UNIT 11 ALL INDIA FINANCIAL

1NS"lrITUTIONS
Structure I

1 1.O Objectives
11.1 Introduction
1 1.2 Development Banking
11.3 Industrial Development Bank of India
11.4 Industrial Finance Corporation of India Limited
11.5 Industrial Credit and Investment Corporation of India
Limited
1 1.6 Industrial Investment Bank of India Limited
1 1.7 Small Industries Development Bank of India
11.8 National Bank for Agriculture and Rural Development
11.9 National Housing Bank
1 1.10 Export-Import Bank of India
1 1.1: Regulation over Financial Institutions
1 1.12 Performance of Major Financial Institutions
1 1.13 Non-Performing Assets
11.14 Let U s Sum Up
11.15 Key Words
11.16 Some Useful Books
1 1.17 Answers/Hints to Check Your Progress.

1 1.0 OBJECTIVES t

,*
After going through this Unit, you would be able to :

Explain the meaning of Development Banking,"

State an overview of the Financial Institutions in India and
their main activities, >

Describe the regulations over the Financial Institutions, and

Discuss the performance of major Financial Institutions.

1 1.1 INTRODUCTION
A well-integrated structure of financial .institutions has
evolved in the country comprising 11 institutions at the
national-level and 46 a t the state-level. These institutions
provide a variety of financial products and services to suit
the varied needs of the corporates. The national-level
institutions comprise five All-India Development Banks
(AIDBs), three Specialised Financial Institutions (SFls) and 3
Investment Institutions (IIs). At the state-level, there are 18
State Financial Corporations (SFs) and 28 State Industrial
Development Corp~rations(SIDCs). The AIDBs are Industrial
Development Bank of India (IDBI), Industrial Finance
Corporation of India Ltd. (IFCI), ICICI Ltd., Small Industries
Development Bank of India (SIDBI)and Industrial Investment
Financial and Investment Bank of India Ltd. (IIBI).The SFIs comprise Risk Capital and
Instituti,ons in India
Technology Finance Corporation Ltd. (RCTC),ICICI Venture
Ltd. (erstwhile TDICI Ltd.) and Tourism F i r l a ~ ~ cCorporation
e
of India Ltd. (TFCI). The Investment I~lstitutionsare Life
Insurance Corporation of India (LIC), Unit Trust of India
(UTI) and General Insurance Corporation ol' India (GIG).

IDBI, IFCI, ICICI, and IIBI provide financial assistance to

medium and large industries, whereas SIDBI caters to the
financial needs of small-scale sector. AIIIBs also undertake
promotional and developmental activities. Arno~lgthe SFIs,
RCTC and TDICI provide risk capital, venture capital and
technology fingnce, mostly to start-up companies in the
knowledge-based IT and related sectors. 'I'ICCI extends
assistance to hotels and tourism-related projects. Arnong
the investment institutions, LIC deals 'in life insurance
business, while GIC provides general insurance cover.. LIC
a n d GIC deploy their f u n d s in accordance with the
~ o v e r n t n e n tguidelines. UTI mobilises savings of small
investors through sale of units and channelises then1 into
corporate investments mainly by way of secontlary capital
market operations. Besides, the invesiment i ~ ~ s l i t u t i o n
also
s
extend assistance to industry through loans anci by way of
underwriting/direct subscription to equities and debentures.
SFCs provide assistance mainly to small and medium
enterprises, while SIDCs cater to- medium and large-scale
industries in their respective states. Apart from providing
financial assistance, SFCs a n d SIDCs also underiake
promotional and development activities.

~ e s e r v eBank of India regulates and supervises All India

Financial Institutions. These institutions are IDBI, ICICI Ltd.,
IFCI Ltd., IIBI Ltd., NABARD, NHB, Exim Bank, TFCI, SlDBI
a n d IDFC.. Reserve Bank of India undertakes on-site
inspection of these institutions and h a s also evolved off-site
surveillance system through obtaining periodic information.

Development Banks in lndia came into existence in the

Post-Independence e r a . Prior to I n d e p e n d e n c e , only
commercial banks existed which provided the business
community with short-term working capjtal fillance The
need, therefore, was felt for the establishment of institutions,
which could provide medium to long-term finance to industry.
The first development bank, set u p in India in 1948, was the
Industrial Finance Corporation of India. Its objective was
"to make medium and. long-term credit inore readily available
to industrial concerns in India, particularly in circumstances
where norm4 banking accomniodation whs inappropriate or
recourse to capital issue method was impracticable."
Development Banking differs from commercial banking in All India Financial
Institutions
several ways. Commercial Banking is primarily concerned
with short-term lending for financing working capital
requirements of a concern. Development banking, on the
other hand, is concerned with lending funds for medium to
long-term for financing the investments in fixed assets of
the company. ~ o m m e r ~ ibanking
al is security-oriented, while
development banking is project-oriented. Development banks
also finance large-scale projects jointly with commercial
banks. Developments Banks have recently been permitted
to grant short-term working capital finance to the corporates.
They .have entered into various other types of financial
activities and have undertaken various financial services a s
well.

Having- discussed the important features of development

banks, let u s explain in brief the functioning of important '
development banks in 1ndia.

1 1.3 INDUSTRIAL DEVELOPMENT BANK OF

INDIA (IDBI)
Industrial Development *Bank of India is one of the four All
India Development Banks in India. In addition, it is the
apex banking institution in the field of long-term industrial
finance and thus, it functions as the principal financial
institution for co~ordinatingthe functions and the activities
of other All India Financial Institutions.

