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CHAPTER

16
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INSTITUTIONAL FINANCE TO

ENTREPRENEURS
. 16.1 Commercial Banks. 16.2 Other Financial Institutions: 16.2.1 Industrial Development Bank of India (IDBI) 16.2.2 Industrial Finance Corporation of India (IFCI) 16.2.3 Industrial Credit and Investment Corporation of India (ICICI) s 16.2.4 Industrial Reconstruction Bank of India (IRBI) 16.2.5 Life Insurance Corporation of India (Lie) 16.2.6 Unit Trust of India (UTI) 16.2.7 State Financial Corporations (SFC) 16.2.8 State Industrial Development Corporations (SIDC) 16.2.9 Small .Industries Development Bank of India (5IDBI).16.2.10 Exim Bank .16.3 Let us Sum up 0 Assessment Questions
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, LEARNING OBJECTIVES

On completion of this chapter, you should be able to: fI Know the types of financial assistance provided by commercial banks to the small entrepreneurs. List the various- financial institutions which provide financial assistance with the types of assistance to the entrepreneurs in the country, Finance is one of the essential requirements of any enterprise. Before actually setting up their units, small entrepreneurs .need to know very clearly about the type and extent of their financial requirements. This we have already discussed in the previous Chapter 14. Integral to financial requirements is to know about the possible alternative sources from which finance can be availed of. Given the shortage or lack of entrepreneurs' own funds! resources, the Government of India as a part of its policy of promotion of small-scale sector in the country has set up a host of institutions to meet the financial req,l1irements of small entrepreneurs. This Chapter is, therefore, devoted to discuss the financial assistance given by various institutions to small entrepreneurs to set up their enterprises. COMMERCIAL BANKS The Scheduled Commercial Banks (sCBs) in the country (288) comprise the State Bank of India (sBI) and its associated banks (8), nationalised banks (19), private sector banks (32), regional rural banks (RRBs) (196) and foreign banks (23). During 1994-95, ten more banks were given the status of SeBs and one, viz. Bank of Karad which was taken over by Bank of India was excluded. As on March 31, 1995, the total number of branches of SeBs stood at 62,067, of these 35,060 (56.5% of the total) were in rural areas. For a long period, commercial banks did not come forward to extend financial assistance to the small-scale industries because of the ssIs weak economic base. The first lead in this regard was taken by the SBI, in consultation with the Reserve Bank of India (RBI),in March 1956 by setting up a pilot scheme for the provision of credit for smallscale industries. In the beginning, the scheme was confined to 9 branches of the sBI which was later extended to all branches of the SBI. The commercial banks started taking initiation in financing sSIs in a greater way only after the bank nationalisation in July
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of SSIs has been the introduction of the Lead Bank Scheme' by the RBi. Under tlus schertle each district has been allotted to one scheduled commercial bank for intensive developmen; of banking facilities. The introduction of 'Credit Guarantee Scheme', in 1960, was a big fillip in the field of commercial bank financing to SSIs. Initially, this scheme was introduced in 22 districts on experimental basis. Later, it was extended to all over the country. Further, the RBI set up a Committee under the Chairmanship of Shri P.R. Nayak, to look into the adequacy ~f institutional credit to SSIs. Based on the recommendations of the Committee, the RBI introduced a special package of measures for financing SSIs and advised banks to take various measures aimed at increasing the credit flow to the SSIs and arresting the probiem of sickness in small-sector. Availability of credit to the SSI sector improved further with the stipulation on foreign banks to extend atleast 10% of their net bank credit to the 5S] sector and to deposit the shortfall, if any, with the Small Industries Development Bank of India (SIDBI). According to the figures released by the Industrial Development Bank of India (IDBIL the outstanding gross bank credit to industrial sector stood at Rs. 102953 crores as on March 3L 1995 of which Rs. 27,612 crores (27% of total) were given to the SSIs by the commercial banks. It is interesting to mention that the bank credit to smallsector as a percentage to total bank credit is on increase year after year. For example, it increased from 22% in March 1993 to 27% in March 1995.

in May 1 'i'} ) raciii '~"E' .n; ue _ the ID5i 1" s lc~ed : 'E' ~ Ja . tlhD na")r": at equitv to nr.y lfl "~ not excepding Rs. 5 lakhs. The banks. The IDBlllas also introd loans and working capital ass~ means the least, the IDBI has ~ to utilize the services of expel cottage units and for providul During 1987-88, the IDBI Sa] industries out of total sanctio industrial assistance was give In order to make the ID committee3 has suggested thz perform only promotional ap SFCsand SIDEl, etc. The direc company, especially set up fe
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16.2.2 INDUSTRIAL

