Indian Financial Institutions

Introduction

In response to the varied and growing demands of industry in the context of its special
needs in a fast developing economy, several specialized financial institutions have been
set up in India, both at all India level and at the states level. Today, there are more than
60 financial institutions each performing a specific task. These financial institutions carry
out their assigned functions, which are far beyond the conventional function of providing
term finance to eligible entrepreneurs and mobilizing resources for their lending
operations.

Development Banks

Specialized financial institutions apart from being money lending agencies, also assess
market potential, offer technical and managerial advice, identify and encourage new
entrepreneurs, give preference to the development of backward regions and provide
underwriting facilities. Therefore, these institutions by virtue of their multifarious
activities relating to development are called development banks.

Meaning

A development bank may be defined as a multipurpose financial institution which shares

entrepreneurial risk, shapes its approach in tune with a view to bringing about speedier
economic growth. As development banks in a developing county, these financial
institutions have responsibilities and commitments far beyond their raison d’ être, as
profit-making commercial institutions. They have to contribute to national development.

The concept of development banking is based on the premise that mere provision of
funds may not bring about entrepreneurial development. That is why development banks
offer a package of financial and non-financial assistance. Their activities focus on
discovery of new projects, preparation of project reports, technical assistance, managerial
advice and provision of funds. These institutions do not supplant the conventional
institutions but supplement them. That is the reason why development banks are called
‘gap fillers’. They serve as catalysts of industrial development and provide channels of
capital, enterprise and management.

Salient Features

The salient features of a development bank are as follows:

1. It  offers  medium-­‐term  and  long-­‐term  finance  to  entrepreneurs;  

2. Its  assistance  is  ‘project  oriented’  rather  than  ‘security  oriented’;  
3. It   acts   as   ‘partner   in   progress,’   guides   supervises   and   advises   the  
entrepreneurs;  and  
4. It  offers  both  equity  capital  and  debt  capital.  
India, being a developing country, need special financial institutions such as development
banks because of shyness of capital, lack of adequate financial institutions that perform
functions of development banks, low rate of capital formation, unorganized capital
market, and other requirements of planned economic development.

The Need for Financial Institutions

After the Second World War, several Western countries went about setting up specialized
financial institutions to rebuild their war-shattered economies. In 1951, when the
Government of India adopted the policy of planned economic development through rapid
industrialization, it called for long-term and medium-term funds generally not available
with the traditional sources of finance. Commercial banks catered only to the short-term
working capital needs of business and industry. It became imperative to instil the
investment habit among people and to build up the capital market in order to purvey
funds for industrial development. To develop the capital market and to meet the financial
requirements of industrialization, many industry-specific financial institutions were
organized in the country mainly in the public sector. These institutions have been set up
at both the national and regional levels. These specialized financial institutions provided
financial assistance to industrial enterprises for setting up new plants to make investment
in expansion and modernization of plants.

Development banks have been set up with a view to (i) assisting entrepreneurs develop
new industries so as to promote all-round industrial development of the country; (ii)
meeting growing long-term financial needs of industry; (iii) helping in the production of
new enterprises by (a) identifying and preparing projects, (b) training and developing
entrepreneurs and (c) streamlining the management of assisted industrial units; (iv)
providing merchant banking facilities such as issue of houses and underwriting to assist
industrial concerns in raising long-term finance from the capital market; (v) mobilizing
public savings and to accelerate the rate of capital formation in the country; (vi) ensuring
balanced regional growth by encouraging industrialization of backward regions;
(vii) developing a healthy and strong capital market; (viii) assisting in the modernization,
expansion and diversification of existing industries; (ix) encouraging the growth of small-
scale industries; (x) providing training and development to new and technical
entrepreneurs and (xi) optimizing the use of scarce resources.

In India, government has established various financial institutions since we attained

independence to help the growth, modernization and upgradation of Indian industries,
both in the private and public sectors. Some of these notable financial institutions include
the Industrial Finance Corporation of India (IFCI), the Industrial Credit and Investment
Corporation of India (ICICI), the Industrial Development Bank of India (IDBI), the
Industrial Investment Bank of India (IIBI), Small Industries Development Bank of India
(SIDBI), State Financial Corporations (SFCs), State Industrial Development Corporations
(SIDCs), National Small Industries Corporation (NSIC) and State Small Industries
Development Corporations (SSIDCs). In the following pages, we will study them in
greater details:
The Industrial Finance Corporation of India (IFCI)

The IFCI, the first of the term-financing institutions to be set up jointly by the
Government of India, RBI, and other financial institutions, was established on 1 July
1948 by a Special Act of the Parliament. With effect from 1 July 1993, the IFCI has been
converted into a public limited company to enable it reshape its business strategies with
greater authority, tap the capital market for funds, expand its equity base and provide
better customer services. It is now known as ‘IFCI Ltd’.

In 1993, the Government of India took the decision of transferring IFCI from statutory
company to a company that would come under the Indian Companies Act, 1956.1

The IFCI has made a wide range of contributions in various sectors in the Indian industry.
Some of the noteworthy contributions of the IFCI include improvement of Indian
industry, export promotion, import substitution, development in business, pollution
control measures, energy preservation and providing direct and indirect employment. The
following are some of the industrial sectors that have been greatly benefited from the
IFCI:

• Capital   and   intermediate   goods   industry   that   would   encompass   electronics,  

synthetic  plastics,  synthetic  fibres  and  miscellaneous  chemicals.  
• Services  industries  such  as  hotels  and  hospitals.  
• Consumer  goods  industry  such  as  textiles,  paper  and  sugar.  
• Infrastructure  sector  involving  power  generation  and  telecom  services.  
• •   Basic   industries   involving   products   such   as   cement,   iron   and   steel,  
fertilizers  and  basic  chemicals.  

Further, IFCI’s economic contribution can be easily assessed from the following: Since
its inception, the IFCI has sanctioned financial assistance of INR 462 billion to 5707
concerns and disbursed INR 444 billion. The magnitude of IFCIs financial assistance can
be gauged from the following data:

It has catalysed investments worth INR 2526 billion in the industrial and infrastructure
sectors. By way of illustration, IFCI’s assistance has helped create production capacities
of

• 6.5  million  spindles  in  the  textile  industry  

• 7.2  million  tonnes  per  annum  (tpa)  of  sugar  production  
• 1.7  million  tpa  of  paper  and  paper  products  
• 18.5  million  tpa  of  fertilizers  
• 59.3  million  tpa  of  cement  
• 30.2  million  tpa  of  iron  and  steel  
 • 32.8  million  tpa  of  petroleum  refining  
• 14,953  MW  of  electricity  
• 22,106  hotel  rooms  
• 5544  hospital  beds  
• 8  port  projects,  66  telecom  projects  and  
• one  bridge  project.2  

Objectives of the IFCI

The IFCI has been established with a view to making the medium-term and long-term
credits more easily available to the industrial organizations in India, ‘especially in
situations where normal banking facilities are unavailable or recourse to capital issue
methods is unworkable’. The IFCI aims at helping industrial companies that have thought
of schemes either for production or for modernization and expansion of a plant so as to
increase their productive efficiency and capacity. The IFCI also provides assistance to
public sector undertakings.

