Subject

DEVELOPMENT
BANKING
 INDEX

Chapter 1 : Definition of Development Banks................................................................................3

Major objectives of Development Banks.....................................................................................4
Important functions of Development Banks................................................................................5
Chapter 2 : Lending procedures of development banks.................................................................11
Chapter 3 : Major objectives of Development Banks....................................................................15
Chapter 4 : Development Banking in India...................................................................................17
Chapter 5 : Promotional role of development banks in India.......................................................19
Chapter 6 : Role of development banks in financial sector...........................................................22
Chapter 7 : Role of development banks in the Indian economy....................................................25
Chapter 8 : Role of Reserve Bank of India (RBI) in Indian Economy..........................................29
Chapter 9 : Small scale Industrial Development Bank of India (SIDBI)......................................34
Chapter 10 : Export-import bank of India (EXIM Bank)..............................................................36
Chapter 11 : National Bank of Agriculture and Rural Development (NABARD).......................38
Chapter 12 : Industrial Development Bank of India (IDBI)..........................................................41
Chapter 13 : Industrial Finance Corporation of India (IFCI).........................................................48
Chapter 14 : State Financial Corporation of India - SFCI.............................................................55
.......................................................................................................................................................59
Chapter 15 : HUDCO.....................................................................................................................60
HUDCO's main objectives can be defined as under:.................................................................60
Chapter 16 : ICICI.......................................................................................................................62
Chapter 17 : The World Bank or The International Bank for Reconstruction and Development
(IBRD)...........................................................................................................................................63
Chapter 18 : India’s apex bank: The Reserve Bank of India(RBI), it’s objectives and functions. 67
Chapter 19 : History of banking in India.......................................................................................69
Chapter 20 : Project Appraisal & Management.............................................................................74
Chapter 21 : Nationalization of Indian Banks................................................................................80
Chapter 22 : Customer Service Strategies in Banking Sector........................................................86
Chapter 23 : Major participants and players in financial markets.................................................91
Chapter 24 : Investment Banking in India....................................................................................93
Chapter 25 : Principal Functions of Investment Banks.................................................................97
Chapter 26 : Foreign Institutional Investors (FII’s) and Indian economy.....................................99
Chapter 27 : Causes of industrial sickness.................................................................................102
Chapter 28 : Company revival strategies – Industrial sickness – causes & remedies................108
Chapter 29 : GENISIS OF SICA, 1985.......................................................................................114
Chapter 30 : Difference between commercial banks and development banks............................130

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 Chapter 1 : Definition of Development Banks

Development banks are those financial 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 them or 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 in the form of loans, underwriting, investment and guarantee operations and
development in general and industrial.”

The role of a development bank has been emphasized in this definition. In this view a
development bank aims to provide financial and promotional facilities for the overall
development of a country.

Features of a development bank.

1. A development bank has the following features or characteristics:

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 2. A development bank does not accept deposits from the public like commercial banks and
other financial institutions who entirely depend upon saving mobilization.
3. It is a specialized financial institution which provides medium term and long-term
lending facilities.
4. It is a multipurpose financial institution. Besides providing financial help it undertakes
promotional activities also. It helps enterprises from planning to operational level.
5. It provides financial assistance to both private as well as public sector institutions.
6. 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.
7. Development banks primarily aim to accelerate the rate of growth. It helps
industrialization specific and economic development in general
8. The objective of these banks is to serve public interest rather than earning profits.
9. Development banks react to the socio-economic needs of development.

Major 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 long gestation period
in those industries. The governments of under developed countries set up development and
institutions to fill the vacuum.

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2. Meet Capital Needs

There 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.

Important 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 industrialization development banks were made multipurpose
institutions. Besides financing they were assigned promotional work also. Some important
functions of these institutions are discussed as follows:

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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

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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.

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 (IDBI) 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

7
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.

Growth of Development Banks

Although development banks attracted great attention after World War II but there were none
insurances or such institutions even much earlier, First development bank was found in Belgium
in 1822, with the purpose of financing and promoting industry. It was a joint stock bank which
nursed funds through the sale of shares and bonds in order to finance; commercial and industrial
enterprises. This new technique of banking got impetus only in 1852 when ‘Credit Mobilize of
France’ was set up. It mobilized resources through the sale of bonds and promissory notes and
made long-term investments particularly in public utility undertakings, railways, insurance
companies and banks. It set a model for similar investment banks established in Germany,
Austria, Belgium, Netherlands, Italy, Spain and Switzerland. Throughout the 19th century, the
Credit Mobilize provided a great appeal to all countries which wanted to develop industries on a
fast pace. In 1902, Industrial Bank of Japan was established for the purpose of financing her
industrial development. This bank undertook functions of an issue, a Commercial Bank and
mortgage institutions. Though the bank was helpful in financing industrialization but it could not
strictly be called a development bank. World War I, European countries developed specialized
institutions to provide industrial finance for reconstruction, modernization and development of
war regard industries. These banks were mainly mortgage banks which extended long-term loans
to industrial undertakings upon first mortgage of industrial property. Among the important
institutions were Bank of Finland Ltd., National Hungarian Industrial Mortgage Institute Ltd.,
and National Economic Bank of Poland. These banks were helpful in reviving the war shattered
economies of these countries. In the second phase of development banking a need for financing
small scale sector was recognized. The institutes created after great depression carried out the
functions of capital under writing and direct subscription along with lending activities. The

8
Industrial credit Company of Ireland and Netherlands, company for Industrial Financing
participated in share capital of industrial undertakings in addition to granting term loans.

In the next phase of development banking after World War II there was a trend to combine
montage lending with underwriting and equity participation.

Some institutions developed during this period were Industrial Development Bank of Canada
(1944), France Corporation for Industry Ltd. and industrial and Commercial Finance Corporation
Ltd., England (1945), Industrial Finance Department of Common wealth Bank of Australia
(1945). These institutions not only provided term loans to industry but also participated in the
share capital of companies. The institutions in England even have the option to convert their
loans into preference or equity shares. Though English and Canadian institutions could at best be
described as finance corporations but that of Australia could be called a development bank
because it could assist in the establishment and development of industrial undertakings. Despite
the differences in the organization, Scope and methods of various institutions the main thrust of
all of them was to access, those enterprises where sufficient help was not forthcoming from
traditional sources. They acted essentially as gap fillers in peculiar circumstances of the pest-war
years.

In the last 50 years developing countries have promoted many development thanks. These banks
have been developed with special purpose in mind. They differ in ownership, organization, scope
etc. Some’ are exclusively owned by government (Industrial Development Bank of Nepal, 1959,
National Development Bank of Brazil, 1965) others by private interests (Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of Thailand, etc.) Some other
Banks (Summer Bank of Turkey) are meant to promote and finance government ‘undertakings
only, some exclusively for private enterprises while some for both. Some banks can only lend
while some can lend and take equities besides underwriting. Some are concerned with entire
economy while some are for specific sectors only. Some banks are regional; some are national
while a few are inter-regional (Asian Development Bank) or international such as World Bank,
International Finance Corporation, International Development Association etc. Some banks
provide only local currency while some deal in both local and foreign currencies, etc.

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 Chapter 2 : Lending procedures of development banks

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.

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 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 programmer for completing 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.

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.

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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.

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11. Follow up

The job of a lending bank does noted by disbursing the assistance. It has first to see whether the
construction .of the project is as per schedule decided earlier. In case some delay is taking place
in executing the plans then the reasons for it should be determined. Later during operations, the
result should be properly followed. It should be seen whether the revenue earned by the concern
will be sufficient to meet its obligations or not so a proper follow up by the bank will enable it to
follow the progress of the unit.

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 Chapter 3 : Major 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 long gestation period
in those industries. The governments of under developed countries set up development and
institutions to fill the vacuum.

2. Meet Capital Needs

There 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.

14
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.

15
 Chapter 4 : 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.

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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. (IRCI)’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.

17
 Chapter 5 : Promotional role of development banks in India

The pace of development cannot be accelerated by providing financial assistance alone. There
are factors which inhibit industrialization of an underdeveloped country. It is essential to make a
correct diagnosis of those factors and plan things accordingly. The growth potential of different
areas, the availability of natural resources, demand conditions, infrastructure facilities, etc.
should be taken into account before deciding the pattern of industrialization of various places.
The task of identification of growth potentialities and preparation of feasibility studies is not an
easy task. It requires huge finances and technical expertise which is beyond the competence of
entrepreneurs of under-developed countries. It is in this area where development banks can play
crucial role. In addition to providing the traditional role of providing financial assistance,
development banks in India are undertaking promotional role also. Some of the areas where
these banks are participating are:

(1) Surveys of Backward Areas

Under the Industrial Development Bank of India, development institutions conducted industrial
potential surveys in June, 1970 with a view to identify specific project ideas for implementation
in those areas. These surveys studied the availability of resources, demand potential and
availability of infrastructures facilities. In 1982, Government of India identified 83 districts in
the country where no medium or large scale industrial units existed. IOBI jointly with IFCI and
ICICI launched a programme for identifying industrial opportunities and needs for. These project
ideas were further screened and developed for arriving at some firm decision about their
implementation. IDBI conducted feasibility studies and cleared projects for implementation.

(2) Inter-Institutional Groups (IIG’s)

With a view to provide a forum to the national and state financial institutions, IDBI constituted
23 IIG’s in various states and union territories These groups aimed to help accelerate the process
of industrial development in a state with particular emphasis on less developed areas, An attempt
was also made to evolve suitable strategies for industrial development within the framework of
national and state policies and local requirements. IDBI has been constantly reviewing the
functioning of these groups so as to evolve suitable measures for malting them effective.

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(3) Establishing Technical Consultancy Organizations (TCO’s)

There is a need for technical consultancy at the time of selling up a new unit and at the time of
making change like modernization, expansion, diversification, etc. The small and medium scale
units cannot pay high fees of consultancy agencies. With a view to help these entrepreneurs,
financial institutions set up 17 consultancy organization for providing consultancy at nominal
rates. These organizations provide consultancy services to small and medium entrepreneurs,
commercial banks, state-level financial institutions and other agencies engaged in industrial
promotion and development. The consultancy services covered so far include market surveys,
preparation of feasibility and project reports, entrepreneur ship development programmes,
diagnostic studies and rehabilitation schemes for sick units, services for implementing projects
on turn-key basis. TCO’s have been giving thrust to modernization small and medium scale
sectors also. In this respect they have undertaken in depth studies of specific sub- sectors of
small scale industry so as to identify their modernization needs and prepare modernization
programmes.

(4) Entrepreneurial Development Programmes (EPP’s)

Industrial development of a country is directly influenced by the quality of entrepreneurs it has

produced, with a view to impart requisite training to entrepreneurs. IDBI has been encouraging
entrepreneurial development programmes. It has mainly used the agency of TCO’s for drawing
up and conducting these programmes to cater to the needs of entrepreneurs from small and
medium scale sectors. IDBI meets up to 50 per cent of the cost of such programmes and the
balance cost is met by state governments or other sponsoring institutions.

Development banks have also been trying to strengthen the infrastructure for conducting
entrepreneurial development programmes. The main thrust has been to institutionalize
entrepreneurship activities, generating, sharpening and sharing knowledge through research
documentation and publication, developing a cadre of professionals. A major step in this area
was the setting up of Entrepreneurship Development Institute of India, Ahmedabad in 1983. The
objective of this institution was to train EPP trainers, providing resource inputs running model
development programmes, conducting.

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(5) Technological Improvements

Development banks, especially IDBI have been helping small and medium sectors in developing
and upgrading of their technology so that they arc able to match the pace of development. These
banks also encourage entrepreneurs to adopt sophisticated technology with the help of academic
and research institutes and also to encourage entrepreneurship among science and technology
graduates. Development banks have done a good job in promoting industrial activities in various
parts of the country. The development of backward areas is a gigantic task in India. Private
entrepreneurs cannot measure to this task of their own. So development banks are expected to
play an important role in this regard. These banks should help in setting up new projects by
associating private entrepreneurs so that their management is left to them. After a particular stage
of a project the development institutions should transfer the responsibility to private sector and
same resource should be used to develop more units. Development banks, in co-operation with
private sector, can certainly help in accelerating the pace of industrial development.

20
 Chapter 6 : Role of development banks in financial sector

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, sewage, communication facilities, electricity etc. Financial institutions
prepare their investment policies by keeping national priorities in major and 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

21
3. Promotional Activities

An entrepreneur faces many problems while setting up a new unit. One has to undertake a
feasibility report, prepare project report, complete registration formalities, seek approval from
various agencies etc. All these things require time, money and energy. Some people are not able
to undertake this exercise or some do not even take initiative. Financial institutions are the
expense and manpower resources for undertaking the exercise of starting a new unit. So these
institutions take up this work on behalf of entrepreneurs. Some units may be set up jointly with
some financial institutions and in that case the formalities are completed collectively. Some units
may not have come up had they not received promotional help from financial institutions. The
promotional role of financial institutions is helpful in increasing the development of a country.

4. Development of Backward Areas

Some areas remain neglected because facilities needed for setting up new units are not available
here. The entrepreneurs set up new units at those places which are already developed. It causes
imbalance in economic development of some areas. In order to help the development of
backward areas, financial institutions provide special assistance to entrepreneurs for setting up
new units in these areas. IDBI, IFCI, ICICI give priority in giving assistance to units set up in
backward areas and even charge lower interest rates on lending. Such efforts certainly encourage
entrepreneurs to set up new units in backward areas. The industrial units in these areas improve
basic amenities and create employment opportunities. These measures will certainly help in
increasing the economic development of backward areas.

5. Planned Development

Financial institutions help in planned development of the economy. Different institutions

earmark their spheres of activities so that every business activity is helped. Some institutions like
SIDBI, SFCI’s especially help small scale sector while IFCI and SIDC’s finance large scale
sector or extend loans above a certain limit. Some institutions help different segments like
foreign trade, tourism etc. In this way financial institutions devise their roles and help the
development in their own way. Financial institutions also follow the development priorities set
by central and state governments. They give preference to those industrial activities which have

22
been specified in industrial policy statements and in five year plans. Financial institutions help in
the overall development of the country

6. Accelerating Industrialization

Economic development of a country is linked to the level of industrialization there. The setting
up of more industrial units will generate direct and indirect employment, make available goods
and services in the country and help in increasing the standard of living. Financial institutions
provide requisite financial, managerial, technical help for setting up new units. In some areas
private entrepreneurs do not want to risk their funds or gestation period His long but the
industries are needed for the development of the area. Financial institutions provide sufficient
funds for their development. Since 1947, financial institutions have played a key role in
accelerating the pace of industrialization. The country has progressed in almost all areas of
economic development.

7. Employment Generation

Financial institutions have helped both direct and indirect employment generation. They have
employed many persons to man their offices. Besides office staff, institutions need the services
of experts which help them in finalizing lending proposals. These institutions help in creating
employment by financing new and existing industrial units. They also help in creating
employment opportunities in backward areas by encouraging the setting up of units in those
areas, thus financial institutions have helped in creating new and better job opportunities.

23
 Chapter 7 : Role of development banks in the Indian economy

The significance of Development Finance Institutions or DFIs lies in their making available the
means to utilize savings generated in the economy, thus helping in capital formation. Capital
formation implies the diversion of the productive capacity of the economy to the making of
capital goods which increases future productive capacity. The process of Capital Formation
involves three distinct but interdependent activities, viz., saving financial intermediation and
investment. However, poor country/economy may be, there will be a need for institutions which
allow such savings, as are currently forthcoming, to be invested conveniently and safely and
which ensure that they are channeled into the most useful purposes. A well-developed financial
structure will therefore aid in the collections and disbursements of investible funds and thereby
contribute to the capital formation of the economy. Indian capital market although still
considered to be underdeveloped has been recording impressive progress during the post-
interdependence period.

Support to the Capital Market:

The basic purpose of DFIs particularly in the context of a developing economy, is to accelerate
the pace of economic development by increasing capital formation, inducing investors and
entrepreneurs, sealing the leakages of material and human resources by careful allocation
thereof, undertaking development activities, including promotion of industrial units to fill the
gaps in the industrial structure and by ensuring that no healthy projects suffer for want of finance
and/or technical services. Hence, the DFIs have to perform financial and development functions
on finance functions, there is a provision of adequate term finance and in development functions
there include providing of foreign currency loans, underwriting of shares and debentures of
industrial concerns, direct subscription to equity and preference share capital, guaranteeing of
deferred payments, conducting techno-economic surveys, market and investment research and
rendering of technical and administrative guidance to the entrepreneurs.

Rupee Loans:

Rupee loans constitute more than 90 per cent of the total assistance sanctioned and disbursed.
This speaks eloquently on DFI’s obsession with term loans to the neglect of other forms of

24
assistance which are equally important. Term loans unsupplemented by other forms of assistance
had naturally put the borrowers, most of whom are small entrepreneurs, on to a heavy burden of
debt-servicing. Since term finance is just one of the inputs but not everything for the
entrepreneurs, they had to search for other sources and their abortive efforts to secure other
forms of assistance led to sickness in industrial units in many cases.

Foreign Currency Loans:

Foreign currency loans are meant for setting up of new industrial projects as also for expansion,
diversification, modernization or renovation of existing units in cases where a portion of the loan
was for financing import of equipment from abroad and/or technical know-how, in special cases.

Subscription to Debentures and Guarantees:

Regarding guarantees, it is well-known that when an entrepreneur purchases some machinery or

fixed assets or capital goods on credit, the supplier usually asks him to furnish some guarantee to
ensure payment of installments by the purchaser at regular intervals. In such a case, DFIs can act
as guarantors for prompt of installments to the supplier of such machinery or capital under a
scheme called ‘Deferred Payments Guarantee’.

Assistance to Backward Areas:

Operations of DFI’s in India have been primarily guided by priorities as spelt out in the Five-
Year Plans. This is reflected in the lending portfolio and pattern of financial assistance of
development financial institutions under different schemes of financing. Institutional finance to
projects in backward areas is extended on concessional terms such as lower interest rate, longer
moratorium period, extended repayment schedule and relaxed norms in respect of promoters’
contribution and debt-equity ratio. Such concessions are extended on a graded scale to units in
industrially backward districts, classified into the three categories of A, B and c depending upon
the degree of their backwardness. Besides, institutions have introduced schemes for extending
term loans for project/area-specific infrastructure development. Moreover, in recent years,
development banks in India have launched special programmes for intensive development of
industrially least developed areas, commonly referred to as the No-industry Districts (NID’s)

25
which do not have any large-scale or medium-scale industrial project. Institutions have initiated
industrial potential surveys in these areas.

Promotion of New Entrepreneurs:

Development banks in India have also achieved a remarkable success in creating a new class of
entrepreneurs and spreading the industrial culture to newer areas and weaker sections of the
society. Special capital and seed Capital schemes have been introduced to provide equity type of
assistance to new and technically skilled entrepreneurs who lack financial resources of their own
even to provide promoter’s contribution in view of long-term benefits to the society from the
emergence of a new class of entrepreneurs. Development banks have been actively involved in
the entrepreneurship development programmes and in establishing a set of institutions which
identify and train potential entrepreneurs. Again, to make available a package of services
encompassing preparation of feasibility of reports, project reports, technical and management
consultancy etc. at a reasonable cost, institutions have sponsored a chain of 16 Technical
Consultancy organizations covering practically the entire country. Promotional and development
functions are as important to institutions as the financing role. The promotional activities like
carrying out industrial potential surveys, identification of potential entrepreneurs, conducting
entrepreneurship development programmes and providing technical consultancy services have
contributed in a significant manner to the process of industrialization and effective utilization of
industrial finance by industry. IDBI has created a special technical assistance fund to support its
various promotional activities. Over the years, the scope of promotional activities has expanded
to include programmes for up gradation of skill of State level development banks and other
industrial promotion agencies, conducting special studies on important issues concerning
industrial development, encouraging voluntary agencies in implementing their programmes for
the uplift of rural areas, village an cottage industries, artisans and other weaker sections of the
society.

