UNIT 27 INDUSTRIAL FINANCIAL INSTITUTIONS

Transcription

1 UNIT 27 INDUSTRIAL FINANCIAL INSTITUTIONS Structure 27.0 Objectives 27.1 Introduction 27.2 Developmental Financial Institutions Industrral Development Bank of India (IDBI) Industrral F~nance Corporatron of India Ltd. (IFCI) Industr~al Credrt and Investment Corporatron of India Ltd. (ICICI) Industrral lnvestment Bank of India Ltd. (IIBI) EXIM Bank Small Industries Development Bank of India (SIDBI) State Finance Corporatrons (SFCs) s Small Industr~al Development Corporations (SIDCs) 27.3 Banks Commercial Banks Universal Banks ' 27.4 Other Financial Institutioils Life Insurance Corporation of India (LIC) Unrt Tnist of lnd~a (UTI) Gencral Insurance Corporation (GIC) More F~nancial lnst~tutions 27.5 Lct Us Sun1 Up 27.6 Key Words 27.7 Soine Useful Books and References 27.8 Answers or Hints to Check Your Progress Exercises 27.0 OBJECTIVES After rcading this unit, you will be able to: a learn the broad structure of Industrial Financial Institutions in India; a appreciatc the role, jurisdiction and mandate of each of the Financial Institutions; a understand various schemes, instruments and types of finance these institutions provide for industries INTRODUCTION ln the last two units we have discussed the various types of sources of finance for business and industry. In this unit, we shall be discussing the various institutions / organisations, which provide these finances. These organisations could be broadly dividcd into: Developmental Financial Institutions, Banks, and Other Financial Institutions. The Figure-27.1 presented below gives a broad structure of the major F~nancial Institutions in India. As can be seen from the Figure-27.1, all the financial Institutions can be broadly dividcd into Developn~ental Financial Institutions (DFIs), Banks, and Other Financial institutions (FIs). Under DFIs we included IDBI, IFCI, ICICI, IIBI, EXIM Bank, SIDBI, SFCs and SIDCs. All these institutions provide primarily developmental finance or project Finance or long-term finance. The mandate of these institutions is to promote industrial developinent in the country. Banks are primarily established for nlobilising savings from the general public. A major part of the funds so mobilised arc invcsted in the industrics by way of short-term loans. The structure of the 27

2 Financi~ig of Industry Structure of Financial Institutions Other Financial Institutions IDBI ICICI IIBI EXIM SIDBI SFCs SIDCs Figure 27.1: Structure of Financial Institutions Banking Scctor in detail is presented in a separate figure in the later part of this unit. LIC and GIC are also cstablished to provide social security to the people. In this process they also generate huge funds and these organisations also invest these funds in industries in various forms. UTI was established on the pattern of mutual funds and it also raises huge funds and invests them in Industries. Some of the institutions, which are presented in Figure-27.1, provide primarily shortterm finance and some provide primarily long-term finance. Most of these organisatiods are national level organisations and some are at the State level. Further many of these organisations provide financial assistance to large and medium organisations and some are providing assistance to small-scalc enterprises. Exact nature of financing of each of these organisations is discussed later in this unit. To provide some idea of the scale of operation of these FIs, Table-27.1 below gives the data on the financial assistance sanctioned and distributed by the various financial institutions during the years Table 27.1: Assistance Sanctioned and Disbursed by All-India Financial Institutions Institutions April-December April-March Sarzctioris All-India Development Banks 71, , , , IDBI 19, , , , IFCI , , ICICI 44, , , , SIDBI 4, , , , IIBI 1, , ,945.9 Specialised Financial Institutions