The IFCI provides project finance, merchant banking, suppliers’ credit, equipment
leasing, finance to leasing and hire-purchase concerns, etc., and promotional services.
Even while assisting all eligible industrial undertakings, the corporation gives priority to
development of backward areas, new entrepreneurs and technocrats, indigenous
technology, ancillary industries, cooperative sector, import substitution and export
promotion. Of special relevance regarding the functions of the IFCI is the fact that its
focus is on providing financial assistance to public limited companies and cooperative
societies engaged in manufacturing, mining, shipping, hotel business, etc.

Functions, Scope and Types of Assistance to Industry

Major activities of the IFCI are condensed below:

1. It   grants   loans   and   advances   to   or   subscribes   to   debentures   of   industrial  

organizations.  
2. It   guarantees   loans   raised   by   industrial   organizations   from   the   capital  
market,  scheduled  banks  or  state  cooperative  banks.  
3. It   gives   guarantees   with   regard   to   deferred   payments   for   imports   of   capital  
goods  manufactured  in  India.  
4. It   guarantees   loans   raised   from   or   credit   arrangements   made   by   industrial  
organizations   with   any   bank   or   financial   institution   outside   India   with   the  
approval  of  the  central  government.  
5. It   underwrites   the   issue   of   shares   and   debentures   by   industrial  
organizations.  
6. It   subscribes   directly   to   the   shares   and   debentures   of   industrial  
organizations.  
7. It   acts   as   an   agent   of   the   central   government   and   World   Bank   relating   to  
loans  sanctioned  by  them  to  industrial  organizations  in  India.  
 8. It   participates   in   the   administration   of   the   soft   loan   scheme   for  
modernization   and   rehabilitation   of   sick   industries   along   with   other   all   India  
term  lending  institutions.  
9. It   provides   financial   assistance   for   setting   up   industrial   projects   in   backward  
areas  notified  by  the  central  government  on  concessional  terms.  
10. It   provides   guidance   in   project   planning   and   implementation   through  
specialized  agencies  such  as  technical  consultancy  organizations  (TCOs).  

The financial assistance provided by the IFCI is available for setting up of new projects,
and also for the expansion, diversification, and modernization of existing units. The IFCI
Ltd also gives financial assistance to industrial concerns not tied to any project, if they
are otherwise eligible. Some of the schemes of assistance introduced for this purpose
include: (i) equipment leasing, (ii) suppliers’ credit and (iii) buyers’ credit. Indirect
finance is provided as assistance to leasing companies. The IFCI also provides short-term
loans for working capital purposes.

The main focus of the IFCI was to provide long-term financial benefits to various sectors
in the Indian industry which it has fulfilled quite efficiently. The IFCI has also been quite
faithful in implementing the number of schemes that the Government of India planned to
ensure financial benefits into services. The IFCI carried out all the responsibilities
regarding government’s industrial policy initiatives till the establishment of the ICICI in
1956 and the IDBI in 1964.

The Management of the IFCI

The IFCI is a joint stock company owned and managed by the Government of India,
which has been vested with wide powers over the financial institutions. The IFCI is
expected to carry out the policy set out by the government. The routine management of
the corporation is carried out by a board of directors comprising a whole time chairman
and 12 directors. The chairman is appointed by the central government in consultation
with the IDBI, two directors are nominated by the central government, four by the IDBI
and the remaining six are elected by the shareholders belonging to institutions other than
the IDBI. The board of directors will act on business principles with due regard to the
interests of trade, industry and the general public. There is also a central committee
comprising the chairman and four directors.

As of 31 March 2003, the principal holders of the total paid-up capital of the IFPCI Ltd.
(along with their shares given in brackets) were: (i) Nationalized banks (19.89%); (ii)
IDBI (18.96%); (iii) SBI and its subsidiaries (9.69%); (iv) LIC (5.02%) and (v) GIC and
its subsidiaries (5.97%) and so on.

The Working of the IFCI

The IFCI has completed more than six decades of operations. During this period, the
activities of the corporation have progressively expanded both in scope and magnitude. It
has emerged as a leading institution providing financial and other assistance to industry
in diverse forms and areas.

Before sanctioning assistance to any company, the IFCI evaluates the proposal in terms
of the following criteria:

1. Importance  of  the  concerned  industry  in  the  national  economy  

2. Feasibility  and  the  cost  of  the  project  
3. Expense  of  the  management  
4. Nature  of  the  collateral  offered  
5. Sufficiency  in  the  supply  of  technical  personnel  and  raw  materials  
6. Country’s  need  for  the  product  produced  and  its  quality  

Institutions Promoted by the IFCI

With a view to supplementing its primary function of assisting industrialization of the

country, IFCI has promoted and participated in the establishment of the following
institutions, among others:

1. Tourism  Finance  Corporation  of  India  (TFCI)  Ltd  

2. Management  Development  Institute  (MDI)  
3. TCO  
4. Investment  Information  and  Credit  Rating  Agency  of  India  (ICRA)  Ltd  
5. Institute  of  Labour  Development  (ILD)  
6. Tourism  Advisory  and  Financial  Services  Corporation  of  India  Ltd  (TAFSCI)  
7. Over-­‐the-­‐Counter  Exchange  of  India  Ltd  (OTCEI)  
8. IFCI  Venture  Capital  Funds  Ltd  
9. Securities  Trading  Corporation  of  India  (STCI)  
10. Discount  and  Finance  House  of  India  Ltd  (DFHI)  
11. Stock  Holding  Corporation  of  India  Ltd  (SIICI)  
12. LIC  Housing  Finance  Ltd  
13. GIC  Grih  Vitta  Ltd  
14. National  Stock  Exchange  (NSE)  of  India  Ltd  

Subsidiary Companies of the IFCI

The IFCI has established the following three subsidiaries: (i) The IFCI financial Services
Ltd; (ii) IFCI Investor Services Ltd and (iii) I-Fin.

Critical Evaluation of the Performance of the IFCI

The IFCI has been criticized due to the following reasons:

1. The  amounts  sanctioned  for  new  projects  have  been  totally  inadequate,  being  
only  about  20  per  cent  of  the  total  assistance  required.  
2. Equity  finance  has  been  very  small  compared  to  debt  finance.  
 3. Adequate   attention   has   not   been   given   to   backward   regions   and   the   small-­‐
scale  sector.  
4. Percentage   share   of   infrastructure   projects   in   the   total   loans   outstanding   is  
just  about  13  per  cent.  
5. There  has  been  a  sharp  fall  in  the  assistance  provided  in  foreign  currency.  
6. The   IFCI’s   income   has   fallen   sharply   though   the   country   has   a   lot   of   forex  
resources.  
7. The   non-­‐performing   assets   (NPAs)   of   the   IFCI   represent   a   very   high  
proportion  of  the  total  net  assets.  Its  capital  adequacy  ratio  has  fallen  to  less  
than  1  per  cent.  

In spite of recapitalization and restricting of liabilities, the financial position of the IFCI
has deteriorated much in recent years.

