Industries

1. INDUSTRIAL FINANCING
MUBASHIR M

2. INTRODUCTION
The study of industrial finance is an important aspect of industrial economics.
There are two major dimensions of such study. One is the source of finance and
second is effective utilization. A business firm takes decisions on various issues
of these two dimensions of financing. Such decisions will have widespread
ramifications as the activities of the firm are interrelated and finance is
involved in all of them.
Industrial financing refers to the provisions of Financial resources for the
establishment, expansion, modernization, and operation of industries. It includes
Funding of fixed capital (Land, buildings, machinery) and working capital (raw
materials, wages, operational expenses)

3. NEED FOR INDUSTRIAL FINANCE
A firm whether it is owned by an individual proprietor or shareholders undertakes
business in anticipation of future gain or return from it. For setting up in business
the firm has to make advance expenditures before it receives any return the
machines are to purchased, the factory space is to purchased or leased, raw
materials are to be bought and wages and salaries are to be paid to the
employees for their services. Finance is needed to undertake all such activities in
business. The money which the firm commits on its business is expected to come
back to the firm in the form of return in due course of time.

4. The requirement for finance depends on the type of business or
production and the kind of payment for which it is to be used. Large
scale production with capital intensive technology will require huge
amount of money for initial investment and for operating expenses.
Small scale production with relatively labor intensive technology on
the other hand may need less amount of money to start the business
and to operate it. In some business it takes considerable long time to
set the plant and make it operative. In business terminology such
length of time is called gestation period. Longer the gestation period
more will the requirement of finance

5. TYPES AND SOURCES OF INDUSTRIAL FINANCE
Depending upon the type of activity,
the entrepreneur requires the
following
types of finances:

6. SHORT TERM FINANCES
Short term finance usually refers to funds required for the period of less than a
year. These funds are usually required to meet variable, seasonal or temporary
working capital requirements. Borrowing from banks is the very important source
of short term finance. Other important sources of short term finance are trade
credit, installment credit and customer advances. The raw materials must be
purchased at regular intervals, workers must be paid wages regularly, water and
power charges have to be paid regularly. Thus there is a continuous necessity of
liquid cash to be available for meeting these expenses. For financing such
requirements short-term funds are needed.

7. SHORT TERM FINANCE SOURCES
• Trade credit refers to credit granted to manufactures and traders by the
suppliers of raw material, finished goods, components, etc. Usually business
enterprises buy supplies on a 30 to90 days credit. This means that the goods are
delivered but payments are not made until the expiry of period of credit. This
type of credit does not make the funds available in cash but it facilitates
purchases without making immediate payment

8. SHORT TERM FINANCE SOURCES
• Commercial banks grant short-term finance to business firms which are known
as bank credit. When bank credit is granted, the borrower gets a right to draw
the amount of credit at one time or in installments as and when needed. Bank
credit may be granted by loans, cash credit, overdraft and discounted bills
• Installment credit is now-a-days a popular source of finance for consumer
goods like television, refrigerators as well as for industrial goods. Only a small
amount of money is paid at the time of delivery of such articles. The balance
is paid in a number of installmen

9. SHORT TERM FINANCE SOURCES
• Loans from co-operative banks Co-operative banks are a good
source to procure short-term finance. Such banks have been
established at local, district and state levels.

10. LONG TERM FINANCE
The period exceeding 5 years is regarded as long term. It is required
for purchasing fixed assets like land and building, machinery etc.
Even a portion of working capital, which is required to meet day to
day expenses, is of a permanent nature. To finance it we require
long term capital. The amount of long term capital depends upon
the scale of business and nature of business

11. SOURCES OF LONG TERM FINANCES
• Shares: Issue of shares is the main source of long term finance. Shares are issued by
joint stock companies to the public. A company divides its capital into units of a
definite face value, say of Rs. 10 each or Rs. 100 each. Each unit is called a share. A
person holding shares is called a shareholder.
• Debentures: Whenever a company wants to borrow a large amount of fund for a long
but fixed period, it can borrow from the general public by issuing loan certificates
called debentures. A debenture is issued under the common seal of the company.

12. SOURCES OF LONG TERM FINANCE
• Retained earnings: Like an individual, companies also set aside a part of their profits to meet future
requirements of capital. The portion of the profits which is not distributed among the shareholders
but is retained and is used in business is called retained earnings or ploughing back of profits.
• Public deposits: It is a very old source of finance in India. When modern banks were not there, people
used to deposit their savings with business concerns of good repute. Even today it is a very popular
and convenient method of raising medium term finance. The period for which business undertakings
accept public deposits ranges between six months to three years. An undertaking which wants to raise
funds through public deposits advertises in the newspapers.

