CHAPTER 2

FINANCIAL INSTITUTION

Meaning: Financial Institutions: an Institution which collects funds from the public and places them in financial assets, such as deposits, loans, bonds other than tangible property are called financial institutions.

Definition: It is an establishment that focus on dealing with financial transactions such as Investments, loans and deposits.

Features of Financial Institution

Its features:

  1. It is an Institution as well as Intermediary.
  2. It channelizes savings fund into investment fund.
  3. It creates financial assets such as deposits, loans, securities etc.
  4. It includes banking and non banking institutions.
  5. And also includes both organized and unorganized institutions.
  6. Established with a clear operating function.
  7. Regulated by the government and regulating authority.

Importance of Financial Institutions:

  1. Provide funds: Financial institutions provide funds for the investment and industrial activities. Active sources which offer appropriate source of funds to the requirement of institutions and individuals.
  2. Infrastructural facilities: Financial institutions also offer basic infrastructural facilities needed for the development and promotion of lucrative ventures. Infrastructural facilities involve development of industrial estates, tech parks, road and water etc.
  3. Promotional activities: To mobilize the funds, reduce the risk of selling financial securities, arrangement of working and long term capital of the business.
  4. Development of Backward areas: Financial institutions also take social responsibilities of developing the backward areas at free cost by offering credit facilities, free education, employment creation etc.
  5. Planned development: Financial institutions initiate all planned developments in the view of economic growth of the state and are coordinated with the government plan and social welfare.
  6. Accelerating industrialization: as the financial institutions are established to earn the profit and safeguard interest of its members, they accelerate the industrialization to contribute industrial growth. They support the industries by granting finance, project development and consultancy.
  7. Employment generation: Channelizing the funds for investment, building of industrial facilities and acceleration of industries generates the employment to the educated and qualified people of the state.

Functions of Financial Institution:

Primary functions

1. Accepting deposits: Financial institutions accept deposits from the public. They offer different schemes to mop up public deposits from the customers.(Give in return in the form of interest on deposit tenure basis).

2. Providing commercial loans: Accepted deposits are used for commercial lending operations in the form of loans, advances, cash credits, bills discounting etc. (Fetch good returns).

3. Providing real estate loans: The financial institutions also provide loans and advances for real estate industries to purchase site, build premises, construction industrial and residential parks.

4. Providing mortgage loans: The financial institutions also provide loans to the needy group on mortgage of properties and collateral securities.( Gold loans, property loan etc).

5. Issuing share certificates:Financial institutions also constitutes accepting shares investment money from the investors and issuing them certificates on behalf of the companies.

Secondary Functions:

  1. Act as an intermediary: Between the savings community and industrialists. Receives the deposits at a lower rate of interest and lend the same fund to the needy group at a higher interest.(Difference amount is profit for their intermediary work).
  2. Facilitate the flow of money: They also facilitate the flow/channelize the money to the investment activities. Financial institutions are the interlinked path stones to make smooth flow of fund from small savers to giant business ventures.

INDUSTRIAL FINANCE CORPORATION OF INDIA(IFCI)

IFCI was established as a statutory corporation on 1st July 1948 by special Act of Parliament, IFCI Act, 1948.

It was converted into a public limited company on July 1, 1993.

Its main object is to provide medium and long term credit to eligible industrial concerns in corporate sectors of the economy, particularly to those industries to which banking facilities are not available.

OBJECTIVES:

(a) To provide long and medium-term credit to industrial concerns engaged in manufacturing, mining, shipping and electricity generation and distribution.

(b) The period of credit can be as long as 25 years and should not exceed that period;

(c) To grant credit to a single concern up to a maximum amount of rupees one crore. This limit can be exceeded with the permission of the government under certain circumstances;

(d) Underwrite and directly subscribe to shares and debentures issued by companies;

(e) Assist in setting up new projects as well as in modernization of existing industrial concerns in medium and large scale sector;

SUBSIDARIES AND ASSOCIATES OF IFCI

  1. IFCI Infrastructure Development Ltd.
  2. IFCI Factors limited
  3. IFCI financial services Ltd.
  4. IFCI Venture Capital Funds ltd
  5. MPCON (Madhya Pradesh Consultancy Organisation)
  6. Assets care and reconstruction Enterprise ltd
  7. Tourism finance corporation of India ltd
  8. Management development institution
  9. Institute of leadership development
  10. RashtriyaGramin Vikas Nidhi
  11. Technical Consultancy Organisations

