Efforts of RBI towards Promoting

Industrial Finance
by Smriti Chand Reserve Bank

Efforts of RBI towards Promoting Industrial Finance!

Rapid industrialisation is the key to accelerating economic growth and
development. Pre-requisites of industrial development are five Ms: Men,
Materials, Machines, Management and Money.
Of these money, is the primary essential. Money in industry comes from
industrial finance. Rapid industrial development, thus, necessitates an adequate
supply of short-term and long-term finance for the purposes of industrys fixed
and working capital.
The industrial sector comprising large and medium scale industries is usually
urban-oriented. It relies on institutional sources of finance. It resorts to the
money market as well as the capital market to secure the required financial
assistance. In the Indian economy, small scale industries also have a strategic role
to play. Small scale industry is confined to urban, semi-urban as well as rural
areas. Small and large industries have their typical borrowing needs short-term
as well as long-term credit.
Commercial banks have been providing short-term credit to the industrial sector;
but they did not favour long-term industrial finance. In the pre-independence era,
the capital market was also underdeveloped in the country.
This, inadequacy of the supply of industrial finance was inevitably felt with its
hampering effect. After independence and during the planning era, therefore, the
Reserve Bank of India assumed the major responsibility of easing the problem of
industrial finance.
It is gratifying to note that the Reserve Bank has played a significantly active role
in the development of institutional agencies for providing industrial finance in
the country. The Reserve Bank of India made commendable efforts for
broadening the domestic capital market for providing the medium and long-term
finance to the industrial sector.
In this regard, it took the initiative in establishing statutory corporations at the all
India and regional levels to function as specialised financial agencies purveying

term-lending. The Reserve Bank subscribed to a considerable part of their share

capital in setting up these special term-lending institutions.
Further, the Bank also extends borrowing and refinances facilities to some of
these special financial institutions with a view to augment their resource position
so that they can smoothly function on a wider scale.

Term-lending Institutions:
The following term-lending institutions have been started with the
Reserve Banks initiative and support:
(1) The Industrial Finance Corporation of India (IFCI), 1948, 20.7 per cent of its
total share capital is owned by the RBI. The bank also subscribed to the bonds
issued by the IFCI. It has also agreed to forego the dividends accrued on its shares
held by it.
The IFCI provides medium and long-term credit to public limited companies and
co-operative enterprises.
In 1971, the RBI provided long-term finance to the IFCI amounting to Rs. 2.2
crores. Its medium-term finance to the IFCI amounted to Rs. 3 crores in 1984.
(2) The State Financial Corporations (SFCs), 1951- 52. There are 18 such SFCs.
The RBI provided technical assistance in organising them and subscribed to 17.5
per cent of their total share capital. The RBI also advises them regarding the
investment of their funds. The bank also subscribes to their bonds. It also
provides them banking and rediscounting facilities. It also inspects their
functioning. In this way, an effective relation is maintained by the RBI with the
SFCs.
(3) The Industrial Development Bank of India (IDBI) 1964. The IDBI was started
as a wholly-owned subsidiary of the RBI. It is regarded as an apex institution to
coordinate and supplement the operations of other term lending institutions. It
also provides direct finance to the industrial concerns, both in public and private
sectors. Besides, the IDBI functions as a developmental agency for planning,
promoting and developing industries to fill the gaps in the industrial structure of
the country.
From February 16, 1976, however, the IDBI was delinked from the RBI and given
full autonomy in its organisation and operations.

