (as envisaged in the charter) 1. Financing 2. Promotion 3. Development 4. Coordination for orderly growth of the small scale industrial sector 6 Prior to the year 2006 the small scale sector was known as the Small Scale Industries (SSI) sector. With the Enactment of Micro, Small and Medium Enterprises Act, 2006 the new acronym came into existence i.e. the MSME. The micro enterprises having an investment outlay in plant and machinery of not more than 25 lakhs of Rupees, the small enterprises with an investment between 25 lakhs to 5 Crores and the medium enterprises having investment in plant and machinery between 5 crores to 10 crores. It raised investment limit in the small enterprises from 1 crore to a maximum of five crores thereby enabling this sector to go for modernization and technological upgradation. 6 Pathak Bharti V. (2011), Indian Financial System, Third Edition, Pearson, New Delhi, p. 389.

12 History and development of DFIs 62 The MSME sector plays an important role in a country like India that has abundant labour. Since, this sector is labour intensive it has huge potentials for absorbing the increasing labour force in the country. 7 As per available statistics (4 th Census of MSME Sector), this sector employs an estimated 59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country. 7 However, this sector is plagued by technological obsolescence, lack of marketing facilities, ineffective management, longer days of receivables, industrial sickness, inadequate infrastructure, etc. SIDBI s role is to act as a friend, philosopher and guide to the small sector. And, this it does so by striking a balance between financing and providing support services for the development of the small scale sector. SIDBI, being the apex institution utilises the retail outlets of the banks and state financial institutions for developing and expansion of the MSME sector. 8 It has started a mechanism of communication and obtaining feedback from the representatives of institutions of the small scale sector and who are members of the SIDBI s National Advisory Committee and Regional Advisory Committees. SIDBI has entered into MOUs (Memorandums of Understanding) with eighteen banks, government agencies, international agencies, development institutions and industry associations to facilitate a coordinated approach for the development of the small scale sector. Financial Products offered by SIDBI SIDBI offers a chain of financial products covering micro finance, business, venture capital, project finance, assistance for technology development and marketing of small scale industries products, export finance, bills finance, factoring, guarantees for loans, and so on. 7

13 History and development of DFIs 63 SIDBI also provides support services such as training, market information, and advice for enhancing the inherent strength of small scale units. Products and services Direct finance schemes Bills finance schemes Refinance schemes International finance schemes Marketing finance and development schemes (Marketing schemes) SIDBI Foundation for Micro Credit Other schemes Promotional and development activities (P & D Activities) Fixed deposit/bonds Direct Finance Schemes Credit linked capital subsidy (CLC) Scheme for development of industrial infrastructure for Small scale sector (IID) Equipment Finance Scheme (EPS) Fast Track Financing Scheme (FTFS) Scheme of Integrated Infrastructural Development ISO 9000scheme (ISO 9000) Project Finance Scheme (PFS) Tannery modernisation Technology Development and Modernisation Fund Scheme (TDMFS) Technology Upgradation Fund Scheme for Textile Industries (TUFS) Vendor Development Scheme (VDS) Working Capital Term Loan (WCTL)

14 History and development of DFIs 64 Bills Finance Schemes Bills Rediscounting Scheme- Equipment (BRS-E) Bills Rediscounting Scheme- Inland Supply Bill Direct Discounting Scheme- Components (DDS-C) Direct Discounting Scheme- Equipment (DDS-E) Refinance Schemes Refinance Scheme for Acquisition of ISO Series Certification, by SSI Unit (RISO 9000) Composite Loan Scheme (CLS) Credit Linked Capital Subsidy Scheme for Technology Upgradation of Small Scale Industries (CLCSS) For Term Loan- Non SSI General Refinance Scheme (GRS) Mahila Udyam Nidhi (MUM) National Equity Fund Scheme (NEF) Refinance Scheme for Rehabilitation of Sick Industrial Units (RSR) Self Employment for Ex-Servicemen Scheme (SEMFEX) Single Window Scheme (SWS) Refinance for Small Road Transport Operators (SRTOs) Refinance Scheme for Tannery Modernisation (RTM) Refinance Scheme for Technology Development and Modernisation (RTDM) Refinance Scheme for Textile Industry under Technology Upgradation Fund (RTUF) International Finance Schemes Booking of forward contract Foreign Currency Term Loan Scheme (FCTL)

15 History and development of DFIs 65 Line of Credit Foreign Currency (LOCFC) Opening of Foreign Letters of Credit (FLC) Post shipment credit in rupees Pre shipment Credit in Foreign Currency (PCFC) Marketing Schemes Marketing fund for women Marketing of SSI products SIDBI Foundation for Micro Credit SIDBI Foundation for Micro Credit Other Schemes Schemes for Domestic Factoring (FAC) Scheme for Invoice Discounting (IDS) Promotional and Development Activities Mahila Vikas Nidhi Rural Industries Programme Entrepreneurship Development Programme Management Development Programmes Technology Upgradation Development Programmes Quality and Environment Management Fixed Deposits/Bonds Fixed Deposit Scheme Capital Gains Bond Further, SIDBI mobilises financial help to the target sector through 1. Indirect financial aid to primary lending institutions (PLIs), and 2. Direct aid to small units.

