ENTREPRENEURIAL DEVELOPMENT

GROUP PRESENTATION GROUP 3 BUDDING ENTREPRENEURS

DONE BY, MAHALAKSHMI NAADIYA NIKITA NITHYA SRIDEVI CLASS I MBA

ROLE OF BANKS IN INDIAN ECONOMY

INTRODUCTION :Banks over the years, have become a significant aspect of an economy. With the on going financial depression, the position of banks have become all the more important in the course of working of the money market and hence the economy of a nation. The banking sector forming a portion of the financial sector primarily works as a financial intermediary generating money supply. From the different macro economic models , banks have been found to be a part of the supply side of the economy . However, over time banks have transformed from merely money generating organizations to a multi tasking entity. WHAT IS A BANK ? A bank is a financial institution where an individual can deposit money. Banks provide a system for easily transferring money from one person or business to another. Using banks and the many services they offer saves an incredible amount of time, and ensures that the funds of micro as well as macroeconomic agents "pass hands" in a legal and structured manner. There are also other types of financial institutions that operate just like banks. FUNCTIONS OF A BANK :Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, for the present condition of banks, where NPAs are of a very high order. The 2

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process of financial reforms, which started in 1991 has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with, makes its operations even more complicated, sometimes bordering on illogical. This section attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, order or otherwise". Deriving from this definition and viewed solely from the point of view of the customers, Banks essentially perform the following functions :
1. 2. 3. 4. 5. 6. 7. 8. 9.

Accepting Deposits from public/others (Deposits) Lending money to public (Loans) Transferring money from one place to another (Remittances) Credit Creation Acting as trustees Keeping valuables in safe custody Investment Decisions and analysis Government business Other types of lending and transactions

ROLE OF BANKS IN INDIAN ECONOMY

ROLE OF BANK IN INDIAN ECONOMY Fourteen major banks were nationalized in 1969, and more some were nationalized a few years later. Since then banks have come to play a major role in the socio-economic life of the country. They are no longer merely instruments for credit-mobilization and money-lending. They are no longer merely institutions for the benefits of a few individuals. They are now powerful instruments of economic growth and social justice. A Shri H. C. Sanker very pertinently remarked "banks have to act not only as purveyors of credit, but also as harbingers of social and economic development through a variety of enterprises, many of which may be tiny and yet capable of generating productive energies". The role of the banks has changed; still the quality of banking services in India remains poor. A bank transaction-is a time consuming affair, causing much harassment and irritation to the constituents. There are frequent exchanges of hot words with the concerned clerks, and instances are not lacking when even abuses and blows have been traded. To avoid such delays and frustrations, it is essential that the teller system be introduced in all major banks at the earliest. Computerization of banking service should also be done in the interest of efficiency and promptness. However, this will have to be done with due forethought and care as the employee's unions are generally opposed to it. Courteous, sincere and duty-conscious staff is also a must, if the banks are to play there due role in the life of the country. At present the staff, even in the major nationalized banks, is not only inefficient and rude, but is also lacking in sense of duty and decorum. Even during peak hours, when the rush is at its maximum, the concerned employees leave their seats to 'take tea' and then return at leisure. During all this time, the people wait and if some-one has the boldness to complain, he is 4

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rudely and his work is delayed further for one reason or the other. The officers remain helpless to remedy the situation. The employees' unions are all powerful, and if there is any against the manager and other officers. Efficient, courteous and sincere staff is the crying need of the hour. This is essential to improve the quality of banking services in the country. It is also essential that banks should mobilize maximum possible deposits, so that they may be more liberal in advancing loans. For mobilization of deposits, it is essential that people are made aware of the fact that it is in their interest to deposit money in the banks. The people, especially in rural areas, should be assured that the money deposited in banks is entirely safe and they can withdraw it at their sweet will. Even small investors should be tapped through such door-to-door approach. People in general specially women, are of the view that it is more profitable to invest money in the purchase of gold. To mobilize deposits such attractive schemes as, "re-investment plan, recurring deposit scheme, retirement plan, permanent plan", etc. should be promoted. Secondly, the small depositors should be given education in banking. They have to be assured that their money in the banks is as good as in their purse, that the process of withdrawal is not difficult and that there are a number of additional benefits, apart from the interest accruing from bank deposits. Such education to the people is very essential for the rapid mobilization of deposits. It is only when maximum deposits are mobilized, that the banks would be able to liberalize their lending policy and play a creative role in national life. It is essential that loans are advanced to small entrepreneurs and the self-employed on easy liberal terms. 5

