Sources of Industrial Finance in India | Financial Management

It is really difficult to depend on any one source for Industrial financing and as such different sources must be tackled.

Some of the important sources of financing industries in India being as under:

1. Sale of Shares:

Each industry floats shares for financing its programmes. These are offered to the public. The money raised through shares is quite substantial and if the industry has established a credit, it can raise any amount for financing its projects.

2. Voluntary Deposits:

When the industries establish their credit worthiness, the individuals, who have surplus money, deposit their amounts with the industry. In this way also sufficient amounts are raised.

3. By Borrowing Money on Interest:

When the money raised is still needed the industry approaches big financiers or houses to loan them money on interest. This amount is raised only when the industry feels that the investment is sure to have returns. Usually the rate of interest paid is much higher than the bank rate and this attracts the people to loan surplus money to the industry rather than depositing that with the banks.

4. Industrial Financial Corporations and Banks:

Government of India has set up many financial corporations such as Industrial Financial Corporation of India, Industrial Credit and Investment Corporation of India, Industrial Credit and Investment Corporation of India, Industrial Reconstruction Corporation of India and Industrial Development Bank of India. All these agencies and bodies are quite prepared to finance the industries in the country, so that industrial progress of the nation in any way does not retard.

5. Financial Assistance from the Banks:

With the nationalisation of banks commercial banks are liberally coming forward to help the industries, both small scale as well as large scale, to finance their projects. These banks are of considerable assistance when the industry is in financial difficulty or when it is facing serious financial crisis.

6. Managing Agency System:

Managing agencies also invest capital in the industry with the result that these provide finances for the industries; similarly funds are also raised through debentures as well. But these methods have their own drawbacks with the result that these are not in common use in so far as funding of industries is concerned.

Sources of Finance:

Capital requirements of the industry on the basis of their use can be divided into two categories, viz.:

(a) Fixed capital, and

(b) Working capital.

Fixed capital is used to provide the necessary means of production to the industrial units, like land and buildings, plant and machinery, furniture and fixtures, tools and equipment, etc.

Working capital provides all the expenses that are necessary in order to manufacture and sell the product or service offered. It is either invested in stocks of raw materials, stores and finished products, loose tools and spare parts or is needed for granting credit to customers or for meeting day-to-day administrative and other expenses.

On the basis of time, the capital requirements of industry are classified into:

(a) Short-term capital,

(b) Medium-term capital, and

(c) Long- term capital.

Short-term capital is required for a period ranging up to one year; medium- term capital is required for a period ranging from one to five years; and long-term capital is required for a period exceeding five years.

Sources of Industrial Finance:

Industrial units raise finance to meet their capital requirements from different sources, the important among these are as follows:

1. Shares and Debentures:

A company’s owned capital is split into a large number of equal parts, each part being called a share. The company invites members of the public to buy as many shares as they like. The share capital of a company is ideal for meeting the long-term requirements.

A debenture is an acknowledgement under seal of debt or loan. Uniform parts of loan are called debentures. Debentures carry a fixed rate of interest to the holders and used to finance long and medium- term requirements of the industry.

2. Public Deposits:

The system of public deposits has been the only source of working capital for some industries in some regions of the country in the past.

On account of the malpractices of the borrowing units, the system came in for much disrepute. The system has, however, been rehabilitated by the Reserve Bank after making suitable amendments of the Companies Act.

3. Ploughing Back of Profits:

This source, in fact, is the indicator of the inner strength and stability of any enterprise. Companies can use their reinvestible surplus to finance the expansion and modernisation of existing plants and establishment of the new ones.

4. Bank Loans:

The commercial banks provide short-term or working capital to industries. They feel hesitant to finance fixed capital needs of industries because of the risky nature of the shares. Banks also do not subscribe to debentures because it is very difficult to dispose them of at a time when they are very much in need of funds.

In short, however, it should be noted that during the last 20 years bank advances to industry have shown remarkable progress. Outstanding advances of the scheduled commercial banks to industries—large, medium and small-scale—have increased from Rs.2,068 crores in March 1968 to Rs.1,02,963 crores in March, 1995. In percentage terms, however, the share of bank advances to industry in total advances declined from 67.5 per cent to 53.2 per cent during the same period.

5. Foreign Capital:

Foreign capital is also an important source of medium-term and long-term finance to industry. Foreign capital is available to the industries, both in the form of loans and equity participation. The sources of foreign capital comprise international institutions like International Bank for Reconstruction and Development, the International Finance Corporation, foreign governments and private investors.

6. Specialised Financial Institutions:

The most important sources of long-term finance to industry are the various financial institutions that have been specially set up to meet the credit needs of industry. Among these institutions mention may be made of the Industrial Finance Corporation of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Unit Trust of India and the Industrial Reconstruction Bank of India.

In brief, there are both internal and external sources of industrial finance. In the recent past, the specialised financial institutions are playing a dominant role in industrial financing.

Soundness of the Financing Agencies:

It is a matter of debate whether the present financial structure is sound enough to sustain the pressure of growing industrialisation of the country. Among all the financing agencies, the most effective and reliable source of finance are the specialised institutions or the development banks.

These institutions not only provide loans but also offer technological know-how and expert guidance to industries. The financial strength of these institutions, however, is not sound enough to meet all the credit requirements of industries.

Foreign capital is again an important source of industrial finance but it has its own limitations. Foreign capital is the most unreliable source of finance. Its availability depends upon the political ties with the ender countries. Moreover, certain political strings are attached with the foreign capital. In some cases, only project-tied capital is offered by the lending countries.

Nationalised banks are playing a useful role in the various development programmes by making finance available for different projects. But in the sphere of industrial activities, they have not been able to provide term loans to industries.

To sum up, the present financial structure is not strong enough to meet the challenges of growing industrialisation.