This note is prepared during COVID-19 pandemic.

The purpose note is to provide reference

notes for students and not for sale. This is prepared by Dr. Sikandar Azam

INDUSTRIAL FINANCE CORPORATION OF INDIA LIMITED (IFCI)

The Industrial Finance Corporation of India Limited (IFCI), India’s first DFI, was established on July 1,
1948, under the Industrial Finance Corporation Act as a statutory corporation. It was set up to provide
institutional credit to medium and large industries. With a view to imparting greater operational flexibility
and enhancing its ability to respond to the needs of the changing financial system, the IFCI was converted
from a statutory corporation to a public limited company. It was the first institution in the financial sector
to be converted into a public limited company on July 1, 1993. IFCI is a board-run company and its
directors are elected by shareholders.

IFCI’s principal activities can be categorized into financing and promotional activities.

Financing Activities

IFCI’s financing operations include project financing, financial services, and corporate advisory services.
These are outlined below.

• Project financing: Project financing is the core business of IFCI. The main objective behind the
incorporation of the DFI was to fund green-field projects. Financial assistance is provided by way of
medium or long-term credit for setting up new projects, expansion/diversification schemes,
modernisation/ balancing schemes of existing projects. Financial assistance is provided by way of rupee
loans, loans in foreign currencies, underwriting of/direct subscription to shares and debentures, providing
guarantee for deferred payments and loans.

• Financial services: IFCI provides tailor-made assistance to meet specific needs of corporate through
specifically designed schemes. The various fund-based products offered are equipment finance,
equipment credit, equipment leasing, supplier’s/buyer’s credit, leasing and hire purchase concerns,
working capital term loans, short-term loans, equipment procurement, installment credit, and others. The
fee-based services offered by it are guarantees and letters of credit.

• Corporate advisory services: IFCI provides advisory services in the areas of projects, infrastructure,
corporate finance, investment banking, and corporate restructuring. It provides customized services in
areas of investment appraisals, corporatization, disinvestment, business restructuring, bid-process
management, and formation of joint ventures. It also acts as a catalyst in channelizing foreign direct
investments (FDIs) and provides a range of services to prospective foreign investors. IFCI also provides
consultancy services on certain policy-related technical and financial matters to regulatory agencies in
different infrastructure sectors, namely, electricity, telecom, oil and gas, insurance, and education.

• Corporate advisory services to foreign investors: IFCI provides a whole range of services to
prospective foreign investors, namely, facilitating the foreign business entities through information
services; necessary office infrastructure for the start-up operations of the organization; coordination for
obtaining the required approvals/clearances from the government departments/regulators/ statutory
agencies; inputs on markets, materials, and manpower available in the country; inputs on available
manufacturing facilities; syndication services for obtaining the required capital; research inputs and
information regarding tax incentives; tariff protections, and opportunities available for acquisitions,
mergers, and amalgamations.
Developmental and Promotional Activities of IFCI

IFCI has been instrumental in translating the government’s development priorities into a reality by
contributing to the development of industry exports infrastructure and generation of employment. It has
played a pivotal role in removing the regional imbalances by sanctioning 47 per cent of its total assistance
to 2,172 units located in backward areas. It has played a key role in the development of cooperatives in
the sugar and textiles sectors. It has promoted technical consultancy organizations (TCOs), primarily in
less-developed states, to provide necessary services to the promoters of small-and medium-sized
industries in collaboration with other banks and institutions. Along with other institutions has also
promoted the Stock Holding Corporation of India Limited (SHCIL), the Discount and Finance House of
India Limited (DFHI), the National Stock Exchange (NSE), the Over the Counter Exchange of India
(OTCEI), the Securities Trading Corporation of India (STCI), LIC Housing Finance Limited. Since
1998–99, the assistance sanctioned and disbursed by IFCI has declined. During 2000–01, sanctions and
disbursements under direct finance constituting 99.4 per cent and 99.5 per cent of overall sanctions and
disbursement declined by 10.8 per cent and 35.3 per cent, respectively. IFCI started reporting losses from
1999. In 1999, it reported a loss of Rs. 267.70 crore which increased to Rs. 884.7 crore in 2001–02.
IFCI’s financial health had deteriorated and the state of affairs displayed a dismal picture of the company.
The reasons attributable to this dismal state of affairs of the company are as follows:

• Operational inefficiency: The cost of borrowing had exceeded the income from operations.

• Political interference: IFCI was used as a handmaiden of politicians and most of the loans have been
sanctioned under political pressures.

• Traditional sector financing: IFCI had sanctioned majority of the loans in traditional sectors such as
iron and steel, textiles, synthetic fibres, cement, synthetic resins, plastics, and so on. These traditional
sectors were facing rough times due to demand recession, price fluctuations, abolition of import controls,
gradual reduction of tariffs, among others. Hence, this led to a rise in NPAs of IFCI.