Impact on Corporate Culture:

The project appraisal and follow-up of assisted projects by institutions through various
instruments, such as project monitoring and report of nominee directors on the Boards of

26
directors of assisted units, have been mutually rewarding. Through monitoring of assisted
projects, the institutions have been able to better appreciate the problems faced by industrial
units. It also has been possible for the corporate managements to recognize the fact that interests
of the assisted units and those of institutions do not conflict but coincide. Over the years,
institutions have succeeded in infusing a sense of constructive partnership with the corporate
sector. Institutions have been going through a continuous process of learning by doing and are
effecting improvements in their systems and procedures on the basis of their cumulative
experience.

The promoters of industrial projects now develop ideas into specific projects more carefully and
prepare project reports more systematically. Institutions insist on more critical evaluation of
technical feasibility demand factors, marketing strategies and project location and on application
of modern techniques of discounted cash flow, internal rate of return, economic rate of return
etc., in assessing the prospects of a project. This has produced a favorable impact on the process
of decision-making in the corporate seeking financial assistance from institutions. In fact, such
impact is not continued to projects assisted by them but also spreads over to projects financed by
the corporate sector on its own.

The association of institutions in the management of corporate bodies has considerably

facilitated the process of progressive professionalism of the corporate management. Institutions
have been able to convince the corporate managements to appropriately re-orient their
organizational structure, personal policies and planning and control systems. In many cases,
institutions have successfully inducted experts on the Boards of assisted companies. As part of
their project follow-up work and through their nominee directors, institutions have also been able
to bring about progressive adoption of modern management techniques, such as corporate
planning and performance budgeting in the assisted units. The progressive professionalism of
industrial management in India reflects one of the major qualitative changes brought about by the
institutions.

27
 Chapter 8 : Role of Reserve Bank of India (RBI) in Indian Economy

Bank Issue:

Under Section 22 of the Reserve Bank of India Act, the bank has the sole sight to issue bank
notes of all denominations. The notice issued by the Reserve bank has the following advantages:

• It brings uniformity to note issue.

• It is easier to control credit when there is a single agency of note issue.
• It keeps the public faith in the paper currency alive.
• It helps in the stabilization of the internal and external value of the currency and
• Credit can be regulated according to the needs of the business.

The system of note issue as it exists today is known as the minimum reserve system. The
currency notes issued by the Bank arid legal tender everywhere in India without any limit. At
present, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50 100, and 500.
The responsibility of the Bank is not only to put currency into, or withdraw it from, the
circulation but also to exchange notes and coins of one denomination into those of other
denominations as demanded by the public. All affairs of the Bank relating to note issue are
conducted through its Issue Department.

Banker, Agent and Financial Advisor to the State:

As a banker agent and financial advisor to the State, the Reserve Bank performs the following
functions:

• It keeps the banking accounts of the government.

• It advances short-term loans to the government and raises loans from the public.
• It purchases and sells through bills and currencies on behalf to the government.
• It receives and makes payment on behalf of the government.
• It manages public debt and
• It advises the government on economic matters like deficit financing price stability,
management of public debts. etc.

28
Banker to the Banks:

It acts as a guardian for the commercial banks. Commercial banks are required to keep a certain
proportion of cash reserves with the Reserve bank. In lieu of this, the Reserve bank provides
them various facilities like advancing loans, underwriting securities etc. The RBI controls the
volume of reserves of commercial banks and thereby determines the deposits/credit creating
ability of the banks. The banks hold a part or all of their reserves with the RBI. Similarly, in
times of their needs, the banks borrow funds from the RBI. It is, therefore, called the bank of last
resort or the lender of last resort.

Custodian of Foreign Exchange Reserves:

It is the responsibility of the Reserve bank to stabilize the external value of the national currency.
The Reserve Bank keeps gold and foreign currencies as reserves against note issue and also
meets adverse balance of payments with other counties. It also manages foreign currency in
accordance with the controls imposed by the government.

As far as the external sector is concerned, the task of the RBI has the following dimensions:

• To administer the foreign Exchange Control;

• To choose,the exchange rate system and fix or manages the exchange rate between the
rupee and other currencies;
• To manage exchange reserves;
• To interact or negotiate with the monetary authorities of the Sterling Area, Asian
Clearing Union, and other countries, and with International financial institutions such as
the IMF, World Bank, and Asian Development Bank.

The RBI is the custodian of the country’s foreign exchange reserves, id it is vested with the
responsibility of managing the investment and utilization of the reserves in the most
advantageous manner. The RBI achieves this through buying and selling of foreign exchange
market, from and to schedule banks, which, are the authorized dealers in the Indian, foreign
exchange market. The Bank manages the investment of reserves in gold counts abroad’ and the

29
shares and securities issued by foreign governments and international banks or financial
institutions.

Lender of the Last Resort:

At one time, it was supposed to be the most important function of the Reserve Bank. When
Commercial banks fail to meet obligations of their depositors the Reserve Bank comes to their
rescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meeting
directly or indirectly all legitimate demands for accommodation by the Commercial Banks under
emergency conditions.

Banks of Central Clearance, Settlement and Transfer:

The commercial banks are not required to settle the payments of their mutual transactions in
cash, it is easier to affect clearance and settlement of claims among them by making entries in
their accounts maintained with the Reserve Bank, The Reserve Bank also provides the facility
for transfer to money free of charge to member banks.

Controller of Credit:

In modern times credit control is considered as the most crucial and important functional of a
Reserve Bank. The Reserve Bank regulates and controls the volume and direction of credit by
using quantitative and qualitative controls. Quantitative controls include the bank rate policy, the
open market operations, and the variable reserve ratio. Qualitative or selective credit control, on
the other hand includes rationing of credit, margin requirements, direct action, moral suasion
publicity, etc. Besides the above mentioned traditional functions, the Reserve Bank also
performs some promotional and supervisory functions. The Reserve Bank promotes the
development of agriculture and industry promotes rural credit, etc. The Reserve Bank also acts as
an agent for the international institutions as I.M.F., I.B.R.D., etc.

Supervisory Functions:

In addition to its traditional central banking functions, the Reserve Bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in

30
India. The supervisory functions of the RBI have helped a great deal in improving the methods
of their operation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949 have given
the RBI wide powers of:

• Supervision and control over commercial and cooperative banks, relating to licensing and
establishments.
• Branch expansion.
• Liquidity of their assets.
• Management and methods of working, amalgamation reconstruction and liquidations.

The RBI is authorized to carry out periodical inspections off the banks and to call for returns and
necessary information from them.

Promotional Role

A striking feature of the Reserve Bank of India Act was that it made agricultural credit the
Bank’s special responsibility. This reflected the realization that the country’s central bank should
make special efforts to develop, under its direction and guidance, a system of institutional credit
for a major sector of the economy, namely, agriculture, which then accounted for more than 50
per cent of the national income. However, major advances in agricultural finance materialized
only after India’s independence. Over the years, the Reserve Bank has helped to evolve a
suitable institutional infrastructure for providing credit in rural areas.

Another important function of the Bank is the regulation of banking. All the scheduled banks are
required to keep with the Reserve Bank a consolidated 3 per cent of their total deposits, and the
Reserve Bank has power to increase this percentage up to 15. These banks must have capital and
reserves of not less than Rs.5 lakhs. The accumulation of these balances with the Reserve Bank
places it in a position to use them freely in emergencies to support the scheduled banks
themselves in times of need as the lender of last resort. To a certain extent, it is also possible for
the Reserve Bank to influence the credit policy of scheduled banks by means of an open market
operations policy, that is, by the purchase and sale of securities or bills in the market. The
Reserve bank has another instrument of control in the form of the bank rate, which it publishes
from time to time.

31
Further, the Bank has been given the following special powers to control banking companies
under the Banking Companies Act, 1949:

• The power to issue licenses to banks operating in India.

• The power to have supervision and inspection of banks.
• The power to control the opening of new branches.
• The power to examine and sanction schemes of arrangement and amalgamation.
• The power to recommend the liquidation of weak banking companies.
• The power to receive and scrutinize prescribed returns, and to call for any other
information relating to the banking business.
• The power to caution or prohibit banking companies generally or any banking company
in particular from entering into any particular transaction or transactions.
• The power to control the lending policy of, and advances by banking companies or any
particular bank in the public interest and to give directions as to the purpose for which
advances mayor may not be made, the margins to be maintained in respect of secured
advances and the interest to be charged on advances.

32
 Chapter 9 : Small scale Industrial Development Bank of India (SIDBI)

The Small scale Industrial Development Bank of India (SIDBI) was set up in October 1989
under the Act of parliament as a wholly owned subsidiary of the IDBI. It is the central or apex or
principal institution which oversees co-ordinates and further strengthens various arrangements
for providing financial and non-financial assistance to small-scale, tiny, and cottage industries.

SIDBI objectives are:

• To initiate steps for technological up gradation and modernization of existing units

• To expand channels for marketing of SSI sector products in India and abroad
• To promote employment-oriented industries in semi-urban areas and to check migration
of population to big cities.

It operates two funds: Small Industries Development Fund and Small Industries Development
Assistance Fund. The operation of the former and of National Equity Fund which were earlier
looked by IDBI is now handled by the SIDBI. Its financial assistance is channeled through the
existing credit delivery system comprising NSIC, SFCs, SIDCs, SSIDCs, commercial banks, co-
operative banks and RRBs. The total number of institutions eligible for assistance from SIDBI is
900. It discounts and rediscounts bills arising from the sale of machinery to small units; extends
seed capital/soft loan assistance through National Equity Fund and through seed capital schemes
of specialized lending institutions; refinance loans; and provide services like factoring, Leasing
and so on.

The union budget 1996-97 envisaged a number of measures to develop small-scale sector with
SIDBI as the focal point. They include:

• SIDBI will now refinance the SFCs and commercial banks for modernization projects up
to Rs 50 lakhs from unutilized corpus of about Rs 75 crore;
• SIDBI’s refinance ceiling of Rs 50 lakhs for single window scheme of SFCs etc. for
composite loans will be doubled to Rs 100 lakhs

33
 • SIDBI will participate in venture capital funds set up by public sector institutions as well
as private companies up to 50 percent of the total corpus of the fund, provided such fund
is dedicated to the financing of small-scale industry;
• SIDBI will provide refinance lending institutions which are now permitted to lend to SSI
units seeking ISO certification of quality.

Since its inception SIDBI has provided assistance to the entire SSIs sector including tiny, village,
and cottage industries through suitable schemes tailored to meet the requirement of setting up of
new products, expansions, diversifications, modernization, and rehabilitation. It has provided
equity capital, domestic and foreign currency term loans, working capital finance, etc.

SIDBI has entered into MOU with many banks, governmental agencies, international agencies,
R&D institutions, and industry associations for developing SSIs.

34
 Chapter 10 : Export-import bank of India (EXIM Bank)

The Export-import bank of India (EXIM Bank) was set up in January 1982 as a statutory
corporation wholly owned by central government. Its paid up capital in 1988-89 was Rs 220.50
crores.

Activities performed by EXIM Bank:

• It grants direct loans in India and outside for the purpose of imports and exports;
• Refinances loans to banks and other notified financial institutions for the purpose of
international trade ;
• Rediscounts usance export bills for banks;
• Provide overseas investment finance for Indian companies toward their equity
participation in joint venture abroad and guarantees, along with banks, obligations on
behalf of project exporters;
• It is also a co-coordinating agency in the field of international finance and it undertakes
development of merchant banking activities in relation to export oriented industries;

Thus it provides fund based as well as non fund based assistance in the foreign trade sector.

The main objective of Export-Import Bank (EXIM Bank) is to provide financial assistance to
promote the export production in India. The financial assistance provided by the EXIM Bank
widely includes the following:

• Direct financial assistance

• Direct financial assistance
• Foreign investment finance
• Term loaning options for export production and export development
• Pre-shipping credit
• Buyer’s credit
• Lines of credit
• Re-loaning facility
• Export bills rediscounting
• Refinance to commercial banks

35
The Export-Import Bank also provides non-funded facility in the form of guarantees to the
Indian exporters.

• Development of export makers

• Expansion of export production capacity
• Production for exports
• Financing post-shipment activities
• Export of manufactured goods
• Export of projects
• Export of technology and software’s

36
 Chapter 11 : National Bank of Agriculture and Rural Development (NABARD)

National Bank for Agriculture and Rural Development (NABARD) is an apex development bank
in India. It has been accredited with “matters concerning policy, planning and operations in the
field of credit for agriculture and other economic activities in rural areas in India”.

NABARD was established by an act of Parliament on 12 July 1982 to implement the National
Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit
Department (ACD) and Rural Planning and Credit Cell (RPCC) of Reserve Bank of India and
Agricultural Refinance and Development Corporation (ARDC). It is one of the premiere
agencies to provide credit in rural areas.

NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for
promotion and development of agriculture, small-scale industries, cottage and village industries,
handicrafts and other rural crafts. It also has the mandate to support all other allied economic
activities in rural areas, promote integrated and sustainable rural development and secure
prosperity of rural areas. It provides short term finance assistance for period of 18 months to
state co-operative banks, commercial banks, RRBs, and so on for wide range of activities in the
areas of production, trading, marketing and storage. It also gives loans up to 20 years of maturity
to the state government to enable them to subscribe to the share capital of co-operative credit
societies. NABARD serves as an apex financing agency for the institutions providing investment
and production credit for promoting the various developmental activities in rural areas.
NABARD takes measures towards institution building for improving absorptive capacity of the
credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring
of credit institutions, training of personnel, etc.

NABARD co-ordinates the rural financing activities of all institutions engaged in developmental
work at the field level and maintains liaison with Government of India, State Governments,
Reserve Bank of India (RBI) and other national level institutions concerned with policy
formulation and also undertakes monitoring and evaluation of projects refinanced by it.

NABARD’s refinance is available to State Co-operative Agriculture and Rural Development

Banks (SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs),

37
Commercial Banks (CBs) and other financial institutions approved by RBI. While the ultimate
beneficiaries of investment credit can be individuals, partnership concerns, companies, State-
owned corporations or co-operative societies, production credit is generally given to individuals.

NABARD provides:

• Long term finance for minor irrigation facilities, plantations, horticulture, land
development, farm mechanizations, animal husbandry, fisheries etc.
• Short term loan assistance fir financing of seasonal agricultural operations, marketing of
crops, purchase/procurement/distribution of agricultural inputs etc.
• Medium loan facilities for approved agricultural purposes;
• Working capital refinance for handloom weavers
• Refinance for financing government- sponsored programmes such as IRDP, Rozgar
Yojna etc.

Besides this pivotal role, NABARD also:

• Acts as a coordinator in the operations of rural credit institutions

• Extends assistance to the government, the Reserve Bank of India and other organizations
in matters relating to rural development
• Offers training and research facilities for banks, cooperatives and organizations working
in the field of rural development
• Helps the state governments in reaching their targets of providing assistance to eligible
institutions in agriculture and rural development Acts as regulator for cooperative banks
and RRBs

General aspects of NABARD:

• NABARD should be a managing agency of Government of India for public investments

in rural India.
• It should be the chief overseer, grand planner for public investment and ensure that each
rupee spent in rural India generates a net positive return for rural India.

38
• NABARD should not resort to passive funding. NABARD has to make things happen by
organizing people and providing knowledge.
• The strength of NABARD is its good networking capabilities. It can act as a coordinating
agency for all the developmental works taking place at the grass roots level.
• The greatest comparative advantage of NABARD is its ability to decontaminate the
effects of subsidy and making public spending more efficient.
• It is a folly for NABARD to become a Commercial Bank. It is the only institution which
can handle public finance better than the government.

39
 Chapter 12 : Industrial Development Bank of India (IDBI)

Industrial Development Bank of India was set up to accelerate the development of the country. A
number of financial institutions came into existence after independence and were catering to a
variety of needs of the industry. There was a lack of co-ordinating different institutions and it led
to overlapping and duplication in their efforts. At the same time some gigantic projects of
national importance were not getting required financial assistance. It was in response to this need
that the Industrial Development Bank of India (IDBI) was established in 1964 as a wholly owned
subsidiary of Reserve Bank of India. The bank was to act as an apex institution co-coordinating
functions of all the financial institutions into a single integrated movement of development
banking and supplementing their resources for industrial financing and as an agency for
providing financial support to all worthwhile projects of national importance whose access to
existing institutional sources is limited.

The ownership of IDBI was transferred to Central Government on February 16, 1976. It is now
working as state owned autonomous corporation. IDBI provides direct financial assistance to
industrial units to bridge the gap between supply and demand of medium and long term finance.

The IDBI Act was amended, in 1994, to permit public ownership upto 49 percent. In 1995, it
raised more than Rs. 20 billion through its first initial public offer (IPO) of equity. It reduced the
stake of the government to 72.14 percent. Further, in June 2000, a pan of the equity shareholding
of the government was convened into preference share capital which was redeemed in March
2001, resulting into further reduction of government stake to 58.47 percent.

Financial Resources of IDBI

1. Share Capital: IDBI was formed with an authorized capital of Rs. 50 crores which was
raised a number of times. In October, 1994, Government of India’s amended certain
provisions of IDBI Act under which its authorized capital has been increased to Rs. 2000
crore which can further be increased to Rs. 5000 crore. A pan of equity capital (Rs. 253
crore) has been convened into preference capital. IDBI has been permitted to issue equity
capital to public with a stipulation that at no time Government holding will be less than

40
 51 per cent. As on March 31, 2003 the paid up capital of IDBI stood at Rs. 652.8 crores
and reserve funds at Rs. 6325.3 crore.
2. Borrowings: The bank is authorized to raise its resources through borrowings from
Government of India, Reserve Bank of India and other fmancia1 institutions. On March
31, 2003, the bank had borrowings of Rs. 41798.0 crore by way of bonds and debentures,
deposits of Rs. 4329.9 crore and borrowings of Rs. 5359.9 crore from Government of
India and other sources.

Management of IDBI

The management of IDBI is vested in a Board of Directors consisting of 22 persons including a

full-time Chairman-cum-Managing Director appointed by the Central Government. The other
members of the Board comprise of a representative of the RBI, a representative each of the all-
India financial institutions, two officials of the Central Government, three representative search
of he public sector banks and SFCs and five representatives having special knowledge and
experience of industry; The Board has constituted an Executive Committee consisting of ten
directors. Ad-hoc committees of Advisers are also constituted to advise it on specific projects.

Recently, Government of India has sought to repeal the IDBI Act, 1964 by introducing The
Industrial Development Bank (Transfer of Undertaking and Repeal) Bill 2002 is Lok Sabha. The
Bill is aimed at convening IDBI into a company under the Companies Act as also enabling it to
undertake banking business.