Products and services of IFCI

  1. Financial products

a. Debt segment

i. Short term loans of less than 3 years duration

ii. Corporate loans of 3-5 years duration

iii. Project loans of 5-15 years duration

iv. Different types of guarantees and non fund based facilities.

b. Equity segment

i. Investment in IPO( Initial Public Offering- Private to Public, Right issue, qualified institutional placement.

ii. Strategic investment in unlisted companies

iii. Trading in the secondary market including equity derivatives

c. Targeted Business segments

i. Public sector undertakings

ii. Manufacturing industry

iii. Infrastructure projects

2. Project development

a. Hydro power projects

b. Thermal power projects

c. Renewable power projects

3. Corporate advisory services

a. Corporate advisory services

b. Infrastructure advisory services

c. Monitoring of public issues

4. Nodal agency for sugar development fund

5. Debenture trustee

IDBI: Industrial Development bank of India

IDBI: Industrial Development bank of India (IDBI) was constituted under Industrial Development bank of India Act, 1964 as a Development Financial Institution (DFI) and came into being as on July 01, 1964 wide government of India notification dated June 22, 1964.Its headquarters in Mumbai, India.RBI categorized IDBI as on “other public sector bank”.

Objectives
The main objectives of IDBI is to serve as the apex institution for term finance for industry in India. Its objectives include:

Co-ordination, regulation and supervision of the working of otherfinancial institutions such as IFCI , ICICI, UTI, LIC, Commercial Banks and SFCs.

Supplementing the resources of other financial institutions and there by widening the scope of their assistance.

Planning, promotion and development of key industries anddiversificationofindustrialgrowth.

Devising and enforcing a system of industrial growth that conforms to national priorities.

Functions

The IDBI has been established to perform the following functions-

To grant loans and advances to IFCI, SFCs or any other financial institution byway of refinancing of loansgranted by such institutions which are repayable within 25 year.

To grant loans and advances to scheduled banks or state co-operative banks by way of refinancing of loans granted by such institutions which are repayable in 15years.

To grant loans and advances to IFCI, SFCs, other institutions, scheduled banks, state co-operative banks by way of refinancing ofloans granted by such institution to industrial concerns for exports.

To discount orre-discount bills of industrial concerns.

To underwrite or to subscribe to shares ordebentures of industrial concerns.

To subscribe toor purchase stock, shares, bondsand debentures of other financial institutions.

To grant line of credit or loans and advances to other financial institutions such as IFCI, SFCs, etc.

To grant loans to any industrial concern.

To guarantee deferred payment due from any industrial concern.

To guarantee loans raised byindustrial concerns inthe market orfrom institutions.

To provide consultancy and merchant banking services in or outside India.

To provide technical, legal, marketing and administrative assistance to any industrial concern or person for promotion, management orexpansion of any industry.

Planning, promoting and developing industries to fill up gaps in the industrial structure in India.

To act astrustee for the holders of debentures or other securities.

Subsidiaries of IDBI

  1. Small Industrial Development Bank of India(SIDBI)
  2. IDBI bank ltd
  3. IDBI Capital market services
  4. IDBI Investment Management Company

PRODUCTS and SERVICES of IDBI: The following are the products and services offered by IDBI.

(i) Preferred banking

(ii) Deposits

a. Savings deposit

b. Current deposit

c. Fixed deposit

(iii) Loans

a. Home loan

b. Loan against property

c. Education loan

d. Personal Loan

e. Auto loan

f. Loans against securities

g. Reserve mortgage loan

h. corporate loan

iv) Cards

a. Cash at POS facility on debit cards

b. Online payment through Debit cards etc.

v) 24 hours banking

a. Phone banking

b. Mobile banking

c. Internet banking

d. Account alert

e. Mobile payment services

vi)Corporate banking

a. Project appraisal

b. Debt Syndication

c. Advisory services

d. Film financing scheme

vii) Investment advisory

viii) SME finance

ix) Agri finance

x)NRI services

xi) Lockers

xii) Foreign currency products

xiii) Treasury

INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA(ICICI)

The Industrial Credit and Investment Corporation of India or ICICI was established on 5th January, 1955 to assist industrial units in the private sector. It was sponsored by the World Bank.

