Source of Long-Term Finance: Special Financial Institutions (SFI) and Industrial Finance Corporation of India (For CBSE, ICSE, IAS, NET, NRA 2022)

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Special Financial Institutions (SFI)

A number of special financial institutions have been set up by the central and state governments to provide long-term finance to the business organisations. They also offer support services in launching of the new enterprises and so also for expansion and modernisation of existing enterprises. Some of the important ones are Industrial Finance Corporation of India (IFCI) , Industrial Investment Bank of India (IIBI) , Industrial Credit and Investment Corporation of India (ICICI) , Industrial Development Bank of India (IDBI) , Infrastructure Development Finance Company Ltd. (IDFC) , Small Industries Development Bank of India (SIDBI) , State Industrial Development Corporations (SIDCs) , and State Financial Corporations (SFCs) , etc. Since these institutions provide developmental finance, they are also known as Development Banks or Development Financial Institutions (DFI) . Besides these development banks there are a few other financial institutions such as life Insurance Corporation of India (LIC) , General Insurance Corporation of India (GIC) and Unit Trust of India (UTI) which provide long-term finance to companies and subscribe to their share and debentures. The main functions of these institutions are:

Image Special Financial Institutions
  • To grant loans for a longer period to industrial establishment.
  • To help the establishment of business units that require large amount of funds and have long gestation period.
  • To provide support for the speedy development of the economy in general and backward regions in particular.
  • To offer specialized services operating in the areas of promotion, project assistance, technical assistance services and training and development of entrepreneurs.
  • To provide technical and professional management services and help in identification, evaluation and execution of new projects.

Let us have a brief idea about some of the Special Financial Institutions.

Special Financial Institutions

Industrial Finance Corporation of India (IFCI)

It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities. It also provides support to modernisation and renovation of plant and equipment in existing industrial units. It can grant loan or subscribe to debentures issued by companies repayable in not more than 25 years. It can also guarantee loans raised from other sources or debentures issued to the public and take up underwriting of the public issue of shares and debentures by companies. For ensuring greater flexibility to meet the needs of the changing financial system IFCI now stands transformed to IFCI Ltd. with effect from 1 June 1993.

Industrial Credit and Investment Corporation of India (ICICI)

It was set up in 1955 for providing long-term loans to companies for a period up to 15 years and subscribe to their shares and debentures. However, the proprietary and partnership firms were also entitled to secure loans from ICICI. Like IFCI, the ICICI also guarantees loans raised by companies from other sources besides underwriting their issue of shares and debentures. Foreign currency loans can also be secured by companies from ICICI. In the context of the emerging competitive scenario in the finance sector, ICICI has merged with ICICI Bank Ltd. , with effect from 3 May 2002.

Industrial Development Bank of India (IDBI)

It was set up in 1964 as a subsidiary of Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the amount of funds. It could also refinance loans granted by other financial institutions and offer guarantees for the loans raised from the capital market or scheduled banks. It also discounts and rediscounts the commercial bills of exchange and undertakes underwriting of the public issues. IDBI, like ICICI, has also transformed into a commercial bank and has been retitled as IDBI Ltd. with effect from 1 October 2004 with IDBI Bank merged into it.

Industrial Investment Bank of India (IIBI)

The erstwhile Industrial Reconstruction Bank of India (IRBI) , an institution which was set up for rehabilitation of small units has been reconstituted in 1997 as Industrial Investment Bank of India. It is a full-fledged all-purpose development bank with adequate operational flexibility and autonomy. After the reconstruction its focus has changed from rehabilitation finance to development banking.

Small Industries Development Bank of India (SIDBI)

It was set up in 1990 as a principal financial institution for the promotion, financing and development of small-scale industrial enterprises. It is an apex institution of all the banks providing credit facility to small-scale industries in our country. It offers refinancing of bills, rediscounting of bills, and several other support services to Small Scale Industries (SSI) . It undertakes a wide range of promotional and development activities for improving the inherent strength of SSI units and creating avenues for the economic development of the rural poor.

State Financial Corporations (SFCs)

In order to provide financial assistance to all types of industrial enterprises (proprietary and partnership firms as well as companies) most of the states of our country have set up SFCs. The primary objective of these corporations is to accelerate the pace of Industrial development in their respective states. SFCs provide finance in the form of long-term loans or through subscription of debentures, offer guarantee to loans raised from other sources and take up underwriting of public issues of shares and debentures made by companies. The SFC (Amendment) Act, 2000 has provided greater flexibility to SFCs to cope with the changing economic and financial environment of the country.

State Industrial Development Corporations (SIDCs)

These corporations were set up in 1960s and early 1970s by most state governments for promotions and development of medium and large-scale industries in their respective states. In addition to providing financial assistance to industrial units, they also undertake a variety of promotional activities. They also implement the various incentive schemes of the central and state governments.

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