A RESEARCH PROJECT ON “ROLE AND GROWTH OF DEVELOPMENT BANK IN INDIA” (Submitted in partial fulfillment of the requirement of degree of MASTERS OF BUSINESS ADMINISTRATION, KURUKSHETRA UNIVERSITY.KURUKSHETRA) RESEARCH SUPERVISOR : SUBMITTED BY: MRS. MONIKA MEHTA HARISH KUMAR CLASS ROLL No. 1460 University roll no. Session 2009-2011 Department of management
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A
RESEARCH PROJECT ON
“ROLE AND GROWTH OF DEVELOPMENT BANK IN INDIA”
(Submitted in partial fulfillment of the requirement of degree of MASTERS OF BUSINESS ADMINISTRATION, KURUKSHETRA UNIVERSITY.KURUKSHETRA)
RESEARCH SUPERVISOR : SUBMITTED BY:MRS. MONIKA MEHTA HARISH KUMAR
CLASS ROLL No. 1460
University roll no.
Session 2009-2011
Department of management
SHRI ATMANAND JAIN INSTITUTE OF MANAGEMENT ANDTECHNOLOGY
AMBALA CITY
PREFACE
Research project is the bridge for the student that takes his theoretical knowledge world
to practical industrial world. The advantage of this sort of integration (research program),
which promotes guided student to corporate culture, functional, social and norms along
with formal teaching numerous. The main aim is :
To bridge the gap between theory and practical.
To help the student in developing the better understanding of concepts and
questions already raised or to be raised subsequently during the research period.
The present research report gives a detailed view of how the celebrity endorsements
make the advertisements effective and how do the customers perceive celebrities. In the
present scenario, the celebrities endorse the high value brands and add to the value of the
brands. .
ACKNOWLEDGMENT
The present report is an amalgamation of hard work and contribution of experience of
eminent personalities.
First of all, I would like to thank the supreme power the Almighty GOD who is the
obviously the one who has always directed me to work on the right path. With his grace
this project could be the reality.
I, express my sincere gratitude to Dr. S.C. AGGARWAL (Director) for their inspiration.
I am also very much thankful to Mrs. Monika Mehta (Faculty, AIMT, Ambala City) for
his guidance, regular counseling, keen interest and constant encouragement. Without
their guidance this project would not have a successful end.
(HARISH KUMAR)
DECLARATION
I, undersigned, hereby declare that this report entitled “ROLE AND GROWTH OF
DEVELOPEMENT BANK IN INDIA” is a genuine and benefited work prepared by
me and my original work. The empirical findings in report are based on data collected by
me. The matter presented in this report is not copied from any source. This report has not
been submitted in any of university.
The work is humbly submitted to AIMT, KURUKSHETRA UNIVERSTY for the
award of degree of master of business administration.
HARISH KUMAR
CERTIFICATE
This is to certify that Mr. HARISH KUMAR has performed under my supervision. His
research project report on “ROLE AND GROWTH OF DEVELOPEMENT BANK
IN INDIA”in the area of her specialisation MARKETING. The work embodied in this
report is original and is of standard expected of a master of business administration
student. The report has not been submitted in part or full to his university for the award of
any degree or diploma. She has completed all requirements or guidelines for research
project report and the work is fit for evaluation.
MONIKA MEHTA
TABLE OF CONTENTS
INTRODUCTION TO TOPIC
OBJECTIVES OF STUDY
RESEARCH METHODOLOGY
INTRODUCTION TO DEVELOPMENT BANKS
OBJECTIVES OF DEVELOPMENT BANKS
BANKS UNDER STUDY
IDBI
IFCI
SIDBI
NABARD
DATA ANALYSIS
SUGGESTIONS
CONCLUSION
LIMITATION
INTRODUCTION TO TOPIC
TO INDIAN FINANCIAL SYSTEM
HISTORY OF DEVELOPMENT BANKS
INDIAN FINANCIAL SYSTEM
Indian financial system is one of the world largest financial systems. Indian economy is
world 4th biggest economy but this Indian financial system has under gone through
various changes or we can say that it has different stages since its inception.
