Govt. Agencies Assisting in
Jacob John Panicker
Types of Institutional Finance
Financial assistance offered to entrepreneurs by the institutional agencies
belongs to the following types.
i. Participation in Equity Capital.
ii. Granting of Terms Loans for the acquisition of fixed assets.
iii. Working capital.
‘Equity Capital’, otherwise known as ‘Base capital’ or ‘Risk Capital” is
formed by the investment of the entrepreneur himself. Since this capital forms
the base amount on which the efficient and initial working of the enterprise
depends, the adequacy of this capital is inevitable to the very existence of
Granting of Terms Loans
Granting of terms loans is aimed at enabling new entrepreneurs to
acquire fixed assets, such as land and building for their enterprises. Usually,
these loans are utilized to purchase plots of land in areas set apart for this
purpose (industrial areas) or plots or sheds in industrial estates.
A number or credit institutions which provide finance to entrepreneurs
for the acquisition of fixed assets and for meeting the working capital
requirements of the existing and newly incorporated enterprises.
• Commercial banks in India, play a vital role in providing institutional finance
to new and existing entrepreneurs for construction of factory buildings and
purchase of machinery and equipment.
• The usual rate of interest varies from 11-16% per annum. Units established
in recognized backward areas enjoy a managerial reduction in the rate of
• The loans are repayable I periodic quarterly or half year installments,
extending from 3-5 years.
The following are some of the major leading commercial banks in
doing entrepreneurial development programs and assistance in India.
1. State bank of India: In 1978, the State Bank of India launched
entrepreneurial development programmes in order to accelerate
development od backward areas by monitoring potential entrepreneurs to
take up new ventures.
1. Initiation phase for creating awareness about entrepreneurial opportunities.
2. Development phase through training programmes in developing motivation and
managerial skills; and
3. Support phase makes counselling, encouragement and infra-structural support
for establishing and running an enterprise.
2. Canara bank 3. Punjab National Bank
Industrial Development Bank of
The IDBI offers concessional terms that cover any or expansion project
proposed to be located in areas which are declared backward by the govt.
The IDBI provides re-financing facilities to medium and small scale industries
through SFCs and Commercial Banks.
The IDBI charges interest rate of 8% (5-Years) on its financial
assistance as against the normal interest rate of 10.5% (3-Years) charged by
other financial institutions.
Functions of IDBI
• The IDBI provides assistance to the small scale sector through its scheme of
refinance and bills rediscounting scheme.
• The financial assistance has been indirect in the form of refinancing of loam
granted by the commercial banks and the State Financial Corporations (SFCs).
• In order to assist the small scale sector. IDBI has set up Small Industries
Development Fund (SIDF) in May. 1986. This fund basically turn at providing a
focal point to co-ordinate financial and non-financial inputs required for growth of
small industries sector.
• In association with Government of India, IDBI has constructed National Equity Fund
(NEF) to provide equity type of support to tiny and small scale units which are
engaged in manufacturing activities. The scheme is administered by IDBI through
• The IDBI has also introduced the Single Window Assistance Scheme for grant of
term loans and working capital assistance to small, tiny and medium scale
The Industrial Finance Corporation
of India (IFCI)
The IFCI was established in 1948 under an Act of Parliament with the
basic object of providing industrial finance (medium and long-term credit) to
industrial concerns especially to small scale industries in India. This institution
was transformed into a corporation from 21st May, 1993 with a view to
provide greater flexibility to respond to the needs of the rapidly changing
financial system of India.
• As against the normal interest rate of 11.25% on rupee loans and 11.5%
on foreign currency loans (with a rebate of 1 % per year for punctual
payments), the IFCI charges a lower interest rate of 9.5% and 10.5% (with
a rebate of 1%) respectively.
• The IFCI allows a grace period of 5 years, as against the normal 3 year
for the first repayment of the principal amount.
Promotional Schemes of IFCI
• Consultancy fees, subsidy schemes for assisting small scale entrepreneurs
in marketing sector,
• Interest subsidy schemes for women entrepreneurs.
• Pollution control in Small and Medium scale Enterprises (SMEs),
• Encouraging the modernization of tiny, small and medium scale! industries.
The Industrial Credit and Investment
Corporation of India (ICICI)
This corporation was established in 1955, as a private sector
Development Bank with the primary objective to provide development finance
to enterprises in the private sector. The main purpose for which financial
assistance s extended by ICICI is the purchase of capital assets such as
land building and machinery. Any company with a limited liability, any sole
proprietary concern, partnership firm or any co-operative society may
approach the corporation for assistance in financing a sound proposal for the
establishment, expansion or modernization of an industrial enterprise. The
ICICI gives special consideration to projects promoted by new entrepreneurs
who desire to setup their ventures in backward areas.
Functions of ICICI
• Financial assistance is extended by way of rupee and foreign currency,
loans, underwriting and direct subscription to shares, debentures and
• Financial facilities such as deferred credit, leasing credit, instalment sale,
asset credit and venture capital are extended by ICICI.
• It also guarantees loans from other private investment sources scale units
are the major beneficiary of the ICICI assistance.
Small Industries Development
Bank of India (SIDBI)
As a harbinger to the setting up of a much needed apex level national
institution in response to the long standing demand from the small scale
sector, a fund known as the “Small Industries Development Fund” was
created by the ‘Industrial Development Bank of India’ in the year 1986,
Backed by a special statute awarded by the Small Industries Development
Bank of India Act of 1989, the SIDBI came into existence in March 1990 with
a capital base of Rs. 450 crore. Making the base of the institution stronger,
the IDBI transferred the fund created by it (Rs. 4,200 crore) to the new born
institution. The availability of experienced man power endowed with
'development tanking skills’ carved out of IDBI’s professional staff and ready
availability of a vast network of institutional infrastructure and enduring
financial linkages with SFCs, Commercial Banks and other leading financial
Institutions, all these contributed well for the growth of this new institution.
Modus Operandi of SIDBI
• Speeding up of the flow of credit to the enterprises in the small scale
sector through direct and indirect financing mechanisms and ensuring the
quick disbursement are the main principles that invigorate the operational
strategy of the SIDBI.
• The new schemes designed and implemented by the bank were mostly
directed at filling the gaps in the existing credit delivery system on target
groups and activities. These schemes are targeted at solving the major
problems faced by the small scale industries, in areas such as marketing,
infra-structural development, delayed realization of bills, obsolescence of
technology, quality improvement, export financing and risk capital assistance.