ROLE OF BANKS IN INDIAN ECONOMY

The criterion should not be the paying capacity of the borrower, but weather the loan so advanced is likely to help in increasing production. If it is so, loans should be advanced even if sometimes there is a default in the payment of due instalments. Bank-managers should make judicious use of their discretionary powers in this connection. Banking services should be extended to rural areas also. We are happy to note that during the last few years more and more banks have opened their branches in the villages. The establishment of the Rural Development. Bank is a step in the right direction. Still, much more remains to be done.. The many advantages of banking should be explained to the rural-dwellers who are ignorant and conservative. Deposits should be mobilized and loans should be advanced on liberal terms. This would enable the agriculturist to purchase good quality seeds, fertilizers, and scientific implements like tractors, thrashers etc. this would result in increased production. In this way, the Indian farmer would be freed from the clutches of the local money-lender and his traditional poverty would be gradually eradicated. India is on the march, far-reaching socio-economic changes are taking place, and Indian banks should come forward to play their due role in the process. But this can be possible only if the quality of banking services is considerably improved. ROLE OF COMMERCIAL BANK IN INDIAN ECONOMY? The partition of India in 1947 had adversely impacted the economies of Punjab and West Bengal, and banking activities had remained paralyzed for months. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into 6

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greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a license from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19th July, 1969. By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jaya prakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential approval on 9th August, 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more 7

ROLE OF BANKS IN INDIAN ECONOMY

control of credit delivery. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. In the early 1990s the then NarasimhaRao government embarked on a policy of liberalisation and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to 8

ROLE OF BANKS IN INDIAN ECONOMY

manage volatility-without any stated exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. The processes of liberalization noted above fundamentally alter the terrain of operation of the banks. Their immediate impact is a visible shift in the focus of bank activities away from facilitating commodity production and investment to lubricating trade and promoting personal consumption. Interest rates in these areas are much higher than that which could be charged to investments in commodity production. According to a study (Consumer Outlook 2004), conducted by market research firm KSA Technopak, Indian consumers are increasingly financing purchases of their dream products with credit that is now on offer, even without collateral. "Personal credit off take has increased from about Rs 50,000 crore in 2000 to Rs 1,60,000 crore in 2003, giving an unprecedented boom to highticket item purchases such as housing and automobiles," the study reportedly found. But there are changes also in the areas of operation of the banks, with banking entities not only creating or 9

ROLE OF BANKS IN INDIAN ECONOMY

linking up with insurance companies, say, but also entering into other ''sensitive'' markets like the stock and real estate markets. It should be expected that this growing exposure to non-collateralized personal debt and entry into sensitive sectors would increase bank vulnerability to default or failure. The effects on bank fragility became clear after the stock scam of the late 1990s. The RBI's Monetary and Credit Policy Statement for the year 2001-2002 had noted that: ''The recent experience in equity markets, and its aftermath, have thrown up new challenges for the regulatory system as well as for the conduct of monetary policy. It has become evident that certain banks in the cooperative sector did not adhere to their prudential norms nor to the well-defined regulatory guidelines for asset-liability management nor even to the requirement of meeting their inter-bank payment obligations. Even though such behaviour was confined to a few relatively small banks by national standards, in two or three locations, it caused losses to some correspondent banks in addition to severe problems for depositors.'' Interestingly, this increase in financial fragility has been accompanied by the emergence of new instruments in the banking sector. Derivatives of different kinds are now traded in the Indian financial system, including crucially, credit derivatives. Most derivatives, financial instruments whose value is based on or derived from the value of something else, are linked to interest rates or currencies. Credit derivatives are based on the value of loans, bonds or other lending instruments. the traditional image of the great banks with armoured vaults has little to do with the banks of today. The latter appear to make loans and then pass them on as quickly as possible, pocketing the margin. That allows them to take bigger risks in trading securities, derivatives, and foreign exchange. 10