Functions of IDBI

The main functions of IDBI are as follows:

1. To co-ordinate the activities of other institutions providing term finance to industry and
to act as an apex institution.
2. To provide refinance to financial institutions granting medium and long-term loans to
industry.
3. To provide refinance to scheduled banks or co-operative banks.
4. To provide refinance for export credit granted by banks and financial institutions

41
 5. To provide technical and administrative assistance for promotion management or growth
of industry.
6. To undertake market surveys and techno-economic studies for the development of
industry.
7. To grant direct loans and advances to industrial concerns. IDBI is empowered to finance
all types of industrial concerns engaged or proposed to be engaged in the manufacture,
preservation or processing of goods, mining, hotel, industry, fishing, shipping transport,
generation or distribution of power, etc. The bank can also assist concerns engaged in the
setting up of industrial estates or research and development of any process or product or
in providing technical knowledge for the promotion of industries.
8. To render financial assistance to industrial concerns. IDBI operates various schemes of
assistance. e.g., Direct Assistance Scheme, Soft Loans Scheme, Technical Development
Fund Scheme, Refinance Industrial Loans Scheme, Bill Re-discounting Scheme, Seed
Capital Assistance Scheme, Overseas Investment Finance Scheme, Development
Assistance Fund, etc.

Operations of IDBI

Since its inception in 1964, IDBI has extended its operations to various areas of industrial sector.
It provides direct as well as indirect financial assistance for increasing the pace of industrial
development. The major operations of IDBI are;

1. Direct Assistance

Direct financial assistance includes project finance assistal1ce, soft-loan assistance, assistance
under technical development fund scheme and rehabilitation assistance for sick units. Various
schemes under direct assistance are discussed as follows:-

a) Project Finance Assistance: - Under project finance scheme. The IDBI extends direct
assistance to industrial concerns in the form of:

1. Project loans
2. Subscription to and/or underwriting of issues of shares and debentures.
3. Guarantee for loans and deferred payments.

42
Financial assistance under this scheme is granted for setting up new projects as well as for
expansion and Modernization renovation of existing units. IDBI normally extends assistance to
public limited companies in the private, public, joint sector and co-operative sectors. Bank’s
assistance is sought for projects involving large capital outlay or sophisticated technology. Bank
gives preference to units set up by new entrepreneurs or projects located in backward areas. The
repayment period is settled by looking at the capacity of the enterprise. Normally, repayment is
spread over a period of 8-10 years with a grace period of 2-3 years. These loans are usually
secured by a first legal mortgage of the immovable properties of the borrowing concern and
floating charge on its other assets, subject to a first charge on raw materials, stocks, etc. for
working capital borrowings.

The bank does not hold shares & debentures, taken over under legal obligation for underwriting
or taken over directly, for a longer period. As a matter of policy, the bank places major emphasis
on the long-term economic viability of the projects rather than on the immediate sale ability of
their products. In the case of assistance in the form of guarantees of loans and deferred payments,
the bank charges a guarantee commission of 1 per cent in normal cases.

There has been a constant increase in direct assistance. Upto March, 2003 cumulative assistance
in the form of direct loans to industrial concerns and .subscriptions came to Rs. 102601.8 crore.
Most of this assistance was in priority sector industries such as basic industrial chemicals,
cement, fertilizers, Iron and steel, electricity, fertilizer, sugar, textiles, paper and industrial
machinery.

IDBI introduced special schemes for industrialization of backward areas. In a scheme introduced
in 1969 it offered concessional rates of interest, longer grace periods for repayments, etc. These
concessions were available to small and medium units having project cost upto Rs. 3 crores. In
collaboration With IFCI and ICICI, the bank is also giving concessional rupee assistance upto
Rs. 2 crores and underwriting assistance up to Rs.1crore. The assistance to backward areas has
also been increasing.

43
To achieve balanced regional growth and accelerate industrial development IDBI initiated
promotion and development activities. In co-operation with other institutions the bank conducted
industrial potential surveys in a number of states.

b) Soft Loan Scheme

IDBI introduced in 1976 the soft loan scheme to provide financial assistance to product units in
selected industries viz., cement, cotton, textiles. Jute, sugar and certain engineering industries to
modernize. Financial replace and renovate their plant and equipment so as to achieve higher and
more economic levels of production. This scheme is implemented by IDBI with .financial
participation by IFCI and ICICI. The basic criteria for assistance under the scheme are the
weakness or non-viability of industrial concerns arising out of mechanical obsolescence.
Industrial concerns which are not in a position 10 bear the normal lending rate of interest of the
financial institutions are provided on accessional assistance to the full extent of the loan. In other
cases the limit of concessional assistance is 66 per cent of the loan.

c) Technical Development Fund Scheme

The Government of India introduced the Technical Development Fund (TDF) Scheme in March.
1976 for issue of import licenses for import of small value balancing equipment, technical know
how, foreign consultancy services and drawings and designs by industrial units to enable them to
achieve fuller capacity utilization, technological up gradation and higher exports. Some
industrial units found it difficult to take advantage of the import license issued under this scheme
for want of rupee resources. In January, 1977, IDBI introduced a scheme for providing matching
rupee loans to industrial units to enable them to utilize import licenses issued under TDF scheme.
The scheme which was started for six specified industries now covers all industries as also
import of any other input needed by the industrial units for improving export capabilities. This
scheme of the bank has not been successful as only one-fourth of the units sought this assistance.

Rehabilitation Assistance to Sick Units

The problem of growing industrial sickness in India is a cause of worry. It adversely affects
production, employment, generation of income and utilization of productive resources. With a

44
view to combat sickness, IDBI has devised the Refinance Scheme for Industrial Rehabilitation.
The units which have been assisted by State Financial Corporation or State Industrial
Development Corporations and are classified as sick are eligible under this scheme. There should
be a possibility of the unit being revived in a reasonable time. The bank provides for capital
expenditure required for restarting the unit on viable level. The need for margin money for
additional term-loan and working

Capital, working capital term loan, payment of statutory liabilities, cash losses during
rehabilitation period etc. are met by the bank. The bank has also been trying to bring merger of
sick units with healthy units.

2. Indirect Assistance

IDBI cannot provide direct financial assistance to various industrial units situated in different
parts of tile country. It has adopted a strategy under which it extends financial assistance directly
to large and complicated industrial units involving large capital outlays and sophisticated
technology. It helps small scale in industries indirectly through providing assistance to other
financial institutions which, in turn, help these industries. The indirect help of IDBI takes the
form of refinancing of industrial loans, rediscounting of bills, seed capital assistance and
financial support to 6ther institutions by way of subscribing to their shares, debentures, bonds
etc.

a) Refinance of Industrial Loans

IDBI provides refinance facility against term loans granted by the eligible credit institutions to
industrial concerns for setting up of industrial projects as also for their expansion, modernization
and diversification. IDBI provides refinance to commercial banks, regional rural banks, state, co-
operative banks, state financial corporations, state industrial development corporations or other
institutions extending term loan assistance to industrial units. Industrial units seeking term loan
approach the eligible financial institutions which, after sanctioning the loans, approach the IDBI
for refinance facility. The appraisal of loan application is done by primary institution by keeping
in view the guidelines issued by central government and the IDBI. The bank relies in the
appraisal done by the primary lending institutions that have to bear primary responsibility for the

45
loans granted by them. IDBI sanctioned a sum of Rs. 20712.3 crores upto March 2003 under
refinance of industrial loans. Since 1967, IDBI has been extending indirect financial help to
small scale sector principally through its schemes of refinance of industrial loans and bills
discounting.

b) Rediscounting of Bills

IDBI introduced another indirect financing scheme in 1965, whereby rediscounting facility of
machinery bills was, introduced. This scheme was to help indigenous machinery manufacturers
and their purchases. The purchaser of machinery accepts bills of exchange or promissory notes
of the seller and undertakes to take the payment in installments. The seller gets the bills
discounted with his banker who in turn rediscounts these bills with min. The buyer is enabled to
acquire the machinery on deferred payment terms without going through the usual procedures
involved in obtaining a project loan. The usual deferred period is 5 years but in deserving cases it
can be extended upto 7 years. The scheme has been extended for expansion and diversification of
existing units also. The rediscounting facility has been made available to imported machinery
also where bills will be required to be drawn by local agents of foreign firms.

c) Seed Capital Assistance:-

With a view to help first generation entrepreneurs who have the skills but lack financial
resources, IDBI started seed capital assistance scheme in September, 1976. Under the first
scheme, Financial Corporations provide seed capital assistance to projects in small scale sector
from their special class of share capital contributed by IDBI and the state government. The
maximum amount of assistance under this scheme is to meet the gap in the equity contribution
which is 20 per cent of the cost of the project.

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 Chapter 13 : Industrial Finance Corporation of India (IFCI)

At the same time raw industrial units were to be set up for industrializing the country.
Government of India came forward to set up the Industrial Finance Corporation of India (IFCI)
in July 1948 under a Special Act. The Industrial Development Bank of India, scheduled banks,
insurance companies, investment trusts and co-operative banks are the shareholders of IFCI. The
Government of India has guaranteed the repayment of capital and the payment of a minimum
annual dividend. Since July I, 1993, the corporation has been converted into a company and it
has been given the status of a Ltd. Company with the name Industrial Finance Corporations of
India Ltd. IFCI has got itself registered with Companies Act, 1956. Before July I, 1993, general
public was not permitted to hold shares of IFCI, only Government of India, RBI, Scheduled
Banks, Insurance Companies and Co-operative Societies were holding the shares of IFCI.

Management of IFCI

The corporation has 13 members Board of Directors, including Chairman. The Chairman is
appointed by Government of India after consulting Industrial Development Bank of India. He
works on a whole time basis and has tenure of 3 years. Out of the 12 directors, four are
nominated by the IDBI, two by scheduled banks, two by co-operative banks and two by other
financial institutions like insurance companies, investment trusts, etc. IDBI normally nominates
three outside persons as directors who are experts in the fields of industry, labour and economics,
the fourth nominee is the Central Manager of IDBI. The Board meets once in a month. It frames
policies by keeping in view the interests of industry, commerce and general public. The Board
acts as per the instructions received from the government and IDBI. The Central Government
reserves the power up to the Board and appoints a new one in its place.

The Board is assisted by the Central Committee which consists of the chairman, two directors
elected by nominated directors and the Board of directors elected by the elected directors. This
committee assists the Board in discharge of its functions. It .can act on all matters under the
competence of the Board, so this committee practically transacts the entire business of the
corporation. IFCI also has Standing Advisory Committees one each for textile, sugar, jute,
hotels, engineering and chemical processes and allied industries. The experts in different fields

47
appointed on Advisory Committees. The chairman is the ex-officio member of all Advisory
Committees. All applications for assistance are first discussed by Advisory Committees before
they go to Central Committees.

Financial Resources of IFCI

The financial resources of the corporation consist of share capital bonds and debentures and
borrowings.

a) Share Capital:

The IFCI was set up with an authorized capital of Rs. 10crores consisting of 20,000 shares of Rs.
5,000 each. This capital was later on increased at different times and by March, 2003 it was Rs.
1068 crores. The capital was subscribed by Central Government, Reserve Bank of India,
scheduled banks, Life Insurance Corporation, investment trusts, co-operative banks are other
financial institutions. In 1964, the share capital held by the central government and RBI was
transferred to the Industrial Development Bank. The corporation thus became a subsidiary of
IDBI. The central government had guaranteed the shares of the corporation both for repayment
of the principal and for the payment of a dividend at 2.5 per cent on the original issue and 4 per
cent on the additional issues. However, since July, 1993 IFCI has been converted into a limited
company.

b) Bonds and Debentures:

The corporation is authorized to issue bonds and debentures to supplement its resources but these
should not exceed ten times of paid-up capital and reserve fund. The bonds and debentures stood
at a figure of Rs. 57.69 crores 1971 and rose to Rs. 15366.5 crores as on 31st March 2003. The
bonds and debentures are also guaranteed by the central government for both payment of interest
at such rates as may be fixed at the time the bonds and debentures are issued.

c) Borrowings:

The corporation is authorized to borrow from government IDBI and financial institutions. Its
borrowings from IDBI and Govt. of India were Rs. 975.6 crore on March 31, 2003. Total assets

48
of IFCI as on March 31, 2003 aggregated Rs. 22866 crore including investments of Rs. 3820.3
crore and loans and advances of Rs. 13212.8crore.

Priority Criterion for Investment

IFCI plans its financing policies as per the priorities set by the government through Industrial
Policy Statements. The Industries which are in high priority are given more importance.
Following considerations are taken into account while selecting a financial proposal:

1. Importance of the project for national economy.

2. Employment-oriented and labour-intensive nature of the project.
3. Export potential of the unit,
4. Projects located in backward areas or ‘no industry districts.
5. Projects initiated by new or technician entrepreneurs.
6. Projects which will harness indigenously available technology, technical know how and
raw materials.
7. Projects which will help rural areas.
8. Projects which help in conserving energy or which manufacture renewable energy
systems or devices.
9. Projects to be set up in co-operative sector.

Eligibility for Assistance under Direct Financing

Following types of industrial concerns are eligible for direct finance under IFCI Act, amended
from time to time:

1. Limited companies incorporated in India, in private, public or joint Sector

2. Co-operative societies registered in India, which are engaged or propose to engage in any
of the activities related to
o Manufacture, preservation or processing of goods
o Shipping
o Mining
o Hotel industry

49
 o Generation or distribution of electricity or any other form of power
o Transport of passengers or goods.
o Maintenance, repair or servicing of machinery or vehicles.
o Assembling, repairing or packing of articles.
o Development of contiguous area of land as an industrial estate.
o Fishing or providing shore facilities for fishing.
o Providing special or technical knowledge or other services for promotion of
industrial growth.
o Research and Development of any process or product in relation to any of the
matters aforesaid.

Purpose of Direct Assistance:

IFCI provides direct financial assistance for the following causes:

1. Setting up of new industrial projects.

2. Expansion of existing units or for diversification into new lines of activity.
3. For renovation and modernization of existing units.

IFCI does not ordinarily provide funds for working capital purpose as this function is left to
commercial banks. It does not allow utilizing its assistance for meeting existing liabilities of the
industrial concerns. Similarly, foreign currency loans can be used for purchasing capital goods
only and not of raw material.

Functions of IFCI

IFCI is authorized to render financial assistance in one or more of the following forms:

1. Granting loans or advances to or subscribing to debentures of industrial concerns

repayable within 25 years. Also it can convert part of such loans or debentures into equity
share capital at its option.
2. Underwriting the issue of industrial securities i.e. shares, stock, bonds, 0r debentures to
be disposed off within 7 years.

50
 3. Subscribing directly to the shares and debentures of public limited companies.
4. Guaranteeing of deferred payments for the purchase of capital goods from abroad or
within India.
5. Guaranteeing of loans raised by industrial concerns from scheduled balls or state co-
operative banks.
6. Acting as an agent of the Central Government or the World Bank in respect of loans
sanctioned to the industrial concerns.

IFCI provides financial assistance to eligible industrial concerns regardless of their size.
However, now-a-days, it entertains applications from those industrial concerns whose project
cost is about Rs. 2 crores because upto project cost of Rs. 2 crores various state level institutions
(such as Financial Corporations, SIDCs and banks) are expected to meet the financial
requirements of viable concerns. While approving a loan application, IFCI gives due
consideration to the feasibility of the project, its importance to the nation, development of the
backward areas, social and economic viability, etc. The most of the assistance sanctioned by
IFCI has gone to industries of national priority such as fertilizers, cement, power generation,
paper, industrial machinery etc. The corporation is giving a special consideration to the less
developed areas and assistance to them has been stepped up. It has sanctioned nearly 49 per cent
of its assistance for projects in backward districts. The corporation has recently been
participating in soft loan schemes under which loans on confessional rates are given to units in
selected industries. Such assistance is given for modernization, replacement and renovation of
plant and equipment.

IFCI introduced a scheme for sick units also. The scheme was for the revival of sick units in the
tiny and small scale sectors. Another scheme was framed for the self-employment of
unemployed young persons. The corporation has diversified not merchant banking also.
Financing of leasing and hire purchase companies, hospitals, equipment leasing etc. were the
other new activities of the corporation in the last few years.

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Promotional Activities

The IFCI has been playing very important role as a financial institution in providing financial
assistance to eligible industrial concerns. However, no less important is its promotional role
whereby it has been creating industrial opportunities also. It has been taking up directly as well
as indirectly; such steps and activities are regarded necessary for the acceleration of the process
of industrialization in the country.

The promotional role of IFCI has been to fill the gaps, either in the institutional infrastructure for
the promotion and growth of industries, or in the provision of the much needed guidance in
project intensification, formulation, implementation and operation, etc. to the new tiny, small-
scale or medium scale entrepreneurs or in the efforts at improving the productivity of human and
material resources.

(a) Development of Backward Areas: – The main thrust of all financial institutions has been to
remover regional imbalances by promoting industrialization of backward areas. IFCI introduce a
scheme of confessional finance for projects set up in backward areas. The backward-districts
were divided into three categories depending upon the state of development there. All these
categories were eligible for concessional finance. Nearly 50 per cent of total lending of IFCI has
been to develop backward areas.

(b) Promotional Schemes:- IFCI has been operating six promotional schemes with the object of
helping entrepreneurs to set up new units, broadening the entrepreneurial base, encouraging the
adoption of new technology, tackling ‘the problem of sickness and promoting opportunities for
self development and . Self employment of unemployed persons etc. These schemes are as such:

1. Subsidy for Adopting Indigenous Technology:- The projects which use indigenously
developed technology are entitled to a concession in the form of subsidy covering interest
payments due to IFCI during the first three years of operations, extendable to five years.
2. Meeting Cost of Market Studies: - The entrepreneurs setting up medium sized
industrial projects for the first time can avail 75 per cent of the cost of market
survey/study subject to a ceiling of Rs. 15,000 provided it is handled by Technical
Consultancy Organization. .

52
 3. Meeting Cost of Feasibility Studies: – IFCI provides subsidy for the fees paid for
consultancy assignments relating to feasibility, project reports etc. The amount allowable
is 80 per cent of the fees of Rs. 7,500 whichever is less. This limit is Rs. 8,500 or 100 per
cent of the total fees whichever is less for handicapped or scheduled caste persons.
4. Promoting Small Scale and Ancillary Industries: – For the identification of products
suitable for ancillary or further processing in small scale sector and preparation of
feasibility reports a subsidy of Rs.0.1 million per annum for technical consultancy
organization is allowed.
5. Revival of Sick Units: – There is a subsidy to the extent of 80 per cent or Rs.5,000
(whichever is less) for the fees charged by a technical consultancy organization for
carrying out a diagnostic study or for the implementation of rehabilitation programme.
This facility is allowed to tiny units or units in small scale sector.’

Self-development and Self employment Scheme: - An unemployed person in the age group of
21 to 35 years may be allowed a soft loan for providing margin money for getting a loan from a
bank or a financial institution. The soft loan at interest free rate in first year and has confessional
interest later on. The amount available under this scheme is 25% of margin money subject to
Rs.5000.

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 Chapter 14 : State Financial Corporation of India - SFCI

Introduction
A Central Industrial Finance corporation was set up under the industrial Finance
corporations Act, 1948 in order to provide medium and long term credit to industrial
undertakings which fall outside normal activities of commercial banks. The State
governments expressed their desire that similar corporations be set up in states to
supplement the work of the Industrial financial corporation. State governments also
expressed that the State corporations be established under a special statue in order to make it
possible to incorporate in the constitutions necessary provisions in regard to majority
control by the government, guaranteed by the State government in regard to the payment
principal. In order to implement the views Expressed by the State governments the State
Financial Corporation bill was introduced in the Parliament.

Statement of objects and reasons :

In order to provide medium and long term credit to industrial undertaking, which fall
outside the normal activities of commercial banks, a central industrial finance corporation
was set up under the industrial Finance Corporations act, 1948.
The state governments wished that similar corporations should be set up in their states to
supplement the work of industrial financial corporation.

The intention is that the State corporations will confine to financing medium and small scale
industrial and will, as far as possible consider only such access which are outside the
purview of industrial fiancé corporation .