FINAN

The Government of India SE IFCIAct in July 1948. Since [t The IFCI extends financial as currency loans, underwriting and also offers financial servic finance, buyers' and supplier purchase companies. It also F ~::~.1 OF INDIA (lOBI) \:,.' a bureau in Bombay. Prior to 1964,there was not any apex organisation to co-ordinate the functions of various Tb,2 financial resources of financial institutions. Then, V.V.Bhatt rightly pointed out that the country needed a central (i) Share capital, (ii) Bonds all development banking institution for providing "dynamic leadership in the task of as on March 31, 1995 stood promoting a widely diffused and diversified and yet viable process of iridustrialisation'". Industrial Development Banl It was to fulfil this objective, the Government decided to establish the Industrial trusts and the co-operative 1 Development Bank of India (IDBI). The IDBI was established on July 1, 1964 under the capital and reserves, the me Act of Parliament as the principal financial institution in the country. Initially, it was set borrowings from the Coverni up as wholly owned subsidiary of the Reserve Bank of India. In February 1976, the IDB! of India and foreign loans. was made an autonomous institution and its ownership passed on from the Reserve Bank The IFCI started its lendir of India to the Government of India. IFCI have grown over the y The lOBI provides assistance to the small-scale industries through its scheme of IFCI during 1994-95, rose b: refinance and, to a limited extent, through its bills rediscounting scheme. As it is not feasible 31.2l)\:, to Rs. 2839 crore dur ' for the lOBI to reach a large number of small-scale industries scattered all over the country, sanctions amounted to Rs, 2, the flow of its assistance to this vast number has, therefore, been indirect in the form of In recent years, the IFCI refinancing of loans granted by the banks and the State Financial Corporations (SFCs). subsidy scheme for wome The lOBI has shown its particular interest in the development of small scale industries. providing marketing assistai Of particular mention is the setting up of the Small Industries Development Fund (SIDF) of tiny small-scale ancillary

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1. IDBI Report on Development Banking 1994-95, Industrial Development Bank of India, Bombay, December 22,1995, p.84. 2. Vv. Bhatt: A Decade of Performance of Industrial Development Bank of India, Commerce, Annual Number, 1974, p.l51.

3. Report of the Committee 011 tl New Delhi, 1991. 4. lDBI Report on Developmen December 22. 1995, p. 23.

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apreneurial

Development

Institutional Finance to Entrepreneurs

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duced in 22 districts onFurther, the RBI set up k into the adequacy of 1e Committee, the RBI . advised banks to take d arresting the problem - . improved further with ,t bank credit to the 58I -s Development Bank of; IDevelopment Bank ot;c: .tor stood at Rs. 102953 ' total) were given'to the te bank credit to smaller year. For example, it

in May 1986 to facilitate the development and extension of small-scale industries. In 1988, the lOBI also launched the National Equity Fund Scheme (NEFS) for providing support in the nature of equity to tiny and small-scale industries engaged in manufacturing, cost not exceeding Rs. 5 lakhs. The scheme is administered by the IDBI through nationalised banks. The IDBI has also introduced the single window assistance scheme for grant of termloans and working capital assistance to new, tiny and small scale enterprises. Last but no means the least, the IDBI has also set up a Voluntary Executive Corporation Cell (VECC) to utilize the services of experienced professionals for counselling small units, tiny and cottage units and for providing consultancy support in specific areas. During 1987-88, the lOBI sanctioned assistance worth Rs. 1,511 crores to the small-scale industries out of total sanction of Rs. 4,580.60 crores. It means about one-third of total industrial assistance was given to small-scale sector alone. In order to make the IDBI's co-ordinating role more effective, the Narasimham Committee3 has suggested that the IDBI should give up its direct financing function and perform only promotional apex and refinancing role in respect of other institutions like SFCsand SIDBI, etc. The direct lending function should be entrusted to a separate finance company; especially set up for this purpose.