ROLE OF BANKS IN INDIAN ECONOMY

ROLE OF BANK FOR ENTREPRENEUR The banking sector environment in India has been undergoing a phenomenal change since 1991. Such systematic changes form major planks of the on-going economic reforms in India. The transformation process got triggered primarily with the prescribing of prudential norms for asset classification, capital adequacy, provisioning, income recognition, deregulation, competition, technology up gradation and entry of new players. These measures were adopted on the basis of the recommendations of Narsimham Committee whose Panel II has again reviewed the banking sector reforms which have taken place. The Panel has also submitted its second report on April 23,1998. Its main suggestions include the merger of strong banks, the freeing of bank boards from day-to- day operations, giving of global character to some large banks, narrow banking to rehabilitate weak banks, confining small and local banks to states or clusters of districts, the refreshing of capital adequacy prescription, the reviewing of CHANGING ROLE OF BANKS IN ENTREPRENEURSHIP DEVELOPMENT IN INDIA...

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ROLE OF BANKS IN INDIAN ECONOMY

FINANCIAL INSTITUTION Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings. The financial institutions have traditionally been the major source of long-term funds for the economy. These institutions provide a variety of financial products and services to fulfill the varied needs of the commercial sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to the industries established in backward areas. Thus, they have helped in reducing regional disparities by inducing widespread industrial development. The Following Diagram Illustrates the LONG TERM FUNDS:

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ROLE OF BANKS IN INDIAN ECONOMY

LONG TERM FUNDS:

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ROLE OF BANKS IN INDIAN ECONOMY

1. INDUSTRIAL FINANCE CORPORATION OF INDIA ( IFCI ) INCORPORATION &PURPOSE :The IFCI was established in 1948 under an Act of Parliament with the object of providing medium & long term credit to Industrial concern of India. IFCI transformed into a corporation from 21st May, 1993 to provide greater flexibility to respond to the needs of the rapidly changing financial system. MANAGEMENT :The Board of Directors consist of a whole time Chairman & 12 directions. The chairman is appointed by the Central Government after consultation with the IDBI. 2 directors are nominated by the Central Government & 4 by the IDBI. The directors are elected by shareholders other than the IDBI. Financial assistance provided by the IFCI can be in one or more of the following forms :

Rupee & foreign currency term loans Underwriting of share & debenture issues Direct subscription to equity Guarantees Soft loans Equipment Financing

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Projects costing up to Rs 300 lakh are financed by the SFC. SIDC & Commercial Banks are considered for assistance by the IFCI. FORMS OF ASSISTANCE :Sec 23 of the IFCI Act outlines the type of activities which the Corporation is authorized to undertake. These are indicated below with the yr in which it was authorized to undertake each type of activity shown within the brackets.
Granting loans on subscribing to debentures repayable within a period not exceeding 25 yrs. ( 1948 ) Guaranteeing loans a) Raised by industrial concerns which are repayable within a period not exceeding 25 yrs & are floated in the market. ( 1948 ) b) Raised by industrial concern from scheduled banks or State Corporative Banks. Guaranteeing deferred payments due from any industrial concern :1) In connection with the import of capital goods from outside India. 2) In connection with the purchase of capital goods within India.