Basically Indian financial system can be divided into 3 categories:
Before independence
Pre- 1991 era
Post-1991 era
BEFORE INDEPENDENCE:
In British rule India first time seen the organized financial system, although all that was
meant for britishers but that provided us the layout for future course of action i.e. to build
our own financial system. At that time banks and other financial institutions were at their
infantry stage but the given a base to build the whole system on them. That time can be
considered as the preliminary stage of Indian financial system and at that time there were
no development banks as the motive of colonial rule was to draw the wealth not to make
country developing.
PRE 1991 ERA:
This era has seen the gradual rise in the economy of India. After independence banks and
other financial institutions to provide funds were established and development banks
were also a part of them which were established specially to provide financial aid to
industrial sector and to promote entrepreneurship in India.
The financial system in this era was based on socialistic pattern of society and the
economy was of mixed type but basically it was public sector based economy. The
motive was to promote every sector of society to uplift and earn for him self. Indian
financial system continued with this pattern for about 40 years but in true sense the
economic growth never boosted up as there was so many hindrances and lacks in syetm
itself which taken country in such a crisis that it has to borrow funds by pledging its gold
that was called the crisis of 1991
POST 1991 ERA:
To come out the crisis, India has to adopt the new policy regarding the financial system
to speed up the growth and to raise the economy and in order to perform that a new
policy of LIBERALIZATION-PRIVATIZATION- GLOBALIZATION i.e. LPG was
adopted. The basic motive was to reduce the government control over the economy and
to let it flourish itself. Indian financial system is currently working on this policy and now
the economic growth rate has also risen. Now the development banks are working in
accordance with the industry in order to satisfy their need of funds and to provide every
possible help required. Although the growth is still slow in comparison with other
countries but soon India will become the strongest economy of world.
HISTORY OF DEVELOPMENT BANKS
The concept of development banking rose only after Second World War , Successive of
the Great Depression in 1930s. The demand for reconstruction funds for the affected
nations compelled in setting up a worldwide institution for reconstructions. As a result
the IBRD was set up in 1945 as a worldwide institution for development and
reconstruction. This concept has been widened all over the world and resulted in setting
up of large number of banks around the world which coordinating the developmental
activities of different nations with different objectives among the world.
The course of development of financial institutions and markets during the post-
Independence period was largely guided by the process of planned development pursued
in India with emphasis on mobilisation of savings and channelising investment to meet
Plan priorities. At the time of Independence in 1947, India had a fairly well-developed
banking system. The adoption of bank dominated financial development strategy was
aimed at meeting the sectoral credit needs, particularly of agriculture and industry.
Towards this end, the Reserve Bank concentrated on regulating and developing
mechanisms for institution building. The commercial banking network was expanded to
cater to the requirements of general banking and for meeting the short-term working
capital requirements of industry and agriculture. Specialised development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with majority
ownership of the Reserve Bank were set up to meet the long-term financing requirements
of industry and agriculture. To facilitate the growth of these institutions, a mechanism to
provide concessional finance to these institutions was also put in place by the Reserve
Bank.
The first development bank In India incorporated immediately after independence in
1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer
institutional credit to medium and large-scale. Then after in regular intervals the
government started new and different development financial institutions to attain the
different objectives and helpful to five-year plans.
The early history of Indian banking and finance was marked by strong governmental
regulation and control. The roots of the national system were in the State Bank of India
Act of 1955, which nationalized the former Imperial Bank of India and its seven associate
banks. In the early days, this national system operated along side of a large private
banking system. Banks were limited in their operational flexibility by the government’s
desire to maintain employment in the banking system and were often drawn into
troublesome loans in order to further the government’s social goals.
The financial institutions in India were set up under the strong control of both central and
state Governments, and the Government utilized these institutions for the achievements in
planning and development of the nation as a whole. The all India financial institutions
can be classified under four heads according to their economic importance that are:
All-India Development Banks
Specialized Financial Institutions
Investment Institutions
State-level institutions
Other institutions
OBJECTIVES OF STUDY
To study the various development banks operating in India
To give glance at the working of development banks
To find out the role of development banks in Indian financial system
To check the contribution of development banks in economic growth
RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. In it we study the
various steps that are generally adopted by a researcher in studying his research problem
along with logic behind him. Why a research study has been undertaken, how a research
problem has been defined, in what way and why the hypothesis has been formulated,
what data have been collected and what particular method has been adopted, why
particular technique of analyzing data has been used and a host of similar other questions
are usually answered when we talk of research methodology concerning a research
problem or study.