3 Industrial Financial 6. IVCF * Institution 7. ICICI VENTURE * * TFCI Investment Institutions 12, , , , LIC 6, , , , UTI 5, , , , ,060.4 Total 84, , ,874.41,15,271.4 Disbrrrsertzerzts All-India Development Banks 40, , , , IDBI 11, , , , IFCI 1, , , ICICI *- 23, , , , SIDBI 2, , , , IIBI 1, , ,555.9 Specislised Financial Institutions IVCF * ICICI VENTURE * * TFCI Investment Institutians 9, , , , LIC 4, , , , UTI 3, , , , 1, , , , ,715.5 * : IVCF (erstwhile RCTC). ** : TDICI Ltd. has beell renailled as 'ICICI Venture Funds Management Company Limited' with effect from October 8, : GIC and its subsidiaries. Notc : Data are provisional. Monthly data are not adjusted for inter-institutional flows. Sour-ce: RBI Bulletin, March 2002 Tablc-27.1 above presents a broad view of Trends and extent of financing by all thc financial institutions, which provide industrial finance DEVELOPMENTAL FINANCIAL INSTITUTIONS Of thc eight DFIs discussed in this section IDBI, IFCI, ICICI and IIBI provide financial assistance for long and medium-term basis to all types of industries. EXIM Brink provides financial assistance mainly to export and import business and units related to this. SIDBI was promoted mainly for promotion of small-scale sector. SFCs and SIDCs are State level industrial development institutions promoted to meet the requirements in the State level Industrial Development Bank of India (IDBI) Thc IDBI was established in 1964 by an Act of Parliament. Like any other Dcvclopi~~cntal Financial Institution, IDBI also provides term finance for the 25

4 Financing ol' Industry formation of fixed assets to the Industry. In addition to this IDBI was also entrusted with the additional rcsponsibility of acting as the principal jnancial institution for coordinating the activities of the other developmental financial institutions. In 1994 IDBI Act was amended to permit public ownership in it. Some of the products and services offered by IDBI are as follows: Equipment Finance Asset Credit Working Capital Loan Corporate Loan Film Financing Direct Discounting Equipment Lease ~ Venture Capital Fund Technology up gradation Fund Scheme Refinance Project Finance Bills Rediscounting I Rehabilitation Finance Forex Services Debenture Trusteeship Merchant Banking. The total assistance sanctioned and disbursed by IDBI in the year was Rs. 2, 87, 11 1 million and 1,74,983 million respectively. IDBI has a total outstanding debt of Rs 5,64,193 million as at March 31, The share of infrastructure was the highest in the total sanctions in the year This is followed by textiles and chemicals. The IDBI's assistance to new projects in the year was Rs , which is about 44% of the total assistance in the year Industrial Finance Corporation of India Ltd. (IFCI) IFCI Ltd. was established on 1'' of July 1948 as a statutory Corporation, to pioneer institutional credit to medium and large industries. This has been converted into a Public limited company in the year IFCI was the India's First Development Financial Institution. Like any public limited company, IFCI is also managed by Board of Directors. The activities, which are undertaken by IFCI, can be broadly classified into: a) Project Financing b) Financial Services 30 c) Comprehensive corporate advisory schemes

5 Industrial Financial Institution (Rs. millions) Cumulative (April-March) (April-March) (July 1948 to March 2001) Sanctions Disbursements Sanctions Disbursements Sanctions Disbursements, Rupee Loans 12, , , , , ,303.6 Foreign Currency 1, , , , ,166.9 Loans UndenvritinglDirect Subscriptions 3, , , , , ,915.4 Guarantees 1, , , , , ,732.1 Equipment Leasing , , ,180.4 TOTAL 18, , , , , ,298.4