IDBI was established in 1964 as a wholly owned subsidiary

of the Resene Bank of India (RBI). In February 1976, it was
de-linked from the RBI and its entire share capital was
transferred to the Central Government. In March, 1994, ,thk
IDBI Act was amended to empower IDBI to issue its equity
capital to the public provided that holding of the Central
Government does not fall below 51%.. Subsequently, IDBI 4 I

made its first public issue of equity in July 1995, which was
the largest equity offering in the Indian stock market till
then. The majority of its shares are still held by the Central
Government, though the percentage holding of Government
has declined to 72.14%.

A s an apex ,developmental financial institution, IDBI provides

both direct as well as indirect assistance to large and medium
scale enterprises. Direct assistance by IDBI constitutes a
major part of Bank's total assistance. Direct assistance is
provided by way of Project Finance, underwriting and direct
subscription to shares and debentures, guarantees for
deferred Payments and Equipment Finance Schemes. IDBI
provides indirect assistance through refinance of Term Loans
and ~e-discountingof Bills.

Besides the Equity Capital of Rs. 659 crores as on March 7

Financial and Investment 3 1 , 1997, IDBI relies heavily on borrowings for its
Institutions in India
requirements of funds. Earlier, it used to borrow lunds
through Government guaranteed bonds, but of late, it has
resorted to borrowings by way of unsecured bonds through
public issues or private placement. IDBI has r a i s d r-csoul-ces
through issue of Certificates of Deposits a s well. IDBI has
been borrowing in the International Capital Markets to meet
its requirement of foreign currency funds for the Indiarl
industry. It has obtained lines of credit from multi-national
agencies like Asian Development Bank, IBRD, Exim 13ank of
J a p a n besides lines of credit from Gcrman and I;I-cnch
financial institutions. IDBI has also negotiated lol~nstl-lrough
floating rate notes in the international capital rnarltet at
competitive rate of interests.

1 1.4 INDUSTRIAL FINANCE CORPORATION

OF INDIA LIMITED
Industrial Finance Corporation o f India (IFCI) was thc first
development bank establislied in India in the year 1948. It
was established a s a statutory corporation undcr the IFCI
Act, 1948 with the objective of making mcdiuill and long-
term funds more readily available to ii~dustrialcoi~cernsin
India. IFCI was converted into public lirnited coinpuny on
July 1, 1993 and is now known a s the Ii~dustr-in1T"lnance
Corporation of India Ltd. Every shareholder" of IFCI bccame
. the shareholder of the company with effect from thc date.
The necessity for IFCI's conversion into a limited company
was felt to ensure greater flexibility and ability of IFCI to
respond to the needs of the changing financial system. After
its conversion into a public limited company, IFCI now has
the flexibility to reshape its business strategies with greater
operational autonomy and in providing quality services to
customers and tapping the capital markets. Under the IFCI
Act, 1948, IFCI was prohibited to enter into the capital
market except when baclted by a Government guarantee
and was thus prevented from raising resources on competitive
basis. A s a joint stock company IFCI is now able to enter
the capital market for resources, through debt and equity
instruments. After becoming a company, IFCI made a public
issue of equity shares aggregating R s . 525 crore during the -
year 1993-94.

1 1.5 INDUSTRIAL CREDIT AND INVEST-

MENT CORPOFWTION OF INDIA
LIMITED
Industrial Credit a n d Investment Corporation o f India Ltd.
(ICICI) was the first development bank set-up a s a joint
stock company in India in 1955. Though Industrial Finance
Corporation of India had already come into existence a t that
 tirne, necessity to establish another institution in the private All India Financial
Institutions
sector was felt primarily to channelise the World Bank funds
to the Indian industry and also to build u p a capital market
in India. Initially, its entire share capital was held by
commercial banks and insurance companies and other
financial institutions, but with the nationalisation of banks,
major portion of its share capital was later held by these
, nationalised institutions. After the public cum-rights issue
o f equity capital by ICICI in 1991, the n u m b e r of
shareholders of the corporation increased considerably. A s
on arch 31, 2001, its major shareholders were the Unit
Trust of India (6.63%), Insurance Companies (23.47%), FI1s ,

and NRIs (15.1I%), Corporate Bodies (7.53%), Banks and

Financial Institutions (3.1 I%), Individuals (10.21%). 32.65%
of the shares were held by Deutsch Bank as depository for
ADRs holders.

The core business activity of the ICICI has traditionally

been the business of providing project finance. But over the
years, it has undertaken many non-projects based activities
l
and has diversified into new but allied activities through the
establishment of its subsidiaries. For (example, during recent
! years, ICICI has considerably increased the share of corporate
lending from 9.1% in 1997 to 39.8% in 200 1. Retail banking,
i.e. lending for automobiles, h'omes, etc. now accounts for)
about 3% of its total loan portfolio. In project financing also,
the share of infrastructure project finance has increased a t
the cost of manufacturing sector project finance, which has
.declined from 73% in 1997 to 35% in 2001.

Though ICICI had entered into varied and diversified financial

services through its subsidiaries, a significant step was taken
I by merging itself with its subsidiary ICICI Bank Ltd. The
I merger became effective from March 30, 2002. Along with
I
ICICI Ltd., two of its subsidiaries-ICICI Personal Finance
I Services and ICICI Capital were also merged with the Bank.

I; Thus, ICICI Bank Ltd. has become the largest bank in the
private sector with a balance sheet size of Rs. 104, 000 crore
and capital adequacy of 11.44%.

1
I
I
Obviously, the apparent reason for the merger was to emerge
a s a Universal Bank, i.e. a bank which undertykes all types
of banking and financial businesses. Probably, ICICI Ltd.
realised that the days of specialisation into a specific line
of activity (i.e. project finance) were over, as project financing
ensures reward over a longer period of time, while commercial
banking earns quick return and without much risk. The
I ICICI Bank Ltd., after merger will have to meet "B.,?
I
requirements of Cash Reserve Ratio, Statutory Liquidity Ratio
and priority sector lending on the entire liabilities of the
merged entity.
 -
Financial and Investment Check Your Progress 1
lnstitutiesas in India
" , I) Distinguish between Commercial Banking and Development
Banking. Who regulates and supervises the development
banks?

