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Financial Institutions

The government has established numerous financial institutions all over the country to provide financial grants to business organisations (see Box E). These institutions are established by the central as well as the state governments. They offer both owned capital and loan capital for medium and long term requirements thereby supplement the traditional financial agencies like commercial banks. Since, these institutions aim at promoting the industrial development of a country, these are also called 'development banks'. Apart from providing financial assistance, these institutions also execute market surveys and provide technical and managerial services to enterpreneurs. This source of financing is considered appropriate when a huge sum is required for expansion, reorganisation and modernisation of an enterprise and can be repaid on a longer term.

The advantages of raising funds through financial institutions are as follows:
  1. Financial institutions grant long-term finance, which are not provided by commercial banks;
  2. In addition to providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms;
  3. Receiving loans from financial institutions increases the goodwill of the borrowing company in the capital market. Accordingly, such a company can raise funds easily from other sources too;
  4. Since repayment of loan can be done in easy installments, it does not substantiate as a burden on the business;
  5. The funds are made quickly available even during periods of low performance, when other sources of finance are unavailable.
The main drawbacks of raising funds from financial institutions are as given below:
  1. Financial institutions pursue rigid criteria with respect to grant of loans. Too many formalities are followed and makes the procedure time consuming and expensive;
  2. Certain limitations viz., restriction on dividend payment is forced on the powers of the borrowing company by the financial institutions;
Box E

Special Financial Institutions

  1. Industrial Finance Corporation of India (IFCI): It was established in July 1948 as a statutory corporation under the Industrial Finance Corporation Act, 1948. Its objectives include assistance towards balanced regional development and encouraging new entrepreneurs to enter into the priority sectors of the economy. IFCI has also contributed to the development of management education in the country.
  2. State Financial Corporations (SFC): The State Financial Corporations Act, 1951 empowered the State Governments to establish State Financial Corporations in their respective regions for providing medium and short term finance to industries which are outside the scope of the IFCI. Its scope is wider than IFCI, since the former covers not only public limited companies but also private limited companies, partnership firms and proprietary concerns.
  3. Industrial Credit and Investment Corporation of India (ICICI): This was established in 1955 as a public limited company under the Companies Act. ICICI assists the creation, expansion and modernisation of industrial enterprises exclusively in the private sector. The corporation has also encouraged the participation of foreign capital in the country.
  4. Industrial Development Bank of India (IDBI): It was established in 1964 under the Industrial Development Bank of India Act, 1964 with an objective to coordinate the activities of other financial institutions including commercial banks. The bank performs three types of functions, namely, assistance to other financial institutions, direct assistance to industrial concerns, and promotion and coordination of financial-technical services.
  5. State Industrial Development Corporations (SIDC): Many state governments have set up State Industrial Development Corporations for the purpose of promoting industrial development in their respective states. The objectives of the SIDCs differ from one state to another.
  6. Unit Trust of India (UTI): It was established by the Government of India in 1964 under the Unit Trust of India Act, 1963. The basic objective of UTI is to mobilize the community's savings and channelise them into productive ventures. For this purpose, it sanctions direct assistance to industrial concerns, invests in their shares and debentures, and participates with other financial institutions.
  7. Industrial Investment Bank of India Ltd.: It was initially set up as a primary agency for rehabilitation of sick units and was known as Industrial Reconstruction Corporation of India. It was reconstituted and renamed as the Industrial Reconstruction Bank of India in 1985 and again in 1997 its name was changed to Industrial Investment Bank of India. The Bank assists sick units in the reorganisation of their share capital, improvement in management system, and provision of finance at liberal terms.
  8. Life Insurance Corporation of India (LIC): LIC was set up in 1956 under the LIC Act, 1956 after nationalising 245 existing insurance companies. It mobilizes the community's savings in the form of insurance premia and makes it available to industrial concerns, both public as well as private, in the form of direct loans and underwriting of and subscription to shares and debentures.
  1. It is likely for the Financial institutions to have their nominees on the Board of Directors of the borrowing company thus restricting the powers of the company.

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