The main features of the State financial Corporations Act 1951:

1. The bill provides that the state government may, by notification in the official
Gazette, establish a financial corporation for the state.
2. The share capital shall be fixed by the State government but shall not exceed
Rs.2crores. The issue of the shares to the public will be limited to 25 % of the share
capital and the rest will be held by the State Governments, The Reserve Bank,

54
 Scheduled Banks, Insurance Companies, Investment Trusts, Co- operative banks and
other financial institutions.
3. Shares of the corporation will be guaranteed by the Sate government as to the re –
payment of principal and the payment of a minimum dividend to be prescribed in
consultation with the central government.
4. The corporation will be authorized to issue bonds and debentures for amounts which
together with the contingent liabilities of the corporations shall not exceed five –
times the amount of the paid – up share capital and the reserve fund of the
corporations. These bonds and debentures will be guaranteed as to payment of the
principal and payment of interest at such rate as may be fixed by the State
government.
5. The corporation may accept deposits from the public repayable after not less than
five years, subject to the maximum not exceeding the paid up capital.
6. The corporation will be managed by a board consisting of a majority of Directors
nominated by the Sate governments, The Reserve banks and the Industrial Finance
Corporation of India
7. The corporation will be authorized to make long term loans to industrial concerns
which are repayable within a period not exceeding 25 years. The Corporation will be
further authorized to underwrite the issue of stocks, shares, bonds or debentures by
industrial concerns, subject to the provision that the corporation will be required to
dispose of and shares etc. Acquired by it in fulfillment its underwriting liability
within a period of 7 years.
8. Until a reserve fund is created equal to the paid – up share capital of the Corporation
and until the State Governments has been repaid all amounts paid by them, if any, in
fulfillment of the guarantee liability, the rate of dividend shall not exceed the rate
guaranteed by the state government. Under no circumstances shall the dividend
exceed 5 % p.a. and surplus profits will be re – payable to the State governments.
9. The corporation will have special privileges in the matter of enforcement of its
claims against borrowers.

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Financial resources of the SFC’s:
The SFC’s mobilize their financial resources from the following sources
1. Their own Share capital
2. Income from investment and repayment of loans
3. Sale of bonds
4. Loans from the IDBI ( To some extent )
5. Borrowings from the Reserve Bank of India
6. Deposits from the Public
7. Loans from State Governments.

In the act Financial corporations are Financial corporations established under section 3 and
includes a Joint Financial Corporation established under section 3 A of the Sate Financial
Corporations Act of 1951.

The act applies to all

“ Industrial Concern “ means any concern engaged or to be engaged in

a. The manufacturing, preservation or processing of goods.

b. The mining or development of mines
c. The hotel industry
d. The transport of passengers or goods by road or by water or by air ( or ropeway or
lift
e. The generation or distribution of electricity or any other form of power,
f. The maintenance, repair, testing or servicing of machinery of any description or
vehicles or vessels or motor boats or trailers or tractors.
g. Assembling, repairing or packaging and article with the aid of machinery or power
h. The setting up or development of an industrial area industrial estate
i. Fishing or providing shore facilities for fishing or maintenance thereof
j. Providing weight bridge facilities
k. Providing engineering, technical, financial, management, marketing or other services
or facilities for industry.

56
 l. Providing medical, health or other allied services.
m. Providing software or hardware services relating to information technology,
telecommunication or electronics including satellite linkage
n. Setting up or development of tourism related facilities including amusement parks,
conventions centers, restaurants travel and transport, tourist services agencies and
guidance counseling services to tourists
o. Construction
p. Development, maintenance and construction of roads
q. Providing commercial complex facilities and community centers including
conference halls
r. Floriculture
s. Tissue culture, fish culture, poultry farming, breeding and hatcheries
t. Service industry, such as altering. ornamentation, polishing, finishing, oiling,
washing, cleaning or otherwise treating or adapting and article or substance with a
view to its use, sale transport, delivery or disposal .
u. Research and development of any concept, technology, design process or product,
whether in relation to any of the matters aforesaid including any activities approved
by the Small Industries Bank State Financial Corporations also include industries
which specialize in “processing goods” which includes any art or process for
producing, preparing or making an article by subjecting any material to manual,
mechanical, chemical, electrical or any other like operation.

Broad functions of State Financial Corporations:

• Project advisory and Finance
As a catalyst in small scale industrial growth the SFC’s provide the following services:

a) Investment appraisal
• Project conceptualization and related services, including guidance in relation to
selection of projects, preparation of feasibility studies, capital structuring, techno –
economic feasibility, financial engineering, project management design etc.
 Credit Syndication including assistance in legal documentation etc.

57
  Documentation of various project documents
 Placement of debt – equity including design of the structure of instruments,
placement of instruments with financial institutions, bank etc.

• Assist in organizational structural changes like :

(1) Analysis of operational performance
(2) Study of existing organizational structure
(3) Study of the existing statures and rules and regulations
(4) Market analysis with respect to products
(5) Review of domestic and international scenario
(6) Valuation of fixed assets and inventory
(7) Advising on formation of new entity
(8) Preparation of relevant agreements / legal documents.

• Industry Research / Information Services

A dedicated research team looking at both macro – level issues as well as sector – specific,
industry research. The expertise of the professional research team and a

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 Chapter 15 : HUDCO

The Housing and Urban Development Corporation Ltd. (HUDCO) is a fully owned
Government of India enterprise. Established on April 25, 1970, HUDCO has emerged as the
leading national techno-financing institution of India. HUDCO was set up with the primary
objective of providing long-term finance for construction of houses, undertaking urban
development programs and infrastructure facilities.

HUDCO's focus on the social aspect of housing and utility infrastructure provision has made it a
different player in the housing finance market. In spite of being a commercial institution,
HUDCO has successfully been able to adopt a policy of preferential allocation of resources to
the socially disadvantaged. It always puts special stress on more socially relevant sectors over
the other commercially viable and profitable sectors.

HUDCO is the single largest housing finance company having contributed over 14 million
housing units with an investment of about Rs. 27,616 crore. Of this, 86.21 lacs houses benefit the
rural housing needs and the balance 55.

23 lacs the urban housing needs. So far, HUDCO has successfully completed 14379 projects,
excluding the Urban Infrastructure projects. It is also involved in urban infrastructure in a big
way. The sectors that HUDCO covers are water supply, sewerage, roads, bridges, flyovers,
airports and social infrastructure.

HUDCO's main objectives can be defined as under:

• Housing and Urban Development program in India with special emphasis on low cost
housing.
• Development of new townships and their infrastructural needs.
• Development of buildings material technology and industries.
• Consultancy services with India and abroad.

HUDCO has played a stellar role in implementation of National Housing Policy. It has been
entrusted with the implementation of the priority programs of the Ministry like Low Cost

59
Sanitation, Night Shelter for Footpath Dwellers, Shelter Up gradation under Nehru Rozgar
Yojana, Rural Housing under Minimum Needs Program etc.

HUDCO Niwas, launched in 1999, is an extremely popular housing loan scheme launched by
HUDCO. Under this scheme, instead of disbursing it through the state governments, individual
housing loans are given directly to the borrowers. In order to learn more about housing finance
companies in India browse through the site.

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 Chapter 16 : ICICI

ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81
billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year
ended March 31, 2010. The Bank has a network of 2,529 branches and 6,000 ATMs in India, and
has a presence in 19 countries, including India.

ICICI Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialized subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset management.

The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in
United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International
Finance Centre and representative offices in United Arab Emirates, China, South Africa,
Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in
Belgium and Germany.

ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New
York Stock Exchange (NYSE).

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 Chapter 17 : The World Bank or The International Bank for Reconstruction and
Development (IBRD)

The International Bank for Reconstruction and Development (IBRD) or the World Bank
was established on December 27, 1945 following international ratification of the Bretton Woods
Agreement of 1944, which emerged from the United Nations Monetary and Financial
Conference (July 1-22,1944).to assist in bringing about a smooth transition from a war time to
peace time economy. It is the sister institution of IMF. Since its inception in 1944, the World
Bank has expanded from a single institution to an associated group of coordinated development
institutions. The Bank’s mission evolved from a facilitator of post-war reconstruction and
development to its present day mandate of worldwide poverty alleviation, social sector funding
and comprehensive development framework. The term ‘World Bank’ now refers to World Bank
Group which includes

• International Bank for Reconstruction and Development (IBRD) established in 1945

for providing debt financing on the basis of sovereign guarantees.
• International Financial Corporation (IFC) established in 1956 for providing various
forms of financing without sovereign guarantees primarily to the private sector.
• International Development Association (IDA) established in 1960 for providing
concessional financing (interest free loans, grants etc.) usually with sovereign guarantees.
• International Centre for Settlement of Investment Disputes (ICSID) established in
1966 which works with various governments of various countries to reduce investment
risks.
• Multilateral Investment Guarantee Agency (MIGA) established in 1988 for providing
insurance against certain types of risks including political risks primarily to the private
sector.

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Functions

The IBRD also called the World Bank performs the following functions:

1. To assist in reconstruction and development of territories of its members by facilitating

the investment of capital for productive purpose and to encourage the development of
productive facilities and resources in less development countries.
2. To promote private foreign investment by means of guarantees on participation in loans
and other investment made by private investors.
3. To promote the long range balanced growth of international trade and the
maintenance of equilibrium in the balance of payments of member countries by
encouraging international investments for the development of their productive resources.
4. To arrange the loans made or guaranteed by it in relation to international loans through
other channels so that more useful and urgent small and large projects are dealt with first.

Membership

World Bank is like a cooperative where its 185 member countries are its shareholders. The
shareholders are represented by a Board of Governors, which is the ultimate policy making body
of the World Bank. Generally governors are member countries ministers of finance or ministers
of development who will meet once in a year at the Annual Meeting of the Board of Governors
of the World Bank Group and IMF

The members of International Monetary Fund are the members of the IBRD. If a country resigns
its memberships, it is required to pay back all loans with interest on due dates. If the Bank incurs
a financial loss in the years in which a member resigns, it is required to pay its share of the loss
on demand.

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Organization

Like the IMF, the IBRD has a three-tier structure with a President, Executive Directors and
Board of Governors. The President of the World Bank Group (IBRD, IDA and IFC) is elected by
the Bank’s Executive Directors whose number is 21. Of these, 5 are appointed by the five largest
shareholders of the World Bank. They are the US, UK, Germany, France and Japan. The
remaining 16 are elected by the Board of Governors. There are also Alternate Directors. The first
five belong to the same permanent member countries to which the Executive Directors belong.
But the remaining Alternate Directors are elected from among the group of countries who cast
their votes to choose the 16 Executive Directors belonging to their regions.

The President of the World Bank presides over the meetings of the Board of Executive Directors
regularly once a mouth. The Executive Directors decide about policy within the framework of
the Articles of Agreement. They consider and decide on the loan and credit proposal made by the
President. They also present to the Broad of Governors at its annual meetings audited accounts,
an administrative budget, and Annual Report on the operations and policies of the Bank. The
President has a staff of more than 6000 persons who carry on the working of the World Bank. He
is assisted by a number of Senior Vice-Presidents and Directors of the various departments and
regions. The Board of Governors is the supreme body. Every member country appoints one
Governor and an Alternate Governor for a period of five years. The voting power of each
Governor is related to the financial contribution of its government.

Workings

The World Bank operates under the leadership and direction of the President, Vice Presidents
and other senior management staffs who will look after the functions like Fund generation,
Loans, Grants and other analytical and advisory services.

Fund Generation: IBRD lending to developing countries is primarily financed by selling AAA
rated bonds in the world financial markets. It earns a small margin on this lending where major
proportion of its income comes from lending of its own capital which consists of, reserves built
over the years and money paid to the Bank from its 185 member countries. International
Development Association (IDA) provides interest free loans and grant assistance to poorest

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countries which is replenished every three years by 40 donor countries. Additional funds are
generated through repayments of loan principle on 35 to 40 years interest free loans which are
then available for relending. IDA accounts for nearly 40% of total lending of the World Bank.

Loans: Through IBRD and IDA, the bank offers two basic types of loans and credits- Investment
Loans and Development Policy Loans. Investment Loans are made to countries for goods, works
and services in support of economic and social development projects in a broad range of
economic and social sectors. Development Policy Loans on the other hand provide quick
disbursing financing to support countries policy and institutional reforms. IDA provides long
term interest free credits at a small service charge of o.5 %to 0.75%.

Grants: Grants are designed to facilitate development projects by encouraging innovation and
co- operation between organizations and local stakeholders participation in projects.; which are
either funded directly or managed through partnerships used mainly to relieve debt burden of
heavily indebted poor countries, improve sanitation and water supplies, support vaccination and
immunization programs to reduce the occurrence of communicable diseases,combat HIV/AIDS
pandemic, support civil society organizations and create initiatives to cut the emission of green
house gases.

Analytical and Advisory Services: Through economic research on board issues such as the
environment, poverty,infrastructure, trade, social safety, and globalization the Bank evaluates a
country’s economic prospects and assists in the following activities:

• Public poverty assessments

• Public Expenditure reviews
• Country economic memoranda
• Social and structural reviews
• Sector reports
• Capital building

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 Chapter 18 : India’s apex bank: The Reserve Bank of India(RBI), it’s objectives
and functions

The Reserve Bank of India (RBI) is the apex financial institution of the country’s financial
system entrusted with the task of control, supervision, promotion, development and planning.
RBI is the queen bee of the Indian financial system which influences the commercial banks’
management in more than one way. The RBI influences the management of commercial banks
through its various policies, directions and regulations. Its role in bank management is quite
unique. In fact, the RBI performs the four basic functions of management, viz., planning,
organizing, directing and controlling in laying a strong foundation for the functioning of
commercial banks.

Objectives of the Reserve Bank of India

The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve
Bank as: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the country
to its advantage.”

Prior to the establishment of the Reserve Bank, the Indian financial system was totally
inadequate on account of the inherent weakness of the dual control of currency by the Central
Government and of credit by the Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and
division of responsibility for control of currency and credit and the divergent policies in this
respect must be ended by setting-up of a central bank – called the Reserve Bank of India – which
would regulate the financial policy and develop banking facilities throughout the country. Hence,
the Bank was established with this primary object in view.

Another objective of the Reserve Bank has been to remain free from political influence and be in
successful operation for maintaining financial stability and credit. The fundamental object of the
Reserve Bank of India is to discharge purely central banking functions in the Indian money
market, i.e., to act as the note- issuing authority, bankers’ bank and banker to government, and to

66
promote the growth of the economy within the framework of the general economic policy of the
Government, consistent with the need of maintenance of price stability.

A significant object of the Reserve -Bank of India has also been to assist the planned process of
development of the Indian economy. Besides the traditional central banking functions, with the
launching of the five-year plans in the country, the Reserve Bank of India has been moving
ahead in performing a host of developmental and promotional functions, which are normally
beyond the purview of a traditional Central Bank.

Functions of the Reserve Bank of India

The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition,
it carries out a variety of developmental and promotional functions attuned to the course of
economic planning in the country:

• Issuing currency notes, Le., to act as a currency authority.

• Serving as banker to the Government.
• Acting as bankers’ bank and supervisor.
• Monetary regulation and management.
• Exchange management and control.
• Collection of data and their publication.
• Miscellaneous developmental and promotional functions and activities.
• Agricultural Finance.
• Industrial Finance
• Export Finance.
• Institutional promotion.

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 Chapter 19 : History of banking in India

There are three different phases in the history of banking in India.

• Pre-Nationalization Era.
• Nationalization Stage.
• Post Liberalization Era.

1. Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early times. The
remittance of money through Hundies, an indigenous credit instrument, was very popular. The
hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different
parts of the country.

The modern type of banking, however, was developed by the Agency Houses of Calcutta and
Bombay after the establishment of Rule by the East India Company in 18th and 19th centuries.

During the early part of the 19th Century, ht volume of foreign trade was relatively small. Later
on as the trade expanded, the need for banks of the European type was felt and the government
of the East India Company took interest in having its own bank. The government of Bengal took
the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal) was
established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also set
up.

These three banks also known as “Presidency Bank”. The Presidency Banks had their branches
in important trading centers but mostly lacked in uniformity in their operational policies. In
1899, the Government proposed to amalgamate these three banks in to one so that it could also
function as a Central Bank, but the Presidency Banks did not favor the idea. However, the
conditions obtaining during world war period (1914-1918) emphasized the need for a unified
banking institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank
of India acted like a Central bank and as a banker for other banks.

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The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of the Country. In
1949, the Banking Regulation act was passed and the RBI was nationalized and acquired
extensive regulatory powers over the commercial banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,
Cooperative banks, Exchange banks and Indian Joint Stock banks.

2. Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey, committee of Direction with
Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial Bank of India and
ten others banks into a newly established bank called the State Bank of India (SBI). The
Government of India accepted the recommendations of the committee and introduced the State
Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and got
the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the
Imperial Bank of India was nationalized in 1955 as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of India was “to
extend banking facilities on a large scale more particularly in the rural and semi-urban areas and
to diverse other public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight state-associated
banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959
2. State Bank of Bikaner 1st January 1960
3. State Bank of Jaipur 1st January 1960
4. State Bank of Saurashtra 1st May 1960
5. State Bank of Patiala 1st April 1960
6. State Bank of Mysore 1st March 1960
7. State Bank of Indore 1st January 1968
8. State Bank of Travancore 1st January 1960

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With effect from 1st January 1963, the State Bank of Bikaner and State Bank of Jaipur with head
office located at Jaipur. Thus, seven subsidiary banks State Bank of India formed the SBI Group.

The SBI Group under statutory obligations was required to open new offices in rural and semi-
urban areas and modern banking was taken to these unbanked remote areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the nationalization of
14 major scheduled Commercial Banks each having deposits worth Rs. 50 crore and above. This
was a turning point in the history of commercial banking in India.

Later the Government Nationalized six more commercial private sector banks with deposit
liability of not less than Rs. 200 crores on 15th April 1980, viz.

• Andhra Bank.
• Corporation Bank.
• New Bank if India.
• Oriental Bank of Commerce.
• Punjab and Sind Bank.
• Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to every corner of
the country. Later in 1975, Regional Rural Banks were set up to supplement the activities of the
commercial banks and to especially meet the credit needs of the weaker sections of the rural
society.

Nationalization of banks paved way for retail banking and as a result there has been an alt round
growth in the branch network, the deposit mobilization, credit disposals and of course
employment.

The first year after nationalization witnessed the total growth in the agricultural loans and the
loans made to SSI by 87% and 48% respectively. The overall growth in the deposits and the
advances indicates the improvement that has taken place in the banking habits of the people in
the rural and semi-urban areas where the branch network has spread. Such credit expansion

70
enabled the banks to achieve the goals of nationalization, it was however, achieved at the coast
of profitability of the banks.

Consequences of Nationalization:

• The quality of credit assets fell because of liberal credit extension policy.
• Political interference has been as additional malady.
• Poor appraisal involved during the loan meals conducted for credit disbursals.
• The credit facilities extended to the priority sector at concessional rates.
• The high level of low yielding SLR investments adversely affected the profitability of the
banks.
• The rapid branch expansion has been the squeeze on profitability of banks emanating
primarily due to the increase in the fixed costs.
• There was downward trend in the quality of services and efficiency of the banks.