In 1971, the RBI provided long-term finance to the IDBI amounting to Rs. 29.8
crores, which increased to Rs. 2,885 crores in 1987. It also gave short-term
finance to the tune of Rs. 87.5 crores to the IDBI in 1987.
(4) The Unit Trust of India (UTI) 1964. The RBI played an active role in setting
up the Unit Trust of India and subscribed to 50 per cent of its initial capital of Rs.
5 crores. The Bank was also closely associated with the operations of the UTI. It
has framed general regulations for the conduct of the affairs of the UTI. Since
1976, however, the shareholding and supervision of the Trust have been
transferred from the RBI to the IDBI. The UTI is, however, entitled to borrow
loans and advances from the RBI.
(5) Industrial Credit and Investment Corporation of India Ltd. (ICICI), 1955.
Though the RBI did not take any initiative in starting this private sector termlending institution, since May 1980, it has become eligible to borrow loans and
advances from the RBI, as per Government Notification under sub-section (4BB)
of Section 17 of the Reserve Bank of India Act.
In 1987, the ICICI borrowed short-term loans of Rs. 15 crores from the RBI,
(6) Refinance Corporation for Industry Ltd. (RCI), 1958. It was set up by the RBI
in collaboration with leading commercial banks and the LIC. It provided
refinance facilities to the member banks to extend medium-term loans to
medium-sized industrial concerns in a private sector. The Governor of the RBI
was the Chairman of the Board of Directors of the RCI. The Corporation was,
however, taken over to the IDBI in September 1964.
(7) Industrial Reconstruction Corporation of India Ltd. (IRCI), 1971. The RBI
provided financial assistance to the Corporation by virtue of the Central
Governments Notification under Section 17 (4BB) of the Reserve Bank of India
Act.

Industrial Credit Department:

The Reserve Bank of India had established the Industrial Finance (or Credit)
Department in 1957. Its main functions were to administer the Credit Guarantee
Scheme for small scale industries. With the cancellation of the Credit Guarantee
Scheme and emergence of the Deposit Insurance and Credit Guarantee
Corporation, the Department has ceased to function since 1981.

Credit Guarantee Schemes:

The R8f has actively participated in implementing a number of Credit Guarantee

Schemes devised by the Government of India.
1. Credit Guarantee Scheme for Small Scale Industries:
In order to encourage bank lending to the small industries, the Government of
India introduced a Credit Guarantee Scheme in July 1960, which has been
administered by the RBI. Under the Scheme, losses against advances made by the
banks and other credit institutions to small scale industries have been protected.
The scheme ceased to operate after 1981.
2. Credit Guarantee Corporation of India Ltd:
This was promoted by the RBI in 1971 to provide a wide-ranging system of
guarantees for loans granted by the credit institutions to small and needy
borrowers. It was taken over by the Deposit Insurance Corporation in July 1978.
3. The Small Loans (Small Scale Industries) Guarantee Scheme:
The scheme was introduced in 1981 in succession to the Credit Guarantee
Scheme. The RBI administered the Scheme as an agent of the Central
Government.
4. Other Guarantee Schemes:
A scheme called the Small Loans (Financial Corporation) Guarantee Scheme was
introduced in 1971 to provide guarantees to a substantial extent in respect of
small loans to borrowers in the priority and neglected sectors. Another scheme
called the Small Loans (Service Co-operative Societies) Guarantee Scheme was
introduced in 1971 to provide guarantees to a substantial extent in respect of
credit facilities granted to certain co-operative societies which may be assisting
workers, artisans and other self-employed persons engaged in industrial
activities.

Credit Authorisation Scheme:

Since November 1965, the RBI has been implementing a Credit Authorisation
Scheme (CAS) as an effective instrument of credit regulation in the industrial
sector. The CAS enforces financial discipline on the part of large industrial
borrowers.
Under the scheme, the commercial banks have to obtain the Reserve Banks prior
authorisation for sanctioning any fresh working capital limit of Rs. 3 crores from
July 1982 (prior to this, the limit was Rs. 1 crore) to private sector companies. The

cut-off limit in the case of medium and long-term loans is fixed at Rs. 25 lakhs for
the private sector companies and Rs. 1 crore for the public sector companies.
Since 1974, the provisions of the CAS have been extended to the co-operative
banks as well.

Concluding Remarks:
The RBI has done its job quite satisfactorily in catering to the needs of industrial
finance in the country.
In recent years, especially during the Seventh Plan period, due to the
liberalisation of policy, industrial expansion has emerged. With the growing
industries in new directions and in new dimensions, the demand for industrial
credit is likely to intensify in the near future. The RBI has, therefore, to remain
alert in dealing with the changing situation.
The Bank will have to make extra efforts and also take some innovative steps to
extend the dimensions of industrial finance and meet the growing requirements
of the emerging and expanding industries in the coming era of electronic
revolution and computers.