16.2.2INDUSTRIAL FINANCE CORPORATION OF INDIA LTD UFCI) The Governrri.ent of India set up the Industrial Finance Corporation of India (IFCI) under IFCI Act in July 1948. Since July 1, 1993, it has been brought under Companies Act, 1956. The IFCI extends financial assistance to the industrial sector through rupee and foreign currency loans, underwriting! direct subscriptions to shares! debentures and guarantees and also offers financial services through its facilities of equipment procurement, equipment finance, buyers' and suppliers' credit, equipment leasing and finance to leasing and hirepurchase companies. It also provides merchant banking with its Head Office in Deihi and 'I) a bureau in Bombay. ~the functions of various The financial resources of the IFCI are constituted of the following three components: country needed a central (i) Share capital, (ii) Bonds and Debentures; and (iii) Other Borrowings. Its paid-up capital dership in the task of as on March 31, 1995 stood at Rs. 352 crore from an initial of Rs. 5 crore in 1948. The ss of iridustrialisation'" .. Industrial Development Bank of India, scheduled banks, insurance companies, investment establish the Industrial trusts and the co-operative banks are the shareholders of the IFCI. Apart from paid-up 1 July I, 1964 under the capital and reserves, the major sources of the IFCI are issue of bonds and debentures, mtry. Initially, it was set' \ borrowings from the Government, the Reserve Bank of India, Industrial Development Bank February 1976, the IDB! bf India and foreign loans. n from the Reserve Bank , The IFCI started its lending operations on a modest scale in 1948. The operations of the iFCI have grown over the years and so have its assistance. Assistance sanctioned by the through its scheme of IFCI during 1994-95, rose by 52.7% to Rs. 5719 crores. Assistance disbursed went up by heme. As it is not feasible . 31.2% to Rs. 2839 crore during the year. Cumulatively, upto end-March 1995, the IFCI's ered all over the country, sanctions amounted to Rs. 24,599 crore, while disbursements aggregated Rs. 15,387 crore." n indirect in the form of In recent years, the IFCI has started new promotional schemes, such as (a) interest ial Corporations (SFCs). subsidy scheme for women entrepreneurs; (b) consultancy fee subsidy schemes for of small scale industries. providing marketing assistance to small-scale industries; (c) encouraging the modernisation evelopment Fund (SIDF) of tiny, small-scale ancillary units; and (d) control of pollution in the small and medium-

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3. Report of the Committee on the Financial System (Narasimham Committee), Government of India, New Delhi, 1991. 4. IDBI Report on Deoelopment Banking in India 1994-95, Industrial Development Bank of India, Decemb" 22, 1995, p. 23.

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backward areas aggregated No doubt. the IFCI has experienced irnoressive performance over the years. At the same time, it is also true thai there are certain t1<1'\5 in us functioning which have invited criticism from different quarters. To quote, the important ones are: (i) The lPCI's lending operations have encouraged concentration of wealth and capital, It still pursues a discriminatory policy to the disadvantage of medium and small-scale units. (ii) There are great delays in sanctioning loans and, then, making the amount of the loan available. (Hi) The IFCI has failed to exercise necessary control over the defaulting borrowers. Further, in many cases, the assistances have not been used for the specific purpose for which they are given. Here also, the IFCI has failed to take any action against such practices. 16.2.3 INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA LTD. (ICICI) The Industrial Credit and Investment Corporation of India Ltd. (ICICI) was set up in January 1955 under the Indian Companies Act with the primary objective of developing small and medium industries in the private sector. Its issued capital has been subscribed by the Indian banks, insurance companies and the individuals and corporations of the United States, the British Eastern Exchange Bank and other companies and general public in India. The ICICI performs the following functions: (i) It provides assistance by way of rupee and foreign currency loans, underwriting and direct subscriptions to sharesl debentures and guarantees. (ii) It offers variety of financiai services such as deferred credit, ieasing credit, instalment sale, asset credit and venture capital. (iii) It guarantees loans from other private investment sources. The ICICI has recently set up a Merchant Banking Division which is working very creditably. It has also set up ICIeI Asset Management Company Ltd. in June 1993 to operate the schemes of the 'ICICI Mutual Fund. Yet another subsidiary called lCICI Investors Services Ltd. (March 1994) and ICICI Banking Corporation Ltd. U anuary 1994) have started operations. Assistance sanctioned by the ICICI during 1994-95 increased by 77.4% to Rs. 15,065 crore, while disbursements went up by 55.9% to Rs. 6,879 crore. Cumulatively, upto endMarch 1995, sanctions amounted to Rs. 53,307 crore and disbursements aggregated Rs. 30,595 crore. The ICICI assists all sectors, that is, the private sector, the joint sector, the public sector and the co-operative sector. It is worth mentioning that the private sector continued to claim the largest share (90.1;;)) of rCICI, sanctions during 1994-95, distantly followed by public sector (4.6%), joint sector (4.1%) and co-operative sector (1.2%). Thus, the major beneficiary of the lOCI's assistance is the private sector mainly comprising of small scale units. 16.2.4 INDUSTRIAL RECONSTRUCTION BANK OF INDIA (IRBI)5 The Government of India set up the Industrial Reconstruction Corporation of India (IRCI) in Apri.l 1971 under the Indian Companies Act mainly to look after the special problems
5. Based on s.s. Khanka: Role of !RBI in Reviving Sick Industries, In: S.5. Bhatia & G.5. Bhatia (Ed.): Management of Sick lndusiries, Deep & Deep Publications. New Delhi, 1994, pp. 192-99