...........................................................................................
2 ) What are the main functions of a Development Bank?

3) What were the reaspns for the merger of ICICI Ltd. with
ICICI Bank Ltd?

>

1 1.6 INDUSTRIAL INVESTMENT BANK OF

INDIA LIMITED
-
r

Industrial Investment Bank of India (IIBI) was originally set-

u p as Industrial Reconstruction Bank of India under the
Industrial Reconstruction Bank of India Act, 1084, as a
principal--credit and reconstruction agency for industrial
revival by undertaking madernisation, expansion, re-
organization, diversification or rationalisation of industry.
However, with the establishment .of the Board for Industrial
and Financial Reconstruction (BIFR), the role of IRBI as a
principal agency for i n d u s t r i a l reconstruction was
marginalised. Hence, it was considered prudent to convert
IRBI into a full-fledged all-purpose developmental financial
institution. IRBI was converted into a Government company
under the Companies Act, 1956 and w a s re-named as
Industrial Investment Bank of India (IIBI). This restructuring
aims a t providing adequqte operational flexibility and
functional autonomy to metit the challenges of the changing
environment.
,
IIBI undertakes all the functions of a develobment bank.
These functions include providing long/inedium-term loan/
assistance to medium and large industrial units, and
providing under-writing support to, issuing of shares and
bonds.
 All India Financial
1 1.7 SMALL INDUSTRIES DEVELOPMENT Institutions

BANK OF INDIA (SIDBI]

Since its inception, the Industrial Development Bank s f
India functioned as the apex bank in the field of financing
all industries including the small-scale industries. But when
financing activities of small-scale industries grew significantly,
need for a separate apex bank for small-scale industry was
felt. The outcome was the establishment of Small Industries
Development Bank of India (SIDBI),which took over IDBI's
financing activities relating to small-scale industries.

SIDBI is the principal institution in the country for

promotion, financing and development of industries in the
tiny and small-scale sectors. It co-ordinates the functions of
other institutions engaged in similar activities. SIDBI
undertakes both financing activities a s well a s promotional
activities and provides support services.

SIDBIs financing activities are broadly classified into two

categories:

A) Direct Assistance, and

B) Indirect Assistance.

A) Direct Assistance : Direct assistance to small industries is

provided in the following ways : ,

a) Project Financing : Project finance is provided for setting

u p of new units and for expansion/diversification/
modernisation/ technology up-gradation of existing
units.
b) Equipment Finance Scheme : Under this scheme,
assistance is provided for expansion and modernisation
of existing units.
c) Technology Development and Modernisation Fund
Scheme : Technology Development and Modernisation
Fund Scheme is a new scheme of SIDBI under which
assistance is granted to units belonging to engineering,
garments, electrical and electronics, crockery, pottery,
etc.
d) Bill Financing Scheme : Bill finance accounts for
the largest amount of direct assistance granted by
SIDBI. Bills discounted fall in two categories:

e Direct discounting of usance bills arising out of sale of

equipments by manufacturers of machinerylcapi tr; i
goods in the small sector. This enables them to offer
deferrdd payment facilities to their prospective
purchasers/ users, and
 Financial and Investment • Direct discounting of short-term bills arising from
Institutions in India
s a l e of p a r t s , c o m p o n e n t s , s u b - a s s e m b l i e s ,
. accessories a n d intermediate manufactured by
small-scale units and supplied to medium and large
indust-ries on credit. The aim of this scheme is to
improve the liquidity and cash flow of small units
a s they receive prompt.payment in respect of their
supplies made to medium and large companies.
e) Equity Assistance Scheme : SIDBI provides equity
assistance' to different types of companies. It provides
lines of credit to merchant bankers to put through bought
I out deals in respect of thejr small industrial unit clients.
Assistqnce is provided to s h a l l units under National
Equity Fund Scheme. Seed Capital is also provided under
Mahila Udyam Nidhi Scheme and Scheme for Employ-
ment of EX-Servicemen.Under the National Equity Fund
a s s i s t a n c e of Rs. 6.8 crore was provided to 730
entrepreneurs during 1995-96 as compared to Rs. 3.1
crore to 536 entrepreneurs during 1994-95.
f ) V e n t u r e Capital A s s i s t a n c e : SlDBI also grants
assistance from the Venture Capital ' ~ u n d SlDBl
. also
subscribeq to the funds of other Venture Capital
Companies. The projects for whtch venture ca pita1
assistance is provided by SIDBI are in the high risks,
specialised and import substi tutive areas. Mosl: of these
projects propose t o u s e indigenously developed
technology and are promoted by experienckd technical
entrepreneurs.
B) Iladirect Assistance : SIDBI grants indirect assistance to
.-. industries through i

a) Refinance of term loans granted by Banks, State Finance

Corporations (SFCs) and State Industrial Development
3
Corporations (SIDCs), and
I
b) By Rediscounting of bills of small-scale inclustries.

11.8 NATIONAL BANK FOR AGFZICULTURE

C
AND RURAL DEVELOPMENT.(NABARD) 1
I

National Bank for Agriculture a n d ~ u r a lDevelopment

t
1
(NABARD) is the apex financial institution, in the area of
agricult'iural finance and rural development. It was set u p in
-, July 1982 by. merging the ~ ~ r i c u l t u rCredit
e Department
and Rural Planning and Credit cell of the Reserve Bank of
India and the entire undertaking of Agriculture Refinance
, and Development Corporation. I

\
NlABARD undertakes the following functions: i
i) Credit to Farm Sector: NABARD provides financial
- - I
12 i -
 assistance to the farm sector by way of refinance for various All I a d h PImanclal
In8titqtionr
agriculture and allied activities, like minor irrigation,
plantation and horticulture, land development, farm
mechanisation, an'd animal husbandry. The refinance is
provided to'commercial banks, State Co-operative Banks, '

Regional Rural Banks and,State Land Development Banks.