RESEARCH DESIGN:
A research design is the arrangement of conditions for collection and analysis of in
a manner and aims to combine relevance to the research purpose with economy in
procedure. In fact the research design is the conceptual structure within which research I
conducted. Research Design is needed because it facilitates the smooth sailing of the
various research operations thereby making research as efficient as possible yielding
maximum information with minimal expenditure of effort, time and money.
I have adopted descriptive and conclusive research design. Descriptive research is
those studies, which are concerned with describing the characteristics of a particular
individual or a group.
Since the aim is to obtain the accurate information about the development banks in
terms of their role in Indian financial system, I have studied the various data available in
books, journals, magazines and on internet.
DATA SOURCES:
The researcher can gather primary data, secondary data or both. Secondary
data are data that were collected for another purpose and already exist somewhere.
Primary data are data specially gathered for a specific purpose or for a specific research
project. Since the study is based on already existing facts and figures, so all the sources of
data are secondary
SECONDARY DATA
The main source of information for the study was
Weakly magazines
RBI bulletin
Information available in form of articles
Information available on internet
Sampling
The study is limited to a sample of top 4 development bank.
1. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
2. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)
3. NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT
(NABARD)
4. SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
INTRODUCTION TO DEVELOPMENT BANKS
DEVELOPMENT banks in India have had a chequered and not always a happy history.
Some have managed to come back from the brink by taking to universal banking, or
merging with a normal bank. In general, it may be said that development banking has lost
its charm. So much so that when an official was shifted from the none-too-healthy Indian
Bank to NABARD, a banking veteran said that she deserved not congratulations but
commiseration.
Political interference and flawed industrial policy have been the main reasons why
development banks have fared badly. At the same time, it needs to be said that some
conceptual errors about the nature of development banking have made matters worse.
From the time of Independence, political interference in the functioning of banks has
been both overt and covert. For instance, loan melas made many banks sick. Even now,
many villagers think that a loan from a government bank is a gift; it need not be repaid.
In spite of such impressive sounding institutions as Debt Recovery Tribunals, it is still
difficult for banks to recover in full the amounts due; more often than not, banks have no
option but write-off most of the dues. Periodic concessions to borrowers ordered by the
Reserve Bank of India have made debt recovery quite difficult. In consequence, ill health
has dogged the banks in India.
Though development banks did not have to suffer from loan melas, they too were subject
to political pressure to fund projects of dubious value. For long years, there was no
culture of financial closure; many projects started more with hope and hype than with
calculated design, and with no clear idea of where the funds would be found to complete
them. Even if the project had been well conceived, administrative delays made many
projects unviable.
Development banking is different: Loans are made not to those who have accumulated
wealth in the past but to those who show promise to become wealthy in the future.
Normal banking looks for safety in assets accumulated from the past; in development
banking, possible accumulation of assets in the future is the true collateral. Thus, while in
normal banking, the collateral is real and tangible, in development banking, the collateral
is a dream; it is intangible. In normal banking, an interest default of more than 90 days
becomes a non-performing asset. In the case of development, growth is rarely smooth;
development happens in fits and starts; cash flows are subject to wild fluctuations and
become negative at times.
For that reason, development banks should not operate on a fixed rate of interest. They
should evolve a mechanism which depends on the health of the borrower. One possibility
is to take a share of the profits. However, that is highly risky. Profit-related investment is
best left to venture capitalists. In risk taking, development banks fall midway between
safety-conscious traditional banks and the daredevil venture capitalists. In seeking
returns, they need to follow a via media — neither be inflexible with a fixed rate of
interest, nor be volatile and bet on equity.
For development banks, a charge on the running costs of the firm could be that via media,
specifically two of them, (a) rents which include the cost of all outsourcing of materials
and services, and (b) wages. Then, a charge on the rent and wage costs of the borrowing
firm, a charge levied only when the firm has a surplus to pay, could be the via media that
development banks could adopt.