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Tl1 Life Insurance Corpora' as a wholly-owned corporatio insurance business in the CGUll security to various segments c pian priorities. - :'1.5 per its investment poiic Fund "in Central and State C marketable securities and in tl purposes like housing. water groups. Ue: also provides ten debentures of corporate sectc During the year 1994,95, L loans to other financial institt Of the total assistance sanctioi March 1995 ,Ue' s sanctions st (32.5% of total sanctions). During 1994-95, assistano private sector claimed the hig by public sector (34.1 'Yo) art assistance sanctioned, the nev followed by expansion I diver: equipment (12.4%). 16.2.6 UNiT TRUST OF IN The Unit Trust of India (U savings of small investors . investments. Over the years, of diverse sections of invest bv wav of term-loans and 13 . During the year 1994-95, common investors. These, ai

eASE 2

Right Rails of Ravindra Barn


He claims to have saved over 25,000 trees in eight years. Ravindra Bam has achieved this by selling hisDecorail' curtain carrier systems to people who would otherwise have got pelmets. An arts graduate, Barn worked in banks for 16 years and as an administration manager for a Muscat-based construction company for another six before deciding to return home and set up. his own business. "My wife and I used to collect any new thing we saw while we were in the Gulf," he recalls. "We saw this product there, and decided to manufacture it in India." Active in the Students' Federation of India while at college, Barn still believes in creating employment in rural areas. So after coming back to Pune in 1986 and surveying the market for two-and-a-half ye~Hs,he searched for a place where there was no industry, and bought land at Gauddara off the Bangalore highway. All his 40 employees today are locals. And in this composite project to make curtain rods; tape and hooks, lack of knowledge of either textiles or engineering proved to be a plus point. "I might not have ventured into it had I been an engineer!", he says. Today, Barn's Ajay Windecor products makes and exports a range of rope operated drapery systems - Rollonrail, Draperail, Minirail, Fast Track and Easyline Track, besides the original Decorail. All of them, except Fast Track which was developed for heavy-duty use in hotels, hospitals and public places, are telescopic: there are four basic sizes, which . provide rust-resistant, powder-coated rods between 90 em and 4.5 metres in size. With 13 components to make, Ajay Windecor needs 150 press-shop operations with 250 different dies. Everthing is done in-house; from shaping and punching the mild steel strips to powder-coating the finished rods and hooks, and weaving of the polypropylene and cotton ropes which open and close the curtains. Barn is especially proud of the fact that he is the only Asian manufacturer of the tape used for his systems. "Unlike the normal curtain tape, which becomes flaccid after washing, this stays stiff so that the curtain retains the . right fall," he points out. . Another division, to make the 'tie bags' used to pull the ropes, was set up as a separate company in collaboration with British Trimmings in 1994. But the UK firm's participation ended when it was itself taken over by a US-based company in 1996; and Saj Trimmings, named after Barn's daughter, is now wholly owned by his family though it continues to supply tie bags to its former partners. Barn employs only women iI1this unit, and intends to stick to this policy even after an impending expansion. "Every family in the villagehas at least one woman who has been widowed, or deserted, or faces other problems," he explains. In developing a dealer network, Barn did not want established businessmen. Most of his 150 dealers today are people who started with De~orail. About 30 of them are women; and the others involve their families in business, because he insists that every dealer must also offer a curtain stitching service: "The customer wants the curtains, not the rod!" he remarks. Along the way, he has also set up three centres to train his dealers' wives and family members for this purpose. The advantage, he points out, is a close dealer - customer rapport, so much so that there are instances where the dealer's son fell in love with - and married -the customer's daughter! Obviously, the dealers are happy: each sells about 100 units a month, earning between Rs. 10,000 and Rs. 15,000 from commission, cloth and stitching, and fitting charges. 370

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Case Studies

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Barn insists he has no competition because he keeps his products at least 25 per cent cheaper than other systems. Sales have grown 20 per cent a year since Decorail entered the market in 1991, barring the last year-and-a-half which saw a slump in new housing. His is the only company from Pune besides Telco and Baja] Auto to advertise on national television, with a monthly adspend of Rs. 2 lakhs; but Barn prefers to participate in exhibitions catering to middle-class people rather than those held in five-star hotels. The strategy works: "Today, people ask for even ordinary curtain rods as Decorail" he adds. So, will Decorail soon become generic for curtain rods? Questions:
1. What factors, in your opinion, helped Ravindra Barn make his brand virtually a generic name in curtain systems? 2. List the major entrepreneurial competencies you find in Ravindra Barn.