Besides providing refinance, NABARD also provides short-
term loans 'to State Co-operatiye Banks and Regional Rural
Banks for financing seasonal agricultural operation,
marketing of crops, purchase of agricultural inputs.
Developmental Activities: NABARD undertikes various
developmental activities such as formulation of credit plans,
building of institutions, promotion of Research and
Technology. It also co-ordinates rural credit agencies and
develops expertise to dealdwith agriculture and rural
problems.
iii) Regulatory Function: The BankGg keg-ulation Act, 1949
has empowered NABARD to inspect the working of the
Regional Rural Banks a n d Co-operative Banks. I t s
recommendation is required for opening of a new branch
before the RBI gives its permission to do so.

NATIONAL HOUSING BANK (NHBI

National Housing Bank (NHB) was set u p in July 1988
under the National Housing Bank Act, 1987 as the apex
bank in the field of housing finance. It is a wholly owned
subsidiary of the Reserve Bank of Indig. It is ,the principal
agency to promote housing finance 'institutions a t the
regional and local levels and to provide financial and other i

support to such institutions.

NHB has a n equity capital of Rs. 300 crores, which is
contributed by Reserve Bank of India. NHB also raises
'resources through a variety of debt instruments such as
bonds, debentures and borrowings. Its bonds which are
guranteed by the Government of India, are eligible securities
for ~01111~.-.~1:2i banks fbr compiling with the staturory
liquidity requirement u n d e r Banking Regulation Act.
Moreover, i t receives external assistance also from the
international agencies such as USAID, OECF Japan. It
accepts deposits through Home Loan Accounts maintained
by commercial banks.

National ~ o u s i n ~ ' ~ k
provides
nk re-finance to the Housing
Finance Companies, which are spread all over the country
and account for the major share, followed by commercial
banks and co-operative banks and Land Development Banks.
The eligibility criteria for obtaining refinance from NHB are
as follows :
 1
Financial and Investment i) The housing finance company must have minimum share
Institutions in India
capital of Rs. 3 crore and the promoters' contribution of at
least 25% of the total capital. i
1
ii) It must be registered a s a public limited company. Long-
term finance for construction/purchase of houses for
residentiai purposes must account for at least 75%of loans.

iii) It should not be a subsidiary of any construction company.

I
1
Top management of Housing Finance Company should not I
hold similar office in Construction Company of the
promoters.

National Housing Bank provides refinance to housing finance

companies a t varying rates depending on the size of the
loans. The performance of NHB in terms of refinance provided
by it to the Housing finance companies is given below :

Table 11.1 : Refinance provided by National Housing Bank

Source: Annual Report-National Housing Bank

NA = Not available .
Thus, though the loans disbursed by Ilousing Finance
- Companies have increased by more than 5 limes during the
sixiyear period but refinance by NHB constitutes just 7% of
the loans disbursecl. Almost 90% of the housing loans given
by the Housing Finance Companies are out of their own
resources.

11.10 EXPORT-IMPORT BANK OF INDLA

(EXIM BANK]
Export-Import Bank of India (EXIM Bank) was s c t u p in
1982 far the purpose of Iinancing, facilitating and promoting
the foreign trade 01 India. EXIM Bank is wholly owned by
 the Government of India. It is the apex financial institution ~ 1 India
1 Financial
Institutions
in the country for co-ordinating the working of institutions
engaged in financing exports and imports. Besides export
finance, it also renders various advisory services to exporters
and other entities connected with foreign trade.

EXIM Bank has a paid u p capital of Rs. 500 crores, which

has been contributed by the Government of India. Besides
the equity capital, the Bank raises its resources from domestic
and international markets, which.. constitute a significant
sour& of funds. Within the country, its diversified resources
base included bonds, fixed deposits, certificates of deposits,
borrowings by way of term money. Banks, debt instruments
have received ' A M ' ratings from CRISlL and ICRA. Exim
- Bank has raised foreign currency loans by way of pedium-
. term syndicated loans from international banks. International
Finance Corporation has granted it a Line of Credit. Similarly
other overseas banks and institutions have sanctioned Import
Lines of Credit under which foreign currency has been
drawn by Exim Bank.

Exina Bank undertakes a variety of lending and service

programmes, which are meant for Indian entities, Commercial
~ a ; l k sand Overseas entities. Exim Bank operates a wide
variety of schemes for the benefit of Indian exporters. Some
of these are a s follows :

i) Export (Supplier's)Credit : Such credit is granted to Indian

exporters to enable them to extend term credit to overseas
importers of eligible Indian goods.

ii) Finance for Consultancy and Technology Serviaes : Such

credit is granted to'Indian exporters of consultancy and
technology services to enable them to extend term credit to
overseas importers.

iii) Pre-shipment Credit : Such credit is granted to Indian

exporters to enable them to buy raw materials and other
inputs for export contracts extending over a period of six
moc+hs.

iv) Foreign Currency Pre-shipment Credit : This is granted

to eligible exporters to enable them to access finance for
import of raw materials and other inputs needed for export
productiop.

v) Finance for Export Oriented Units and Units in Export

Processing Zones : This credit is granted to Indian
Companies to acquire indigenous and imported machinery
and other assets for export production.

vi) Foreign Currency Lines of Credit for Imports : Under this

scheme, eligible export oriented units get foreign currency
loans to acquire imported machinery for export production. 15
Financial and Investment vii) Overseas Investment Finance : Such finance is provided
Institutions in India
to Indian promoters of joint ventures or subsidiaiy set up
abroad. It enables them to finance equity contribution in
such ventures. Exim Bank is one of the agencies to carry
out technical appraisal to establish viability of overseas
projects for approval by Govt./ RBI.