3. Post-Liberalization Era—Thrust on Quality and Profitability:

By the beginning of 1990, the social banking goals set for the banking industry made most of the
public sector resulted in the presumption that there was no need to look at the fundamental
financial strength of this bank. Consequently they remained undercapitalized. Revamping this
structure of the banking industry was of extreme importance, as the health of the financial sector
in particular and the economy was a whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater with the initiation of the real
sector reform process in 1992. the reforms have enhanced the opportunities and challenges for
the real sector making them operate in a borderless global market place. However, to harness the
benefits of globalization, there should be an efficient financial sector to support the structural
reforms taking place in the real economy. Hence, along with the reforms of the real sector, the
banking sector reformation was also addressed.

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The route causes for the lackluster performance of banks, formed the elements of the banking
sector reforms. Some of the factors that led to the dismal performance of banks were.

• Regulated interest rate structure.

• Lack of focus on profitability.
• Lack of transparency in the bank’s balance sheet.
• Lack of competition.
• Excessive regulation on organization structure and managerial resource.
• Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about a paradigm
shift in the banking industry, by addressing the factors for its dismal performance.

In this context, the recommendations made by a high level committee on financial sector,
chaired by M. Narasimham, laid the foundation for the banking sector reforms. These reforms
tried to enhance the viability and efficiency of the banking sector. The Narasimham Committee
suggested that there should be functional autonomy, flexibility in operations, dilution of banking
strangulations, reduction in reserve requirements and adequate financial infrastructure in terms of
supervision, audit and technology. The committee further advocated introduction of prudential
forms, transparency in operations and improvement in productivity, only aimed at liberalizing
the regulatory framework, but also to keep them in time with international standards. The
emphasis shifted to efficient and prudential banking linked to better customer care and customer
services.

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 Chapter 20 : Project Appraisal & Management

Projects

A project is a specific plan or design presented for consideration. UNIDO defines a project as a
proposal for an investment to crate and or develop certain facilities in order to increase the
production of goods/services in a community for a certain period of time. Burns and Tolbet
define the term projects discrete package of investments, policy measures and institutional and
other actions designed to achieve a specific development objectives. Projects are common term
used by many flexibly to denote specific action plans. There are projects to develop a new road,
new car, new motorbike, marketing plan, construction of buildings, transport and communication
etc. A project can be long term or short term, limited or comprehensive, single sector
concentrated or multi sector concentrated. While all of these projects have a general goal with
macro and micro directives with specific time frame.

Project: can be defined thus as

* A scientifically evolved work plan

* Devised to achieve a specific objectives
* Within specified time limit
* Consuming planned resources

Project Questions

Before the formulation of project problem, many questions to be asked by the project initiators.
These questions can be summarized as follows:

• What for: The objectives of the project

• How: The process, and the internal and external resources
• Who: For whom, By whom – Project partners, stake holders
• When: The time factor
• Where: The location
• What: The activity

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Identifying the Project

The first phase of project management is concerned with identifying the project to achieve the
desired objectives. The initial task coming under project identification is to find out the sources
of the project. Agencies like government organizations, international institutions like WHO,
World Bank, UNDP, and Non Governmental Organizations etc can be better source of projects.

Project Need Analysis

The factors included under project need analysis are the, problem, solutions, beneficiaries and
decisions. The problem should exhibit an immediate intervention. The focus should be to
identify the beneficiaries. The solutions should be based on the original problem. The decision to
take up the project lies on how these three factors problem, solutions and beneficiaries are
important to project intervention.

Problem formulation and Statement of the Problem

The crux of the project lies in the problem formulation process. The project team should have
detailed understanding of the problem, scope, intervention areas and the out come of the project
to be hypothesized. Based on a multi phased understanding and analysis, describe the problem to
be addressed and resolved. The macro level objectives and micro level objectives to be separated
and should give differential weightages.

Project Planning : Project planning: can be defined as

o A scientific and systematic process, in which

o Logical linkages are clearly established, among
o Various element of projects

Successful implementation of the project lies on effective project plan. Based on the anticipated
goals and objectives the project planning to be made. The project plan is the blue print of the
project. Effective planning gives proper direction in the implementation of the project and it
further helps in adequate monitoring and evaluation. For the implementation of plan, an activity
chart to be prepared. The activity chart consists of all the proposed activities in the

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implementation process, including the start date, calendar for the entire project, dates of
monitoring and evaluation periods, finishing stages, series of out puts, slack time, responsible
person to coordinate the activities etc.

Project Budget

The project budgeting phase is in the project formulation phase. Two types of budgets are to be
made. The prior one is the cost category budget (materials, administration, capital; expenditures
etc) and the later is the activity budget. This project budget is to calculate the cost of each project
out put. The cash flow of the project, considering the contingencies like, technical shortage,
shortage of raw materials, delays in the activity implementation etc should be kept in mind. The
estimation of the project cost should be made on fairly realistic sense of financial values. In the
multi year projects the inflation rate also to be anticipated in advance.

Feasibility of the Projects

1. Management Appraisal

Management appraisal is related to the technical and managerial competence, integrity,

knowledge of the project, managerial competence of the promoters etc. The promoters should
have the knowledge and ability to plan, implement and operate the entire project effectively. The
past record of the promoters is to be appraised to clarify their ability in handling the projects.

2. Technical Feasibility

Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to the
technical inputs required and formation of conclusion there from. The availability of the raw
materials, power, sanitary and sewerage services, transportation facility, skilled man power,
engineering facilities, maintenance, local people etc are coming under technical analysis. This
feasibility analysis is very important since its significance lies in planning the exercises,
documentation process, risk minimization process and to get approval.

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3. Financial feasibility

One of the very important factors that a project team should meticulously prepare is the financial
viability of the entire project. This involves the preparation of cost estimates, means of financing,
financial institutions, financial projections, break-even point, ratio analysis etc. The cost of
project includes the land and sight development, building, plant and machinery, technical know-
how fees, pre-operative expenses, contingency expenses etc. The means of finance includes the
share capital, term loan, special capital assistance, investment subsidy, margin money loan etc.
The financial projections include the profitability estimates, cash flow and projected balance
sheet. The ratio analysis will be made on debt equity ratio and current ratio.

4. Commercial Appraisal

In the commercial appraisal many factors are coming. The scope of the project in market or the
beneficiaries, customer friendly process and preferences, future demand of the supply,
effectiveness of the selling arrangement, latest information availability in all areas, government
control measures, etc. The appraisal involves the assessment of the current market scenario,
which enables the project to get adequate demand. Estimation, distribution and advertisement
scenario also to be here considered into.

5. Economic Appraisal

How far the project contributes to the development of the sector, industrial development, social
development, maximizing the growth of employment, etc. are kept in view while evaluating the
economic feasibility of the project.

6. Environmental Analysis

Environmental appraisal concerns with the impact of environment on the project. The factors
include the water, air, land, sound, geographical location etc.

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Project Implementation

This is the period in which all the activities that are planned in the initial phases of the project get
materialized through operation. Here the role of the project managers comes in to the picture. It
is the task of the project managers to schedule the activities one by one and establish functional
relationship of the project activities in fulfillment of the project. The techniques like PERT
(Programme Evaluation and Review Technique), CPM (Critical Path Method) etc are the various
network techniques the managers utilize to implement the activities planned in the project
considering the cost and time.

Monitoring and Evaluation

Monitoring is the process of observing progress and resource utilization and anticipating
deviations from planned performance. In the monitoring and controlling phase the project
managers have to monitor the technical performance, time and cost performance in addition to
the organizational performance. Correction, re-planning and cancellation of the activities are the
control actions expected from this phase in order to get the expected outcome. The monitoring is
periodical by fixing milestones in the project phases.

Evaluation

The final stage is the evaluation of the project. Upon the conclusion of the project success in
attaining the goals, and to determine how future projects could be managed. Here the
effectiveness of the degree of the objective achievement, the efficiency of the financial, human,
and time resources to be observed. The impact of the project, the major concern of the project,
i.e. whether the project reach up to the beneficiaries with quality and quantity is to be measured.
Different types of evaluation are there like performance appraisal, work audit, result evaluation,
cost benefit evaluation, impact analysis etc. Evaluation is done to ensure the effective mutilation
of all resources for the accomplishment of the project.

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Conclusion

Here the role of the project manager to be analyzed into. From the conception stage to
implementation stage and from periodical monitoring to evaluation stage his role is inevitable.
He should show his leadership in managing the relationship, motivating the team, procuring the
resources, developing the capabilities, leading all the resources to the accomplishment of the
project. The accountability of the project manager's leadership comes only when the team
members accept the ideas and directions of the leader towards the accomplishment of the project.
A project manager here should be an effective leader.

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 Chapter 21 : Nationalization of Indian Banks

This is the main turning point in the history of Indian banks. After nationalization all banks were
under the control of central government. Without a sound and effective banking system in India
it cannot have a healthy economy. The banking system of India should not only be hassle free
but it should be able to meet new challenges posed by the technology and any other external and
internal factors.

For the past three decades India’s banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reasons of India’s growth process.

The government’s regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient
bank transferred money from one branch to other in two days. Now it is simple as instant
messaging or dial a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as
mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

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Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These
three banks were amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore
were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in

India as the Central Banking Authority. During those day’s public has lesser confidence in the
banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility
provided by the Postal department was comparatively safer. Moreover, funds were largely given
to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State Governments

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Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in
the Country:

• 1949 : Enactment of Banking Regulation Act.

• 1955 : Nationalization of State Bank of India.
• 1959 : Nationalization of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalization of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his
name which worked for the liberalization of banking practices.

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The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given more importance than money. The
financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is
all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not
yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Need For Nationalization of Banks

Bank nationalization was a political act and as such the motives for it will have to be found on its
sphere. But the policy was founded on economic principles the most influential part of it was
RAJ(1974). “If the dimensions of the problem introduced by market imperfection in the
allocation of resources were fully recognized, and the objective of the development programme
kept in mind one would have less hesitation being shown in nationalizing all commercial banks
in country and an using them directly for more optimal distribution of finance in economy. For
there are important reasons why banking enterprise maximizing their profits would not venture
out in these areas and sector of activity to which high priority needs to be attached from a larger
social and economic point of view.”

RAJ (1974:308)

• Compelling banks to carry out a larger social role.

• It needs to be recognized that the very basis of profit making in banking industry is the
development of habit of deposit money.
• The profits of commercial banks depend upon the proportion of their earning assets to the
idle cash reserves they have hold- their profits are higher in this case. That’s why they
have a natural bias to advancing credit to the sector which has already developed banking
habits.
• By letting the private players to operate in the state, the former is merely permitting to
make profits where the whole responsibility for social responsibility has to be borne by
state at the cost e.g. general public.

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 • Commercial bank was hardly advancing any loan to social sector.

Merits of Nationalization

1. The intervention of the state in the functioning of the banking sector itself. The
ownership of the State gave a new confidence to the savers and being backed by a
sovereign the normal suspicions associated with the capabilities of the bankers in the
private sector were gone.
2. Banking ceased to be selective. The entry barriers that existed for customers to bank,
social economic and political were lowered. This resulted in a massive quantitative
expansion of the bank customer base as well as in the nature of services provided.
3. The reach of banking widened. Absence of concern for profitability and targeting made
banks to expand rapidly in un-banked areas thereby the entire country was linked to
banking activity.
4. The expansion of banks also expanded the economy. The entire infrastructure that
required was built by themselves or by the citizens for their use.
5. A large employment base was created. Young men and women mostly from middle and
poorer sections of society but qualified with the requisites got into the banking system
and we see the results today.
6. Customers got acquainted with banking practices faster than it would otherwise have
taken.
7. The well intentioned policies channeled through the banks helped the borrower clientele
with a generous disposition.
8. The savings of the community had an efficient channel which otherwise would not have
had the benefit of aiding transactions.
9. State intervention to some extent distorted the banking sector. The domination of the
State has had a negative effect on the contribution of the banking sector as a whole to the
economy. Absence of profitability, non-realization of its potential as a business and also
the deterioration in service has all affected citizens.
10. The intervention by the State and excessive domination and intervention by the
bureaucracy and polity into the functioning of banks has led to deterioration on economic
efficiency, which runs counter to the principles of a good Government.

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Effects of Nationalization on Indian Industry

• The two decades since nationalization of banks witness the transformation of the Indian
banking scenario. The total number of branches which were 8000 in 1969 increased to
60,000 in 1990. Such expansion was the most rapid in rural sector.
• The share of rural offices has increased from 17.6% in 1969 to 56% in 1990.
• The share of rural areas in total deposits rose from about 3% to 15% in the same period.
• The rise in share of credit was spectacular from 1.5% in 1969 to 6.3% in 1989.

In all the two decades since the nationalization of commercial banking in India saw banks being
taken from its urban confines to vast rural stretches. The expansion of banking into rural areas
meant a phenomenal expansion in terms of number of deposits and loan accounts.

• The total number of loan accounts shows a rapid increase from about 4 million in 1970 to
60 million in 1990.
• In terms of agriculture accounts the increase was about 1 million in 1970 to 10 million in
early 1980.
• Transport and trade also show significant increase.
• Totally neglected areas like small artisans, small scale industry also gets a significant
place.
• By early 1980’s the share of agriculture in credit has risen to 17%, transport operators
about 5% and small scale sector about 12%.
• The regional distribution of branches was also shifted away from Maharashtra, south
India and Gujarat to rest of the country.
• The sharp increase in cash reserve ratio from about 8.3% to 16.8% during the period of
1977 to 1990’s.
• It is much evident that initial result of taking credit to rural areas was taking money out of
banks but much later with the development of deposit habit that cash outflow tend to
decrease. Therefore the nationalization of banks had and still has a great effect on
industry banking industry.

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 Chapter 22 : Customer Service Strategies in Banking Sector

Today, banking sector is seen as a catalyst in economic growth of a country and, lot is expected
from the banking fraternity. The recognition of banking, as a tool for all inclusive growth by
economists, financial planners, reformist etc has made it an important sector in the Government’s
planning of economic growth. The banking sector in India is there fore witnessing tremendous
changes because of political, social and economic changes that are taking place domestically and
internationally.

The concept of banking, which was earlier restricted to accepting of deposits from public for the
purpose of, has also undergone sea change. Today the banking sector is seen as a vehicle for all
inclusive economic growth, social responsibility and equiv-distribution of national resources.

Today banks are wooing existing customers, prospective customers by offering new facilities,
products, and services in order to retain/increase their base in market. The way the banking has
changed, so has the customer changed. The customer of today is not what he was yesterday.
Today the customer is more knowledgeable, demanding, analytical and aware of his rights. It is
therefore a challenging task before the banking sector to revisit their entire working modules, up
gradation of skills, technology, and policies so that they are competent to withstand the
international competitive environment in future.

All customers from different backgrounds have different expectations. Unless the service
standards fit to each person’s expectations, he will not be satisfied. Therefore one has to
understand each type of customer thoroughly to be able to provide customer specific services.

The entire process of customer service is dependent on following.

1. Human resources

Any organization’s success or failure is the result of success or failure of its employees
collectively. Here the employee doesn’t mean only the staff working down the ladder, but also
includes people right up to the top. All the functions in an organization are undertaken by
humans, whether it is selection of staff, development of product, making software, formulating

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policies, devising systems, procedures, defining processes, delivery channels, undertaking
market studies etc. Humans may be assisted by the technology for arriving at the decisions. In all
the functions enumerated above, different departments do the work separately but the same are
ultimately linked to each other to achieve the corporate goal. It is just like gears though rotating
independently, move the entire structure in the desired direction. If any gear malfunctions, it
brings the entire process to halt. Thus the human beings working in an organization are very
important. Handling of humans by humans is a very complex job also.

The job requirements of HRD are to select, train, develop, deploy, and motivate the human
resources in the organization so as to get optimum results for the organization.

2. Products/services

Banks do not provide physical goods to its customers. The products which a bank offers are
mostly financial products and along with these products also provide other services which are not
financial in nature, like safe deposit vaults, Locker facilities etc.

In financial products there are basically two types of activities, namely deposit procurement and
its deployment profitably. These two activities constitute more than 80% of banking business in
all the banks.

• Deposits: Basic structure of deposit is to attract the customer by offering interest on

funds or some facility in lieu of interest. However depending upon the needs of different
set of customers various types of deposit schemes are formulated. For example, savings
bank accounts are for those who want short term savings with liquidity and to make
regular deposits and withdrawals etc. Term deposits are for those who want to invest for
longer duration having surplus funds not needed immediately. Some may want savings to
grow gradually by contributing smaller amounts at set intervals. The ultimate goal of
depositor is to keep his money safely in the bank and be able to use when needed. Like
wise there are various combinations of deposit schemes based on liquidity, returns and
safety.
• Advances: Banks, in a similar way deploy deposits by lending to those who need it at a
cost in the shape of interest. Here again the products differ depending upon the need of

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 the customer. It may be overdraft facility, working capital finance, term loan, etc for
business or personal needs.
• Other products/ services: Apart from deposit and advances, banks offer various other
facilities/services to their clients, like remittances, investment services, fund
management, financial advisory services, tax collections, bill payment services etc. to
earn fee based incomes.

The flexibility of banks to adopt changing needs and expectation of customers and bring out
products/ services to suit customers is an important area in banking services. A robust Research
and Development department which can effectively and efficiently bring out newer products/
services based on market feel and futurist visualization of customer preferences is an important
aspect in banking services.

3. Processes.

Today’s customer is short of time and feels uncomfortable when the process involved in getting
the product or service is lengthy and cumbersome. The customer wants very simple processes to
get his work done. The processes for any product or service should be at the minimum and at one
go. Frequent back references and repeated information and excessive documentation dissatisfy
the customer. The processes devised for getting the services should be very customer friendly,
easy to understand and complete. The forms, applications, documents should be simple, easy to
understand with proper column and space to write. Sometimes it is observed that the space
provided for writing is very small. The quality of paper, the font size and the language should be
proper.

4. Delivery channels.

Customer satisfaction is also dependent upon the delivery channels used by banks in providing
the services. Today’s customer wants effortless, efficient, secure, simple and dependable
channels of delivery, whether it is through humans or technology driven channels. To quote an
example, suppose a customer uses internet banking and made a third party payment. He would
like to know what happened to his payment instructions. He should be able to track the payment
on line till it reaches the beneficiaries account. If this facility is not available, he may not be

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comfortable with the internet banking. Another thing mostly observed in Public sector banks is
that their websites are not updated regularly and navigation is very tardy. The forms/ applications
are scanned and can not be filled on line. The information/ forms etc. are outdated and not
properly tagged.

5. Customer feedback and complaints.

Feed back from customers is of immense help in formulating products, fine tune services and
plug the loopholes. However most of the time, feed backs are generally not available and public
sector banks are normally not enthused about taking feed back on their services. Rather wherever
a customer gives his feedback (read complaint), it is not taken in right spirit by the bank/
concerned staff. Instead of looking into the real cause an effort is made to provide alibis or blame
the staff. It may be possible that that the procedure itself is the cause of complaint or it is because
of reasons which are not under control of the branch.

Customers may be of three types. One type of customer never complains and continues the
relationship. Second type of customer does not complain but changes the bank silently and third
type of customer complains. First and second type of customers does not give an opportunity to
bank to improve upon its services. Third type of customer however gives opportunity to the bank
to improve the service though he may not be preferred over the other two types of customers.

Today no bank is willing to accept complaints from the customers and normally effort is made to
somehow get the complaint withdrawn or resolved without analyzing why the complaint has
originated. It becomes very difficult for field level staff to get the complaint redressed when the
cause or reason of complaint is not because of them. However they are made to beg the customer
to give satisfaction letter.