FUNCTIONS & LENDING POLICIES Any ltd company or co operative society incorporated & registered in India which is engaged or proposes to engage itself, in the manufacture, preservation or processing of goods, or in the shipping, mining or hotel industry, or in the generation or distribution of electricity or any other form of power, is eligible for financial assistance from the co- operation on the same basis as 15

ROLE OF BANKS IN INDIAN ECONOMY

industrial projects in the private & joint sectors. Public sector projects are also eligible for financial assistance from the Corporations on the same basis as industrial projects in the private & joint sectors. The assistance may take the form of long term loans, both in rupees & foreign currencies, the underwriting of equity, preference & debenture issues, subscribing to equity, preference & debenture capital, guaranteeing of deferred payments in respect of machinery imported from abroad or purchased in India & guaranteeing of loans raise in foreign currency from foreign financial institutions. SOURCES OF FUNDS :The main sources of funds other than its own capital, retained earnings, repayment of loans & sale of investments are borrowings from the market by the issue of bonds, loans from the Central Government & foreign credits. In its development role, the IFC has undertaken various promotional activities. The resources for financing such activities come from the Benevolent Reserve Fund which was created in terms of an amendment of the IFC Act in 1972, & from the allocation of the Interest Differential Funds by the Government. The Corporations Technical Assistance Scheme for training middle level executives of the State Financial & development agencies & the senior executives of these organizations continues to elicit a good response because it has been found to be very useful. Since the inception of the schemes in 1971, 78 middle level executives from 33 state level institutions & 43 senior executives from 16

ROLE OF BANKS IN INDIAN ECONOMY

28 state level institutions have availed themselves of the scheme, which aims at acquainting them with the policies, procedures & practices of the corporation. NEW PROMOTIONAL SCHEME :In 1989, the Corporation framed 2 new schemes of promotional activities which encourage new entrepreneurs & technologists to set up their own industries, & which assist in the growth of indigenous technology & small industries. The scheme for encouraging the development of ancillary industries was liberalized. The present positions is that IFCI has 14 Promotional Schemes, of which 8 are consultancy fee subsidy schemes, 4 interest subsidy schemes & 2 entrepreneurship development schemes.

ENTREPRENEURSHIP DEVELOPMENT SCHEMES :- Scheme for Encouraging Entrepreneurship Development in Tourism & Tourism related Activities. - Scheme for Encouraging Self Employment amongst persons Rendered Jobless due to Retrenchment or Rationalisation in a sick industrial unit in the organized sector undergoing a process of Rehabilitation / Revival. 17

ROLE OF BANKS IN INDIAN ECONOMY

2. THE INDUSTRIAL DEVELOPMENT BANK OF INDIA ( IDBI ) The IDBI was established on 1st July, 1964 under the IDBI Act, as a wholly owned subsidiary of the RBI. In terms of the Public Financial Institutions Laws ( Amendment ) Act, 1975, the ownership of the IDBI has been transferred to the Central Government with effect from 16th Feb 1976. The IDBI has assigned a special role to play in regard to Industrial Development. OBJECTIVES &FUNCTIONS : To serve as an apex institution for term finance for industry, to co- ordinate the working of institutions engaged in financing, promoting or developing industries & to assist in the development of these institutions. To plan, promote & develop industries to fill gaps in the industrial structure in the country. To provide technical & administrative assistance for promotion, management or expansion of industry. To undertake market & investment research & surveys as also technical & economics studies in connection with development of industry.

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ROLE OF BANKS IN INDIAN ECONOMY

IDBIs SCHEMES :IDBI is having the following schemes for the benefit of enterprise & entrepreneurs in the small & medium scale sector : DIRECT ASSISTANCE :- Project Finance Scheme ( loans, underwriting, direct subscription & guarantees ) ;
- Modernisation Assistance Scheme for all industries - Textile Modernisation Fund Scheme - Technical Development Fund Scheme - Venture Capital Fund Scheme - Foreign Currency Assistance Scheme

INDIRECT ASSISTANCE :- Refinance Scheme for Industrial Loans for Small & Medium Industries. - Refinance Schemes for Modernization & Rehabilitation of Small & Medium Industries. - Equipment Reliance Scheme - Bills Discounting / Rediscounting Scheme - Seed Capital Scheme - Scheme for investment shares & bonds of other financial institutions.