These two costs are linked to inflation and to national economic growth too. Hence,
however low the charge on these two items, it will, in due course, overtake whatever
fixed rate of interest one may consider as an alternative. In initial years, the returns from
such a charge will be low; even nil. In course of time, whatever sacrifice is made in the
teething (or difficult) years will always be made good — unless the firm is incurable.
An unsympathetic fixed interest burden often makes otherwise curable firms mortally ill.
A flexible charge will give a breather to recover too many firms that are liable to become
incurably sick in a fixed interest regime. Flexible charges reduce risks for lending banks
too: Because of inflation and growth, a charge on rents and wages will sooner or later
overtake any fixed rate of interest. With patience, development banks can recover their
sacrifices with little risk.
In other words, development banks should think differently, and should have a long time
horizon. They should acquire the expertise to assess the optimum waiting period and fix
the rate of charge on wage costs and rents paid accordingly. Incidentally, this kind of
charge is not only transparent; it will also make firms cost-conscious. That is an added
benefit, additional safety.
If development banks charge variable returns, they will need a complementary deposit
regime. Pensioners like to have constant real returns that are protected against erosion by
inflation. Hence, they need returns that rise with time. Thus, development banks would
do well to devise a Pension Fund with inflation-linked returns. Then, they will have a
matched programmed for assets and liabilities.
Sir Arthur Lewis won the Nobel for explaining how poor countries can develop quickly
by exploiting the surplus labour they have. On the same analogy, the rural areas can
develop rapidly by exploiting the cheap land they have in plenty. The scheme PURA
(Providing Urban amenities in Rural Areas) banks on that idea. PURA starts with the
construction of a ring road linking a loop of villages. The moment the road is built, the
value of land alongside increases. PURA goes further. It runs frequent bus services on the
ring road, at least once 10-15 minutes. With bus services in place, the ring road connects
to large numbers of customers. That connectivity will attract many new businesses,
increasing land values further. Every new business can become a magnet for yet another
setting into motion a virtuous cycle, and to rapid growth and development of newer and
newer businesses.
Traditional banking is lending to the real estate developer at a fixed rate of interest.
Venture funding is taking a share in his profits, but development banking is the policy of
placing a charge on the rents collected. That is not normal and requires a change in the
mindset, a new vision, which could give development banks a new life.
DEFINITATION OF A DEVELOPMENT BANK
Development banks are .the institutions engaged in the promotion and development of
industry, agriculture and other key sectors. In the words of A.G. Kheradjou "A
development bank is like a living organism that reacts to the social-economic
environment and its success depends on reacting most aptly to that environment".
Kheradjou assigns an important task to the development banks. He feels that these banks
should react to the socio-economic needs. They should satisfy the developmental needs
of the economy and their success is linked to the satisfactory growth of the economy. In
the views of William' Diamond" A development bank has the opportunity to promote
enterprises i.e. To conceive investment proposals and to stimulate others to pursue terms
itself to carry them through, from 'conception' to 'realization'. In principle, a development
bank is well suited to assume this kind of role. Yet, enterprise creation is fraught with
costs and risks which development bank cannot neglect. Development banks can
prudently undertake them only when they have the requisite financial strength, technical
expertise and the managerial skill to bank. ", In his views, a development bank is an
institution which takes up the job of developing industrial enterprises from its inception
to completion. This process involves costs as well as risks. The bank should have
sufficient financial sources and expertise to promote a new unit. D.M. Mithani states that.
"A development bank may be defined as a financial institution concerned with providing
all types of financial assistance (medium as well as long-term) to business units. I the
form of loans, underwriting, investment and guarantee operations and development in
general and industrial
FEATURES OF A DEVELOPMENT BANK
A development bank has the following features or characteristics:
1) A development bank does not accept deposits from the public like commercial
banks and other financial institutions who entirely depend upon saving
mobilization.
2) It is a specialized financial institution which provides medium term and long-term
lending facilities.
3) It is a multipurpose financial institution. Besides providing financial help it
undertakes promotional activities also. It helps an enterprise from planning to
operational level.
4) It provides financial assistance to both private as well as public sector institutions.
5) The role of a development bank is of gap filler. When assistance from other
sources is not sufficient then this channel helps. It does not compete with normal
channels of finance.