6 Financing of Industry already obtained. The merged entity will be second only to the State-run State Bank of India in terms of its assets Industrial Investment Bank of India Ltd. (IIBI) Industrial Investment Bank of India Ltd (IIBI) was set up as a company under the Companies Act, 1956, in March It came into being by converting the erstwhile Industrial Reconstruction Bank of India. IIBI is a company, which is fully owned by the Government of India. As on , the paid up capital of IIBI was Rs crores, out of which Rs crores was equity and the remaining was preference. Some of major functions of IIBI are: a) Providing financial assistance in the form of short, medium, and long-term loans, demand loans, working capital facilities, equity participation, assets credit, equipment finance. b) Investing in capital market instruments like shares, debentures, bonds and also money market instruments. c) Underwriting and extending guarantees d) Providing leasing and hire purchase finance e) Providing consultancy and merchant banking services. IIBI provides financial assistance to newlgross root projects, existing companies for expansion, modernisation and diversification EXIM Bank Export Import Bank of India (Exim Bank) was set up in the year by an Act of Parliament for the purpose of financing, facilitating and promoting Foreign Trade in India. It also coordinates the working.of the institutions engaged in financing exports and imports in India. Its head quarters is at Bombay and the Bank has a network of 13 offices in India and Overseas. The Bank's operations can be broadly classified as: a) Providing Export Credits, b) Creating Export Capability, c) Export Services, and d) Research & Development Of these activities a) & b) categories are more directly related to financing of Projects. The Bank provides loans on a deferred payment terms for exports of Indian machinery, manufactured goods, consultancy and technology services. It also provides assistance by way of extending lines of credidbuyers credits to overseas ' agencies like Governments, Central Barrks, Commercial Banks, etc. for financing export of goods and services from India. The Bank also provides competitive finances at various stages of the export cycle covering: Export Production, Export Product Development, Import of Technology, Investment Abroad, Post- shipment, Pre-shipment and Export Marketing. 32 The Bank also seeks to co-finance projects with global and regional development

7 agencies to assist Indian cxports in thcir efforts to participate in such overseas Indust rial Financial Institution The Bank is ii~volvcd in the promotion of two-way techllology transfer through the outward flow of invcstmcnt in Indian joint vcntures ovcrscas and forcign direct investment flow into India. Exim Bank also is a partner institution with European Union and operates for facilitating pronlotioli of joint ventures in India through tcclinicnl and fil~ancial collaboration with medium sized firms of the European Small Industries Development Bank of India (SIDBI) SIDBI was established on April 2, 1990 in order to promote, finance and develop thc industrics in the small-scalc sector. It also coordinates the functions of other institutions'engagcd in similar activitics. Thc business domain of SIDBI consists of SlDRl finances SSIs through its direct financing n~cchanism and through indirect assistaricc n~cchanism. Somc of the products and scrvices offered by SIDBI are: Dircct Finance Schemes Rills Finance Schcn~es Kcfinancc Schcmcs lntcrnal Finance Schemes Marketing Financc & Developn~ent Schcnies SIDBI Foundation for Micro Credit Promotional & Development Activities Fixcd Dcposit Schcmcs State Fiiiance Corporations (SFCs) clevelopment banks. Thcsc Corporations are playing a crucial role in thc development of s~ilall and mcdiuni cntcrpriscs in the respcctive Statcs. Thcrc are 18 SFCs in the country and most of thcse arc sct up under thc SFCs Act, The main objcctivcs of pronioting thcsc cntcrpriscs arc for achieving balanced SFCs providc financial assistance by way of term-loans, direct subscription to equity debcniurc, guarantees, discounting of bills of exchange and seedjspecial. capital. The SFCs also opcratc a nunlber of rcfiliance scheliics and equity assistance schemcs on IDBIISIDBI's bchalf. SFCs also providc assistance to newer types of business like floriculture, tissue culture, poultry fanming, commercial complexes and The Tablc 27.3 below shows us the purposc wise assistance sanctiorled during thc years and the cumulative assistance sanctioned by all the SFCs up to March