In January 2004, IFCI’s ratio of NPAs stood at 21.10 per cent and by March 2012, its
capital adequacy ratio was precariously close to unsatisfactory. The share of NPAs in
IFCI’s net loans as at end March 2000 was 9.1 per cent. The capital to risk weighted per
cent, though it improved substantially to 14 per cent by 2007. There were other adverse
performance parameters indicating the growing irrelevance of the IFCI in the present
Indian capital market. According to the D. Basu Committee, change in the external
environment for commodity companies, a depressed capital market and change in the
operating environment of DFIs were the factors responsible for the downslide.

Case 37.1: The Latest on IFCI

It was reported in the media that the Industrial Finance Corporation of India (IFCI), the
country’s oldest development finance institution, may form a holding company through
which it will apply for banking license. The IFCI is looking for a suitable partner for
entering the banking business.

Preliminary consensus evolved in internal consultations appears that the IFCI will remain
a non-deposit-taking finance company, while the new holding company will be formed to
run the banking business. The company is expected to speed-track the formation of the
holding company so that it can apply for the banking licence shortly.

IFCI’s MD and CEO, Atul Kumar Rai, while confirming the development, said that it is
too early to comment on it. After 10 years, the institution has expanded its loan portfolio
by around INR 30 billion in 2008–09. It is also planning to expand its asset base by
around 20 per cent from the present level of INR 150 billion. The IFCI has been making
profit for the past 3 consecutive years. The 60-year-old institution with a capital
adequacy ratio of more than 20 per cent and almost no net NPAs is looking at raising
more money towards the end of the year. Since the IFCI has secured good credit ratings,
it will be easier to raise resources.

Source: Anto Antony (2009), ‘IFCI Mulls Banking Foray, Looks Out for Partners, Mulls
Holding Co, To Seek Licence in Next Fiscal’, The Economic Times, 2 July.
Table 37.1 Audited Financial Results for the Year Ended 31 March 2009 (INR billion)

 
 

In early 2004, the authorities have put into effect, as a sort of crisis management, a
restructuring package with a view to arresting further decline of its deteriorating health.
In future, the IFCI Ltd would cater to the needs of small and medium enterprises and to
serve as a mid-corporate specialist. It would mainly focus on asset financing, IPO
management, loan syndication, project finance, receivables financing, mergers and
acquisitions, and corporate and project advisory services. The IFCI is also planning to set
up a clearing house for securities and has applied to RBI to set up a commercial bank. It
has also ambitious plans to venture into insurance, asset management and stock broking.

The Industrial Credit and Investment Corporation of India (ICICI)

The IFCI and its counterparts in states were originally designed to provide only loan
capital and were not positioned to meet all the requirements of development finance. To
fill the void, it was found necessary to create an institution to develop the capital market
by stimulating the supply of risk capital through subscriptions and underwriting issues of
joint stock companies. Accordingly, the ICICI, a private sector development bank, was
established as a public limited company on 5 January 1955. It was sponsored by
industrialists in India, England and the United States of America, the World Bank and the
Government of India. As a joint stock company, ICICI had greater flexibility in
operations. The ICICI-promoted Shipping Credit and Investment Corporation of India
(SCICI) was merged with ICICI in April 1996. The ICICI acquired ITC Classics in 1997
and Anagram Finance in 1998.

In early 2002, the ICICI established the ICICI Bank and on 30 March 2002, the ICICI
Ltd. was merged with its subsidiary, the ICICI Bank Ltd. The ICICI Bank which has now
assumed the role of a universal bank is the second largest commercial bank in India next
to the SBI and the largest bank in the private sector. It offers a wide range of financial
products and services in the areas of commercial banking, investment banking, non-
banking finance, investor services, broking, venture capital financing, mutual funds, etc.

Objectives of the ICICI

The main objective of the ICICI was to promote industrial development in the private
sector by providing financial, technical, administrative and related services. The ICICI
was established with a view to (a) helping in the promotion, expansion and modernization
of industrial enterprises in the private sector; (b) encouraging and promoting the
participation of private capital, both Indian and foreign, in such enterprises and (c)
stimulating the growth of private ownership of industrial investments and expansion of
investment markets.

Functions of the ICICI

The kind of assistance rendered by the ICICI and scope of its activities were more or less
similar to those of the IFCI. Its main business was to provide medium-term and long-term
project financing, leasing and related kind of financial and advisory services to private
industry in India. Till recently, it was the only financial institution in the private sector
that provided foreign currency loans. Even today, its foreign currency loans business is
much greater than that of other financial institutions.

To sum up, the ICICI provides assistance to industrial enterprises by (i) providing
medium-term and long-term rupee loans to industrial concerns; (ii) giving loans in
foreign currencies towards the cost of imported capital equipment; (iii) offering
guarantees to the loans raised by companies in the open market; (iv) promoting and
underwriting new issues of industrial securities; (v) contributing directly to shares and
debentures of companies; (vi) offering funds available for reinvestment by revolving
investments as rapidly as prudence demanded; (vii) providing technical and managerial
know-how to industries; (viii) helping industrial concerns in obtaining technical and
administrative services from internal and external sources; and (ix) sponsoring the
participation of both internal and external private capital in industrial concerns.

Resources of the ICICI

The resources of ICICI came from (i) share capital; (ii) initial interest free loan given by
the Government of India; (iii) advance in foreign currency by the World Bank; (iv) rupee
loans by IDBI; (v) borrowings from the RBI; (vi) lines of credit from the World Bank;
(vii) bond issues in India and foreign capital markets; (viii) issues of shares to Indian
public: and (ix) reserves.

The Management of the ICICI

The management of the ICICI is vested in a board of directors comprising a full-time

CMD and 11 directors. The central government nominates one director, seven directors
are elected by the Indian shareholders and three by foreign shareholders. There are a few
committees to assist the board of directors.

The ICICI Bank provides project finance, corporate finance and retail finance. It also
undertakes fee-based services and capital market operations. The organizational structure
of the ICICI Bank consists of five principal groups: (a) Retail banking; (b) Wholesale-
banking; (c) Project finance and special assets management; (d) International business;
and (e) Corporate Centre.

The merger of the ICICI with the ICICI Bank in 2002 has strengthened the financial
position of the combined entity. However, with this merger, ICICI does not exist
anymore as a development financial institution.

Subsidiaries of the ICICI Bank Ltd

As per the Annual Report for FY 2009, ICICI has the following subsidiaries:

1. ICICI  Securities  Primary  Dealership  Limited  

2. ICICI  Securities  Limited  
3. ICICI  Securities  Holdings  Inc.  
4. ICICI  Securities  Inc.  
5. ICICI  Venture  Funds  Management  Company  Limited  
6. ICICI  International  Limited  
7. ICICI  Prudential  Life  Insurance  Company  Limited  
8. (viii)  ICICI  Lombard  General  Insurance  Company  Limited  
9. (ix)  ICICI  Home  Finance  Company  Limited  
10. (x)  ICICI  Investment  Management  Company  Limited  
11. ICICI  Trusteeship  Services  Limited  
12. (xii)  ICICI  Bank  UK  PLC  
13. ICICI  Bank  Canada  Limited  
14. (xiv)  ICICI  Wealth  Management  Inc.  
15. (xv)  ICICI  Bank  Eurasia  LLC  
16. (xvi)  ICICI  Prudential  Asset  Management  Company  Limited  
17. ICICI  Prudential  Trust  Limited3  