6) Development banks primarily aim to accelerate the rate of growth. It helps
industrialization specific and economic development in general
7) The objective of these banks is to serve public interest rather than earning profits.
8) Development banks react to the socio-economic needs of development.
OBJECTIVES OF DEVELOPMENT BANKS
Every country felt the need to accelerate the rate of development in post world war era.
Some countries were directly involved in war while many others were indirectly affected
by it. There was a need for reconstructing economics at a faster speed. The existing
machinery for developmental activities was not sufficient to the requirements of industry.
There was a need to set up such institutions which would take up promotional activities
besides financing. In this background developmental banks were needed for the following
reasons:
1. Lay Foundations for Industrialization
A number of countries got independence from colonial rule. Their economies needed to
be rehabilitated. Other underdeveloped and developing countries too needed to accelerate
the pace of industrialization. To lay a solid foundation for growth, establishment of
certain key industries such as cement, engineering, machine making, chemicals, etc. is
essential. Private entrepreneurs were not forthcoming to invest in these vital' areas due to
risk involved and Ibng gestation period in those industries. Moreover, it was beyond the
means and capacity of private individuals to take up these projects. They needed special
facilities from institutions which could extend long-tenn help. The governments of under
developed countries set up development and institutions to fill the vacuum.
2. Meet Capital Needs
1'nere was a dearth of capital needed to foster industrial growth in underdeveloped
countries. Owing to the low level of income of the people there were no sufficient
surpluses for capitalization. There was a need for institutions which could meet this gap
between demand and supply for capital.
3. Need for Promotional Activities
Besides capital needs, underdeveloped countries suffered from lack of expertise,
managerial and technical know-how. Developmental banks could take up the job of and
joint sectors and provide managerial and resources and skills and of channeling them into
approved fields under private auspices are needed in these countries.
4. Help Small and Medium Sectors
The large scale was, to some extent, able to meet its needs. There was a need to mitigate
sufferings of small and medium size industries which form a sizeable sector of the
industrial economy. Despite the important role played by these sectors they experience
scarcity of capital owing to the apathy of investors to invest their savings because of their
credit worthiness and profitability. There was a need for special institutions to help these
sectors in playing vital role in the industrialization of developing and under developed
countries.
FUNCTIONS OF DEVELOPMENT BANKS
Development banks have been started with the motive of increasing the pace of
industrialization. The traditional financial institutions could not take up this challenge
because of their limitations. In order to help all round industrialisation development
banks were made multipurpose institutions. Besides financing they were assigned
promotional work also. Some important functions of these institutions are discussed as
follows:
1. Financial Gap Fillers
Development banks do not provide medium-term and long-term loans only but they help
industrial enterprises in many other ways too. These banks subscribe to the bonds and
debentures of the companies, underwrite to their shares and debentures and, guarantee the
loans raised from foreign and domestic sources. They also help 'undertakings to acquire
machinery from with in and outside the country.
2. Undertake Entrepreneurial Role
Developing countries lack entrepreneurs who can take up the job of setting up new
projects. It may be due to lack of expertise and managerial ability. Development banks
were assigned the job of entrepreneurial gap filling. They undertake the task of
discovering investment projects, promotion of industrial enterprises, provide technical
and managerial assistance, undertaking economic and technical research, conducting
surveys, feasibility studies etc. The promotional role of development bank is very
significant for increasing the pace of industrialization.
3. Commercial Banking Business
Development banks normally provide medium and long-term funds to industrial
enterprises. The working capital needs of the units are met by commercial banks. In
developing countries, commercial banks have not been able to take up this job properly.
Their traditional approach in dealing with lending proposals and assistance on securities
has not helped the industry. Development banks extend financial assistance for meeting
working capital needs to their loan if they fail to arrange such funds from other sources.
So far as taking up of other functions of banks such as accepting of deposits, opening
letters of credit, discounting of bills, etc. there is no uniform practice in development
banks.