• Higher provisioning for non-performing assets: Project financing is the major activity of IFCI and
revenue arising from this activity constitutes a substantial portion of its revenues. These projects have a
long gestation period. The RBI has tightened the provisioning norms for NPAs and stipulated that loans
related to projects under implementation have to be classified as NPAs. Hence, the company had to make
larger provision at the end of the year, dampening the net profit level.
The GOI, based on the recommendations of the Basu Committee appointed for suggesting a restructuring
plan for IFCI, declared a Rs. 1,000 crore package for IFCI in late 2001. It was proposed to merge IFCI
with IDBI Limited. The attempts to merge IFCI with IDBI failed.

Steps Taken for Revival

IFCI constituted an expert committee in 2001 to formulate a medium-to long-term strategic plan for IFCI
in the emerging new business environment. The committee laid down the road map/action plan for the
next five years. The committee made recommendations covering a wide range of structural and
operational areas. IFCI is concentrating on its core competence and is focusing on lending to established
clients with a sound track record. It has strengthened its risk management techniques and is putting in
efforts to bring down the NPAs to a manageable level, through corporate debt structuring. The company
has initiated the process of restructuring of liabilities and has initiated action against defaulters and has fi
led suits against defaulter companies.
It has repositioned itself as a mid-corporate specialist targeting small and medium enterprises (SMEs) and
offering them services relating to asset financing, IPO management, loan syndication, project finance,
receivables financing, mergers and acquisitions, and corporate and project advisory services. Inspite of all
these efforts, the financial state of affairs of the company has not improved.
THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

The Small Industries Development Bank of India (SIDBI) was set up in 1990 under an act of
parliament— the SIDBI Act, 1989. The charter establishing SIDBI envisaged SIDBI to be ‘the principal
financial institution for the promotion, financing and development of industries in the small scale sector
and to coordinate the functions of other institutions engaged in similar activities’.
SIDBI commenced its operations on April 2, 1990, by taking over the outstanding portfolio and activities
of IDBI pertaining to the small scale sector. In pursuance of the SIDBI (Amendment) Act, 2000, and as
approved by the GOI, 51.1 per cent equity shares of SIDBI held by IDBI have been transferred to public
sector banks, LIC, GIC, and other institutions owned and controlled by the central government. Presently
SIDBI has 35 banks, insurance companies, investment and financial institutions as its shareholders in
addition to IDBI, which continues to hold 49 per cent share in SIDBI. Four basic objectives are set out in
the SIDBI charter. They are:
1. Financing
2. Promotion
3. Development
4. Coordination for orderly growth of the small scale industrial sector

Small-scale industries are the industrial units in which the investment in plant and machinery does not
exceed Rs. 10 million. The small-scale sector, consisting of 3.1 million units, forms the backbone of the
Indian economy, contributing to around 40 per cent of India’s total manufacturing sector output, around
35 per cent of total exports and providing employment to nearly 19 million persons. The major issues
hindering the growth of small-scale industries are technology obsolescence, managing inadequacies,
delayed payments, poor quality, incidence of sickness, lack of appropriate infrastructure, and lack of
marketing network. This sector needs to be nurtured and provided strong support services for its long-
term profitable growth. SIDBI tries to strike a balance between financing and providing support services
for the development of the small-scale sector.
As an apex institution, SIDBI makes use of the network of the banks and state financial institutions,
which have retail outlets for coordinating the development of the small scale sector.

Financial Products Offered by SIDBI

SIDBI offers a chain of financial products covering micro-finance, business, incubation, venture capital,
project finance, assistance for technology development and marketing of small-scale industries products,
export finance, bills finance, factoring, guarantees for loans, and so on. SIDBI also provides support
services such as training, market information, and advice for enhancing the inherent strength of small-
scale units.

Products and Services

• Direct finance schemes
• Bills finance schemes
• Refinance schemes
• International finance schemes
• Marketing finance and development schemes (Marketing schemes)
• SIDBI Foundation for Micro Credit
• Other schemes
• Promotional and development activities (P&D Activities)
• Fixed deposit/bonds

Direct Finance Schemes

• Credit linked capital subsidy (CLC)
• Scheme for development of industrial infrastructure for SSI sector (IID)
• Equipment Finance Scheme (EPS)
• Fast Track Financing Scheme (FTPS)
• Scheme of Integrated Infrastructural Development (IID)
• ISO 9000 scheme (ISO 9000)
• Project Finance Scheme (PFS)
• Tannery modernisation
• Vendor Development Scheme (VDS)
• Working Capital Term Loan (WCTL)