8 Financing of Industry Table 27.3: Purvose-wise Assistance Sanctioned bv all SFCs Purpose Cumulative Up to end March 2000 New Expansion/diversification Modernisationt Balancing equipment Rehabilitation Others T6tal Source : IDBI Report on Development Banking in India, State Industrial Development Corporations (SIDCs) These are 28 SIDCs in India. SIDCs are established under the Companies Act, 1956, as wholly owned undertakings of State Governments for prolnotion and development of medium and large industries in their respective States. Some of these Corporations are also functioning as SFCs. These Corporations also act as to sharesldebentures, guarantees inter-corporate deposits. These Corporations also oper; letters of credit on behalf of their borrowers. SIDCs are also involved in setting up of medium and large industrial projects in the joint sector in collaboration 2,07,940 million. During year itself SIDCs have sanctioned Rs 16,482 million as assistance to various industries. Check Your Progress 1 1) EXIM Bank provides financial interest for a) Export Business b) Rehabilitation c) Small-scale Sector 2) Which one of the following Financial Institution has a rehabilitation scheme a) IDBI b) SIDBI c) EXIM Bank 34 d) ICICI

9 BANKS Industrial Finallrial I~trlitulio Banks are the most commonly visible and most frequently used financial institutions by general public. The primary objective of a Bank is to collect funds from the public and to re-deploy them in a profitable way. - Banks in India can be broadly divided into two categories: Scheduled Banks and Non-Schedulcd Banks. Schedulcd Banks are those banks, which arc listed, in the second schedule of thc Reserve Bank of India Act, These Scheduled Banks includc Commercial Banks, Regional Rural Banks, Urban Cooperative Banks and State Cooperative Banks. Therc were 100 Commercial Banks, 196 Regional Rural Banks, 51 Urban Coopcrative Banks and 16 State Cooperative Banks in India, which werc operating as scheduled banks as on 3lS' March The Figure-27.2 prcscnted below gives detailed structure of the banking sector in India. Scheduled Commercial Banks Scheduled Banks in India + I Public Sector Private Sector Foreign Banks Regional Rural Banks (27) Banks (3 1) in India * (42) Banks (196) Scheduled Urban Nationalised State Bank of India Banks (19) & itsassociates (8) Old Private Banks (23) New Private Banks (8) Figure 27.2: Scheduled Banking Structure in (As on March 31, As included in the Second Schedule of the Reserve Bank of India Act, 1934 * The Sakura Bank Ltd. merged with Sumitomo Bank Ltd. in April 2001 Note: Figurcs in brackets indicate number of banks in each group. Sotrrce: RBI Rcport on the trends and progress of Banking in India Commercial Banks There are 296 Scheduled Commercial Banks (SCBs) in India as on 31" March These include State Bank of India and its Subsidiaries, Nationalised Banks, Private Sector Banks, Regional Rural Banks and Foreign Banks. There are 65, 340 branches all over India of these banks, which are involved in the banking operations. These banks extend credit to small-scale sector, medium and large-scale industries.. These industries include all types like textiles, chemicals, engineering, etc. and are sprcad over all the States of India.

10 Financing of Industry The following table presents the pattern of Investments in non-slr securities. Ot the investments thesc SCBs made, majority were in the public sector fixcd income securities like bonds/debentures/preference shares, etc. This trend can be clearly seen from the Table 27.4 Table 27.4: Scheduled Commercial Banks' Investment in Non-SLR Securities Issued by the Non-Financial Commercial Sector (Rs. crore) Outstanding as on March 27, March 26, March 24, March23, 1 1. Conlniercial Paper 2. Bonds/Debentures/ Preference Shares Issued by a) Public Sector Units 18,767 (PSUs) b) Private Corporate 9, Equity Shares * Total Menlorandttm Item: Loans to Corporates against 44 shares P * Issued by PSU and private corporate sector. Notes: 1. Constituent figures may not add up to totals due to rounding off. 2. Data are based on special fortnightly returns rcceived from SCBs. Sotlrce: RBI Report on trends and progress of banking in India Further a very significant amounts are deployed in the small, medium, and large industrics. Banks are rcquircd to invest in small-scale industries as a requirement under thc priority sector Icnding. In addition to this, banks are also investing in housing and tourism sectors Universal Banks Universal Banking is a new concept, which has come to India in late 90's as a result of the problems faced by DFIs in the wake of reforms in the Financial Sector. These banks peribrm the functions of both DFIs and Conimercial Banks. Some of the activities undertaken by these banks are: Iiivestnient Banking, Insurance, Mortgagc Financing, Securitisation, etc, in addition to normal commercial bank functions. 6 In India universal Banking concept began with the suggestion of the Narasimhani Committee I1 Report (1998) that the DFIs have to convert themselves into banks or non-bank financial companies, in order to solve their problems. This was furth2 endorsed by Khan Working Group (1998). Finally the RBI has issued a circular in April 200 1, setting out the operational and regulatory aspects ot conversion of DFIs into universal banks. This paved the way for UniversalBanking,in India. The ICICI a DFI started the process of becoming a Universal Bank by merging with the ICICI. Bank. The High Court of Bombay has approved the merger of ICICI Ltd with

