Financial institutions are playing a vital role in the financial system. These are gaining much importance in the growing economy as these institutions are providing long term capital requirements of the industry. The three major financial institutions at the national level are industrial Development Bank of India (IDBI), Industrial Finance Corporation of India (IFCI) Industrial Credit and investment Corporation of India (ICICI). Apart from these institutions there are some specialized financial institutions like Export and Import Bank (EXIM Bank), Export Credit Guarantee Corporation (ECGC) and Industrial Reconstruction Bank of India (IRBI). There are about 40 state level financial corporations organized as State Finance Corporations (SFCs) and State Industrial Development Corporations (SIDCs).
The special purpose finance institutions, IRBI provides finance for rehabilitation of sick units, which show signs of recovery. EXIM Bank provides finance and other related services for import and export of goods and for export project. It functions as a coordinating agency in export finance. ECGC provides the credit insurance cover against the commercial and other risks inherent in the exports.
Besides the financial institutions the three major investment institutions of the country, Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and the Unit Trust of India (UTI) also play a dominant role in providing finds to the Indian corporate sector. These institutions provide funds by subscribing to the securities issued by the companies and by participating in the project finance extended by financial institutions.
The major sources of funds for financial institutions are their share capital, borrowings from government of India, and the lines of credit from institutions like the World Bank. The investment institutions like LIC, GIC, derive their funds from the insurance premiums collected in advance while UTI’s main stay is from funds mobilized from the sale of units.
The picture below shows the financial institution’s sources and uses of capital
1. Share Capital
2. Borrowing from Government of India
3. Credit from Institutions like World Bank
4. Through Investment Schemes
1. Through Subscription of corporate Shares
2. By providing Term Loans
3. By Re-discounting of Bills*
4. By Underwriting of a Public issue
The Industrial Development Bank of India (IDBI):
The industrial Development Bank of India was established on 1st July, 1964 as a subsidiary of the Reserve Bank of India. It was converted into a wholly owned Government of India undertaking in 1975 IDBI is an apex development institution which oversees and co-ordinates the industrial development activities of all development agencies and has been instrumental in the rapid industrialization of the country.
The various schemes of assistance from IDBI, both direct and indirect are shown below:
Assistance from IDBI
1. By subscription to share capital and debentures
2. Rupee loans and foreign currency loans
3. Underwriting of issues.
1. Refinance facilities to state level institutions and commercial banks
2. Bill re-discounting facility
BiIl discounting is the financial assistance provided by commercial banks and financial institutions to the customer either by outright purchasing of discounting the bills, arising out of the sales of finished goods. IDBI provides assistance to commercial banks by discounting the discounted bills. This process is called re-discounting of bills.
Small Industries Development Bank of India (SIDBI):
The Small Industries Development Bank of India (SIDBI) is a wholly owned subsidiary of IDBI. SIDBI has been set up to provide services to the small scale industrial units (SSIs). Services of SIDBI are similar to the IDBI, but is meant for SSIs whereas IDBI is intended for medium and large scale sector.
Industrial Finance Corporation of India (IFCI):
Industrial Finance Corporation is the first development institution to be established in India after independence in 1948. The objective of setting up IFCI is to provide medium and long term finance to eligible industrial concerns. IFCI has its head office at New Delhi and 8 regional offices at Bombay, Calcutta, Chandigarh, Delhi, Guwahati, Hyderabad, Kanpur and Madras.
Assistance from IFCI
1. Direct investment by way of subscription of share capital and debentures
2. Rupee loans
3. Foreign currency loan
4. Underwriting of issues
5. Merchant banking* services
1. Various schemes of subsidies to technical consultancy organization
2. Risk capital finances