Each complaint when made may be because of so many factors, not necessarily the fault of the
person or branch against which it is made. It may be due to system lapse, procedural deficiency,
inapt technology, poor in-house work allocation, work flow module etc. Some times the
complaints are frivolous and made to harass the person concerned. Though in customer oriented
markets, customer is always right but care should be taken that the staff is also protected from
frivolous complainants. Each complaint of the customer should be properly analyzed, assessed. It

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may be possible that route cause may be some where else which should be rectified rather then
the concerned staff or branch made the scapegoat.

6. Grievances redressal Mechanism.

Improving upon the services is an ongoing process. The essential inputs are customer feedback,
market surveys and the complaints received by an organization. No organization can say that
they have zero customer complaints. However an organization which has robust mechanism to
redress the complaints and resolve problem of the customer gets recognition as a customer
friendly organization. Accepting the mistake and offering compensation goes a long way in
retaining the customer. Most of the banks have come out with their compensation policies and
customer grievances cells. However they are mostly on paper and seldom followed in the spirit
in which they are framed. Even where the compensation policy provides automatic payment of
compensation, interest in case of delays etc., it is seldom paid unless the customer demands it.

7. Market Studies.

Market studies are effective tools to study the behavior of customers and their response to
present standard of services. It also helps to understand future trends and requirements as needs
of the customer’s keeps of changing with change of times. Market research gives way to
innovations in products and services. Market studies may be done in-house, or assigned to
outside expert agencies or both depending upon the vision of the bank.

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 Chapter 23 : Major participants and players in financial markets

In the financial markets, there is a flow of funds from one group of parties (funds-surplus units)
known as investors to another group (funds-deficit units) which require funds. However, often
these groups do not have direct link. The link is provided by market intermediaries such as
brokers, mutual funds, leasing and finance companies, etc. In all, there are a very large number
of players and participants in the financial market. These can be grouped as follows :

The individuals: These are net savers and purchase the securities issued by corporates.
Individuals provide funds by subscribing to this security or by making other investments.

The Firms or corporates: The corporates are net borrowers. They require funds for different
projects from time to time. They offer different types of securities to suit the risk preferences of
investors’ Sometimes, the corporates invest excess funds, as individuals do. The funds raised by
issue of securities are invested in real assets like plant and machinery. The income generated by
these real assets is distributed as interest or dividends to the investors who own the securities.

Government: Government may borrow funds to take care of the budget deficit or as a measure
of controlling the liquidity, etc. Government may require funds for long terms (which are raised
by issue of Government loans) or for short-terms (for maintaining liquidity) in the money
market. Government makes initial investments in public sector enterprises by subscribing to the
shares, however, these investments (shares) may be sold to public through the process of
disinvestments.

Regulators: Financial system is regulated by different government agencies. The relationships

among other participants, the trading mechanism and the overall flow of funds are managed,
supervised and controlled by these statutory agencies. In India, two basic agencies regulating the
financial market are the Reserve Bank of India (RBI ) and Securities and Exchange Board of
India (SEBI). Reserve Bank of India, being the Central Bank, has the primary responsibility of
maintaining liquidity in the money market’ It undertakes the sale and purchase of T-Bills on
behalf of the Government of India. SEBI has a primary responsibility of regulating and
supervising the capital market. It has issued a number of Guidelines and Rules for the control

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and supervision of capital market and investors’ protection. Besides, there is an array of
legislations and government departments also to regulate the operations in the financial system.

Market Intermediaries: There are a number of market intermediaries known as financial

intermediaries or merchant bankers, operating in financial system. These are also known as
investment managers or investment bankers. The objective of these intermediaries is to smoothen
the process of investment and to establish a link between the investors and the users of funds.
Corporations and Governments do not market their securities directly to the investors. Instead,
they hire the services of the market intermediaries to represent them to the investors. Investors,
particularly small investors, find it difficult to make direct investment. A small investor desiring
to invest may not find a willing and desirable borrower. He may not be able to diversify across
borrowers to reduce risk. He may not be equipped to assess and monitor the credit risk of
borrowers. Market intermediaries help investors to select investments by providing investment
consultancy, market analysis and credit rating of investment instruments. In order to operate in
secondary market, the investors have to transact through share brokers. Mutual funds and
investment companies pool the funds(savings) of investors and invest the corpus in different
investment alternatives. Some of the market intermediaries are:

• Lead Managers
• Bankers to the Issue
• Registrar and Share Transfer Agents
• Depositories
• Clearing Corporations
• Share brokers
• Credit Rating Agencies
• Underwriters
• Custodians
• Portfolio Managers
• Mutual Funds
• Investment Companies

These market intermediaries provide different types of financial services to the investors. They
provide expertise to the securities issuers. They are constantly operating in the financial market.
Small investors in particular and other investors too, rely on them. It is in their (market
intermediaries) own interest to behave rationally, maintain integrity and to protect and maintain
reputation, otherwise the investors would not be trusting them next time. In principle, these
intermediaries bring efficiency to corporate fund raising by developing expertise in pricing new
issues and marketing them to the investors.

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 Chapter 24 : Investment Banking in India

For more than three decades, the investment banking activity was mainly confined to merchant
banking services. The foreign banks were the forerunners of merchant banking in India. The
erstwhile Grindlays Bank began its merchant banking operations in 1967 after obtaining the
required license from RBI. Soon after Citibank followed through. Both the banks focused on
syndication of loans and raising of equity apart from other advisory services. In 1972, the
Banking Commission report asserted the need for merchant banking activities in India and
recommended a separate structure for merchant banks totally different from commercial banks’
structure. The merchant banks were meant to manage investments and provide advisory services.
The SBI set up its merchant banking division in 1972 and the other banks followed suit. ICICI
was the first financial institution to set up its merchant banking division in 1973.

The advent of SEBI in 1992 was a major boost to the merchant banking activities in India and
the activities were further propelled by the subsequent introduction of free pricing of primary
market equity issues in 1992. Post-1992, there was lot of fluctuations in the issue market
affecting the merchant banking industry. SEBI started regulating the merchant banking activities
in 1992 and a majority of the merchant bankers were registered with it. The number of merchant
bankers registered with SEBI began to dwindle after the mid nineties due to the inactivity in the
primary market. Many of the merchant bankers were into issue management or associated
activity such as underwriting or advisory. Many merchant bankers succumbed to the downturn in
the primary market because of the over-dependence on issue management activity in the initial
years. Also not all the merchant bankers were able to transform themselves into full-fledged
investment banks. Currently bigger industry players who are in investment banking are
dominating the industry.

Major constraints in Indian Investment banking industry

The major constraints were:

• The Indian investment banks depended on issue management to a greater extent and so
some of them had to perish due to the primary market downturn in the 90’s.

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 • The bigger industry players were the only ones to survive because of a general lack of
institutional financing in a big way to fund capital market activity, which would have
otherwise paved way for other smaller players.
• The lack of depth in the secondary market, especially in the corporate debt market could
not supplement the primary market for any major development.

Characteristics of Indian Investment Banking Industry

Till the 1980s, the Indian financial services industry was characterized by debt services in the
form of term lending by financial institutions and working capital financing by banks and non-
banking financial companies. Capital markets were still an unorganized industry and were
mostly restricted to stock broking activity. In the early nineties, when the capital markets opened
up, merchant banking and asset management services flourished. Many banks, NBFCs and
financial institutions entered the merchant banking, underwriting and advisory services driven by
the boom in the primary market.

Over the subsequent years, the merchant banking industry had faced a huge downturn due to
recession in the capital markets. Also, the capital markets and investment banking activities
came under lot of regulatory developments that required separate registration, licensing and
capital controls. This proved to be an impediment for the growth of the investment banking
industry.

Structure of Indian Investment Banking Industry

The Indian investment banking industry has a heterogeneous structure for the following reasons:

• The regulations do not permit all investment banking functions to be performed by a

single entity for two reasons:

1. To prevent excessive exposure to business risk

2. To prescribe and monitor capital adequacy and risk mitigation mechanisms.

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 • The commercial banks are prohibited from getting exposed to stock market investments
and lending against stocks beyond certain specified limits under the provisions of RBI
and Banking Regulation Act.
• Merchant banking activities can be carried out only after obtaining a merchant-banking
license from SEBI.
• Merchant bankers other than banks and financial institutions are not authorized to carry
out any business other than merchant banking.
• The Equity research activity has to be carried out independent of the merchant banking
activity to avoid conflict of interest.
• Stock broking business has to be separated into a different company

Regulatory framework for Investment banking in India

An overview of the regulatory framework is furnished below:

• All investment banks incorporated under the Companies Act, 1956 are governed by the
provisions of that Act.
• Those investment banks that are incorporated under a separate statute are regulated by
their respective statute. Ex: SBI, IDBI.
• Universal banks that function as investment banks are regulated by RBI under the RBI
Act, 1934.
• All Non-banking Finance Companies that function as investment banks are regulated by
RBI under RBI Act, 1934.
• SEBI governs the functional aspects of Investment banking under the Securities and
Exchange Board of India Act, 1992.
• Those investment banks that carry foreign direct investment either through joint ventures
or as fully owned subsidiaries are governed by Foreign Exchange Management Act, 1999
with respect to foreign investment.

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Major Players in the Indian Industry

Several big investment banks have set many group entities in which the core and non-core
business segments are distributed. SBI, IDBI, ICICI, IL&FS, Kotak Mahindra, Citibank and
others offer almost all of the investment banking activities permitted in the country. The long-
term financial institutions like ICICI and IDBI have converted themselves into full service
commercial banks (called as Universal banks). The Indian investment banks have not gone
global so far though some banks do have a presence in the overseas. The middle level constitutes
of some niche players and a few subsidiaries of the public sector banks. Certain banks like
Canara bank and Punjab National bank have had successful merchant banking activities while
some other subsidiaries have either closed their operations or sold off their business due to a
couple of securities scam in the industry.

There are also merchant banks structures as NBFCs such as Alpic Finance, Rabo India Finance
ltd and so on. Some of the pure advisory firms that operate in the Indian market are Lazard
Capital, Ernst & Young, KPMG, and Price Water Coopers etc.

Future of Investment banking in India

The scope for investment banking in India is very big, as much of it has not been exploited so
far. This proves to be a significant point for a bright future for the Indian investment banks. A lot
of pure merchant banks and advisory firms have an opportunity to convert themselves in to full
service investment banks. With this, their markets are bound to broaden and their service
deliveries poised to be more efficient. The technological and market developments influencing
the capital market will also provide an additional impetus to the growth of the investment banks.

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 Chapter 25 : Principal Functions of Investment Banks

Global investment banks typically have several business units, each looking after one of the
functions of investment banks. For example, Corporate Finance, concerned with advising on the
finances of corporations, including mergers, acquisitions and divestitures; Research, concerned
with investigating, valuing, and making recommendations to clients – both individual investors
and larger entities such as hedge funds and mutual funds regarding shares and corporate and
government bonds); and Sales and Trading, concerned with buying and selling shares both on
behalf of the bank’s clients and also for the bank itself. For Investment banks management of the
bank’s own capital, or Proprietary Trading, is often one of the biggest sources of profit. For
example, the banks may arbitrage stock on a large scale if they see a suitable profit opportunity
or they may structure their books so that they profit from a fall in bond price or yields. In short
the functions of Investment banks include:

1. Raising Capital
2. Brokerage Services
3. Proprietary trading
4. Research Activities
5. Sales and Trading

1. Raising Capital

Corporate Finance is a traditional aspect of Investment banks, which involves helping customers
raise funds in the Capital Market and advising on mergers and acquisitions. Generally the highest
profit margins come from advising on mergers and acquisitions. Investment Bankers have had a
palpable effect on the history of American business, as they often proactively meet with
executives to encourage deals or expansion.

2. Brokerage Services

Brokerage Services, typically involves trading and order executions on behalf of the investors.
This in turn also provides liquidity to the market. These brokerages assist in the purchase and
sale of stocks, bonds, and mutual funds.

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3. Proprietary Trading

Under Investment banking proprietary trading is what is generally used to describe a situation
when a bank trades in stocks, bonds, options, commodities, or other items with its own money as
opposed to its customer’s money, with a view to make a profit for itself. Though Investment
Banks are usually defined as businesses, which assist other business in raising money in
the capital markets (by selling stocks or bonds), they are not shy of making profit for itself by
engaging in trading activities.

4. Research Activities

Research, is usually referred to as a division which reviews companies and writes reports about
their prospects, often with “buy” or “sell” ratings. Although in theory this activity would make
the most sense at a stock brokerage where the advice could be given to the brokerage’s
customers, research has historically been performed by Investment Banks (JM Morgan Stanley,
Goldman Sachs etc). The primary reason for this is because the Investment Bank must take
responsibility for the quality of the company that they are underwriting Vis a Vis the prices
involved to the investor.

5. Sales and Trading

Often referred to as the most profitable area of an investment bank, it is usually responsible for a
much larger amount of revenue than the other divisions. In the process of market making,
investment banks will buy and sell stocks and bonds with the goal of making an incremental
amount of money on each trade. Sales is the term for the investment banks sales force, whose
primary job is to call on institutional investors to buy the stocks and bonds, underwritten by the
firm. Another activity of the sales force is to call institutional investors to sell stocks, bonds,
commodities, or other things the firm might have on its books.

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 Chapter 26 : Foreign Institutional Investors (FII’s) and Indian economy

Introduction to Foreign Institutional Investors (FII’s)

Since 1990-91, the Government of India embarked on liberalization and economic reforms with
a view of bringing about rapid and substantial economic growth and move towards globalization
of the economy. As a part of the reforms process, the Government under its New Industrial
Policy revamped its foreign investment policy recognizing the growing importance of foreign
direct investment as an instrument of technology transfer, augmentation of foreign exchange
reserves and globalization of the Indian economy. Simultaneously, the Government, for the first
time, permitted portfolio investments from abroad by foreign institutional investors in the Indian
capital market. The entry of FIIs seems to be a follow up of the recommendation of the
Narsimhan Committee Report on Financial System. While recommending their entry, the
Committee, however did not elaborate on the objectives of the suggested policy. The committee
only suggested that the capital market should be gradually opened up to foreign portfolio
investments.

From September 14, 1992 with suitable restrictions, Foreign Institutional Investors were
permitted to invest in all the securities traded on the primary and secondary markets, including
shares, debentures and warrants issued by companies which were listed or were to be listed on
the Stock Exchanges in India. While presenting the Budget for 1992-93, the then Finance
Minister Dr. Manmohan Singh had announced a proposal to allow reputed foreign investors,
such as Pension Funds etc., to invest in Indian capital market.

Market design in India for foreign institutional investors

Foreign Institutional Investors means an institution established or incorporated outside India

which proposes to make investment in India in securities. A Working Group for Streamlining of
the Procedures relating to Foreign Institutional Investors, constituted in April, 2003, inter alia,
recommended streamlining of SEBI registration procedure, and suggested that dual approval
process of SEBI and RBI be changed to a single approval process of SEBI. This recommendation
was implemented in December 2003.

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Currently, entities eligible to invest under the FII route are as follows:

• As FII: Overseas pension funds, mutual funds, investment trust, asset management
company, nominee company, bank, institutional portfolio manager, university funds,
endowments, foundations, charitable trusts, charitable societies, a trustee or power of
attorney holder incorporated or established outside India proposing to make proprietary
investments or with no single investor holding more than 10 per cent of the shares or
units of the fund.
• As Sub-accounts: The sub account is generally the underlying fund on whose behalf the
FII invests. The following entities are eligible to be registered as sub-accounts, viz.
partnership firms, private company, public company, pension fund, investment trust, and
individuals.

FIIs registered with SEBI fall under the following categories:

• Regular FIIs- those who are required to invest not less than 70 % of their investment in
equity-related instruments and 30 % in non-equity instruments.
• 100 % debt-fund FIIs- those who are permitted to invest only in debt instruments.

The Government guidelines for FII of 1992 allowed, inter-alia, entities such as asset
management companies, nominee companies and incorporated/institutional portfolio managers
or their power of attorney holders (providing discretionary and non-discretionary portfolio
management services) to be registered as Foreign Institutional Investors. While the guidelines
did not have a specific provision regarding clients, in the application form the details of clients
on whose behalf investments were being made were sought.

While granting registration to the FII, permission was also granted for making investments in the
names of such clients. Asset management companies/portfolio managers are basically in the
business of managing funds and investing them on behalf of their funds/clients. Hence, the
intention of the guidelines was to allow these categories of investors to invest funds in India on
behalf of their ‘clients’. These ‘clients’ later came to be known as sub-accounts. The broad
strategy consisted of having a wide variety of clients, including individuals, intermediated
through institutional investors, who would be registered as FIIs in India. FIIs are eligible to

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purchase shares and convertible debentures issued by Indian companies under the Portfolio
Investment Scheme.

Prohibitions on Investments:

Foreign Institutional Investors are not permitted to invest in equity issued by an Asset
Reconstruction Company. They are also not allowed to invest in any company which is engaged
or proposes to engage in the following activities:

• Business of chit fund

• Nidhi Company
• Agricultural or plantation activities
• Real estate business or construction of farm houses (real estate business does not include
development of townships, construction of residential/commercial premises, roads or
bridges).
• Trading in Transferable Development Rights (TDRs).

Trends of Foreign Institutional Investments in India.

Portfolio investments in India include investments in American Depository Receipts (ADRs)/

Global Depository Receipts (GDRs), Foreign Institutional Investments and investments in
offshore funds. Before 1992, only Non-Resident Indians (NRIs) and Overseas Corporate Bodies
were allowed to undertake portfolio investments in India. Thereafter, the Indian stock markets
were opened up for direct participation by FIIs. They were allowed to invest in all the securities
traded on the primary and the secondary market including the equity and other
securities/instruments of companies listed/to be listed on stock exchanges in India.

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 Chapter 27 : Causes of industrial sickness

Industrial Sickness in Small Scale Industries – Causes & Remedies

Industry

An industry is the manufacturing of a good or service within a category

The key industrial economic sectors are:

The primary sector, largely raw material extraction industries such as mining and farming;

The secondary sector, involving refining, construction, and manufacturing;

The tertiary sector, which deals with services (such as law and medicine) and distribution of
manufactured goods;

Sickness: Constituting an unhealthy environment for those working

Industrial Sickness

Introduction

Definition of a sick unit is given by Sick Industrial companies act, 1985. According to the act “
The sick industrial company is a company which has at the end of any financial year
accumulated losses equal to or excluding its entire net worth and has also suffered cash losses in
that financial year and in the financial year immediately preceding it.”

Extent of sickness

Industrial sickness is growing at an annual rate of about 28% and 13% respectively in terms of
number of units and out standing number of bank credit. It is reckoned that as of today there are
more than 2 lakh sick units with an outstanding bank credit of over Rs 7000 crore nearly 29000
units are added to sick list every year.

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Industrial sickness especially in small-scale Industry has been always a demerit for the Indian
economy, because more and more industries like – cotton, Jute, Sugar, Textile, small steel and
engineering industries are being affected by this sickness problem.

Causes of sickness of SSI's

Most of the Indian authors and researchers have classified the different types of industrial
sickness under two important categories. They are:

1) Internal Cause for sickness:

We can say pertaining to the factors which are within the control of management. This sickness
arises due to internal disorder in the areas justified as following:

a) Lack of Finance: This including weak equity base, poor utilization of assets, inefficient
working capital management, absence of costing & pricing, absence of planning and budgeting
and inappropriate utilization or diversion of funds.

b) Bad Production Policies : The another very important reason for sickness is wrong selection
of site which is related to production, inappropriate plant & machinery, bad maintenance of Plant
& Machinery, lack of quality control, lack of standard research & development and so on.

c) Marketing and Sickness: This is another part which always affects the health of any sector as
well as SSI. This including wrong demand forecasting, selection of inappropriate product mix,
absence of product planning, wrong market research methods, and bad sales promotions.

d) Inappropriate Personnel Management: The another internal reason for the sickness of SSIs
is inappropriate personnel management policies which includes bad wages and salary
administration, bad labour relations, lack of behavioral approach causes dissatisfaction among
the employees and workers.

e) Ineffective Corporate Management: Another reason for the sickness of SSIs is ineffective
or bad corporate management which includes improper corporate planning, lack of integrity in
top management, lack of coordination and control etc.