11 lclcl Bank Ltd. Some more DFIs like IDBI are likely to conyert themselves on the lines of ICICI sooner than later. Some of the reasons for ICICI to convert itself into an Universal Bank by merging with ICICI bank are: Industrial Financial Institution a) The need to access a low cost retail deposit base b) To raise capital to write off its bad loans. c) To compensate for slowing long-term loan demand from corporations and for big d) To reduce the levels of low performing assets. e) To boost the profits by exploiting the potential for fee based services OTHER FINANCIAL INSTITUTIONS There are some Financial Institutions like LIC, UTI, GIC, etc which also provide industrial finance in a big way along with DFIs. Though their primary objectives are not industrial financing, they deploy the funds raised from the public in projects both in public and private sector. In this part of the unit, we would be discussing three such institutions, namely, LIC, UTI and GIC Life Insurance Corporation of India (LIC) Life Insurance business in India was mostly in the private hands till it was nationalized in the year 1956 and till the formation of LIC of India. In the year 1955, about 170 Insurance Business. LIC of India came into being on 1' September The basic objective of this corporation is to encourage public to invest in life insurance in order to minimize risk to people and their famllies. In this process the LIC generates huge amounts of funds and invests them in socially oriented projects like Public Transport, Power, Housing, Water supply, etc. As on 31 st March 1999, 84,49% of LICYs total investments were in the public sector 1.84% were in the cooperative sector and % were in the private sector. The corporation helps boost the industrial growth in the country. It helps small scale and medium industries by granting loans for setting up Cooperative Industrial Estates and Industrial Development Corporations. The Corporation also helps State Finance ~or~oration~, IDBI, IFCI, ICICI, etc, by subscribing to their bonds and debentures issued by these institutions. The Corporation also makes direct investment in the corporate sector in the form of long, medium and short-term loans to companies/ corporations. Table-27.5 below presents some of the highlights of Investments made by LIC over the years. Table 27.5: LIC's Investments - Some Highlights (Rs. In Crore) Type of Investment Investments Upto Central Govt. Securities State Govt. & Other Govt. Guaranteed Marketable Securities Electricity

12 Financing of Industry Housing 121 ' _07 Water Supply & Sewerage State Road Transport Corporations Loans to Industrial Estates Loans to Sugar Co-operative Development Authority-Nagaland Roadways 25 25, Power Generation (Private Sector) Municipality 4 4 Corporate Sector: Preference Shares N.A N.A N.A N.A Equity Shares N.A N.A N.A N.A Debenture N.A N.A A N.A Term Loan N.A N.A N.A N.A 2782 * 3004 * 3309 * 2965 Short Term Loan N.A N.A N.A N.A Mid Term Loan N.A N.A N.A N.A Commercial Paper Total Note: Items (1 & 2) are shown at Book Value and Items(3 to 12) are Gross Investments. The book value of socially oriented investments as at is Rs. 88,83 1 crore and the book value of total investments including corporate sector and other investments is Rs. 1'20,446 crore All the above items are shown at Book value. * Exclude 175 HDFC loan transferred to Housing. Source: Website of LIC. - From the above Table 27.5 it can be seen that the LIC has been investing huge amounts of funds in both Central and State Government Securities and the infrastructure projects. As far as financing of industries is concerned the Corporation invests primarily in debentures and equity shares. The primary sources of funds of LIC are: 1) premium income and 2) income from investments Unit Trust of India (UTI) Unit Trust of India is the India's largest mutual fund organisation. It has over million investor accounts under 85 schemes. UTI was set up in 1964 by an Act of Parliament. UTI was established to encourage and mobilize savings of small investors through sale of 'Units' and to channelise these funds into corporate investments. UTI has invested its funds in the equity and debt securities of about 19,000 Indian companies in the public, private and joint sectors. It also invests in a big way in government securities and moncy market instruments. 38 The total investible funds of UTI, at the end of June 2000, was Rs. 7,42,910

