Financial Institutions and Services

Neeraj singh

1

Non-Banking Financial Companies (NBFCs)

• Non-Banking Financial Companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still exercised under bank regulation.

• NBFCs offer most sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term Finance Certificate) and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities.

• NBFCs perform functions similar to that of banks; however there are a few differences in that an NBFC cannot accept demand deposits; an NBFC is not a part of the payment and settlement system and as such, an NBFC cannot issue cheques drawn on itself; and deposit insurance facility of the Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors, unlike banks.

Neeraj singh

2

Types of NBFC

• The types of NBFCs registered with the RBI are:-

1) Equipment leasing company:- Is any financial institution whose principal business is that of leasing equipments or financing of such an activity.

2) Hire-purchase company:- Is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions.

3) Loan company:- Means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).

4) Investment company:- Is any financial intermediary whose principal business is that of buying and selling of securities.

• Now, these NBFCs have been reclassified into three categories:-

a) Asset Finance Company (AFC)

b) Investment Company (IC) and

c) Loan Company (LC).

Neeraj singh

3

Operations of NBFC

• The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act.

• As per the RBI Act, a 'non-banking financial company' is defined as:-

1) a financial institution which is a company;

2) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

3) such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.

• Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. This registration authorises it to conduct its business as an NBFC. For the registration with the RBI, a company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution, should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).

Neeraj singh

4

Industrial Finance Corporation of India (IFCI)

• Industrial Finance Corporation of India At the time of independence in 1947, India's capital market was relatively underdeveloped. Although there was significant demand for new capital, there was a dearth of providers. It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector.

• IFCI was changed in 1993 from a statutory corporation to a company under the Indian Companies Act, 1956. Subsequently the name of the company was also changed to 'IFCI Limited ' with effect from October 1999.

• IFCI has fulfilled its original mandate by providing long term financial support to all segments of Indian Industry. It has also been chiefly instrumental in translating the government's development priorities into reality. Until the establishment of ICICI in 1956, IFCI remained solely responsible for 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.

Neeraj singh

5

Objectives of IFCI

• The main objective of IFCI is too 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.

• Objectives of IFCI:

1) For setting up a new industrial undertaking.

2) For expansion and diversification of existing industrial undertaking.

3) For renovation and modernisation of existing concerns.

4) For meeting the working capital requirements of industrial concerns in some exceptional cases.

• Some sectors that have directly benefited from IFCI include:

a. Agro-based industry (textiles, paper, sugar)

b. Service industry (hotels, hospitals)

c. Basic industry (iron & steel, fertilizers, basic chemicals, cement)

d. Capital & intermediate goods industry (electronics, synthetic fibres, synthetic plastics, miscellaneous chemicals) and Infrastructure (power generation, telecom services)

Neeraj singh

6

Operations of IFCI

• The Industrial Finance Corporation of India grants financial assistance in the following forms:

1) Granting loans or advances both in rupees and foreign currencies repayable within 25 years,

2) Guaranteeing rupee loans floated in the open market by industrial concerns,

3) Underwriting of shares and debentures of the industrial concerns,

4) Guaranteeing

a) Deferred payments in respect of imports of machinery.

b) Foreign currency loans raised from foreign institutions, and

c) Rupee loans raised from scheduled banks or state cooperative banks by industrial concerns.

• IFCI’s economic contribution can be measured from the following:

I. The direct employment generated as a result of its financial assistance is estimated at almost 1 million persons.

II. IFCI has also provided assistance to self-employed youth and women entrepreneurs under its Benevolent Reserve Fund (BRF) and the Interest Differential Fund (IDF).

III. Rashtriya Gramin Vikas Nidhi (RGVN) for promoting, supporting and developing voluntary agencies engaged in uplifting rural and urban poor in east and northeast India.

Neeraj singh

7

State Financial Corporations (SFCs)

• Industrial Finance Corporation of India was set up in 1948 to cater to the needs of large

industrial concerns. It can render financial assistance only to limited companies and co-operative societies. After independence the Government of India realised the need for financial institutions at the state level to assist the promotion and expansion of medium ands mall-scale industries.

• The State Financial Corporations Act was born out of this need in1951. The Act was amended in 1956 and 1962. The State Governments were empowered by the Act to establish financial corporation in their respective regions to foster and stimulate the development of medium and small scale industries.