Bills Finance Schemes

• Bills Rediscounting Scheme—Equipment (BRS-E)
• Bills Rediscounting Scheme—Inland Supply Bill
• Direct Discounting Scheme—Components (DDS-C)
• Direct Discounting Scheme—Equipment (DDS-E)

Refinance Schemes
• Refinance Scheme for Acquisition of ISO Series Certification, by SSI Unit (RISO 9000)
• Composite Loan Scheme (CLS)
• For Term Loan—Non-SSI
• General Refinance Scheme (GRS)
• Mahila Udyam Nidhi (MUN)
• National Equity Fund scheme (NEF)
• Refinance Scheme for Rehabilitation of Sick Industrial Units (RSR)
• Self Employment for Ex-Servicemen Scheme (SEMFEX)
• Single Window Scheme (SWS)

International Finance Schemes

• Booking of forward contract
• Foreign Currency Term Loan Scheme (FCTL)
• Line of Credit Foreign Currency (LOCFC)
• Opening of Foreign Letters of Credit (FLC)
• Post-shipment credit in rupees
• Pre-shipment Credit in Foreign Currency (PCFC)

Marketing Schemes
• Marketing fund for women
• Marketing of SSI products

SIDBI Foundation for Micro Credit

• SIDBI Foundation for Micro Credit

Other Schemes
• Scheme for Domestic Factoring (FAC)
• Scheme for Invoice Discounting (IDS)

Promotional and Development Activities

• Mahila Vikas Nidhi
• Rural Industries Programme
• Entrepreneurship Development Programme
• Management Development Programmes
• Quality and Environment Management
Fixed Deposits/Bonds
• Fixed Deposit Scheme
• Capital Gains Bond

SIDBI’s financial assistance to the small-scale sector is channelised through

1. Indirect assistance to primary lending institutions (PLIs); and
2. Direct assistance to small units
Indirect assistance is extended by way of refinance, granting of line of credit (LOC) in lieu of refinance to
and rediscounting of bills of exchange to eligible PLIs including banks, state financial corporations, and
state industrial development corporations having over 65,000 branches all over the country. SIDBI
refinances loans sanctioned and disbursed by PLIs to set up new SSI projects and for expansion,
technology, upgradation, modernization, quality promotion, diversification by existing units, and
rehabilitation of sick SSI units. This refinance assistance flows to the transport, health, and tourism
sectors and also to professional and self-employed persons setting up small-sized professional ventures.
SIDBI extends short-term loans to scheduled banks in respect of their outstanding portfolio relating to SSI
sector against which no financial support has been availed from other institutions. SIDBI has created a
Growth Fund (Venture Fund) with an initial corpus of Rs. 100 crore for supporting all SME activities.

Subsidiaries

To facilitate the creation of an environment for self-sustaining and growing SSI units and to provide a
completed range of services, SIDBI has set up (i) Credit Guarantee Fund Trust for Small Industries;
(ii) SIDBI Venture Capital Limited; (iii) Technology Bureau for Small Enterprises; and (iv) SIDBI
Foundation for Micro credit.
The Credit Guarantee Fund Trust for Small Industries (CGTSI) has implemented a credit guarantee fund
scheme for small industries to facilitate collateral free and third party guarantee-free credit facilities (both
long-term and working capital) from scheduled commercial banks and select regional rural banks to new
and existing units in the SSI sector, including units in the information technology and software industry.
CGTSI, which guarantees collateral-free/third party guarantee-free loans upto Rs. 25 lakh per SSI
borrower is an important credit facilitating initiative. It introduced an innovative product—Corpus
Support for Transformation—to target the lowest segment of NGOs / MFIs to facilitate their scale-up and
eventual transformation. In 2006, it created a Risk Fund to cover loans to MFIs in underserved States.
SIDBI is among top 30 development banks of the world. SIDBI, in association with CIBIL and select
public sector banks has setup a specialized rating agency ‘SMERA’ for the SME sector. It also launched
SME Growth Fund, a new venture capital fund with a corpus of Rs. 500 crore in participation with major
commercial banks.

Resources Raised by SIDBI

SIDBI has been raising resources through international and domestic markets. It has raised borrowings
from Japan Bank for International Cooperation and KfW Germany. It also raises taxable priority sector
bonds from domestic markets as also deposits from foreign banks. As per the provisions of Union Budget
2002–03, SIDBI has been allowed to raise capital gains bonds. The Government of India converted
SIDBI’s borrowings from the RBI into bonds of 20 years tenure issued to GOI. These bonds are eligible
for inclusion in tier I capital. This increased the capital adequacy ratio of the bank from 28% in 2000–01
to 45% in 2001–02. It has raised higher amount of resources through fixed deposits in 2009.

References:
Bharati Pathak (2011) Indian Financial System, Institutions and Services, 3rd edition, Pearson Publication.