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ROLE OF BANKS IN INDIAN ECONOMY

SOURCES OF FUNDS :- Capital Contribution from Government. - Loan Capital from Government. - Loan capital from RBI out of National Industrial Credit ( Long Term Operation ) Fund created out of its annual profits. - Borrowings in Foreign Currency from International capital market. - 3 yr IDBI Capital Bond Scheme

SOFT LOAN BANK SCHEME The IDBI extends soft loans to units in selected industry groups, namely cotton textiles, jute, cement, sugar & specified engineering industries to enable them to overcome the backlog in modernization, replacement & renovation of plant & machinery so that they may achieve higher & more economic levels of production & improve their competitiveness. The loans under the Soft Loan Scheme are extended on concessional terms not only in regard to the interest but also in regard to the promoters contribution, debt equity ratio, initial moratorium & repayment period.

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ROLE OF BANKS IN INDIAN ECONOMY

3. INDUSTRIAL CREDIT & INVESTMENT CORPORATION OF INDIA ( ICICI ) The ICICI was conceived as a private sector development bank in 1955 with the primary function of providing finance to private sector. OBJECTIVES : Assisting in the creation, expansion & modernization of such enterprises. Encouraging & promoting the participation of private capital, both internal & external, in ownership of industrial investment & expansion of investment markets.

Apart from its head office at Mumbai, the ICICI has 4 regional offices located at Mumbai, Calcutta, Chennai& New Delhi. Financial assistance is being provided by ICICI in the following forms : - Rupee & foreign currency term loans.
- Underwriting of share & debenture issues - Direct subscription to equity - Guarantees - Soft Loans

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- Suppliers line of credit for promoting sale of industrial equipment on deferred payment terms - Lease financing - Financial Indo US joint ventures in R &D.

FINANCE FOR INDUSTRY :Over the past 30 yrs, the ICICI, in pursuit of its objective of promoting industrial development, has provided financial assistance in various forms such as : Underwriting of public & private issues & offers of sale of industrial securities ordinary shares, preference shares, bonds & debenture stock Direct subscription to such securities Securing loans in rupees, repayable over period up to 15 yrs Providing similar loans in foreign currencies for the payment for imported capital equipment & technical services Guaranteeing payments for credits made by others.

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ROLE OF BANKS IN INDIAN ECONOMY

The primary purposes for which assistance is extended is the purchase of capital assets in the form of land, buildings & machinery. Of the alternative types of assistance provided by the ICICI, the one best calculated to assure the success of enterprises is chosen in each case. There are neither firm limits to the size of the enterprise the ICICI is prepared to assist, nor is there a maximum or a minimum limit to the assistance that it may offer. In practice, the lower limit of the finance provided by the ICICI is set at Rs- 5 lakh because there are other institutions which provide assistance for smaller amounts. In promoting industrial investment, the ICICI is anxious not only to invest, but also to encourage others to invest. Accordingly, it seeks to encourage other financial institutions & individuals, both Indian & Foreign, to co operate with it in its investment & lending operations. 4. THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA The idea of setting up small scale industries development bank of India in response to long standing demand from the small scale sector as an apex level national institution for promotion financing and development of industries in the small scale sector embodied an opportunity to setup a proactive responsive and forward looking institution to serve the current and emerging needs of small scale industries in the country. SIDBI became operational on April 2 1990 Indian economy has been in transition for most part of the last five years government of India formulated a new set policies aimed at harnessing the potential of the small scale sector in august 1991 sidbi has been set up for refining its strategies 23