viii) Export Marketing Finance : Such finance is provided to

exporters to implement market development programmes
and finance productive capabilities through loail financing.
Companies can upgrade their production facilitieu and
implement their strategic export market development plants
to penetrate and sustain their presence in industrialiscd
country markets.

ix] Production Equipment Finance : Under this scheme

eligible export-oriented units are granted loans to acquire
equipment.

x) Programme for Financing Product/ Process Quality

Certiflcrrtion : Under this programme, 50% of the. eligible
expenditure incurred by corporates to obtain product/
process quality certification is reimbursed.

xi) Export Vendor Development Finance : This facility

enables the vendors of export-oriented units to acquire
plant and machinery and other assets for increasing
export capability.

xii) Export Product Development Finance : This scheme is

meant to enable Indian firms to undertake product
"
development, Research and Development for exports.

minr Bank provides finance/refinance to commercial banks

in Indialabroad to enable them to provide finance to lndian
exporters/importers from India. These progran~mesare as
-
,rdllows :

i) Refinance for Export (Suppliers) Credit : Under this

programme credit is granted by Exim Bank to banks in
India to enableQ-ihernto offer credit to Indian exporters of
eligible goods who offer term credit over 180 clays to their
importers overseas.

ii) Small Scale Industries Export Bills Re-discounting : Under

this scheme, banks can rediscount with Exim Bank exporl:
bills of their Small Scale Industries customers. The usancc;
of the bills should not exceed 90 days.

iii) Re-financeof Term Loans to Expo&Oriented Units : Under

this scheme, Exim Bank provides reiii~anceto banks that
offer credit to eligible export oriented units to acquirle
indigenous and imported machinery and other assets for
export production.
iv) Bulk Import Finance : This scheme is meant to enable All Irrdia Financial
Institutions
banks to offer finance to importers for bulk import of
consumable inputs.

v) Guarantee-cum-Refinance Suppliers Credit : This

scheme is meant to protect the cash flow of the banks
and their exporter clients if the overseas buyer defaults.
It protects the Bank by not treating the advances a s
non-performing asset for making provisions.

vij Programme for Confirmation of Letters of Credit : Under

this programme the ability of comnlercial banks in lndia
is enhanced to open Letters of Credit on behalf of their
importer customers for importing raw materials a n d other
items.

vii) Re-Lending Facility : This facility is granted to the

overseas banks. Under this facility, these banks are
granted credit by Exim Bank to en:tble them to grant
term finance to their clients for import of eligible Indian
goods.

Exim Bank also operates schemes for the benefit of Overseas

Entities (Importers/Institutional agencies in the Iinporters
country), which are as follows :

i) Lines of Credit : Lines of credit are granted to financial

irlstitutions abroad, foreign governments, their agencies to
enable them to grant term loans to finance iinport of eligible
goods from India.

ii) Buyers' Credit : This scheme enables foreign buyers to

irnport eligible goods from India on deferred credit terms.

A s a complement to its financing programmes, Exim Bank

offers a wide range of information, advisory and support
services to Indian companies and foreign entities, which are
a s follows :

a) Market related information, assistance in evolving marltetiilg

strategies, undertaking sector and feasibility studies, and
identification of technology supplies, partner search,
investment facilitation and development of joint venture in
India and abroad.

I) Advisory services, which enable exporters to evaluate

international risks, assets and parlicipate in trade and
investment opportunities.

Check Your Progress 2

) Explain the Equity Assistance Scherrles and Venture Capital

Assistance Scheme of the Small Industries Development
Bank of India.
~ i a a i i c i a lant1 Investment ...........................................................................................
Institutions in India
...........................................................................................
2) Explain functions of NABARD.

...........................................................................................

3) what is re-lending lacility?

4) State whether following statements are true or false:

i) National Mousing Bank provides refinance t o the Housing
Finance Cornparlies a t v a ~ y i n grates. F / F)
ii) NABAIID is the Apex Financial 1nstitul-iol.li r i the area of
agriculture, finance a n d rural developmen 1. (TIF)
iii) IRBI does not perform all functions o l a development
bank. (T/ F)

1 1.1 1 REGULATION OVER FINANCIAL

INSTITUTIONS
The Developmerlt Financial I n s t i t u t i o n s corlstitutc a n
important segment of the Indian Financial System. Thcy
provide long-term funds for the development o l irlduslries,
infrastructure projects a n d other major activi~ic:~ alid thus,
help in the growth o l the econonly. They a r c basic;llly
governed by their own s t a t u e s a n d cllarters---Industrial
Developmeilt Bank of lndia by the provisions o f 111RI A c t ,
1964; a n d the Industrial Finance Corporation o l India Ltd.,
the Industrial Credit and Investment Corporatio~lLtd. (ICICI)
and the Industrial Investment Bank of India (IIUI) by thcir
respective Memorandum of Association arid Articlcs of
Association, besides the Companies Act, 19St,. Moreover,
t h e s e financial irlstitutioi~s a r e also colltrolled by the
regulations made by both t h e regulators of the lndian
Financial System, namely the Reserve Bank of India (RBI)
a n d the Securities and Exchange Doard of l r l t l i i l (SEU1).

Section 4 5 L of the Reserve Bank of India A c t , 1934, cxtcllds

the supervisory authority of the Hescrvc B a n k over the
financial institutions. This section empowers the: Reserve
Rank of India to :

i) require the financial institutions to furnish to the Bunk

 information and particulars relating to their business, and AII India Financial
Institutions

ii) give these institutions directions relating to the conduct of

their business as financial institutions.