Besides these subsidiaries, the ICICI has diversified its own activities into several fee and
commission-based services including custodial services to cater to the needs of the
foreign and domestic institutional investors.
Working of the ICICI

The ICICI has played a vital role in the development of industries in the private sector
and in strengthening the capital market in the country. With a considerable reservoir of
foreign currencies, the ICICI became the largest supplier of foreign currency to private
sector industries. It has taken many valuable initiatives in promoting investments in
computerization, information technology, agro-based industries, energy conservation,
pollution control and export orientation. For this purpose, it has been engaged in leasing
operations. The ICICI has also set up the Housing Development and Finance Corporation
(HDFC) Ltd. for financing housing schemes. In the field of education and research, ICICI
has sponsored the Institute of Financial Management and Research (IFMR) in Chennai
for training and research in the field of financial management. Besides these initiatives,
ICICI has played a leading role in areas of venture capital. It launched a Programme for
Acceleration of Commercial Energy Research (PACER). It promoted Technology
Development and Information Company of India (TDICI) Ltd to widen technology
development in the country. ICICI made its contribution to establish the Credit Rating
and Information Services of India Ltd (CRISIL). It also administers the Programme for
the Advancement of Commercial Technology (PACT).

The ICICI has instituted the Indian Investment Centre (IIC) with a view to encouraging
the participation of foreign capital in Indian industries. It is the pioneer in the field of
underwriting by developing consortium underwriting in cooperation with other financial
institutions. ICICI has set up a merchant banking division to promote a healthy capital
market. It has a project promotion department for developing backward regions. It is also
providing soft loans for the modernization and rehabilitation of sick industries. It
provides deferred credit, leasing credit, asset credit and venture capital, apart from
technical consultancy and managerial know-how to private sector industries in India.
It encourages flow of private and foreign investments in the country.

The ICICI’s Achievements

The ICICI Bank as the largest private sector and the second biggest amongst all Indian
commercial banks, next only to SBI has 540 branches with more than 1000 ATM centres.
The bank has been recognized for many achievements. It was the first Indian company to
be listed on the New York Stock Exchange (NYSE) in September 1999, and has
successfully floated ADINR and GDINR. It launched Infinity the first internet banking
service in India. ICICI Bank is also the largest issuer of credit cards in India.4 The ICICI
Bank is rapidly expanding markets abroad and has the largest international balance sheet
among Indian banks. ICICI Bank now has wholly owned subsidiaries, branches and
representatives offices in 18 countries, including an offshore unit in Mumbai. The bank’s
wholly owned subsidiaries are in Canada, Russia and the UK, offshore banking units in
Bahrain and Singapore and elsewhere. If we look at the financial position of the
company, as of 30 June 2008, ICICI Bank and its subsidiaries had consolidated total
assets of INR 4846.43 billion. They have a capital adequacy ratio of 13.4 per cent on 30
June 2008, as against the regulatory requirement of 9.0 per cent. ICICI Bank UK PLC
had total assets of about USD 8.7 billion at that date. ICICI Bank PLC’s investment of
Euro 57 million (approximately USD 80 million) in senior bonds of Lehman Brothers
Inc. constitutes less than 1 per cent of ICICI Bank UK PLC’s total assets and less than
0.1 per cent of the consolidated total assets of the ICICI Group. ICICI Bank UK PLC
already holds a provision of about USD 12 million against investment in these bonds.
Considering a 50 per cent recovery estimate, the additional provision required would be
about USD 28 million. They have also been increasing profits year on year basis. There
were rumours that ICICI’s exposure to Lehman Brothers that went bust in the USA in
2008 would seriously affect the ICICI and there were heavy withdrawals by the bank’s
customers. However, ICICI claimed that there was no material impact on ICICI Bank or
ICICI Bank UK PLC on account of exposure to Lehman Brothers. RBI has also backed
the claims.

ICIC’S profit before tax of INR 51.17 billion for the year ended 31 March 2009
compared to INR 50.56 billion for the year ended 31 March 2008.5

Its growth and success is based on a strategy that focuses on technology, strong and
decisive management and low cost branches. ICICI’s use of technology has been a trend-
setter among financial institutions in the country. The bank provides mobile/telephone
banking, online financial information, retail financial products over the internet and has
developed e-commerce.

The Other Side of the ICICI Bank

However, there is a perception amongst its innumerable customers that the bank in its
ambitious programme of fast-track and diversified growth has trampled on their
legitimate banking needs and used strong-arm methods to achieve its ends. For instance,
The Delhi Consumer Commission imposed INR 5.5 million penalty on ICICI Bank for
hiring goons, who beat up a youth with iron rods to recover a loan.6 ICICI was again
fined more than USD 130,000 after its loan collectors beat a man with iron rods and
dragged him from a car before seizing the vehicle.7

The IDBI

The IDBI was set up as an apex development finance institution. It was set up as a
statutory corporation under Industrial Development Bank of India Act, 1964. It started its
operations with effect from 1 July 1964. IDBI was initially established as a wholly owned
subsidiary of the RBI, but in 1976 the ownership of IDBI was transferred to the central
government. The imperatives of rapid industrialization, long-term financial requirements
of heavy industry beyond the resources of the then existing institutions, absence of a
nodal agency to coordinate the activities of other financial institutions and gaps in the
financial and promotional services were the main factors that prompted the establishment
of IDBI. IDBI represents an initiative to place together in a single institution the
wherewithal for an expanding economy as well as the rationale for a coordinated
approach to industrial financing. The setting up of IDBI is thus an important landmark in
the history of institutional financing in the country. In March 1994, the IDBI Act was
amended to permit the Bank issue equity shares in the capital market. However, the
majority of its shares are still owned by the Government of India.

The Management of the IDBI

Since originally IDBI was a wholly owned subsidiary of the RBI, it was managed by the
central bank. As such, the general direction, management and superintendence of IDBI
were vested in a board of directors. This was the same as the central board of directors of
the RBI. The governor and the deputy governor of the RBI were the chairman and vice
chairman, respectively, of IDBI. Ultimately, the Finance Ministry of the Government of
India wanted to secure direct control and direction of IDBI. Accordingly, in 1976, IDBI
was taken over by the Government of India from the RBI.

The IDBI is now managed by a board of directors consisting 22 directors including the
chairman. The directors are elected by the shareholders of IDBI. The IDBI, in addition to
the head office, has four regional offices in Mumbai, Kolkata, Chennai and Delhi.

Objectives of the IDBI

The objectives of IDBI are to (a) bring together, regulate and supervise the activities of
all financial institutions providing term loans to industry; (b) widen the utility of these
institutions by providing additional resources and by broadening the scope of their
assistance; (c) bridge the gap between demand and supply of long-and medium-term
finance to industrial units in both public and private sectors by offering direct finance; (d)
identify and fill up gaps in the industrial structure of the country; and (c) prioritize a
system so as to diversify and speed up the process of industrial growth. Having been
conceived as a development agency, IDBI was expected that it is ultimately to be
concerned with all issues relating to industrial finance in the country.