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and business policies in alignment with the policy changes which has been taken place in a larger level. The main operational strategy of sidbi is to direct and indirect financing mechanism and ensuring speedy disbursement the new schemes designed and implemented were directed at filling the gaps in the existing credit delivery system focusing on new target groups and activities sidbi helps in addressing some of the major problem of ssi in areas such as marketing, infra structure development, delayed realization of bills, ancillarition ,obsolesce of technology,venture capital etc The operational priorities of sidbi therefore were to build up a financial portfolio reflecting a high order of health and strength based on quantity of assets ,sidbi maintains an organizational structure which lean functional and capable of adapting to the state of art to remain competitive sidbi has obtained a high credit rating investment grade ratingaaa by credit rate information services of india ltd There has been consistent growth of sidbi in the last five years sidbi has transferring to idbi surplus of its profits after apportioned as return on capital sidbi is one the development financial insituations in the country with high capital adequacy ratio Sidbi now focus on a collaborative effort so as to facilitates timely flow of credit both by way of term loans and working capitalto the small scale units. 24

ROLE OF BANKS IN INDIAN ECONOMY

GROWING OPERATIONS OF SIDBI At present financial assistance being by sidbi it covers direct equity participation , equity type loan on soft terms,term loan , working capitalto the small scale units the proportion of direct assistance in the total portfolio of sidbi has increased significantly financial assistance has aggregated to rs 36264 crores by way of sanction and rs26702crore by way of disbursements during its 8 years operations. SUPPORT SERVICES OF SIDBI Over the years the scope of promotional and developmental activities has been enlarged to encompass several new activities like technology adoptation ,technology exchange and upgradation ,quality promotion etc,which helped the tiny and hi tech small scale industries are covered under promotional and development services sidbi acts in collaboration with voluntary organisation non govermentalorganisations to enhance the level of overall impact of such activities on the sector.

IMPACT OF SIDBI The overall economic impact of sidbi s operations during the last 5 years has been under cumulative investment catalysed of the order rs 34380 crores and fresh employment opportunities for about 86 lakhs persons the development activities of sidbi in select clusters of SSI such as lock ,leather , readymade garments has been noticeable with commensurate improvement in the overall productivity ,product quality levels and process in such clusters significant achievements made in these spheres will be buttressed with new initiatives an the years to come. 25

ROLE OF BANKS IN INDIAN ECONOMY

6. INDUSTRIAL INVESTMENT BANK OF INDIA The Industrial Investment Bank of India (IIBI) was established in 1985 under the IRBI Act, 1984 on reconstitution of the erstwhile Industrial Reconstruction Corporation of India as the principal credit and reconstruction agency to undertake reconstruction and rehabilitation of sick and closed industrial units in the country. IRBI was converted into a full fledgedall purpose development institution as IIBI on 17.03.97. The scope of IIBIs financing activities has widened with the withdrawal of the Government stipulation that 60% of its portfolio should consist of sick companies; IIBI now finances all industrial projects like any other financial institution. IIBI extends loans and advances to industrial concerns, underwrites stocks, shares, bonds, debentures and provides guarantees for loans/deferred payments. It provides finance for acquisition of equipment and makes available machinery and other equipment on lease or hire purchase basis. It also provide infrastructure facilities, consultancy, managerial and merchant banking services. During 1993-94, as a part of its merchant banking services, IRBI ventured into issue management activities for the first time. It also took several steps to re-orient its business strategy in response to the emerging environment and ongoing changes in the financial sector by introducing newer products for financing. IIBI has envisaged the setting up of a Special Fund, viz., Reconstruction Assistance Fund to meet special financial needs of assisted medium and large-scale units for their revival and rehabilitation which cannot be met from banks and financial institutions under normal conditions. 26