Vested with the aforesaid powers, Reserve Bank of India has

exercised coiltrol over the financial institutions through
directives or otherwise, as outlined below :

i) Raising of Resources

111 the matter of raising of resources, financial iilstitutions

have to comply with the dirqction of the Reserve Bank 01
India, and the Securities and Exchange Board of India (SEBI).
Till 1991, these institutions had access to cheap sources of
funds-IDBI, along with Export-Import Bank of India and
Illdustrial investment Bank of India (IIBI) used to receive
loans and advances out of the National Industrial Credit
(Long Term Operations) Fund of the Reserve Bank of India.
The bonds issued by them carried Government guarantee,
making them eligible for being subscribed to by comrnercicll
banks to meet their statutory liquidity requirement. Both of
these sources of raising finance a t cheaper cost have been
withdrawn since 199 1. They are now allowed to raise resource
from the capital market through bonds on market-determined
terins and conditions without the patronage of government
guarantee.

For raising the funds in the capital market through bonds,

the financial institutions are required to seek the approval
of the Reserve Bank of India. I n addition, they have to
comply with "Guidelines to Development Financial Institutions
for Disclosure and Investor Protections" issued by SEE31 in
September 1992.

In May 1997, Reserve Bank of India replaced instrument-

wise limits fixed for each financial institution with a n
umbl-ella limit (i.e. overall limit) for mobilisation of resource
by way of term money borrowings, c~rtificatesof deposits,
fixed deposits, Commercial Paper a n d inter-corporate
deposits. The overall ceiling for the umbrella liinit h a s been
Sixed'at 100% of the net owned funds for each financial
institution. Financial institutions are also permilted to accept
fixed' deposits for 1 to 5 years and issue certificates of
deposits for a minimum amount of Rs. 10 lakhs, Rating for
the term deposits accepted by financial institutions h a s
bee11 made mandatory effective from November lSt,2000.

During 1997-78, Reserve Bank of India permitted these

institutions lo issue bonds with maturity of 5 years and
above without its prior zpproval, but with simple registration
with the Reserve Bank, provided the bonds are without
options, etc., and carry interest rate not more t.han 200
basis points (one hundread basic points equal one percent)
Financial and Investment above the yield on Government of India securities of equal
Illstitutions in India
residual maturity a t the time of their issue. All other bond
issues are required to be referred to the Reserve Bank for
approval. In April 2000, Reserve Bank of India has decided
to provide more freedom and flexibility to financial institutions
in raising resources through bonds subject to overall limits
fixed in terms of net owned funds. At present their total
borrowings can be within the ceiling of 10 times of their net
owned funds.

A copy of the offer document is to be submitted to SEBI.

Lead Manager h a s to certify t h a t this document is in
conformity with the SEBI Guidelines.

ii) Exposure Norms

To minimise the llsks in term lending, Reserve Bank of

India has prescribed the exposure limits for tcrm lending
institutions (i.e. IDBI, ICICI, IIBI, Exim Bank arid TIXI) and
the refinancing institutions (i.e. SIDBI, NHB, and NABARD).
Exposure ceiling has been linked to the institution's capital
funds. Earlier it was not to exceed 25% of the paid u p
capital and free reserves in case of individual borrowers and
50% in case of group borrowers. Exposure i~lcludesfunded
a n d non-funded credit limits, underwriting a n d other
commitments. Witli effect from September 1997, the group
exposure limit was raised to 60% provided that the additional
exposure related to infrastructure projects anly. Moreover,
exposure to any single industry h a s been prescribed a t 15%
of institution's loan portfolio. These exposure limits are
applicable to Infrastructure Development Finance Company
(IDFC) also. With effect form arch 2002, thc maximum
exposure has been reduced to 1S0/o for individual borrowers,
40% for group borrowers and additional 10% l'or financing
infrastructure projects.

iii) Lending Operations

Though, the financial institutions enjoy autonomy as regards

their lending operatioi~s,the Reserve Bank of India has
intervened in the matter on a few occasions. I t imposed a
ban on financial institution on granting bridge loans against
expected equity flows/issues, which was subsecluently lifted
on 23rd January, 1998. Recently, the developmcrl t finiincial
institutions have been permitted by the Reserve Bank of
India to grant short-term loans to the corporates for working
capital purposes. Reserve Bank of India has also permitted
these institutions to fix their prime lending ratcs separately
for short-term loans.

iv) Pkbdential and Capital Adequacy Guidelines

In March 1994, Reserve Bank of India prescribed prudential
guidelines regarding capital adequacy, incomc I-ecognitiori,
asset classification and provisioning for t h e term lending
institutions. Subsequently these guidelines were extended
to SIDBI, NABARD and National Housing Bank also. These
guidelines are similar to those issued to the commercial
banks, except for minor changes.

a) Capital Adequacy Norm

All India Financial Institutions were required to achieve

capital adequacy norm of 8% by March 31, 1996. Capital
adequacy norm has been expressed a s a percentage of risk
weighted assets. In December 1998, the minimum Capital
Adequacy Norm for financial institutions, was enhanced to
9% to be effective from March 31, 2000. All the financial
institutions except IFCI Ltd., have achieved this norm a t the
end of March, 2001. Capital funds are divided into two
categories i.e. tier I and tier I1 capital on the pattern of
norms for commercial banks.

b) Income Recognition

Financial institutions are allowed to treat an asset a s non-

performing asset (NPA) if interestlprincipal is overdue for
more than 180 days with effect from March 31, 2002. In
respect of NPAs the financial institutions should not take
interest income, fees or any other charge, unless actually
received.

c) Asset Classification and Provisioning

The basis of assets classification and provisioning for financial

institutions is almost on the same lines, a s prescribed for
commercial banks.

