Industrial Finance Corporation of India and Its Financial Resources


By

Hemant Kumar Yadav
Lecturer
SMS, Varanasi
 


Abstract

Industrial Finance Corporation of India [IFCI] is first development financial institution in country to cater to long term financial needs of industrial sector. The first development finance institution was set up in 1948 under the IFCI Act to pioneer long-term institutional credit to medium and large industries. With a view to achieving greater operational flexibility  and access to capital market, the undertaking of IFCI  was transferred to and vested in a new company called Industrial Finance Corporation of India Ltd. (since renamed as IFCI Ltd.) with effect from July 1, 1993. Industrial Finance Corporation of India [IFCI], is first development financial institution in country to cater to long term financial needs of industrial sector. IFCI has fulfilled its original mandates as a developing financial institution by providing long term and medium term financial support to all segments of Indian industries. So the main point of this paper is to examine about the financial resources and cause of its variation raised by Industrial Finance Corporation of India.

KEYWORDS: - Concessional rates, KFW, modernization, Industrial finance corporation of India.
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Introduction:

At the time of independence in 1947, India's capital market was relatively under-developed. Although there was significant demand for new capital, there was a dearth of providers. Merchant bankers and underwriting firms were almost non-existent.

Also commercial banks were not equipped to provide long-term industrial finance in any significant manner. It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1st, 1948, as the first Developing Financial Institution in the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through the central bank's Statutory Liquidity Ratio (SLR) which in turn enabled it to provide loans and advances to corporate borrowers at concessional rates. Financial institutions like IFCI have been experiencing considerable difficulties in recovering loans and enforcement of securities charge with them.

Financial Resources:

Financial institution, as stated earlier is primarily concerned with mobilization of resources and channelization of the pooled resources in productive outlets. IFCI main dependence for funds has been borrowing both with in the country and outside. Institution may also meet their financial requirements by resorting to state and institutional borrowings to meet their growing demand of funds from up and coming enterprises. The principal source of rupees borrowing has been the bond issued by IFCI carrying government guarantees. Such bonds were eligible for subscription by commercial banks under the statutory liquidity requirements. The authorized Share capital of IFCI is Rs 1500 crore divided into equity shares of Rs 10 each in31 march 2005. IFCI placed a heavy responsibility on it to fill in this gap consequently; it became equally important that it be also equipped with the adequate resources for meeting the rising demand for industrial finance in the country. Sources of funds of financial institution may be either domestic or foreign or partly domestic and partly foreign, the same may be derived from both equity and loans. The Corporation came out with public issue of its shares in 1993. Thus, they need burgeoning funds to dispense financial support to up and coming industrial projects of national priority. After the conversion of IFCI into a company, it has raised funds in the capital market on market related terms by way of certificates of deposits, bonds, fixed deposits and other borrowings. The IFCI has been evincing greater interest in raising funds through short-term deposits and placing greater reliance on generation of internal resources to meet its growing funds requirements. Industrial Finance Corporation, Industrial Credit and Investment Corporation of India, State Financial Corporations and Refinance Corporation of India sought to serve the increasing financial needs for industrial growth in the private sector. The financial mechanism adopted by the bank and its networking play a significant role in raising funds from the savers. Equity capital may be taken up by the central government, central bank and domestic private investors, institutional or individual commercial banks and insurance companies are the usual subscribers of initial share of capital as in the case of IFCI and ICICI. IFCI also borrows fund from government of India in terms of KFW agreement for interest differential fund. Since these institutions are supposed to fund capital expenditure projects through investment in and underwriting of securities and extend term loans to these projects, their fund requirements tend to be of permanent or long-term nature. However it felt that in relation to the investment needs which were likely to arise for industrial development in future financial institution role goes more important. The Government provides subsidized financial assistance to the financial institutions so as to help develop priority sector industries particularly in backward regions of the country. The success of the Industrial finance corporation of India, or of any other institution depends largely upon the total resources at its disposal as also the different sources of funds available for augmenting its resources. The authorized Share capital of IFCI is Rs 1000 crore divided into equity shares of Rs 10 each  at the annual general meeting 1996 ,10 percent of this amount  (100 crore) has been converted into cumulative redeemable preference shares of the face value of Rs 10 each. The principal forms in which financial institution may raise long-term resources from outside are issue of equity shares, preference shares and debentures, long-term deposits and long-term borrowings. The Corporation was earlier empowered to accept deposits for a period of 5 years; but the amount of deposits can in no case exceed Rs. 10 crores. Besides capital and reserves, the Bank is empowered to raise funds by Borrowing from the Central Government interest free loans on terms and conditions as may be agreed upon, Borrowing from such other authority, organization or institution in India as may be generally or specially approved by the central Government.