16 History and development of DFIs 66 Indirect assistance is extended by way of refinance, granting of line of credit (LOC) in lieu of Refinance to and rediscounting of bills of exchange to eligible PLIs including banks, state finance corporations and state industrial development corporations having over sixty five thousand branches all over the country. The total number of eligible PLIs as at the end of March 2001 stood at nine hundred and ten. SIDBI refinances loans sanctioned and disbursed by PLIs to set up new SSI projects and for expansion, technology Upgradation, modernisation, quality promotion, diversification by existing units and rehabilitation of sick SSI units. This refinances assistance flows to the transport, health, and tourism sectors and also to professional and self-employed persons setting up small sized professional ventures. SIDBI extends short term loans to scheduled banks in respect of their outstanding portfolio relating to SSI sector against which no financial support has been availed form other institutions. SIDBI rediscounts bills of SSI suppliers and bills arising out of sales/ purchase of machinery discounted by the scheduled commercial banks. SIDBI is designated as nodal agency of the Government of India s Small and Medium Enterprises (SME) Fund of Rs. 10,000 crores which it launched from April Under this fund, the borrower will receive credit at two percent below the prime lending rate. It is negotiating lines of credit from World Bank, Kreditstalt fur Wiederaufbau (KfW) and Asian Development Bank (ADB) to meet the requirements under this fund. SIDBI has created a Growth Fund (Venture Fund) with an initial corpus of Rs. 100 crore for supporting SME activities.

17 History and development of DFIs 67 Subsidiaries To facilitate the creation of an environment for self-sustaining and growing SSI units and to provide a complete range of services, SIDBI has set up the following: I) Credit Guarantee Fund Trust for Small Industries; II) SIDBI Venture Capital Limited; III) Technology Bureau for Small Enterprises; and IV) SIDBI Foundation for Micro Credit. The Credit Guarantee Fund Trust for Small Industries (CGTSI) has implemented a credit guarantee fund scheme for small industries to facilitate collateral free and third party guarantee-free credit facilities (both long term and working capital) from scheduled commercial banks and select regional rural banks to new and existing units in small scale sector, including units in the information technology and software industry. CGTSI, which guarantees collateral-free/third party guarantee-free loans upto Rs. Twenty-five lakh per SSI borrower, is an important credit facilitating initiative. SIDBI s Venture Capital Limited provides venture funds for various activities such as software services and education, product development and internet services. The Technology Bureau for Small Enterprises has been set up in association with United Nations and Asia Pacific Centre for Transfer of Technology (APCTT). The bureau assists small enterprises in accessing the latest technologies in diverse industrial fields, both from within and outside India. SIDBI Foundation for Micro Credit (SFMC) was launched in January In 2004, SFMC introduced the concept of Score Chart for pricing of loans wherein interest rate on loans to MFIs are priced based on internal

18 History and development of DFIs 68 scoring done on various parameters. In 2006, it introduced an innovative product named Corpus Support for Transformation to target the lowest segment of NGOs/MFIs in underserved States. In 2007, it set up SIDBI growth Fund for MFIs (SGF-MFIs) with a fund size of Rs. 50 crore for providing equity and quasi equity support to MFIs. The fund has since been increased to Rs. 500 crore. In 2009, it introduced Micro Enterprise Loan product for dispensing small loans ranging from Rs. 50,000 to Rs. 5 lakh. Loans are covered under CGTMSE scheme. SFMC is creating a national network of strong, viable, and sustainable micro-finance institutions from the informal and formal financial sectors to provide micro finance services to the poor, especially women, for setting up micro-enterprises. SIDBI Foundation for Risk Capital was set up in 2009 with an objective of to develop and operationalise appropriate risk capital products for micro, small and medium enterprises (MSMEs) of different size, constitution and in different industry segments. Some of the products introduced are equity/equity like instruments and mezzanine instruments like optionally convertible debt and subordinate debt for MSMEs. Apart from direct funding by SIDBI, various deliveries like Banks, VC funds, etc. are used for providing risk capital to MSMEs. Besides these, SIDBI is the co-promoter of IDBI Bank Ltd., North Eastern Development Financial Institutions (NEDFIs), SBI Factors and Canbank Factors. Consequent upon amendments to the State Financial Corporations (SFCs) Act, state finance corporations have been brought under the ambit of SIDBI. SIDBI is among top thirty development banks of the world. As per the May 2001 issue of The Banker, London, SIDBI ranked 25 th both in terms of capital and assets.

19 History and development of DFIs 69 SIDBI, in association with CIBIL and select public sector banks has set up a specialised rating agency SMERA for the SME sector. SIDBI launched software tool Credit Appraisal and Rating Tool (CART) for SME financing by Banks and Institutions on December 7, It also launched SME Growth Fund, a new venture capital fund with a corpus of Rs. 500 crore in participation with major commercial banks. It also entered in to a Memorandum of Understanding (MoU) with IDBI Ltd. in January 2006 for co-financing of projects relating to SME, service sector infrastructure projects and micro credit in industrial clusters in the country. 8 8 Pathak Bharti V. (2011), Indian Financial System, Third Edition, Pearson, New Delhi, p