13 1111Ilions. Of these funds about 90% are invested in the corporate sector in the form of cquity, debentures 1 bonds, government securities, deposits & other investments with banks and term loans. The Table 27.6 below shows us the component wise assistance sanctioned by UTI to the industries. Industrial Financial Institution Form of Cumulative Assistance, up to end March 2000 Rupee Loans Direct subscription 1 ) Equi tylpreference ) Debentures Special deposits Clnderwriting 1 ) Equitylpreference ) Debentures Bridge/slzort-term * Loans Table 27.6: Component-wise Assistance Sanctioned to Corporate Sector (Rs. million) Grand - total * Included in special deposits. Soul-ce: IDBI Report on Development Banking in India, General Insurance Corporation (GIC) General Insurance Corporation was formed along with its four erstwhile subsidiaries after the nationalisation of the General Insurance sector in the year The four erstwhile subsidiaries of GIC are: a) The New India Assurance Con~pany Ltd. b) United 1nb Insurance Con~pany Ltd. c) The Oriental Insurance Company Ltd. d) Natioilal Insurance Company Ltd. All the above companies offer a number of insurance schemes to cater to the diverse and cillcrging needs of various segments of the society.the intention of having four subsidiary companies was to have a healthy competition among them, to improve the services and to reduce the lethargy of a single Corporation. The products available were similar and pricing was mainly controlled by a common tariff regime. The geographical area of operation is also same. In the month of November 2000, GIC has disassociated itself from the holding company status and now the erstwhile subsidiaries have started functioning as independent companies and the GIC has became a reinsurer. GIC also participates in a big way in financing of industrial projects along with DFIs through t m low, short-term loans, and direct subscription to shares and debentures of new and existing industrial enterprises. Table 27.7 given below prcsents a picture of the patters of financing by GIC component wise for the years , &

14 Financing of' Industry Form of Assistance Term loans Direct subscriptions, Firm allotments and rights issues 1) Equitylpreferencek ) Debentures Total

15 Industrial Financial Institution 2) Name any two 'Other Financial Institutions' that provide project finance for Industrial Development LET US SUM UP This unit familiarise you to the various Development Financial Institutions, Bank and other Financial Institutions like LIC, UTI, GIC. The unit discusses tfie different kinds,of schemes, these institutions offers and the kind of activities they undertake KEY WORDS Capital Structure Development Finance : Capital structure repres6nts the mix of different sources of funds. It includes - the proportion of long-term loans, the proportion of equity capital and the proportion of short-term obligation. In short, capital structure means the entire sources part of the Balance sheet. : Finance provided by Financial Institutions primarily for development projects on long-term basis SOME USEFUL BOOKS AND REFERENCES Bhole L.M., (1992). Financial Institutions and Markets, ~ata McGrawHill Publishing Company Ltd., New Delhi. IDBI, (2002). Report on Development Banking in India: , Industrial Development Bank of India, Bombay. Machiraju, H.R., (2002). Indian Financial System, Vikas Publishing House Pvt. Ltd., New Delhi. RBI, (2002). Report on Trends and Progress of Banking in India: , Reserve Bank of India, Bombay. Websites of Various Financial Institutions. 4 i

16 Financing of Industry 27.8 ANSWERS OR HINTS TO CHECK YOUR PROGRESS EXERCISES Check Your Progress 1 Check Your Progress 2 1) See Section ) See Sub-section