Functions of the IDBI

The main function of the IDBI, as its name itself suggests, is to finance industrial units
engaged in manufacturing, mining, processing, shipping and other transport industries
and hotel industry. The following are IDBI’s major functions:

1. Contributing   to   the   shares   and   bonds   of   financial   institutions   and  

guaranteeing  their  underwriting  obligations;  
2. Refinancing   term   loans   and   export   credits   extended   by   other   financial  
institutions;  
3. Giving  loans  and  advances  directly  to  industrial  concerns;  
4. Offering   guarantees   for   deferred   payments   due   from   and   loans   raised   by  
industrial  units;  
5. Subscribing   to   and   underwriting   shares   and   debentures   of   industrial  
concerns;  
6. Providing   financial   intermediation   services   such   as   accepting,   discounting  
and   rediscounting   bona   fide   commercial   bills   or   promissory   notes   of  
 industrial  concerns  including  bills  arising  out  of  sale  of  indigenous  machinery  
on  deferred  payment  basis;  
7. Funding   turnkey   projects   by   Indians   abroad   and   extending   credit   to  
foreigners  for  buying  capital  goods  from  India;  
8. Filling   the   gaps   in   the   industrial   structure   of   the   country   by   planning,  
promoting  and  developing  industries.  The  Bank  may  undertake  promotional  
activities   such   as   marketing   and   investment   research,   techno-­‐economic  
surveys,  etc.  
9. Giving   technical   and   managerial   assistance   for   promotion   and   expansion   of  
industrial  undertakings;  and  
10. Coordinating  and  regulating  the  activities  of  other  financial  institutions.  

Apart from providing assistance to industry directly, IDBI also arranges assistance to
industries from other financial institutions and banks. IDBI provides project finance for
new projects and for expansion, and caters to the diversification and modernization of
existing projects. IDBI also offers equipment finance, asset credit, corporate loans,
working capital loans, refinance, rediscounting and fee-based services in respect of
merchant banking, mortgage, trusteeship and forex services.

Thus, IDBI performs financial, promotional and coordinating functions. IDBI

supplements and coordinates the activities of various national and state level financial
institutions in the country as an apex institution in the field of development banking.

IDBI has been vested with wide powers and it enjoys full operational autonomy. The
Bank can provide financial assistance directly as well as through other institutions to all
types of industrial units irrespective of their size or pattern of ownership. No maximum
or minimum limits have been fixed on the amount of assistance or security. The Bank is
empowered to deal with problems relating to industrial finance or for that matter
industrial development. The IDBI has created a corpus known as Development
Assistance Fund to offer financial assistance to industrial units which are unable to get
assistance from normal sources. It also makes available foreign currencies to industrial
units that need them.

The Working of the IDBI

In the 1960s, IDBI provided financial assistance to capital intensive industries. During
the next two decades, the focus shifted to the upgrade of technology, import substitution
and export promotion, and venture capital funding. During the 1990s, IDBI started
offering new services such as asset credit, equipment leasing and bridge loans for
pollution control and energy conservation in response to the liberalized environment. The
Bank also focused on non-fund-based activities such as merchant banking, debenture
trusteeship and foreign exchange services. IDBI has been assisting backward regions,
small-scale industries and sick units.

With the view to promoting the objectives for which it was established, IDBI has
sponsored/co-sponsored, among others, the following institutions:
 1. Credit  Analysis  and  Research  (CARE)  Ltd.  
2. Investor  Services  of  India  Ltd.  (ISIL)  
3. National  Stock  Exchange  (NSE)  
4. EXIM  Bank  
5. Securities  and  Exchange  Board  of  India  (SEBI)  
6. IDBI  Trusteeship  Services  Ltd.  (ITSL)  
7. National  Securities  Depository  Ltd.  
8. Entrepreneurship  Development  Institute  of  India  (EDII)  

The IDBI’s Subsidiaries

Apart from the above-mentioned institutions, IDBI subsidiaries include

1. IDBI  Bank  Ltd.  

2. IDBI  Mutual  Fund  
3. IDBI  Capital  Market  Services  Ltd.  (ICMS)  
4. SIDBI,  and  
5. IDBI  Intech  Ltd.  (IIL).  

Restructuring of the IDBI

As per the amendment to the IDBI Act in 1994, IDBI has been granted functional
autonomy in the matter of granting loans, accepting deposits, and having exposure to
foreign currency borrowing in international financial markets to meet foreign currency
needs of the industry since 1982.

IDBI went public in June 1995 by making a public issue of equity. As a result of going
public, its board of directors will now include representatives of the shareholding public.
IDBI can now have public ownership up to 49 per cent of its issued capital. Shareholding
of the Government of India stood at about 58 per cent in 2003.

Other Developments Relating to the IDBI

The Parliament enacted, on 30 December 2003, IDBI (Transfer of Undertaking and

Repeal) Act, 2003 with a view to converting IDBI into a banking company under the
Companies Act. On 1 October 2004 IDBI Bank Ltd. was merged into IDBI. With this
merger, IDBI as a development bank ceased to exist.

IDBI’s performance as a development has been satisfactory till the year 2000. The
Bank’s loan sanctions had increased several folds from INR 12.80 billion in 1980–81 to
INR 26,830 in 2000– 01, while its disbursements had increased from INR 10.10 billion to
INR 174.80 billion during the corresponding period. This growth was a reflection of the
rapid industrial and business growth of the country on one side and the increasing
mobilization of resources by the development banks on the other. As the apex financial
institution of the country, IDBI played a leading role in the growth process registered by
business and industry during the two decades between 1980 and 2000.
However, IDBI registered a steep decline in both loans sanctioned and funds disbursed
since 2000–01. Likewise, disbursements by IDBI declined to INR 48.20 billion in 2004–
05. Paucity of funds and heavy accumulation of NPAs contributed to this sorry state of
affairs. As a result, the IDBI, like other public development financial institutions
managed by the Ministry of Finance of the Government of India, had almost collapsed.

The Industrial Investment Bank of India (IIBI)

In April 1971, Industrial Reconstruction Corporation of India (IRCI) was set up at the
instance of IDBI as a joint stock company to revive and rehabilitate sick and weak
industrial units. The IFCI, ICICI, LIC and public sector banks had contributed to its share
capital. IRCI was reconstituted and rechristened as Industrial Reconstruction Bank of
India (IRB1) on 26 March 1985 as a statutory corporation, the principal credit and
reconstruction agency for industrial revival, modernization, expansion rehabilitation,
expansion, reorganization, diversification and rationalization in the country. It was
primarily entrusted with the task of reviving the sick industrial concerns. The Industrial
Reconstruction Bank of India Act empowers it to grant loans and advances, underwrite
stocks and shares of banks and guarantee loans, performance and deferred payments. It
also provides loans to capital expenditure, additions to balancing equipment, for
correcting imbalances in working capital of sick, weak and closed units and those units
facing imminent closure. The IRBI was converted into a government company with
effect from 27 March 1997 and was renamed the IIBI. It was registered as a limited
company under the Companies Act, 1956. The restructuring was done to provide
adequate operational flexibility and functional autonomy. At present, government owns
the entire share capital. But the IIBI is permitted to access the capital market for
additional equity.