13. SOURCES OF LONG TERM FINANCE
• Traditionally, commercial banks in India do not grant long term loans. They
grant loans only for short period not extending one year. But recently they
have started giving loans for a long period. Commercial banks give term loans
i.e. for more than one year. The period of repayment of short term loan is 139
extended at intervals and in some cases loan is given directly for a long period.
Commercial banks provide long term finance to small scale units in the priority
sector.

14. Factors affecting the choice of the source of
funds
• Cost: There are two types of cost viz., the cost of procurement of funds and cost of
utilizing the funds. Both these costs should be 142 taken into account while deciding
about the source of funds that will be used by an organization.
• Financial strength and stability of operations: In the choice of source of funds
business should be in a sound financial position so as to be able to repay the principal
amount and interest on the borrowed amount.
• Form of organization and legal status: A partnership firm, for example, cannot raise
money by issue of equity shares as these can be issued only by a joint stock company.

15. Factors affecting the choice of the source of
funds
• Purpose and time period: A short-term need for example can be met through
borrowing funds at low rate of interest through trade credit, commercial paper,
etc. For long term finance, sources such as issue of shares and debentures are
more appropriate.
• Tax Benefits.

16. Here are some real-life examples of
industrial financing in different sectors:
• Tata Steel’s Expansion Using Corporate Bonds
• Situation: Tata Steel needed funds to expand its Jamshedpur plant.
Financing: Issued corporate bonds to raise money from investors.
Outcome: Expanded production capacity, leading to higher output
and revenue.

17. Here are some real-life examples of
industrial financing in different sectors:
• 2. Reliance Jio’s Infrastructure Financing via Foreign Investment
Situation: Reliance needed funds to build its telecom network.
Financing: Raised over $20 billion from foreign investors like
Facebook and Google.
Outcome: Launched affordable mobile data, revolutionizing India's
telecom industry.

18. Here are some real-life examples of
industrial financing in different sectors:
• 3. Kalyan Jewelers' Growth with IPO Financing
Situation: The Thrissur-based jewelry brand wanted to expand.
Financing: Raised 1,175 crore via Initial Public Offering (IPO).
₹
Outcome: Expanded to multiple cities in India and the Middle East.

19. Here are some real-life examples of
industrial financing in different sectors:
• 5. Kitex Garments’ MSME Loan for Textile IndustryGrowth
• Situation: Kitex Garments, a leading apparel exporter from Kerala,
needed funds for expansion.
• Financing: Secured loans under MSME schemes from banks like SBI and
Federal Bank.
• Outcome: Increased textile exports and created new jobs.

20. Here are some real-life examples of
industrial financing in different sectors:
• 6. Cochin International Airport’s Public-Private Partnership (PPP)
Situation: Kerala needed a new international airport in Kochi.
Financing: Raised funds through a Public-Private Partnership (PPP),
where NRIs and the government contributed.
Outcome: First fully solar-powered airport in the world, boosting
tourism and trade.

21. CONCLUSION
Industrial financing plays a crucial role in fostering economic growth, enhancing productivity, and promoting industrial
development. Industrial financing not only facilitates capital formation but also ensures the smooth functioning of
industries by meeting their short-term and long-term financial needs. A well-structured industrial financing system
contributes to balanced regional development, technological advancement, and employment generation. However,
challenges such as high capital costs, credit constraints for small enterprises, and inefficiencies in financial institutions
need to be addressed. Barthwal emphasizes the importance of a diversified financing system that includes government
support, private investments, and foreign capital to sustain industrial expansion. To improve industrial financing,
policymakers must focus on strengthening financial institutions, ensuring better credit accessibility for MSMEs, and
encouraging innovative financing mechanisms like venture capital and public-private partnerships. A robust and inclusive
financial ecosystem will enhance industrial competitiveness and contribute significantly to economic development.

22. REFERENCES
• Barthwal, R. R. (2010). Industrial economics: An introductory textbook (3rd ed.)
• Reliance Industries. (2020). Reliance Industries Investor Relations. Retrieved from
https://www.ril.com/InvestorRelations.aspx
• Kalyan Jewellers. (2021). Kalyan Jewellers IPO Details on BSE. Retrieved from
https://www.bseindia.com/Business Today. (2021, March 15). Kalyan Jewellers raises 1,175 crore
₹
through IPO. Business Today. Retrieved from https://www.businesstoday.in
• Tata Steel. (2021). Tata Steel Investor Relations. Retrieved from
https://www.tatasteel.com/investors/Business Standard. (2021, February 22). Tata Steel raises 3,000
₹
crore through bond issuance. Business Standard.