The recommendations of the Narsimham Committee, the financial institutions including IFCI, ICICI and IDBI have, of late, been permitted to raise funds from the open market. The IFCI Act was amended in July, 1993 to convert the Industrial Finance Corporation into a public limited company so as to enable the IFCI to access the capital market and to reduce its dependence on Government guaranteed funds. This Fund is intended to assist, with the prior approval of the Central Government, specially deserving projects to which banks and other financial institutions are not likely to provide the requisite finance in the ordinary course of business for various reasons. Recently, the Government has allowed these financial institutions to raise foreign currency loans with a maturity of 10 years and above without any ceiling from external commercial borrowing. The Fund comprises amounts received by way of loans, gifts, grants, donations etc. from the Central Government or any other source. The financial position of the Corporation with debt-equity ratio ranging between 5.7:1 and 10:1 is quite satisfactory as per the international norm of the World Bank. This leads us to suggest that the IFCI has the potential for resorting to long-term borrowings subject to its availability at reasonable cost. The resources of the corporation have been further augmented by issuing debentures/bonds in India and commercial markets abroad. The profits and losses arising out of the operations of the Fund are respectively credited or charged to the Fund. During 1999-2000, the IFCI raised equity share capital of Rs. 86 crore. As a result, relative share of paid up capital soared to over 4 per cent as on 31st March 2000 from 2.56 per cent in 1996. The resources of the IFCI initially comprised share capital, interest-free loan from Government of India.

Borrowings

For meeting the foreign exchange requirements of its client  IFCI raises foreign currency loans through the following two ways firstly, lines of credit(from KFW Asian development bank and other foreign banks)secondly, commercial borrowings through syndicated loans.  Recently, the Corporation has been allowed to raise money by way of term money, certificate of deposits, term deposits and inter-corporate deposits under an umbrella limit equal to their net owned funds for a period of 1 to 5 years. Act empowers the Central Government may, after due appropriation made by parliament by law in this behalf, advance to the Bank an interest free loan repayable in installments, and such further amounts of money by way of loan on such terms and conditions as may be agreed upon. As per the Government Policy, the Corporation can borrow up to 10 times its paid-up capital and reserves in the form of bonds, debentures, loans, etc. Institution was also to reduce significantly the cost of borrowings during the Financial Year 2004-05 by Rs.378 crore to Rs.958 crore, compared with Rs.1,336 crore in the Financial Year 2003-04. Repayment of assistance by Borrowers is one of the important sources of finance for the Industrial finance corporation of India.

IFCI also borrows fund from government of India in terms of KFW agreement for interest differential fund. The amount of Repayment by Borrowers has increased not only in absolute terms but also in relative terms. It can borrow resources in foreign currency. It can also borrow from the RBI for a period of 90 days against Government securities and/or for a period of 18 months against its own bonds. Since the Industrial finance corporation of India was set-up in 1948 and started advancing financial assistance to industrial concerns in that year, it is but natural that the Repayment amount would be lower in the initial years. Amount received From Government of India under Interest Differential Fund (IDF) is of a capital nature and to be utilized for specified purposes for promotional activities of Industrial Development. So far as the trends in the relative share of various sources in the total financing is concerned, Repayment by Borrowers, Reserves and 'others' showed a rising trend over the years. After economic reforms during the period of 1995-96, being in the business of providing finance to industries as well as the service sector, it has to constantly raise resources. During the year, liquidity in the money market remained under pressure. Yet, IFCI was able to mobilize need-based resources through private placement of bonds, Certificates of Deposits, Fixed Deposits and other borrowings.

Variation in financial resources


the total of financial resources is 12905 crore in 1996  which was lowest in comparison to period of 1995 to 2006, share capital of IFCI was Rs 353 crore , reserve and surplus was 1282 crore, borrowing in rupees was 8658 crore and borrowing in foreign currency is Rs 2612 crore. In 1996-97 the share capital amount was Rs 352.8 crore is almost constant in comparison to previous year but borrowing in rupees raised to 11441 crore ,where borrowing in foreign currency was 3197.5 crore and reserve and surplus 13508 crore only. During the period of 1997-98, Corporation raised Rupee resources and Foreign Currency resources by way of syndicated loan, lead arranged by Bank of Tokyo-Mitsubishi. Corporation has made significant provision towards bad and doubtful debts as required in terms of RBI's guidelines. This affected the profitability adversely. IFCI financial position is going stronger so its share capital is increased to near about 452.9 crore, reserve and surplus was 1293.9 crore and borrowing in rupees was 14362.3 crore with borrowing in foreign currency of Rs 3655.6 crore. In 1998-99 borrowing were increased continuously due to strong position of IFCI, at that time share capital was increased to 790.4 crore and reserve and surplus was Rs 936.1 crore where borrowing in rupees was 16459.8 crore ,borrowing in foreign currency was Rs 3713.3 crore. Corporation made a "Golden Move" in the Golden Jubilee year with the shifting of all its departments in the Corporate Office located in various rented premises to the newly built "IFCI Tower" at Nehru Place, New Delhi in October, 1997. From the period of 2000 to 2006, the overall economic environment in 1999-2000 was thus mostly favorable. As a consequence of the financial-sector reforms in recent years, IFCI has been mobilizing domestic resources from the market through the issuance of public /privately placed bonds /debentures, certificate of deposits (CDs), inter-corporate deposits (ICDs) and institutional /term-money borrowings, subject to the guidelines of the Reserve Bank of India. Share capital performance is constant and it varies minutely from 1096.4 crore to 1067.9 crore. Where reserve and surplus also start decrease from 2000   amounted to Rs 906.7 crore, borrowing in rupees and borrowing in foreign currency are respectively 16577crore and 3515.2 crore.
 

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Source: E-mail July 16, 2011

          

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