• These corporations have opened a number of regional offices in the states to cater to the requirements of the entrepreneurs . SFCs provide term loan to small and medium scale industries for creation of assets, viz., land, building and machinery.

• They also provide working capital term-loan to the industrial units on competitive terms. Various non fund based services like merchant banking, under-writing of public issues, project counselling, bill discounting, leasing and hire purchase are also been undertaken by them.

Neeraj singh

8

Objectives of SFC

• The State Financial Corporations are empowered to render financial help in the following forms:

1) Granting loans and advances to or subscribing to the debentures of industrial concerns repayable within 20 years.

2) Guaranteeing loans raised by industrial concerns repayable within 20 years.(c) Underwriting the stocks, shares, debentures, subject to their being disposed off in the market within 7 years.

3) Guaranteeing deferred payments due from industrial concerns on their purchases of capital goods in India.

4) Granting soft loans to or participating in the equity of the weaker segments of the medium and small-scale sector.

• They are operating a number of financial assistance schemes for the benefit of the entrepreneurs such as assistance for marketing activities, equipment finance, special schemes for assistance to ex-servicemen, single window scheme, etc. SFCs provide maximum loan upto Rs. 240 lakhs. The interest on loan ranges between 13.75% to 16.5% depending upon the size of the loan and its term.

Neeraj singh

9

Operations of SFC

• During the last five decades the SFCs have played a significant role in the development of medium and small-scale industries. The following facts and figures peak of their performance and achievements:

1) In recent years, there has been some welcome change in the attitude of SFCs towards the small-scale industries and units in backward areas. The assistance sanctioned and disbursed to the units in these areas is gradually increasing.

2) The corporations have provided financial assistance on very liberal scale to a number of technical entrepreneurs.

3) The corporations have also advanced loans in foreign currency for import of capital goods.

4) Some of the corporations have conducted area surveys and prepared project reports to promote industrial development in backward area.

5) The corporations have also provided guarantees for deferred payments by industrial units for purchase of capital goods.

6) The corporations have directly subscribed to the share capital of a number of companies.

• Currently there are 18 State Financial Corporation (SFCs) .

Neeraj singh

10

The Industrial Reconstruction Bank of India (IRBI)

• To provide financial assistance as well as to revive and revitalise sick industrial units in public/private sectors, an institution called the Industrial Reconstruction Corporation of India (IRCI) was set up in 1971 with a share capital of Rs. 10 crores. In March 1985, it was converted into a statutory corporation called the Industrial Reconstruction Bank of India (IRBI), with an authorised capital of Rs. 200 crores and a paid up capital of Rs. 50 crores.

• The Industrial Reconstruction Bank of India (IRBI) was established as per the provisions of the Industrial Reconstruction Bank of India Act, 1984 and the erstwhile Industrial Reconstruction Corporation of India was vested and transferred to IRBI.

• The IRBI moved into business-oriented activities and in 1991 was converted into a company, transforming it into a full-fledge financial institution.

Neeraj singh

11

Objectives of IRBI

• The following objectives were laid down for the IRBI:

1) To provide financial assistance to sick industrial units,

2) To provide managerial and technical assistance to sick industrial units,

3) To secure the assistance of other financial institutions and government agencies for the revival and revitalisation of sick industrial units,

4) To provide merchant banking services for amalgamation, merger, reconstruction, etc.,

5) To provide consultancy services to the banks in the matter of sick units, and

6) To undertake leasing business.

• In a similar fashion, the IRBI is to function as the principal credit and reconstruction agency for industrial revival and co-ordinate the activities of other institutions engaged in the revival of industries and also to assist and promote industrial development and rehabilitation of industrial concerns.

Neeraj singh

12

Operations of IRBI

• The IRBI is empowered to take over the management of assisted sick industrial units, lease them out or sell them as running concerns or to prepare schemes for reconstruction by scaling down the liabilities with the approval of the Government of India.

• The IRBI gives loans for modernisation, diversification, expansion and renovation as also for meeting supplementary needs such as bridging liquidity gap and for working capital requirements. The other form of assistance includes line of credit, equipment leasing, hire purchase, etc.