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2) External causes for sickness:

a) Personnel Constraint: The first and foremost important reason for the sickness of small scale
industries are non availability of skilled labour or manpower wages disparity in similar industry
and general labour invested in the area.

b) Marketing Constraints: The second cause for the sickness is related to marketing. The
sickness arrives due to liberal licensing policies, restrain of purchase by bulk purchasers, changes
in global marketing scenario, excessive tax policies by govt. and market recession.

c) Production Constraints: This is another reason for the sickness which comes under external
cause of sickness. This arises due to shortage of raw material, shortage of power, fuel and high
prices, import-export restrictions.

d) Finance Constraints: another external cause for the sickness of SSIs is lack of finance. This
arises due to credit restrains policy, delay in disbursement of loan by govt., unfavorable
investments, fear of nationalization.

REASONS FOR SICKNESS IN SSI’s

Production Related Reasons:

• Faulty Product Mix

• Backlog of Production
• Poor Quality of end product
• Delayed delivery schedule

Financial Reasons:

• Low Profitability
• Low fund generation
• Poor liquidity
• Step Cost structure
• Lack of financial resources
• Lack of credit facility
• Faulty credit utilization
• Low share value

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Market Reasons:

• Poor marketing strategy

• Imbalance between production & marketing
• Wild market shifts
• Lack of awareness of consumer’s preferences
• Lack of specific market segmentation
• Poor distribution network
• Poor market performance

Signals of sickness

The following actions of the unit indicate that the unit is sick or going to be sick:

• Continuous irregularity in cash credit accounts ;

• Low capacity utilization;
• profit fluctuations, downward sales and fall in profits followed by contraction in the share
market;
• Failure to pay statutory liabilities;
• Larger and longer outstanding in the bills accounts;
• Non submission of periodical financial data /stock statement etc. in time;
• financing capital expenditure out of funds provided for working capital purposes;
• Rapid turn over of key personnel;
• Existence of large no. of law suits against a company;
• Rapid expansion and too much diversification within a short time;
• Any major change in the share holdings.

Effect of sickness

• Industrial Sickness contributes to high cost economy. This in turn, will affect the
competitiveness of the economy at home and abroad.
• Dead investment is a burden on both banks and budgets and ultimately consumers should
pay the high cost.
• Money locked up in sick units gives no returns and effects the availability of resources to
the other viable units

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Remedies

Majority of sick units is retrievable in order to tackle the problem of sickness from the two
angles the role of three agencies assumes significance: a) The government b) Financial
institutions and the industry associations

a) The Role of Government: If the number of units in the country has increased some 10 times
since independence and if we have diversified industrial structure with wide spread
entrepreneurship the credit for this largely belongs to government.

Second area where the government can be helpful is Vis-à-vis industrial licensing. The very
existence of licensing and monopoly regulation legislation implies that there is a stampede to “to
get in” when ever licensing is liberalized for an industry or an economy as a whole

b) The Role Of Financial Institutions: The following are the ways by which sickness can be
prevented by financial institutions :

a. Continuous monitoring of unit

b. Careful project appraisal
c. Professional institutional response to unit’s problems
d. Required systems at client units
e. Incentives to units to remain healthy

c) The Role Of Industry Associations : A good practical review by each industry association of
installed and usable capacity in the industry, capacity utilization, growth trends, problems etc
should be useful 4 the potential new entrants 4 deciding whether 2 enter the industry or not. The
industry can have some sort of 1st aid cell this could consist of professionals who could go to the
aid of a unit that is beginning to fall with the offer of managerial and technical help also.

Curative measures

These measures include how to cure the sickness after it has crept in. There are lots of agencies
which help cure Industrial sickness.

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There is Industries (Development and Regulation) Act, 1951, which provides for the takeover of
a sick unit by the Government of India. Before resorting to a takeover, other alternatives like
rehabilitation through the concerned state government and financial institutions or for the merger
of a sick unit with a healthy unit could be explored.

Then there is the Sick Industrial Companies (special provisions) Act, 1985, which was passed by
parliament and received the assent of president in January 1986. It was amended in December
1991 so as to bring government companies within the preview of the Act.

Further, there is the Industrial Reconstruction Bank of India (IRBI) which came into being on
March 20th 1985 by converting the erstwhile Industrial Reconstruction Corporation of India. It
provides assistance for reconstructions and rehabilitation of the sick industrial units by granting
those loans and advances, underwriting shares and debentures etc.

For the sick units in the small scale sector, separate facilities are available. State Finance
Corporations and commercial banks will be asked to devise a scheme for the rehabilitation of
sick units in the small scale sector, and the assistance given by them for the revival of such units
will be eligible for refinancing by the IRBI at the confessional rate of interest.

Conclusion

Government should hike its spending to create more jobs and boost the manufacturing
sectors in the country.

Government should try to increase the export against the initial export.

The way out for builders is to reduce the unrealistic prices of property to bring back the
buyers into the market. And thus raise finances for the incomplete projects that they are
developing.

The falling rupees against the dollar will bring a boost in the export industry. Though the
buyers in the west might become scarce.

The oil prices decline will also have a positive impact on the importers.

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 Chapter 28 : Company revival strategies – Industrial sickness – causes &
remedies

Sickness in industry is a universal phenomenon .According to one estimate there are five lac sick
units in small scale sector and one lac in the medium and large scale sector. Over Rs. 75000
crores of banks and financial institutions funds are locked up in these units.
Sickness is not defined in precise terms in the various Acts. Sickness is a symptom of ailment
and not an ailment in itself. Sickness of physical body indicates that some part of the body or the
organ is not functioning normal and requires diagnosis. Thus defining sickness in absolute terms
has been slightly a tedious job. Defining sickness in industry is still a tough exercise. There has
been no standard definition of sickness in industry and probably whatever exists or has been
stated as sickness is not definition of sickness but the existence of various parameters which, if
present, would indicate that the industrial unit is sick. The financial institutions pay reliance on
the· following parameters for the categorization of the unit in the sick category.
1. Continuous default in repaying the dues of industry.
2. Continuous default in repaying the installments which have fallen due.
3. Continuous losses.

"Cash-loss" is a fairly acceptable term and stands for the losses before providing depreciation. A
unit may not incur cash losses yet it may make default in paying the institutional dues. A unit
may be incurring cash losses on a continued basis yet the promoters of the project might be
resourceful enough that they might be pumping in additional funds and paying the dues of the
institutions in time. The situation thus becomes analogous i.e. a unit which is making cash losses
is paying the dues because the promoters are resourceful and a unit which is generating cash
accruals is committing default; say due to temporary liquidity problems. Hence the parameters of
industrial sickness, as defined above, also do not provide any foolproof yardstick .for measuring
sickness.

In this connection reference is invited to the Sick Industries (Special Provisions) Act 1985. As
per provisions of the Act a Company may be declared sick if it is registered for seven years; it
has accumulated losses which are equal to the net worth of the Company; and if it has incurred

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cash losses during the financial year in which the reference to Board is made and the year
preceding the financial year. Thus the occurrence or cash loss i.e. loss after. deducting
depreciation should be for 2 years.

For the purpose of this paper, it is assumed that "Sick Unit" is not a new unit, it has consistently
made revenue and cash losses for a number of years, it finds its share capital eroded and needs
drastic action to revive it. At the outset it needs to bring out the fact that sickness is not merely a
financial phenomenon consisting of losses which can be made good by pumping additional funds
to clear all dues. It requires deeper and detailed analysis of the cause which led to the situation.

The Purpose of this article is to know why companies become sick particularly public sector
undertakings, what remedial steps should be taken to prevent the chances of companies
becoming sick. This paper does not pretend to provide a comprehensive treatment of the subject
it raises a few pertinent issues and hopefully provides material for thinking.

Here the fact should not be glossed over that efforts to deal effectively with industrial sickness
have so far been largely unsuccessful, is beyond dispute. Only a very small proportion of sick
units have been successfully revived. Sickness concerns the Government, employees, bankers
and others having direct contact with the company. However it is also a national problem in as
much as companies which consistently make losses result, inter-alia in:
a. Under utilization of productive capacity.
b. Lack of product demand.
c. Loss of revenue in various forms of indirect taxes.
d. Over Staffing.
e. Possible loss of exports.

The industrial sickness can be due to many factors such as:-

Bad strategy and policy.

No diversification, product obsolescence.
Company went into new project which was badly conceived.

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 Delays in execution of new project.
Poor organization and staffing.
No modernization.
Old and expensive manufacturing process.
Poor Marketing Organization
Inadequate emphasis on marketing as opposed to selling.
Did not change from seller's to buyer's market
Lack of any formal Planning, especially financial planning.
Wrong Capital Structure

What steps should a company and all concerned with it Government, management and bank
should take to revive a sick undertaking. A comprehensive study of the undertaking problems
and preparing a composite plan of action must be the starting point of the exercise. Piecemeal
and adhoc solutions are rarely adequate. What is needed is a detailed assessment of the
company's existing situation and future prospects covering corporate strategy, Investment,
markets, organization, productivity, labour relations, profitability and finance. An undertaking is
ostensibly sick because it is short of working capital and systems have not kept pace with its
growth, therefore receiving funds alone will not help. Fortunately, revival is possible in a
majority of cases, if timely action is taken and revival programme is implemented with sincerity
and commitment.

The old Jute mills and textile mills became sick because they were not modernized, technology
were not upgraded. Due to rising costs, the operations of these units became unviable.
Eventually, the units became sick. Some of the blue chip companies of today are sick units of
yesteryear. Take the case of Goldline, now better known as LG. At one point of time everyone
wrote off the company and but thanks to revival efforts of new management LG not only
recovered from sickness but grew in a spectacular way. At one stage, Apollo Tyre, Tata Tea
HMV etc. were among the sick units. But the Management did not lose heart. They revived them
with a clear vision and suitable strategies. Unfortunately managements of several undertaking
think wrongly that once they get funds, the undertaking can be revived. However, as mentioned

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in the beginning, providing funds, without attending to the underlying causes of sickness could
be throwing money into a bottomless pit. From . the long list of possible causes of sickness it
will be apparent that the single most important cause of sickness is ineffective management.
Well managed undertaking can even overcome and deal effectively with difficulties which are
due to external factors such as poor demand for the industry's products. Therefore what a sick
undertaking needs more than anything else or its revival is a good and stable management. In
particular, the undertaking should ensure that it has the full time chief executive. Also the other
key posts such as Finance Director and Heads of other functions or division should be properly
manned. There is unfortunately inadequate mobility of Managers in our country. Therefore
where there are inadequacies in managerial talent attracting good people from outside to a sick
undertaking is difficult. However, this is a problem which has to be faced. Some people may be
attracted by the challenge which the sick units provide. Management is one area where a sick
undertaking should not try to economies. The Board of Directors of Indian Public undertakings
are amongst the most ineffective in this area. This is in many cases due to fact that they have part
time ex-office Directors nominated by the State or Central Govt. They devote more time to their
regular duties and a very little time, if at all, on policy matters of the undertakings. The need for
an effective Board is particularly strong when the undertaking is in poor health.

The other important consideration which arises is how Government maintains take control over
management of undertaking which has been financed largely by it to which several concessions
in the form of interest reduction, conversion of debt into equity etc. As mentioned above, direct
involvement by the Government in the management of undertaking is not desirable mainly
because they do not have capabilities in industrial management. Some financial institutions have
worked towards building up a pool of senior Managers on their payroll who could be assigned to
sick undertaking for limited periods of say I to 3 years. This is easy to achieve. Probably the best
way to ensure control is through control over equity share holding, constitution of the board and
leaving .the actual management to carefully chosen professional managers who are both
competent and independent. A sick undertaking like a sick patient needs quick action to restore
its health. Every day of delayed action means loss of contribution, increase in cash losses,
interest, loss of credibility with suppliers and customers and lowering of staff morale. Once a
detailed and comprehensive plan of action has been prepared and viability of the unit established,

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early action by all concerned is imperative. In practice one finds numerous delays which can be
attributed to principal shareholders, Banks, Management, Government and labour.
The delays in obtaining funds from Banks and Financial institutions need particular mention
because it is funds that the undertaking needs more than anything else, at least in the short term.

However, the management (including the Board) of undertaking are perhaps even more to blame
because they have often not prepared a comprehensive plan of action. Also the boards of
directors and Government are found to pay scant attention ·to the manning of top management
posts. The banks being business institutions, therefore do not know how precisely they are going
to revive the undertaking and improve its ability to repay loans and keep up with interest
payments.

When an undertaking becomes sick, several agencies are involved in the revival exercise, Central
or State Govt. as the case may be, Board of Directors, Managements, Banks, Financial
institutions and labour unions. To get them all to act fast in the interests of the undertaking is not
an easy task but it is nevertheless essential to prevent the situation from deteriorating. Skilful
financial management during sickness is important and there may be need for reconstruction of
capital. The comprehensive study discussed earlier should culminate in short term and long term
cash projections and once they are reviewed and accepted, actual performance would need to be
carefully monitored. A Financial re-organization may involve some sacrifices by the creditors
and shareholders of the undertaking which can be in several forms:-

a. Reduction of the par value of shares.

b. Reduction in rates of interest.
c. Postponement of maturity of debt.
d. Conversion of debt into equity.
e. Change in the nature of claim or obligation such as from secured to unsecured.
f. Concession by the Government in the form of reduction or waiving of indirect taxes,
electricity dues etc.

While sickness among companies in private and public sector has become wide spread,

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regretfully it is stated that enough research has not been done in developing schemes of financial
reconstruction in the Indian environment. Needless to add that the academic and professional
institutes could play useful role in this regard.

A great deal more is required to be done to revive sick undertaking than is being done today, in
particular one could be more systematic about it and act faster. However, in an extreme case, if
viability can not be clearly established, a sick undertaking should be allowed to die peacefully.

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 Chapter 29 : GENISIS OF SICA, 1985

Industrial sickness had started right from the pre-Independence days.

Government had earlier tried to counter the sickness with some ad-hoc measures.
Nationalization of Banks and certain other measures provided some temporary relief.
RBI monitored the industrial sickness.
A study group, came to be known as Tandon Committee was appointed by RBI in 1975.
In 1976, H.N. Ray committee was appointed.
In 1981, Tiwari Committee was appointed to suggest a comprehensive special legislation
designed to deal with the problem of sickness laying down its basic objectives and
parameters, remedies necessary for revival of sick Units.
The committee submitted its report to the Govt. in September 1983 and suggested the
following:
Need for a special legislation
Need for setting up of exclusive quasi-judicial body.
Thus the SICA came into existence in 1985 and BIFR started functioning from 1987.

IMPORTANT PROVISIONS OF SICA

Constitution of two quasi-judicial bodies – BIFR and AAIFR and their Benches.
Procedure of the Board and the Appellate Authority.
Filing of references u/s 15 and criteria of sickness.
Provision of enquiry u/s 16.
Appointment of Special Directors and OAs u/s 16(4) and 17(3).
Preparation of sanctioned scheme under section 17(2), 17(3) & 18(4).
Provision for monitoring of schemes u/s 18(12)
Rehabilitation by giving financial assistance u/s 19.
Winding up of sick industrial companies u/s 20.
Protection to safeguard the interests of the sick companies u/s 22(1), 22(2), 22(3).
Provisions for dealing with potential sickness u/s 23, 23(a), 23(b).
Provision in case of misfeasance u/s 24.
Provision for seeking information and giving information – Central Govt., RBI, FIs State
institutions and sick companies and in case of amalgamation other companies.
Power to seek assistance of MMs & DMs u/s 29.
SICA has overriding provisions u/s 32 over other laws except the provisions of FERA, 1973
and the ULCRA,1976.
Penalty u/s 33 for violation of the Act.

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Rehabilitation of Sick Units
10.1 GENERAL
Industries that have gone sick have far-reaching consequences on the economy of the nation. The
following are the bad effects of industrial sickness.

� There is under utilization of capital assets. Though under utilization of capital assets is a drain
on the capital of any nation, it very much affects the capital formation process of less developed
and developing countries.
� The entrepreneurship level declines. In economics land, labour and capital are referred to as
the factors of production. It is only entrepreneurship of project promoters that brings together the
factors of production for accomplishing the task of nation building. Increase in industrial
sickness discourages entrepreneurship.
� The investor confidence reaches lower ebb. Thus, capital is not put to productive use.
� Industrial sickness results in large scale unemployment and industrial unrest.
� Profitability of banks and financial institutions gets affected since they don’t get back their
funds invested in projects that have gone sick. Nor do they earn interest on their invested funds.
Since their funds get blocked in sick units banks/financial institutions could not recycle their
funds with the result that even a good project can not be funded by them. Therefore, prevention
of sickness and rehabilitating sick projects assume greater importance.

10.2 DEFINITION OF SICKNESS

The sick industrial companies (Special provisions) Act, 1985, as amended in 1993 defines sick
industrial company as an industrial company (being a company registered for not less than five
years) which has at the end of any financial year accumulated losses equal to or exceeding its
entire networth.

Section 3 (1) (ga) of the amendment act, 1993 defines ‘Net worth’ as the sum of the paid-up
capital and free reserves, while the term ‘free reserves’ means all reserves credited out of the
profits and share premium account, but does not include reserve out of re-valuation of assets,

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write back of depreciation provisions and reserves created out of amalgamations. Government
companies having State or Central Government share holdings of 51% or more are kept outside
the purview of the Act. Also small scale industrial units and Ancillary units are kept outside the
purview of the Act.

10.3 BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR)

Board of industrial and Financial Reconstruction (BIFR) was established by the Central
Government, under section 3 of the Sick Industrial Companies (Special provisions) Act, 1985
and it became fully operational in May, 1987. BIFR deals with issues like revival and
rehabilitation on sick companies, winding up of sick companies, institutional finance to sick
companies, amalgamation of companies etc. BIFR is a quasi judicial body.

The role of BIFR as envisaged in the SICA (Sick Industrial Companies Act) is:
a. Securing the timely detection of sick and potentially sick companies
b. Speedy determination by a group of experts of the various measures to be taken in respect
of the sick company
c. Expeditious enforcement of such measures

BIFR has a chairman and may have a maximum of 14 members, drawn from various fields
including banking, labour, accountancy, economics etc. It functions like a court and has
constituted four benches.

10.3.1 Reporting to the BIFR

The Board of Directors of a sick industrial company is required, by law, to report the sickness to
the BIFR within 60 days of finalization of audited accounts, for the financial year at the end of
which the company has become sick. BIFR has prescribed a format for this report. While
reporting by a company of its sickness to the BIFR is mandatory as per the provisions of law,
any other interested person/party can also report the fact of sickness of a company to the BIFR.
Such interested parties may be the financial institution/bank that has lent loan to the company,
the RBI, the Central/State Governments. The BIFR has prescribed a different format for the

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report to be submitted by such interested parties. When a company has been financed by a
consortium of banks, it is the Lead Bank that should report to the BIFR about the sickness under
advice to other participating banks in the consortium.