1 1 12 PERFORMANCE OF MAJOR
FINANCIAL INSTITUTIONS
The following table shows the disbursements by the three
All-India Financial Institutions during recent years. ICICI's
share has increased while those of other two institutions
declined.

Table 11.2 :Disbursements of Major Financial Institutions

1998-99 1999-2000 2000-01

Institution Amount % age Amount % age Amount % age
(RE. in crore) Share (RS. in crore) $hare (RS. in crore) Share

(A) IDBI 14,470 37.6 17,059 37 17,498 33.9

ICICI 19,225 49.9 25,836 55.9 31,965 62
IFCI 4,819 12.5 3,272 7.1 2,121 4.1
Total 38,514 100 46,167 100 S1,5Q4 100
, I
Financial and Investment
Institutions in India *

Source : Report on Trends & Progress of Banking in India, 2000-01

(Page 113).

It is evident from the table that the three All-India Financial

Institutions account for 71% of the total disbursement of
~11-1ndiaFinancial Institutions. Even amongst them the share
of ICICI Ltd. is predominant and has consistent.ly increased
;over the last years.

Table 11.3 : Resources Raised by Major Financial Institutions

Total ICICI IDBI IFCI

1999- 2000 1999- 2000 1999- 2000 1999-2000
2000 2001 2000 2001 2000 2001 2000 2001
Public 4648 4062 2575 2901 2074 1161
Issue (28.5) (21.5) (37.6) (27.2) (27.0) (21.2)
of bonds
Private 11663 14806 4274 7777 5603 4320 1787 2709
Placement (71.5) (78.5) (62.4) (72.8) (73.0) (78.8) (100) (100)
of Bonds
Total 16311,18867 6849 10678 7676 5481 1787 2709

Source : Report on Trend and Progress of Banking in India, 2000-01

I (Page 1 17).

The above table shows that the financial institutions have

largely relied on private placement of their bond of
debentures and public issues have contributed to a small
percentage. IFCI could not make any public issue of its
debentures/ bonds because of its unsat.isfactory financial
position.

The three major financial institutions have prescribed their

prime ending Rates as follows (as on July, 2001):

Table 11.4 :Structure of Lending Rate8 of Major Financial Institutions

IDBI ICICI IFCI

Lang-Term Prime Lending Rate 13.5 12.5 13.0
(for term loans exceeding 3 years)
Medium-Term Prime Lending Rate 12.5 12.5 '
-
(loans for 1 year-3 years) ,
-

Short-Term Prime Lending Rate . 12.0 12.5 12.5

(bdow 1 year)
Source: Report on Trend and Progress of Banking in India, 2000-01
(Page 117).
 All India Financial
1 1.13 NON-PERFORMING ASSETS Institutions

The ratio of net Non-performing Assets (NPA) to net loans

as on March 31, 2001 was below 10% in respect of ICICI,
SIDBI and Exim Bank. But for IDBI, IFCI and IIBI this ratio
was as high as 14.8%, 20.8% and 22.9% respectively. These
three institutions are thus, suffering from low quality of
their loan portfolios, which affect their profitability and
solvancy .

Check Your Progress 3

1) Which changes have been made by Reserve Bank of 1ndia

over raising of resources by Development Financial
Institutions?

2 ) What do you understand by Exposure Norms? Give details

of such norms prescribed forAll-India Financial Institutions.

3 ) Fill in the blanks:

a) Capital Adequacy ~ o r m is
s expressed as a percentage of
............................
b) An Asset of a financial institution becomes non-
performing if it remains overdue for ...........................
c) In t h e total d i s b u r s e m e n t bf All-India Financial
Institution, .......................... is pre-dominated

11.14 LET U S SUM UP

A well-integrated structure of financial institutions h a s
evolved over a period of time. All India Financial Institutions
include IDBI, ICICI Ltd., IFCI Ltd., IIBI Ltd., NABARD, NHB,
EXIM F3ank, TFCI, SIDBI and IDFC. Unlike Comrrierciril banks,
development banks (IDBI, IFCI, IIBI, SIDBI, and ICICI) deals
with lending funds for' medium to long-term for financing
the investment in fixed assets of the companies.

Industrial Development Bank of India (IDBI) established in

1964 is the apex banking institutioils in the field of long-
term industrial finance. It provides both direct and indirect
assistance to large and medium-scale enterprises. Industrial
Financial and Investment Finance Corporation of India Ltd. established a s a statutory
Institutions in India
corporation under the IFCI Act, 1948 has been converted
into public limited company with effect from July 1, 1993.
It now has greater flexibility for chalking out its strategies
in providing quality services to customers and tapping the
capital markets.

ICICI, the first development bank set-up a s a joint stock

company in India in 1955 h a s been merged with i t s
subsidiaries namely ICICI Bank Ltd., ICICI Personal Finance
Services and ICICI capital. It has become the largest private
sector bank in the country having capital adequacy of 11.4%.

Industrial Investment Bank of India (IIBI) originally set up

a s Industrial Reconstruction Bank of India in 1984, has
been converted into a Government company under the
Companies Act, 1956 a s IIBI. It performs all functions or a
development bank, like term loan assistance to medium and
large industrial units, equipment financing providing
underwriting support to issues of shares and bonds.

Small Industries Development Bank of India is the main

institution in the country iilvolved in the promotion, financing
and development of industries in the tiny and small-scale
sectors.

National Bank for Agricultural a n d Rural Development

(NABARD), established in July, 1982, is a specialised
financial institution. It is the Apex financial institution in
the area of agriculture finance and rural development. It
provides financial assistance to the farm activities and
undertakes various development activities. It also regulates
the Regional Rural Banks 'and Co-operative banks.

National Housing Bank (NMB) set u p in July, 1988, provides

financial and other support to the institutior~sinvolved in
the housing related activities.