4. Joint Finance
Another feature of development bank's operations is to take up joint financing along with
other financial institutions. There may be constraints of financial resources and legal
problems (prescribing maximum limits of lending) which may force banks to associate
with other institutions for taking up the financing of some projects jointly. It may also not
be possible to meet all the requirements of a concern by one institution, So more than one
institution may join hands. Not only in large projects but also in medium-size projects it
may be desirable for a concern to have, for instance, the requirements of a foreign loan in
a particular currency, met by one institution and under writing of securities met by
another. In case of big projects where substantial financial assistance is needed, more
institutions may form a consortium to meet their needs. The members of the consortium
will undertake joint appraisal of projects and then decide the quantum of assistance to be
provided by each institution.
5. Refinance Facility
Development banks also extend refinance facility to the lending institutions. In this
scheme there is no direct lending to the enterprise. The lending institutions are provided
funds by development banks against loans extended' to industrial concerns. In this way
the institutions which provide funds to units are refinanced by development banks. In
India, Industrial Development Bank of India provides reliance against ('term loans
granted to industrial 'concerns by state financial corporations. commercial banks and state
co-operative banks.
6. Credit Guarantee
The small scale sector is not getting proper financial facilities due to the clement of risk
since these units do not have sufficient securities to offer for loans, lending institutions
are hesitant to extend them loans. To overcome this difficulty many countries including
India and Japan have devised credit guarantee scheme and credit insurance scheme. In
India, credit guarantee scheme was introduced in 1960 with the object of enlarging the
supply of institutional credit to small industrial units by granting a degree of protection to
lending institutions against possible losses in respect of such advances. In Japan besides
credit guarantee, insurance is also provided. These schemes help small scale concerns to
avail loan facilities without hesitation.
7. Underwriting of Securities
Development banks acquire securities of industrial units through either direct subscribing
or underwriting or both. The securities may also be acquired through promotion work or
by converting loans into equity shares or preference shares. So development banks may
build portfolios of industrial stocks and bonds. These banks do not hold these securities
on a permanent basis. They try to disinvest in these securities in a systematic way which
should not influence market prices of these securities and also should not lose managerial
control of the units.
Development banks have become world wide phenomena. Their functions depend upon
the requirements of the economy and the state of development of the country. They have
become well recognized segments of financial market. They are playing an important role
in the promotion of industries in developing and underdeveloped countries.
LENDING PROCEDURES OF DEVELOPMENT BANKS
OPERATIONAL ACTIVITIES
Development banks follow a procedure for evaluating a proposal for a project. The basic
objective is to check whether the applicant fulfils various conditions prescribed by the
lending institution and the project is viable. The acceptance of a wrong proposal will
result in the wastage of scarce resources. These banks adopt the following procedure for
lending:
1. Project Appraisal and Eligibility of Applicant
Every financial institution serves a particular area of activity or there are certain limits
prescribed beyond which they cannot go. Before processing the application, it is
important to find out whether the applicant is eligible under the norms of the institution
or not. The second aspect which is looked into is to determine whether the enterprise has
fulfilled various conditions prescribed by the government. In case some license is
required from the government. It should have been taken or an assurance is received from
the licensing authority. After satisfying these preliminary issues the project is appraised
by a team of technical financial and economic officers of the institutions from various
discussions with the promoters and clarifications sought on various points. The bank
institution considers financial assistance in the light of
(I) Guidelines for assistance to industries issued by the government or others concerned
from time to time
(ii) Guidelines issued by the bank
(iii) Policy decisions of the Board of Directors of the bank.
2. Technical Appraisal
A technical appraisal involves the study of:
1) Feasibility and suitability of technical process in Indian conditions.
2) Location, of the project in relation to the availability of raw materials, power:
water. labour, fuel, transport, communication facilities and market for finished
products.
3) The scale of operations and its suitability for the planned project.
4) The technical soundness of the projects.
5) Sources of purchasing plant and machinery and the reputation of suppliers. etc.
6) Arrangement for the disposal of factory affluent and use of bye products, if any.
7) The estimated cost of the project and probable selling price of the product.
8) The programme for completing the project.
9) The sources of supplying various inputs and marketing arrangements.
10) Details of any technical collaboration and its practical aspects. The technical
appraisal determines the suitability of the project.
3. Economic Viability
The economic appraisal will consider the national and industrial priorities of the project
export potential of the product employment potential, study of market.