• To arrest sickness at its incipient stage or to prevent any unit from falling to sickness, the IRBI has been emphasizing the need to obtain economic size of operation, modernisation, diversification,, technological up gradation etc. of its assisted units, either singly or jointly in consortium with other all-India financial institutions.

Neeraj singh

13

The State Industrial Development Corporations (SIDCs)

• The State Industrial Development Corporations were set up under the Companies Act, 1956, as wholly owned state government undertakings for promotion and development of medium and large industries. Since 1960, the State Industrial Development Corporations (SIDCs) have been set up by state governments as counterparts of the NIDC.

• In addition to provision of financial assistance, they are also involved in developing industrial infrastructure like industrial estates, industrial parks and setting up industrial projects either on their own or in the joint sector in collaboration with private entrepreneurs or as wholly owned subsidiaries.

• SIDCs exist in all the States and have developed industrial infrastructure facilities to enable prospective entrepreneurs to set up their industries in the states. These corporations render technical assistance to the entrepreneurs in the formulation of the project reports and also provide common facilities in the industrial estates.

Neeraj singh

14

Objectives of SIDC

• SIDCs are not merely financing agencies, but are intended to act as instruments for accelerating the pace of industrialization in the respective States.

• SIDCs also undertake the development of industrial areas, construction of sheds and provision of infrastructural facilities .and also the development of new growth centres. They also administer various State Government incentive schemes.

• These corporations provide loans and advances to the industrial units in the medium and large sectors to the maximum of Rs. 400 lakhs. The interest rate ranges between 13.5% to 17% depending upon the size of the loan.

Neeraj singh

15

Operations of SIDC

• Besides providing financial assistance to industrial concerns by way of loans, guarantees and underwriting of or direct subscriptions to shares and debentures, the SIDCs undertake various promotional activities such as conducting techno-economic surveys, project identification, preparation of feasibility studies, selection and training of entrepreneurs.

• SIDCs also promote joint sector projects in association with private promoters. In such projects SIDCs take 26% private co-promoter takes 25% of the equity, and the rest is offered to the investing public.

• The IDBI grants refinance to SIDCs also against the term loans provided by them. SIDCs also borrow by way of bonds and from the Government and accept deposits to augment their resources.

• Currently there are 28 State Industrial Development Corporations (SIDCs)

Neeraj singh

16

Small Industries Development Bank of India (SIDBI)

• With a view to ensuring larger flow of financial and non-financial assistance to the small scale

sector, the Government of India announced in the Budget for 1988-89, its decision to establish Small Industries Development Bank of India (SIDBI) as a subsidiary of IDBI.

• The SIDBI Act was passed by the Parliament on October 1989 and the bank commenced its operations from April 2, 1990. To equip SIDBI to play its apex role in SSI credit provision more effectively, the Union Budget 1998-99 passed the delinking of SIDBI from IDBI and transferring of IDBI shareholding in SFCs to SIDBI.

• The SIDBI commenced its operations with an initial paid-up capital of Rs. 250 crores and by taking over the outstanding portfolio of IDBI relating to small-scale sector held under Small Industries Development Fund as on March 31, 1990 amounting to Rs. 4,200 crores. The paid up capital was subsequently raised to Rs. 450 crores. The financial resources of SIDBI aggregated Rs. 16,561 crores in 1999-2000. Of these, borrowings from RBI, Government of India and other sources contributed Rs. 8,012 crores (i.e., 48.4 per cent). Bonds and debentures contributed Rs. 2,437 crores (14.7 per cent).

Neeraj singh

17

Objectives of SIDBI

• 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:

1) Initiating steps for technological upgradation and modernisation of existing units;

2) Expanding the channels for marketing the products of the small scale sector; and

3) Promotion of employment-oriented industries, especially in semi- urban areas to create more employ­ment opportunities and thereby checking migration of population to urban areas.

Neeraj singh

18

Operations of SIDBI

• 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:

1) It refinances loans and advances provided by the existing lending institutions to the small-scale units.

2) It extends seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi and Mahila Vikas Nidhi and seed capital schemes.

3) It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small-scale units.

4) It extends financial support to State Small Industries Corporations for providing scarce raw materials to and marketing the products of the small-scale units.

5) It provides financial support to National Small Industries Corporation for providing; leasing, hire pur­chase and marketing help to the small-scale units.

Neeraj singh

19

• Thank You……..

Neeraj singh

20