Objects

To assist in the creation, expansion and modernization at industrial units in the private sector.

To encourage the inflow and participation of foreign capital in the private sector industrial units.

To expand the investment market in India.

Functions
The main functions of ICICI are as follows:

To sponsor and underwrite new issues.

To provide medium and long-term loans to industrial units in the private sector.

To guarantee loans taken from other private sources.

To furnish managerial, technical and administrative advice to industrial units by the private sector.

To make funds available for reinvestment.

To advance loans in foreign currency towards the cost of imported capital equipments.

To extend guarantee for deferred payments.

To purchase the shares and debentures of new companies.

Financial Resources (Capital)
The authorized capital of ICICI is Rs. 25 crores which was raised to Rs. 60 crores. The present subscribed capital is Rs. 22 crores.

The capital has been subscribed by

(i)Indian banks and insurance companies,

(ii)General public in India,

(iii) Foreigners including British and American investors.

Financial Assistance:

The performance of the ICICI in the field of financial assistance provided to the industrial concerns has been quite satisfactory.

Over the years, the assistance sanctioned by the Corporation has grown from Rs.14.8 crore in 1961-62 to Rs. 43.0 crore in 1970-71 and Rs. 36229 crore in 2001-02.

Similarly the amount disbursed has increased from Rs.8.6 crore in 1961-62 to Rs.29.8 crore in 1970-71 and to Rs. 25831 in 2001-02. Cumulatively, at the end of March 1996, the ICICI has sanctioned and disbursed financial assistance aggregating Rs. 66169 crore and Rs. 36591 crore respectively.

The important features of the functioning of the ICICI arc as given below:

(i) The financial assistance as provided by the ICICI includes rupee loans, foreign currency loans, guarantees, underwriting of shares and debentures, and direct subscription to shares and debentures.

(ii) Originally, the ICICI was established to provide financial assistance to industrial concerns in the private sector. But, recently, its scope has been widened by including industrial concerns in the public, joint and cooperative sectors.

(iii) ICICI has been providing special attention to financing riskier and non-traditional industries, such as chemicals, petrochemicals, heavy engineering and metal products. These four categories of industries have accounted for more than half of the total assistance.

(iv) Of late, the ICICI has also been providing assistance to the small scale industries and the projects in backward areas.

(v) Along with other financial institutions, the ICICI has actively participated in conducting surveys to examine industrial potential in various states.

(vi) In 1977, the ICICI promoted the Housing Development Finance Corporation Ltd. to grant term loans for the construction and purchase of residential houses.

(vii) Since 1983, the ICICI has been providing leasing assistance for computerisation, modernisation and replacement schemes; for energy conservate; for export orientation; for pollution controller balancing and expansion: etc.

(viii) The ICICI has not contributed much to reduce regional disparities. About three-fifth of the total assistance given by the ICICI has been received by the advanced states of Maharashtra, Gujrat and Tamil Nadu.

(ix) With effect from April 1, 1996, Shipping Credit and Investment company of India ltd, (SCICI) was merged with ICICI.

(x) The ICICI Ltd. was merged with ICICI Bank Ltd. effective from May 3, 2002.

INDUSTRIAL INVESTMENT BANK OF INDIA(IIBI)

The Industrial Reconstruction Corporation of India Ltd., set up in 1971 for rehabilitation of sick industrial companies, was reconstituted as Industrial Reconstruction Bank of India in 1985 under the IRBI Act, 1984.

With a view to converting the institution into a full-fledged development financial institution, IRBI was incorporated under the Companies Act 1956, as Industrial Investment Bank of India Ltd. (IIBI) in March 1997.

IIBI offered a wide range of products and services, including term loan assistance for project finance, short duration non-project asset-backed financing, working capital/other short-term loans to companies, equity subscription, asset credit, equipment finance and investments in capital market and money market instruments.