Functions of the IIBI

As a full-fledged development bank, the IIBI now undertakes the functions such as: (i)
granting medium- and long-term loans; (ii) providing hire-purchase of equipment, leasing
finance and finance for the purpose of buying assets; (iii) underwriting shares and
debentures; (iv) subscribing directly to shares and debentures; (v) guaranteeing deferred
payments; and (vi) granting short-term working capital loans.

The IIBI lays emphasis on the technology upgrade and improvement of productive
capacity, so essential for the long-term viability of the assisted units. For the sick/weak
industrial units, help is provided for capital expenditure, acquisition of balancing
equipment, etc. For non-sick units or units which are in their incipient stage of sickness,
assistance is also provided to prevent sickness. The IIBI also provides assistance for
acquiring pollution control equipment. It provides loans to individuals also for housing,
professional and personal needs. IIBI has diversified into ancillary activities such as
consultancy services, merchant banking and equipment leasing.
Presently, the IIBI is facing a difficult financial position due to mounting NPAs and low
capital adequacy ratio. From all indications the IIBI cannot survive alone and it is likely it
will merge with the IDBI.

The SIDBI

The SIDBI was set up under the Indian Companies Act, 1956 on 2 April 1990 under a
Special Act of Parliament, as a wholly owned subsidiary of the IDBI. SIDBI took over
the outstanding portfolio of IDBI relating to the small-scale sector worth over INR 40
billion. The authorized capital of SIDBI is INR 2.50 billion which could be increased to
INR 100 billion. It has taken over the responsibility of administering Small Industries
Development Fund and National Equity Fund which was earlier administered by IDBI.
SIDBI was de-linked from the IDBI through the SIDBI (Amendment) Act, 2000 with
effect from 27 March 2000. Its management vests with an elected board of directors.

The SIDBI’s Objectives

SIDBI was envisaged as ‘the principal financial institution for the promotion, financing
and development of industry in the small scale sector and to coordinate the functions of
other institutions engaged in the promotion, financing and developing industry in the
small scale sector and for matters connected therewith or incidental thereto’.8 SIDBI
coordinates the functions of existing institutions engaged in promoting, funding and
developing industrial units coming lender the small-scale sector. Thus, financing,
promotion, development, and coordination small scale industries are the basic objectives
of SIDBI.

The SIDBI’s Functions

SIDBIs main functions are as follows: (i) SIDBI refinances loans and advances extended
by primary lending institutions to small-scale industrial units; (ii) It discounts and
rediscounts bills arising from sale of machinery to or manufactured by industrial units in
the small-scale sector; (iii) It extends need capital/soft loan assistance under National
Equity Fund, Mahila Udyam Nidhi, Mahila Vikas Nidhi and through specified agencies;
(iv) It grants direct assistance and refinance for financing exports of products
manufactured in the small-scale sector; (v) It extends support to SSIDCs for providing
scarce raw materials to and marketing the end products of industrial units in the small-
scale sector; (vi) It gives financial support to NSIC for offering leasing, hire-purchase and
marketing support to industrial units in the small-scale sector; and (vii) It provides
services such as leasing, factoring, etc., to industrial concerns in the small-scale sector.

In establishing SIDBI, the objective of the Government of India was to ensure larger and
continuous flow of funds to the small-scale sector. SIDBI has already taken steps towards
technological upgrade and modernization of existing small-scale industrial units. It has
also started opening new and expanding the marketing channels for SSI products in
domestic and international markets. With the view to generating more employment
opportunities, and thereby checking the migration of rural population to urban
conglomerations, SIDBI is in a big way and concerted manner promoting employment-
oriented industries especially in semi-urban areas.

The SIDBI’s Working

The intention of the government in establishing SIDBI was to ensure larger and
uninterrupted flow of funds to small-scale industries. True to this desire of the
government, the SIDBI provides both term loans and working capital loans and also
equity finance. It assists new projects, and also helps the expansion, diversification and
modernization of existing units, for ensuring quality improvement, marketing and
rehabilitation of sick units in the small-scale sector. The SIDBI makes effective use of the
network of banks and state-level financial institutions to ensure the flow of finance to
small-scale sector.

SIDBI also provides development and support services under its Promotional and
Developmental (P&D) schemes apart from financing. Through such efforts, it seeks to
ensure enterprise promotion, technology upgrade, market promotion, human resource
development, dissemination of information and quality management. The SIDBI
Foundation for Micro Credit, Rural Industries Programme, Mahila Vikas Nidhi,
entrepreneurship development programmes, management development programmes, and
environment management are the thrust areas of SIDBI’s P&D activities. Under refinance
assistance, the SIDBI operates special schemes such as single window scheme, composite
loan scheme and equipment refinance scheme. It also provides venture capital assistance
and scheme for ex- servicemen. There is a credit guarantee fund scheme also. By 2008–
09, financial assistance disbursed by SIDBI was INR 280.00 billion of which refinance
exceeded INR 202.00 billion and direct finance was INR 78.00 billion.9 Within a short
span of less than two decades, the SIDBI has emerged as a significant player in providing
financial support to the small-scale sector. A London-based journal Banker in its May
2001 issue ranked SIDBI 25th in terms of capital and assets among development banks of
the world.

State Financial Corporations

Apart from several all India level institutions, there are 18 state level financial
institutions. SFCs, SIDCs and SSIDCs are examples of state level institutions.

The need for state level financial institutions was felt to meet the financial needs of local,
medium- and small-sized industries as the IFCI provides finance to large public
companies and cooperative societies. On 28 September 1951, the Parliament passed the
State Financial Corporations Act, which empowered the state governments to establish
financial institutions for their local units. Accordingly, 17 SFCs were set up under the Act
by the respective state governments as regional institutions. Additionally, the renamed
The Tamil Nadu Industrial Investment Corporation Ltd, established by the Tamil Nadu
government in 1949 under the Companies Act as Madras Industrial Investment
Corporation also functions as the SFC.
Objective of the SFCs

The main aim of the SFCs is to provide finance to medium- and small-scale industries
and other enterprises within the respective state and which are outside the purview of the
IFCI. Proprietary and partnership firms and joint stock companies and cooperative
societies are authorized to borrow funds from these corporations. The SFCs seek to
supplement the operations of the IFCI and IDBI.

The SFCs play an effective role in the development of small and medium units and help
in bringing about regionally balanced economic growth. Moreover, they also help at
wider dispersion of small and medium enterprises within each state. They primarily cater
to term credit needs of such units.

Prior to 1990, the activities of the SFCs were under the control and supervision of the
IDBI and RBI. Since 1990, the RBI and SIDBI have been overseeing SFCs.

The SFCs draw their capital from (a) share capital reserves, bond issues, loans from the
RBI, IDBI and state governments; (b) refinance from the RBI and IDBI; (c) fixed
deposits from state governments, local authorities, and the public and (d) assistance from
International Development Association (IDA) of the World Bank group and foreign
currency line of credit from the IDBI.