4. Assessing Commercial Aspects
The examination of commercial aspects relates to the arrangements for the purchase of
raw materials and sale of finished products. If the concern has some arrangement for sale
then the position of the party should be assessed.
5. Financial Feasibility
The financial feasibility of a new and an existing concern will be assessed differently.
The assessment for a new concern will involve:
1) The needs for fixed assets, working capital and preliminary expenses will be
estimated to find out its needs.
2) The financing plans will be studied in relation to capital structure, promoters'
contribution, debt-equity ratio.
3) Projected cash flow statements both during the construction and .operation
periods
4) Projected profitability and the like dividend in near future.
If a project is already in operation and is undertaking expansion or diversification, the
financial feasibility will be different. The analysis of existing capital structure,
contribution of owners, debt-equity ratio, past financial performance results shown by
profit and loss accounts and balance sheets, the sources of raising funds, likely needs .of
the concern, future debt-equity ratio (after extending financial help), debt service
coverage, internal rate .of return, in the financial position of the concern and viability for
6. Managerial Competence
The success .of a concern depends up on the competence of management. Proper
application of various policies will determine the Success of an enterprise. A lending
institution would see the background, qualifications, business experience of promoters
and other persons associated with management.
7. National Contribution
Besides commercial profitability, national contribution .of the project is also taken into
account. The role of the project in the national economy and its benefits to the society in
the form of good quality products, reasonable prices, employment generation, helpful in
social infrastructure etc. should be assessed. Development banks aim at the over all
welfare of the society.
8. Balancing of Various Factors
Various factors should be balanced against each other. The circumstances .of the
individual project will help in weighing various factors. Some factors may be strong as
their in-depth analysis should be avoided. In case a project is profitable, there will be no
need to assess cash flow. Weaknesses located in certain areas may be .off set by the good
points in the .other. An experienced management and sound economic outlook may
compensate some weakness in financial positions. The responsibility of lending bank lies
in balancing judiciously different considerations for arriving at a consensus.
9. Loan Sanction
After the appraisal report on the project is prepared by the bank's officers, it is placed
before the advisory committee consisting of experts drawn from various fields of the
particular industry. If the advisory committee is satisfied tile proposal then it
recommends the case to the Managing Director or board of Directors along with its own
report. When the assistance is sanctioned hen a letter to this effect is issued to the pay
giving details of conditions.
10. Loan Disbursement
The loan is disbursed after the execution of loan agreement. The execution of documents
of security or guarantee etc. should precede the disbursement of loan. In case some
property is pledged to the bank then title deeds of such property are properly scrutinized.
The fulfillment of various conditions proceeding to disbursement will determine the time
of paying the money to the party.
DEVELOPMENT BANKING IN INDIA
The foreign rulers in India did not take much interest in the industrial development of the
country. They were interested to take raw materials to England and bring back finished
goods to India. The government did not show any interest for securing up institutions
needed for industrial financing. The “recommendation for setting up industrial financing
institutions was made in 1931 by Central Banking Enquiry Committee but no concrete
steps were taken. In 1949, Reserve Bank had undertaken a detailed study to find out the
need for specialized institutions. It was in 1948 that the first development bank i.e.
Industrial Finance Corporation of India (IFCI) was established. IFCI was assigned the
role of a gap-filler which implied that it was not expected to compete with the existing
channels of industrial finance. It was expected to provide medium and long-term credit to
industrial concerns only when they could not raise sufficient finances by raising capital or
normal banking accommodation. In view of the vast size of the country and needs of the
economy it was decided 10 set up regional development banks to cater to the needs of the
small and medium enterprises. In 1951, Parliament passed State Financial Corporation
Act. Under this Act state governments could establish financial corporations for their
respective regions. At present there are 18 State Financial Corporations (SFC's) in India.
The IFCI and state financial corporations served only a limited purpose. There was a
need for dynamic institutions which could operate as true development agencies. National
Industrial Development Corporation (NIDC) was established in 1954 with the objective
of promoting industries which could not serve the ambitious role assigned to it and soon
turned to be a financing agency restricting itself to modernization and rehabilitation of
and jute textile industries.
The Industrial Credit and Investment Corporation of India (ICICI) were established in
1955 as a Joint Stock Company. ICICI was supported by Government of India, World
Bank, Common wealth Development Finance Corporation and other, foreign institutions.