Export-Import Bank of India (EXIM) set u p in 1982 facilitates

and promotes the foreign trade of India apart from export
finance who renders various advisory services to exporters
and other entities involved in the foreign trade.

The Development I~illancialInstitutions are basically goveriled

by their own status and charters under which they have
been setup. Moreover, these financial irlstitutions are also
controlled by the regulations of the Reserve Bank of India
(RBI) and Sec'urities and Exchange Board of India l(SEB1).
For raising resources, they are required to take permission
from the Reserve Bank or India.

In the performance of inajor financial instilut ions, I CtCI's

share has predominated during the recent. years a n d its
share has consistently increased over t.he last three years.
IDBI, IFCI and IIBI have been suffering froh low quality of AII India Financial
Institutio~~s
their loan-portfolio.

KEY WORDS
Bridge Loans : These are short-term loans which are
granted to the borrowers of term
, loans by a bank or financial institu-
tions to enable them to meet their
immediate needs for funds. These
loans are adjusted/repaid when the
t e r m loan i s d i s b u r s e d by t h e
financial institutions.

Equity Assistance : Assistance, which is provided in the

Scheme forin of subscribing to the equity
shares of the company.

Exposure Norms : These norms prescribe the maximum

amount of assistance that a financial
institution is permitted to provide to
a single borrower or a group of
borrowers. These nurms are expre-
ssed as a percentage of the paid-up
capital and reserves of the institu-
tions.

Floating Rate Notes: These are debt instruments on which

variable interest rate is payable. The
rate of interest is linked to a bench-
mark rate of interest and changes
with the change in such bench mark
rate of interest.

Guarantee for : In case of sale of capital goods, the

Deferred Payments seller generally grants credit for
several years i.e. the cost of the
capital goods is recovered in several
instalments. For this purpose they
require a guarantee by a b a n k /
financial institution.

Pre-shipment : The loans which are provided by

Credit Commercial B a n k s to exporters
before the shipment of the goods are
called pre-shipnment credit. These
loans enable the exporters to procur?*
process a n d pack the gsodv irrr
exports.
 Financial and Investme Promoter'e ': The cost of the project is financed
.InstitutiaIns in India from different sources e.g. equity,
Contribution
debt, etc. A part of the cost is
required to be provided by t h e
promoters of the project. It is called
promoter's contribution.

Project Finance : Project finance is the long/ medium-

term loan assistance provided by a
development .bank to the industrial
undertakings for setting up, expan-
'
sion or diversification of an industrial
unit.

Refinance of : Term loans are provided by Commercial

Term Loans . Banks and State Financial Corpora-
tion to industrial concerns. On the
basis of these loans, these institu-
tions can get loans from Industrial
, Development Bank of India or Small
Industries Development Bank o-f
India. Such loans are called Re-
finance of Term Loans.

Venture Capital Capital is that capital which

: ~entuie
is provided by Venture Capital Fund/
Company to a n entrepreneur to
undertake a new non-traditional
venture with high risk and with the
prospects of earning high return.
This is provided in the form of equity
besides 'loans.

11.16 SOME USEFUL BOOKS,

Annual Report of IFCI, IDBI, SIDBI, NABARD, EXIM Bank,
National Housing Bank (latest).

IDBI-Report on Development- Banking (1998-99).

'

Machiraju, H.R. (1998): Indian Financial System, Vikas

Publication, New Delhi.

: RBI-Report on Trend and Progress of Banking in India (2000-

on).-
Sundaram, K.P.M. and Varshney, P.N. (2000): Banking and
Financial System, Sultan Chand and Sons, Delhi
Varshney, P.N. and Mittal, D.K. (2002): Indian Financial
System, Sultan Chand & Sons, ~ e l h ~
 All india Financial
1'1.17 ANSWERS/HINTS TO CHECK YOUR Institutions
PROGRESS
Check Your Progress 1

1) Commercial banking provides security oriented, short-term

lending for meeting working capital requirements, whereas,
development banks provide project oriented, medium and
- -

long-term funds for financing the fixed assets of the

company.

The development banks are supervised and regulated by

the Reserve Bank of India. i

2 ) The main functions of development banks are: '

i) to provide lending funds for medium and long-term for

financing the investments in futed assets, and
ii) to undertake promotional and development activities and
to provide .various other types of financial services.
3) The reason for merger of lCICI Ltd. with ICICI Bank Ltd.
was to realise their will to emerge as a Universal Bank, so
that it can undertake all types of banking and 'financial
business.

Check Your Progress 2

1) Under Equity Assistance Scheme, equity assistance is

- provided to small industrial units, clients and assistance is
released out of National Equity Fund Scheme, Mahila
Udyam Nidhi Scheme and Scheme for Employment of Ex-
Seivicemen.

Venture Capital Assistance is provided out of venture capital

fund to the projects located in high risks, specialised and
import substitutive areas.

2) The functions of NABARD are:

i) providing credit to various form of agricultural activities,

ii) u n d e r t a k i n g various development activities like
formulation of credit plans, building of institutions,
promotion of research and technologies,
iii) regulation of regional-rural banks and co-operative
banks.
3) The credit facility extended to the overseas banks for
enabling them to grant term finance to their clients for
import of eligible Indian goods.

4) (i)True (ii) True (iii) False

Financial and Investment
Institution in India
Check Your gr~gres83 I
1) Development Financial Institutions have been allowed to
raise resources from capital market through bonds.
Instrument-wise limits have been replaced by overall ceiling
for the umbrella limit at 100% of the net owned funds for
each financial institu tion.

2) Exposure norms refer to regulations prescribing credit limits

for term lending institutions and refinancing institutions.
With effect from March, 2002, the maximum exposure has
been reduced to 15%for industrial borrowers, 40% for group
borrowers and additional 10% for infrastructure projects.
1

3) (a) risk weighted assets (b) 3 years (c) ICICI