Functions of the SFCs

The SFCs function as regional development banks in respective states. They are
authorized to provide financial assistance in the following forms:

1. Providing  loans  or  advances  and  subscribing  to  the  debentures  of  industrial  
units  
2. Giving   guarantee   to   loans   raised   by   industrial   units   on   such   terms   and  
conditions  as  may  be  agreed  upon  mutually  
3. Underwriting  shares,  debentures  and  other  industrial  securities  
4. Providing  guarantee  to  deferred  payments  for  the  purchase  of  capital  goods  
within  India  
5. Acting  as  the  agent  on  behalf  of  central  and  state  governments  in  respect  of  
disbursing  loans  to  small-­‐scale  units  
6. SFCs   act   as   channels   to   route   the   International   Development   Association  
(IDA)  credit  to  assist  small  and  medium  industrial  units  and  
7. Rediscounting  bills  of  small-­‐scale  units  

The Management of the SFCs

Each SFC is managed by a board of directors comprising a managing director and nine
other directors. Four directors (including the Managing Director) are nominated by state
governments and one each by the RBI and IDBI. The remaining four directors are elected
by the external shareholders. There is also an Executive Committee selected by the board
of directors.

Working of the SFCs

In most of the states, SFCs provide concessional finance to small-scale industries on

behalf of the state governments. The bulk of the assistance is granted by SFCs to small-
scale industries including road transport operators. SFCs have granted liberal financial
assistance on concessional terms to industrial units in the specified backward areas and to
technician entrepreneurs. SFCs sanction and disburse seed capital assistance of IDBI to
women and other entrepreneurs.

SFCs face several problems and difficulties in practice. More often, they find it difficult
to evaluate correctly the financial position and credit worthiness of applicants in the
absence of systematic, up-to-date and audited accounts. Many applicants are not able to
provide adequate collaterals and about 27 per cent of the outstanding loans are overdue.

There is an urgent need to improve the financial resources of SFCs. An efficient

organizational and managerial structure is to be built to make them efficient. Assistance
granted by the SFCs is inadequate for the growing needs of industry. SFCs should cut
down procedural delays and cost involved in providing assistance. Proper arrangements
should be made for training and development of executives of the SFCs. New industries
and backward areas need more focus.

Most SFCs are bankrupt. A committee headed by G. P. Gupta, former IOB chairman, had
estimated that 12 out of 18 SFCs had their net worth wiped out by early 2001. The
committee recommended recapitalization of SFCs, subject to restructuring. The SFCs
have to be kept going in good health to maintain the flow of funds to small and medium
enterprises, particularly new ventures. Merger of SFCs into SIDCs may avoid duplication
of efforts and may help in achieving greater efficiency.

The Government of India amended the State Financial Corporations Act with effect from
12 September 2000, with a view to equipping the SFCs meet international competition.
This is to be realized by enlarging the shareholder base and providing operational
flexibility and granting greater functional autonomy to SFCs.

The Working Group on Development Financial Institutions appointed by the RBI

concluded in its report dated 10 May 2004 that the SFCs have outlived their utility in the
present context and should be phased out within a time frame.

State Industrial Development Corporations (SIDCs)

Mainly with a view to accelerating the pace of industrial development in their states,
many state governments have established SIDCs. SIDCs were set up under the
Companies Act, 1956 during 1960s and 1970s as wholly owned state government
undertakings for promotion and development of medium and large industries at the state
level. Andhra Pradesh and Bihar were the first group of states to set up SIDCs in 1960
followed by other states. Gradually, their number grew to 28 out of which 11 of them are
functioning also as SFCs. All these SIDCs are wholly owned financial institutions owned
by the respective state governments. They undertake a wide range of functions, the
important ones being ‘(a) grant of financial assistance; (b) provision of industrial
sheds/plots; (c) promotion and management of industrial concerns; (d) promotional
activities such as identification of project ideas, selection and training of entrepreneurs,
provision of technical assistance during project implementation etc., and (e) providing
risk capital to entrepreneurs by way of equity participation and seed capital assistance’.10
SIDCs provide financial assistance in the form of direct investment loans, extension of
guarantee for loans and deferred payment, underwriting and subscription to the issue of
shares, bonds and debentures. SIDCs act as catalysts for industrial development and
provide impetus to investment in their respective states.

The SIDCs provide financial assistance to industrial concerns by way of loans,

guarantees, underwriting and direction subscription to shares and debentures. In addition,
SIDCs undertake promotional activities such as techno-economic surveys, project
identification, feasibility studies, and selection and training of entrepreneurs. They also
promote joint sector projects in association with private sector entrepreneurs. SIDCs
undertake the development of industrial areas by providing all infrastructural facilities.
They administer various incentive schemes of central and state governments. They pay
special attention to industrial development of backward areas.

The National Small Industries Corporation (NSIC)

The NSIC was instituted in 1955 as a fully government owned company, mainly with the
view to helping small-scale units through promotional, marketing, financing and other
activities. The main functions of NSIC are as follows: (i) procurement of machinery, both
indigenous and imported, on hire-purchase basis for establishing new units and for
modernizing existing units; (ii) creating prototypes for transfer along with know-how to
production units for commercial production; (iii) giving training in various engineering
trades; (iv) arranging for indigenous and imported raw materials on continuing basis; (v)
marketing of products of small-scale units both within the country and abroad; (vi)
establishing showrooms for routine display of products of small-scale units and;(vii)
taking up small industries projects on turnkey basis and offering total services from
feasibility studies for the installation and commissioning of plants.

State Small Industries Development Corporations

SSIDCs were the latter-day additions catering to the financial needs of small-scale
industries in the states. They were set up under the Companies Act 1956 to serve the
needs of small-scale industries in the respective states and union territories. They were
expected to undertake a variety of activities for the benefit of small-scale industries.

SSIDCs perform the following functions: (i) arranging for and distribution of raw
materials; (ii) making available machinery on hire-purchase basis; (iii) managing seed
capital scheme on behalf of state governments; (iv) operating of a scheme of assistance to
production units; (v) building and managing industrial estates; (vi) taking up marketing
activities; and (vii) collaborating with other institutions to establish TCOs.

Apart from these activities, SSIDCs are engaged in providing infrastructural facilities
such as sheds, go downs, and common production facilities, technical and consultancy
services, particularly to the unemployed, such as preparation of feasibility reports,
formulation of project reports, planning for modernization/expansion of product range
and implementation of projects. Some SSIDCs have also sponsored industrial feasibility
surveys to identify viable small projects to be based mainly on local raw materials and
local demand conditions. SSIDCs also help in disposing of finished products of small-
scale units in domestic and export markets. Many SSIDCs have helped in setting up
emporia and showrooms for the products of small-scale units. They also organize and
participate in exhibitions in various markets.

There are several other development-cum-financial institutions that provide promotional,

financial and marketing assistance to enterprises. These are Khadi and Village Industries
Commission (KVIC), Export–Import Bank of India (EXIM Bank), National Bank for
Agriculture and Rural Development (NABARD), and Infrastructure Development
Finance Company Limited (IDFC). All of them act as financial and developmental
institutions in their respective fields of activities.

Recent trends in financial sector reforms as early as April 2012, the Government of India
was set to give up its long-drawn plans for financial sector reforms, ‘includes are increase
in voting rights for foreign investors in private banks and a hike is the foreign investment
ceiling for insurance.

Evaluation of the Role of Financial Institutions

The above-mentioned financial institutions that have been set up after independence have
been anticipated to not merely serve as providers of finance but also act as catalytic
agents in the industrialization of the country. These institutions have accomplished their
objectives to a large extent.