10.3.2 Enquiry by the BIFR

When a case is referred to the BIFR, it is verified by the Registrar of the BIFR as to whether the
facts of the case falls within the provisions of the Sick Industrial (Special provisions) Act, 1985.
If so, the BIFR accepts the case and notifies a date for hearing the case. For rehabilitating a sick
unit, cooperation of various connected agencies is a must. This co-ordination is achieved by the
BIFR. The BIFR invites the representatives of the informant sick company, the representatives of
concerned financial institutions and commercial banks, representatives of the Central/State
Governments, trade union representatives etc., to the hearing and inquiry is made under section
16 of the Act. After the hearing, the BIFR itself may conduct a study or entrust the work to an
‘operating agency’ appointed by it to determine whether the company is in fact sick. Normally,
the lead financial institution (IDBI, ICICI, IFCI, SFC) or the lead public sector bank that has
financed the company is nominated as the operating agency. Lead institution is one that has
major financial stake in the sick company. The enquiry is to be completed within 60 days. On
completion of the enquiry, the BIFR will declare whether the company is sick or not.

10.3.3 Revival Package

Once a company has been found sick, the BIFR may grant time to the sick company to enable it
to make its networth positive and bring the company out of sickness, without any external
financial assistance. If it is found infeasible for company to make its networth positive with out
any external financial assistance, or if the BIFR decides that the company can not make its
networth positive Rehabilitation of Sick Units within a reasonable time, the BIFR will direct the
operating agency to prepare a suitable revival package for the restoration of the health of the
company.

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The operating agency prepares a suitable revival package. The revival package may vary from
case to case depending on the nature of the problem and may include additional financial
assistance, postponement of recovery of loan already lent by banks and financial institutions,
change in management, amalgamation, sale of redundant assets, lease of assets or any other
suitable measure. The revival package should be submitted to the BIFR within a time limit of 90
days or such extended period as may be granted by the BIFR. On submission of the revival
package by the operating agency, the BIFR sends the revival package in a draft form to all the
interested parties (i.e., the sick industrial company, the banks/ financial institutions who have
given financial assistance to the sick company, the operating agency, the transferee company (if
there is a recommendation in the revival package for amalgamation) etc., eliciting their
views/suggestions on the revival package. The BIFR will also publish particulars of the draft
revival package in newspapers inviting suggestions/objections, if any, from the shareholders of
the sick company, creditors and employees of the sick company, transferee company and any
other interested party. On receipt of views/suggestions/objections on the draft revival scheme,
the BIFR may, if deemed fit, afford an opportunity to the interested parties to be heard. After
careful examination of all the aspects, the BIFR will sanction the revival scheme with or without
any modifications. The scheme, as sanctioned, will come into force from the specified date and
all the concerned parties are required to abide by the provisions of the revival scheme. The BIFR
may also order the operating agency to implement the sanctioned revival scheme. When the
revival package as finalized by the BIFR contains further financial assistance or reliefs,
concessions, sacrifices etc. (for example, sanctioning of additional financial assistance for the
purchase of certain balancing equipments, waiving of penal interest/compound interest charged,
waiving of interest in part or full, waiver from sales tax etc.) the scheme will be circulated to the
concerned agencies for their consent to be received within a period of 60 days. Once the various
agencies involved in the revival scheme give their consent to the scheme, it will become binding
on the consenting parties to implement the recommendations contained in the revival scheme.
However, when any of the involved agencies does not give its consent to the scheme, the BIFR
has no powers to force the agency to accord its consent. If in the opinion of the BIFR, the revival
package can not be successful with out the consent from one or more of the agencies involved,
the BIFR has no other option but to recommend for winding up of the company. In fact, the
threat of actual winding up of the company is the only weapon in the hands of the BIFR to make

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the various agencies to extend suitable reliefs and concessions as may be deemed necessary by
the BIFR. BIFR itself cannot initiate the winding up proceedings. It can only forward its opinion
to the concerned High Court and the High Court will initiate the winding up proceedings.

10.4 CAUSES OF SICKNESS

‘Prevention is better than cure’ is the proverb that reflects the need for knowing the likely causes
of industrial sickness so that one can plan to avoid the same. Just as human beings fall sick by
two ways, viz., either born sick or acquiring sickness during growth, an industry can either run
into trouble even during the implementation stage itself or develop sickness during its lifetime.

The causes of sickness can be categorized into two viz., internal causes and external causes.

Internal causes are those that are internal to the organization over which the management of the
organization has control. Sickness due to internal causes can be avoided if the management is
shrewd enough to identify the causes and eliminate them at their initial stage itself. External
causes are those that are external to the organization over which the management of the
organization has little control. Government’s plans and actions, failure of monsoon which affects
agriculture and allied industries, emergence of strong competitors etc., are some of the external
factors. Though sickness may be caused either by internal or external factors, sometimes, the
management may be able to revamp its organization, plan suitable strategies and take on the
external factors to reduce their impact.

The areas/stages in which these causes may exist and their effects can be studied under the
following heads.

� Project formulation.
� Project implementation.
� Production.
� Marketing.
� Finance.

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� General and personnel administration.

Project formulation: Most of sickness is attributed to ill-conceived projects. A project that may,
prima-facie present a rosy picture may have many hidden pitfalls. Irrational, hasty, over-
optimistic decisions may result in choosing projects that may have inherent weaknesses. A
project that has an inherent weakness is very unlikely to be a successful project. The existence of
a few players in the chosen field who are doing well, is not always a sound proof that the project
will be a success. The existing players may have their own special advantages due to which they
could have overcome the hurdles and pitfalls that are present in the project.
A thorough investigation of the project during the identification and formulation stage is the
sinequa- non of any project proposal. “Think before you act”—is the proverb that is worth
practicing. Any amount of time and efforts spent at this stage is worth it as any hasty decision
made at this stage will be very costly. External factors play a major role in project formulation
stage. The present stage of and the future course of the external environment are to be carefully
studied for their influence on the project.

Project implementation: Delayed implementation gives a project a difficult start. Unduly long
time taken for project implementation results in time-overrun which is invariably followed by
cost overrun. Cost-overrun has the ill effect of affecting the financial viability of the project since
a project that is viable at a capital cost of say Rs. 100.00 lakhs may prove to be unviable when
the cost raises to, say Rs. 150.00 lakhs due to cost-overrun. The problem of cost-overrun will get
more compounded if the finance necessary to meet the increased cost can not be arranged in
time. Any delay in arranging for the finance needed to meet the cost overrun will only further
tend to increase the cost and this may land the project in trouble leading eventually to the death
of the project and the project may not take off.

The following are some of the problem areas in implementation stage.

o The promoters may not be in a position to bring in funds to the required extent in time. In
general, Banks/Financial institutions, of late, insist that the promoters shall bring in their
capital contribution to the project upfront before release of loan. Any delay in bringing

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 the stipulated capital by the promoters will delay the drawal of loan, which will lead to
delay in implementation. Rehabilitation of Sick Units

o The loan disbursement may be delayed if the promoters are not able to comply with
major terms and conditions of the loan agreement. For example, the loan agreement,
inter-alia, may stipulate that collateral security to cover, say 25% of the loan amount
shall be offered. The value of the property that the promoters offer as collateral security
to the bank/financial institution may be short of the requirement. Or, when the value of
the property meets the requirement, there may be other impediments like legal hurdles for
clear, unencumbered title to the property etc.

o The cost of different components of project-cost may increase due to price escalation.
The cost provided for some of the elements of project-cost might have been
underestimated. It is also likely that some elements which are essential might have been
left out. These factors lead to cost-overrun which may delay the project implementation.

o There may be delay in getting power connection, water connection, approval from local
bodies, approval from pollution control authorities etc., which may postpone project
implementation/ commencement of production.

o When more than one institution are involved in funding a project, there may be delay in
tying up the financial arrangements with the different institutions. This is more so when
term loan and working capital loan are provided by two different institutions. The
institution that is to lend working capital loan may wish to see that the project comes
through successfully and reaches a ready-to-start stage before committing sanction of
working capital finance. There is likelihood of the capital investment on the project
having been fully made and the project waiting for sanction/release of working capital
finance to commence commercial operations. Any delay in release of working capital
finance due to procedural formalities involved will harm the project heavily, as the
capital investment will be lying idle, without earning any return.

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 o ‘Rethinking’ of the project during the course of implementation, like changes in
production process, use of alternate raw material, changes in technology etc., may hold
up project implementation.

o Over spending on travel, entertainment and non-productive assets like guest houses,
compound walls, staff quarters etc., may result in cost-overrun, which in turn may delay
project implementation.

o Adverse foreign currency exchange rate fluctuations may affect projects involving
imported plant and machinery and may result in cost-overrun. This is an external factor
over which the management has no control. However, a prudent management can guard
against adverse foreign currency movement by entering into forward contracts etc.,

Production: The major aspects of production that may lead to sickness are
o Increase in the cost of production.
o Decrease in the quantity of production.
o Quality of product not meeting the standards/customer expectation.
o Producing more quantity than can be sold, leading to accumulation of stock.

The increase in cost of production may be due to external factors like increase in the cost of raw
materials, increase in the cost of consumables, power, etc., or due to internal factors like
improper choice of raw material/raw material-source, wrong choice of production process etc.

Decrease in quantity of production may be due to defects/under performance of plant and

machinery, defects in production process etc.,

Defects in quality of products may be due to defects in raw material used, or due to
unsatisfactory performance of machinery or due to ineffective supervision. Inspite of the raw
material, machinery and supervision being good, the advent of new technology may bring in
product-obsolescence and the product may loose customer preference.

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Lack of proper planning of product mix and lack of co-ordination between production and
marketing departments may lead to piling up of inventory, which will only add to the cost of the
product.

Marketing: Marketing occupies an important position in the organization of any business unit.
The prime objective of marketing, is the satisfaction of customer’s needs. Marketing functions
include all functions necessary to satisfy the customers. Marketing includes all activities starting
with the idea of producing a product to satisfy the needs of the consumers and ending with the
satisfaction of the consumer even after the product is sold. Thus, it involves planning and
producing to meet the customer needs and also servicing the customers after selling the product.
In the present day situation where buyer’s market has come to stay almost for all products, any
organization that does not give due importance to marketing is bound to find its sales turnover
taking a downward trend. The problem areas may be summarized as under.

� Introduction of better substitute products by competitors.

� Absence of product innovation and new product development.
� Failure to maximize the potential of existing products.
� Poor and inadequate distribution system.
� Failure to meet the agreed delivery schedules.
� Absence of correct costing and correct pricing system for the products.

Finance: Finance is the lifeblood of business. It links and passes through all areas of a business
unit. The problem areas may be summarized as under:

o The promoters might have chosen a project which is beyond their financial capacity. This
often happens due to over ambitious approach of entrepreneurs. A bigger project needs a
bigger investment and accordingly a higher promoter’s contribution in absolute terms. If
the promoters are not able to mobilize their contribution, with the sole idea of
implementing the project, they often resort to borrowings, invariably at higher interest
rates with the hope of clearing the high cost borrowings once the project takes off (a hope
that rarely comes through!).

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 o Funding a project with a higher debt component than that it can safety bear is another
reason for sickness, since such projects will not be able to service the high interest
charges. On the other hand, inadequate long-term debt component will also be
detrimental since the project will either not take off due to the promoter’s inability to
raise the required capital or will be funded by high cost short term borrowings which is
harmful.

o Using short term funds for acquiring fixed assets is an area of concern. This will put the
liquidity position of the business in strain when the shorter obligations become due for
repayment.

o Improper inventory management policy will lead to holding huge stock of finished
products, late realization of debts from sundry debtors, lack of proper planning to pay to
creditors of raw materials, etc., which will all have telling effects on the operation of a
business unit.

General and personnel administration: The problem areas are summarized as under:
o Dispute/difference of opinion among the promoters/directors.
o Poor industrial relations leading to labour unrest.
o Lack of motivation and co-ordination.
o Lack of manpower planning.
o Lack of assigning equal importance to all areas of business. It is generally observed that
the main promoter takes more interest in the area of his specialization and ignores other
aspects of the business. For example, technocrat entrepreneurs, by their nature are more
inclined to improving the technical aspects of the product. The result may be that the
product will not be a commercial success though it may have technical excellence.
o Projects that solely depend upon the skills of a key promoter may find it difficult to sail
through in the event of death or ill-health of the key person.

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Leading indicators of sickness: Just as diseases are identified by certain symptoms, industrial
sickness can be identified by the following symptoms. These symptoms act as leading indicators
of sickness, and if immediate remedial actions are not taken, the sickness will grow to the extent
that the organization will find its natural death.

o Continuous reduction in turnover.

o Piling up of inventory.
o Continuous reduction of net profit to sales ratio.
o Short term borrowings at high interest rate.
o Continuous cash losses leading to erosion of tangible net worth.
o Default in payment of interest on borrowings and default in repayment of term loan
installments.
o The ‘sundry debtors’ as well as the ‘sundry creditors’ keep growing and reaching a
disproportionately high level.
o Approaching the banker for temporary over draft at frequent intervals.
o High turnover of personnel, especially at senior levels.
o Change in accounting procedure with to view to window dressing.
o Delay in finalization of accounts.

10.5 PREDICTION OF SICKNESS

Though symptoms of sickness can be observed from the leading indicators, such indicators may
only suggest that the unit is a potentially sick unit. However, it is not easy to arrive at a definite
conclusion about the impending sickness on the basis of the leading indicators of sickness.
Considerable research work has been done to identify other measurable parameters that can be
used for predicting sickness. The research, in general has been done by two different methods of
analysis. They are, Univariate Analysis and Multivariate Analysis

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Technical Appraisal
(a) Study the manufacturing process used by the unit. Ascertain if any new process has since
been developed. Explore the necessity of switching over to the latest manufacturing process and
study the cost, benefit aspects of such switchover.

(b) Study the production capacity of different production sections and checkup if the production
capacity of different sections are perfectly balanced. If there is any production section, which has
a lower capacity than that required for perfect balancing, the overall capacity of the plant can be
significantly increased without huge investments, by adding the required balancing machinery.

(c) Explore the possibilities of adding additional/special features to the products that will add
competitive edge to the product. Also examine the need for changing the product-mix that is in
tune with the market requirement.

(d) Find out if any plant/equipment need major repair/overhauling to improve its operating
efficiency.

(e) If the locational disadvantages outweigh all other factors, the scope for shifting the location to
an advantageous place may be examined and the consequent cost-benefit analysis studied. This
may be possible if the firm is functioning in a leased premise and owns only the plant and
machinery. If the unit is located in own building, the proposal for shifting the plant and
machinery to a leased building in an advantages location may also be studied. The building
owned by the firm can be leased out to some other firms. The long-term cost-benefit analysis
will give lead to the acceptability or otherwise of such a proposal.

(f) Study the modifications required, if any in the plant layout so that the material handling time
can be reduced which may improve the efficiency of operations and improve the output.

(g) Examine if any of the manufacturing operations that are done in house can be entrusted to
outside agencies, which may result in cost reduction.

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Commercial Appraisal

(a) Commercial failure of a project will be mainly due to problems relating to the product
itself viz., defects/imperfections in product design which may lead to consumer resistance. Such
situations indicate that the products offered by competitors have better features that attract
consumers. Hence, the scope for product improvement and the cost involved are to be studied.

(b) In spite of consumer acceptance of the product, if the project has gone sick, it is likely that
the profit margins might be low. Minor modifications in designing and packing the product with
upward revision in price may be accepted by the market which may bring better returns to the
company. This aspect may be studied by carrying out test marketing for the improved product.

(c) Every product follows a life cycle which passes through four stages viz.,
• Introduction.
• Rapid expansion.
• Maturity.
• Decline.

Profit margins shrink and signs of sickness appear when the product is in its ‘decline’ stage.

Product innovation can only sustain the product at this stage. The decline once started can not be
contained for long inspite of product innovations. Product diversification may prove to be a
feasible solution. Hence for rehabilitating a unit whose product has already reached its ‘decline’
stage, the feasibility of switching over to diversified products making use of the existing
production facilities is to be studied. The cost-benefit analysis of additional investments needed
for product diversification and additional benefits that may accrue are to be analyzed.

Management Appraisal: A good project in the hands of an ineffective management turns the
project bad. Similarly a good management is capable making a not-so-good project, a success.
Hence the first thing under management appraisal is to study whether the sickness is due to
reasons beyond the control of the present management or due to ineffective management.

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If the sickness is due to reasons beyond the control of the management, for any revival package
to come out successful, it should be first ascertained if the management is still committed to the
project and is serious about reviving the unit. The management’s commitment and seriousness
may be indicated by,

� Its readiness to inject additional funds to revive the unit.

� Its readiness to strengthen the existing management by agreeing to induct professionals as
directors at various functional areas like technical/finance/marketing/research and development
etc. The managerial appraisal shall suggest the required changes in the existing organizational set
up of the unit and also shall study the possible reduction in the man power that can be achieved
without affecting the organizational efficiency, the likely compensation payable for retrenchment
etc

Financial appraisal: Since appraisal of all other areas have a financial commitment in one form
or the other, financial appraisal assumes greater importance. All aspects of financial
reconstruction need to be considered and analyzed. When a project that has long term debt
component in its capital structure becomes sick, it becomes necessary to ease the burden of debt
to enable the sick unit to recover from its sickness. This necessitates restructuring of the debts. In
general, banks and financial institutions offer the following concessions in their package of
rehabilitation assistance.

(a) Reduction in interest rate of existing loans.

(b) Conversion of short-term loans in to long-term loans. (This gives the unit under revival the
much-needed leeway to repay short term borrowings.)
(c) Conversion of part of long term loans into equity.
(d) Funding of the overdue interest (un-paid interest) and making it repayable in easy
installments. The funded interest component may carry concessional rate of interest or even at
times bears no interest.
(e) Offering a revised schedule of repayment for the principal components of term loan.
(f) Sanction of additional loan to meet the additional capital expenditure.

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(g) Enhancement of working capital limits and regularizing the irregular portion of working
capital finance already availed.

If any asset is found not useful, the wise choice would be to dispose off the asset and use the
amount realized to support the rehabilitation programme.

Monitoring of nursing programme: For the growth of a healthy person it is enough if ordinary
care is taken, while a sick person who is in convalescent stage needs critical attention. He is
prone to getting sick again if proper care is not taken to monitor his health and to administer
medicine at the required intervals. A sick unit that is under a nursing programme is similar to a
sick person who is in convalescent stage and needs continuous monitoring. A simple and
practical monitoring mechanism shall be devised.

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 Chapter 30 : Difference between commercial banks and development banks

Commercial Banks : Commercial banking activities are different than those of investment
banking, which include underwriting, acting as an intermediary between an issuer of securities
and the investing public, facilitating mergers and other corporate reorganizations, and also acting
as a broker for institutional clients.

Development Bank : regional development bank established in 1966 to promote economic and
social development in Asian and Pacific countries through loans and technical assistance. It is a
multilateral development financial institution owned by 67 members (as of 2 February 2007), 48
from the region and 19 from other parts of the globe. ADB's vision is a region free of poverty. Its
mission is to help its developing member countries reduce poverty and improve the quality of
life of their citizens.

The work of the Asian Development Bank (ADB) is aimed at improving the welfare of the
people in Asia and the Pacific, particularly the 1.9 billion who live on less than $2 a day. Despite
many success stories, Asia and the Pacific remains home to two thirds of the world's poor.

The bank was conceived with the vision of creating a financial institution that would be "Asian
in character" to foster growth and cooperation in a region that back then was one of the worlds
poorest. ADB raises funds through bond issues on the world's capital markets, while also
utilizing its members' contributions and earnings from lending. These sources account for almost
three quarters of its lending operations.

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