It provides term loans and takes an active part in the underwriting of and direct
investments in the shares of industrial units. Though ICICI was established in private
sector but its pattern of shareholding and methods of raising funds gives it the
characteristic of a public sector financial institution. .
Another institution, Refinance Corporation for Industry Ltd. (RCI) was set up in 1958 by
Reserve’ Bank of India, LIC and Commercial Banks. The purpose of RCI was to provide
refinance to commercial banks and SFC's against term loans granted by them to industrial
concerns in private sector. In 1964, Industrial Development Bank of India (IOBI) was set
up as an apex institution in the area of industrial finance, RCI was merged with IDBI.
IDBI was a wholly owned subsidiary of RBI and was expected to co-ordinate the
activities of the institutions engaged in financing, promoting or developing industry.
However, it is no longer a wholly owned subsidiary of the Reserve Bank of India.
Recently, it made a public issue of shares to increase its capital. In order to promote
industries in the slate another type of institutions, namely, the State Industrial
Development Corporations (SIDC's) were established in the sixties to promote medium
scale industrial units. The state owned corporations have promoted a number of projects
in the joint sector and assisted sector. At present there are 28 SIDC's in the country. The
State Small Industries Development Corporations (SSIDC's) were also set up to cater to
the needs of industry at state level. These corporations manage industrial estates, supply
raw materials, run common service facilities and supply machinery on hire purchase
basis. Some states have established their own institutions.
A number of other institutions also participate in industrial financing. The Unit Trust of
India (UTI) established in 1964, Life Insurance Corporation of India (1956) and General
Insurance Corporation of India (GIC) set up in 1973 also finance industrial activities at
all India level. Some more units have been set up to provide help in specific areas such as
rehabilitation of sick units, export finance, agriculture and rural development. Industrial
Reconstruction Corporation of India Ltd. (RCI)' was set up in 1971 for the rehabilitation
of sick units. In 1982 the Export-Import Bank of India (Exim Bank) was established to
provide financial assistance to exporters and importers. In order to meet credit needs of
agriculture and rural sector, National' Bank for Agriculture and Rural Development
(NABARD) was set up in 1982. It is responsible for short term, medium term and long-
term financing of agriculture and allied activities. The institutions such as Film Finance
Corporation, Tea Plantation Finance Scheme, Shipping Development Fund, Newspaper
Finance Corporation, Handloom Finance Corporation, Housing Development Finance
Corporation also provide financial various areas.
Role of development banks in financial system
Financial institutions provide means and mechanism of transferring resources from those
who have an excess of income over expenditure to those who can make productive use of
the same. The commercial banks and investment institutions mobilize savings of people
and channel them into productive uses. Financial institutions provide all type of assistant
required infrastructural facilities Institutions e p economic persons who can take the
development in the following ways.
1. Providing Funds:-
The underdeveloped countries have low levels of capital formation. Due to low incomes,
people are not able to save sufficient funds which are needed for sensing up new units
and also for expansion diversification and modernization of existing units. The persons
who have the capability of starting a business but does not have requisite help approach
to financial institutions for help. These institutions help large number of persons for
taking up some industrial activity. The addition of new industrial units and increasing the
activities of existing units will certainly help in accelerating the pace of economic
development. Financial institutions have large inventible funds which are used for
productive purposes
2. Infrastructural Facilities
Economic development of a country is linked to the availability of infrastructural
facilities. There is a need for roads, water, sewerage, communication facilities, electricity
etc. Financial institutions prepare their investment policies by keeping national priorities
in miner-The institutions invest in those aim is which can help in increasing the
development of the country. Indian industry and agriculture is facing acute shortage of
electricity. All India" institutions are giving priority to invest funds in projects generating
electricity. These investments will certainly increase the availability of electricity. Small
entrepreneurs cannot spare funds for creating infrastructural facilities. To overcome this
problem, institutions at state level are developing industrial estates and provide sheds,
having all facilities at easy installments. So financial institutions are helping in the
creation of all those facilities which are essential for the development of a country.
3. Promotional Activities
An entrepreneur faces many problems while setting up a new unit. One has to undertake a