On the positive side, it can be said that: (i) No viable project has been denied assistance
solely due to paucity of funds; (ii) Long-term finance has been given at fixed interest
rates, thus avoiding uncertainty of cash flows; (iii) A considerable portion of the equity of
new projects has been contributed by these institutions: and (iv) These institutions have
sponsored/promoted special agencies for venture capital funding, leasing, and factoring.

On the negative side, the following criticisms have been levelled against them:

1. Most   institutions   have   laid   emphasis   on   projects   promoted   by   existing  

entrepreneurs   and   companies.   Thus,   new   entrepreneurs   have   not   been  
helped  to  establish  new  enterprises  and  make  a  mark.  
 2. Most   institutions   have   mainly   assisted   large   and   medium   projects   thereby  
contributing  to  concentration  of  economic  power  in  the  country.  
3. Over   the   time,   the   gap   between   sanctions   and   disbursements   has   been  
raising  indicating  delay  in  mobilization  of  funds.  
4. Sufficient  attention  has  not  been  paid  on  reduction  of  regional  disparities  in  
industrial  development.  
5. These   institutions   have   not   been   able   to   arrest   to   any   appreciable   degree   the  
growing  sickness  in  Indian  small-­‐scale  industry.  
6. They  have  been  indifferent  towards  the  management  of  assisted  companies.  
7. The  NPA  of  most  of  the  financial  institutions  have  been  rising  fast,  reflecting  
poor  recovery  of  loans  and  advances.  
8. There   is   a   considerable   degree   of   overlapping   in   the   functions   of   these  
institutions  with  the  result  that  more  than  one  institution  caters  to  identical  
purposes   leading   to   duplication   and   wastage.   Effective   collaboration   and  
coordination   between   various   financial   institutions   have   been   found  
wanting.  

On the recommendations of M. Narasimham Committee (1991 and 1998) and S. H. Khan

Working Group that examined the working of financial institutions in the country, the
Government of India has put in place the following policy reforms in connection with the
financial institutions: (i) too much reliance on SLR has been reduced; (ii) prudential
norms have been prescribed; (iii) management of various institutions have been
diversified; (iv) interest regime has been more liberalized; and (v) bigger and viable
institutions such as the ICICI and the IDBI are being converted into universal banks.

An objective and balanced analysis of the role of financial institutions in providing

adequate and timely finance to industry gives a mixed picture. Purely from the
quantitative point of view, these financial institutions have provided substantial amount
of finance to thousands of industrial units and almost all of them owe their existence and
growth to the general help rendered by these financial institutions. However, on the
qualitative side, many of them have failed to deliver tangible results. The objectives for
which the financial institutions were established were to provide assistance to new
enterprises, small and medium firms and industries established in backward regions with
a view to promoting widespread industrial development while reducing regional
disparities. But in reality, the financial institutions have offered a substantial part of the
funding to large industrial houses and that too to those in the developed states. Developed
states such as Maharashtra, Gujarat and Tamil Nadu accounted for a lion’s share of the
total assistance developed by these institutions. Moreover, while they were prompt in
granting loans, they were falling behind in collecting the money due to them from the
borrowers resulting in rising NPAs. Another flaw pointed out by a working group in RBI
headed by N. Sadasivan was that in a purely market-driven situation, the DFIs cannot
afford to raise long-term resources at market rate of interest and extend product finance
for long period and hope to succeed. However, taking all factors into account, we can
agree with G. N. Bajpai, when he said ‘The DFIs have spurred balanced industrialization
and economic growth in the country over the past half a century and have substantially
fulfilled their initial mandate.’
Discussion Questions

37.1. Evaluate the role of various financial institutions set up by the government for
providing industrial finance.

37.2. How are the long-term capital requirements of large-scale industries met in India?

37.3. What is the role of capital market in India as a source of finance to private sector?
Discuss the major policy initiatives taken in recent years for strengthening the capital
market.

37.4. What are development banks? Evaluate their performance in India in terms of their
role as a specialized institution of industrial finance.

37.5. What are the institutions created in India after 1951 for financing large-scale
industries? Critically comment on their functions.

37.6. Evaluate the performance of all-India development banks in fulfilling the objectives
of industrial policy and planning.

37.7. Examine the role of commercial banks in providing industrial credit to Indian
industry.

37.8. Do you think that the bourgeoning Indian capital market in the wake of economic
reforms can dispense with public financial institutions as a source of financial industries?
Substantiate your answer with the help of recent experience.

37.9. Give a brief account of the ways in which savings have been mobilized for
industrialization in India. Examine, in this context, the role of development banks and the
hurdles in developing an efficient capital market.

37.10. Discuss the reasons behind the establishment of ICICI Ltd. Explain the factors
responsible for its spectacular growth.

Suggested Readings

37.1. Bajpai, G. N. (2004), ‘Development Financing in a Changing Environment’,

Economic and Political Weekly, 29 May, p. 2213.

37.2. Bhatt, V. V. (1974), ‘A Decade of Performance of Industrial Development Bank of

India’, Commerce, Annual Number, p. 151.

37.3. Government of India (2009), ‘Economic Survey 2008–09’ (New Delhi:

Government of India).
37.4. Karunagaran, A. (2005), ‘Should DFIs be revived?’ Economic and Political
Weekly, 19 March, p. 1247.

37.5. Mohan, R. (2005), ‘Financial Sector Reforms in India—Policies and Performance

Analysis’, Economic and Political Weekly, 19 March, p. 1117.

37.6. http://www.icicibank.com/.http://www.idbi .com/

37.7. http://www.ifciltd.com/tabid/82/Default.aspx.
http://thecomforts.com/thccomforts_directory.asp? Spc = 695. http://www. india
stat.com/banksandfinancialinstitutions/3/financialin-stitutions/99/statefinancialcor
porationssfcs/252/stits.aspx.

37.8. http://www.sidbi.in/.

37.9. http://www.indiastat.com/ banksandfinan cia/institutions/3/financia-linstitutions/99/

stateindustrialdevelopmentcorporationssidcs/256/stats.aspx.

Footnotes

1 The Industrial Finance Corporation of India Limited,

http://business.Mapsofmida.com/sectors/public/the-industrial-fiance-corporation-
limited.html.

2 Indian Economy and IFCI, http://www.ifciltd.com/tabid/82/Default.aspx.

3 Annual Report FY 2009 Subsidiaries ICICI Bank Annual Report, WWW. ICICI
bank.com

4 ICICI Bank, http.//in.travel.yahoo.com/page/icici+bank.

5 ICICI Bank Performance Review—Year ended 31 March 2009, available online at

www.encylopedia.com/doc/1G1-198457317.html

6 Correspondent Reporter, ‘Taming Recovery Agents’, Tribune, 7 November 2007.

7 ‘Small Industries Development Bank of India (SIDBI)’, Micro-finance Gateway,

http://www.microfinanecgateway.org/p/site/m/template.rc/1.11.47823/

8 SIDBI, http://www.sidbi.in/.

9 Kuchhal, S.C. (1987), The Industrial Economy of India (Allahabad, India: Chaitanya
Publishing House).

10 Bajpai, G. N. (2004), ‘Development Financing in a Changing Environment’.

Economic and Political Weekly, 29 May, p. 2213.