Role and functions of IIBI

  1. To grant loans and advances to industrial concerns.
  2. To underwrite shares, stocks, bonds and debentures.
  3. To guarantee loans/deferred payments and performance obligations of any contracts undertaken by industrial concerns.
  4. To act as an agent of central and state govt, reserve bank, State bank, scheduled commercial and state co operative banks, public financial institutions, SGCs etc.

EXPORT AND IMPORT BANK (EXIM BANK)

EXIM Bank is the premier finance institution of the country, established in 1982 under the export-import bank of India Act,1981.The head quarters of the bank is located in Mumbai. It is established to finance and support export and import activities.

Objectives

  1. To provide financial assistance to exporters and importers.
  2. To function as the principal financial institution for coordinating the working institutions engaged in financing export and import of goods and services with a view to promoting the country’s international trade.
  3. To act on business principles with due regard to public interest.

Functions of EXIM Bank

  1. Corporate Banking Group: which handles a variety of financing programs for Export Oriented Units (EOUs), Importers, overseas investment by Indian companies.
  2. Project Finance/Trade Finance Group: handles the entire range of export credit services such as supplier’s credit, pre-shipment Agri Business group etc. The project also handles project and export transactions in the agricultural sector for financing.
  3. Small and Medium Enterprise: The group handles credit proposals from SMEs under various lending programmers' of the bank
  4. Export Services Group: offers variety of advisory and value added information services aimed at investment promotion.
  5. Export marketing services: Bank offers assistance to Indian companies, to enable them establish their products in overseas market.
  6. Support services group which include research and planning, corporate finance, loan recovery, internal audit, HRM, legal, IT etc.

Finance and Services

  1. Export credit
  2. Finance for export oriented units
  3. Overseas investment finance
  4. SME and Agri finance
  5. Lines of credit
  6. Film Finance
  7. Rural initiatives
  8. Export services

Roles of EXIM Bank in Export financing

EXPORT CREDITS

  1. For Indian Companies Executing Contracts Overseas: It is to help Indian based organizations to compete and sustain their ventures in international markets.

Pre-shipment Credit

Supplier's Credit

For Project Exporters

For Exporters of Consultancy and Technological Services

Guarantee Facilities

Deferred Payment Exports

Term Loans for Export Production

Overseas Investment Finance

Finance for Export Marketing

  1. For Commercial Banks: Help the Indian based commercial Banks which are involved in export and import transactions.

Export Bills Rediscounting

Refinance of Supplier's Credit

Guaranteeing of Obligations

  1. For Overseas Entities: Export and Import bank also help the overseas entities which transact with domestic traders.

Buyer's Credit

Eligible Goods

Lines of Credit

Relending Facility to Banks Overseas

FINANCE FOR EXPORT ORIENTED UNITS

  1. Term Finance(For Exporting Companies)

Project Finance

Equipment Finance

Import of Technology & Related Services

Domestic Acquisitions of businesses/companies/brands

Export Product Development/ Research & Development

General Corporate Finance

  1. Working Capital Finance

(For Exporting Companies)

Funded

–Working Capital Term Loans (< 2 years)

–Long Term Working Capital (up to 5 years)

–Export Bills Discounting

–Export Packing Credit

–Cash Flow financing

Non-Funded

–Letter of Credit Limits

–Guarantee Limits

  1. Term Finance (For Non- Exporting Companies)

Import of Equipment

  1. Working Capital Finance (For Non- Exporting Companies)

Bulk Import of Raw Material

  1. Export Finance

Pre-shipment Credit

Post Shipment Credit

Buyers' Credit

Suppliers' Credit (including deferred payment credit)

Bills Discounting

Warehousing Finance

TOURISM FINANCE CORPORATION OF INDIA (TFCI)

INTRODUCTION

•The TFCI was set up on 1 February 1989 as public limited company under the companies act by the IFCI and some banks.

•It had paid up capitalof Rs.50 crore.

•It is specialized in all India development financing institutions, which provide assistance in the form ofrupee loans, underwriting and subscription to industrial securities.

•Other form of assistance is foreign loans, guarantees, suppliercredit.

•Head office: New Delhi

PURPOSE

The assistance provided will be used for the development of tourism and tourism related activities, facilities and services.

•It includes travels agents, highways facilities, car rental services, airport facilities, restaurants and holiday resorts.