ROLE OF BANKS IN INDIAN ECONOMY

7. LIFE INSURANCE CORPORATION OF INDIA The Life Insurance Corporation of India (LIC) was set up under the LIC Act in 1956, as a wholly- owned Corporation of the Government of India, on nationalization of the life insurance business in the country. LIC took over the life insurance business from private companies to carry on the business and deploy the funds in accordance with the Plan priorities. LIC operates a variety of schemes so as to extend social security to various segments of society and for the benefit of individuals and groups from the urban and rural areas. The Committee on Reforms in the Insurance Sector set up by Government retaining 50% stake. The Committee has also suggested that foreign companies be allowed to conduct life insurance business in the country through joint ventures with Indian partners. According to the investment policy of LIC out of the accretion to its controlled Fund, not less than 75% has to be invested in Central and State Government securities including Government guaranteed marketable securities in the form of shares, bonds and debentures. LIC extends loans for the development of socially oriented sectors and infrastructure facilities like housing, rural electrification, water supply, sewerage and provides financial assistance to the corporate sector by way of term loans and underwriting / direct subscription to shares and debentures. LIC also extends resource support to other financial institutions by way of subscription to their shares and bonds and also by way of term loans. 27

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8. GENERAL INSURANCE CORPORATION OF INDIA The General Insurance Corporation of India (GIC) was established in January 1973 on nationalization of general insurance companies in the country. GIC has four subsidiaries, viz., National Insurance Co. Ltd. Oriental Fire & General Insurance Co. Ltd. And United India Insurance Co. Ltd. GIC and its subsidiaries operate a number of insurance schemes to meet the diverse and emerging needs of various segments of society. In the recent past, GIC and its subsidiaries devised several need based covers to keep pace with the new liberalized economic environment. The investment policies of GIC and its subsidiaries have been evolved within the ambit of the provision 27(B) of the Insurance Act 1938 and guidelines, 70% of the annual accretions to their investible funds are required to be invested in socially oriented sectors of the economy. Since April 1976, GIC has been participating with other financial institutions in extending term loans to industrial undertakings and providing facilities for underwriting/direct subscription to their shares and debentures. 9. EXPORT IMPORT BANK OF INDIA The Export Import Bank of India (Exim Bank) was set up on January 1 1982 by an Act of Parliament as the principal financial institution for promotion and financing of Indias international trade. Exim Bank finances exporters and importers, co-ordinates the working of institutions engaged in financing export and import of goods and services, finances export oriented units and undertakes promotional activities necessary for international trade. It has a menu of 23 major programmes to meet the needs of different customer groups, viz., Indian exporters, overseas entities and 28

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commercial banks. Exporters can avail of pre-shipment credit, suppliers credit, overseas investment finance, export product development loans, loans for export marketing, bulk import finance and investment vendors development finance. Foreign Governments and agencies are offered buyer credit and lines of credit. To commercial banks in India, Exim Bank offers export bills rediscounting facility, refinance of suppliers credit and refinance of term loans in respect of export oriented units. It also participates in guarantees issued by commercial banks on behalf of Indian project exporters. Besides providing finance, EXIM Bank promotes exports through advisory and information services to exporters on procurement practices and bidding procedures of multilateral institutions, country risk analysis, merchant banking and marketing focused on catalyzing exports of nontraditional products to developed countries. 10. KHADI & VILLAGE INDUSTRIES COMMISSION The Khadi and Village Industries Commission (KVIC) established by an Act of Parliament in 1956, is engaged in the development of khadi and village industries in rural areas. It has under its purview 26 village industries besides khadi. After amendment to the KVIC Act in July 1987, the scope for coverage of activities was widened and as a consequence 70 more new village industries were identified and brought under its fold for implementation. The main objectives of the KVIC are providing employment in rural areas, skill improvement, transfer of technology, building up of strong rural community base and rural industrialization. The significant characteristics of khadi and village industries under the purview of KVIC lie in their ability to use locally available raw materials, local skills, local markets, low per capita investment, simple techniques of production, which can be 29

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easily adopted by the rural people, short gestation period and above all production of consumer goods. KVI activities serve the poorest of the poor comprising scheduled castes, scheduled tribes, women physically handicapped and minority communities in difficult, inaccessible hill and border areas. The development programmes of khadi and villages industries are implemented through 30 State Khadi and Village Industries Boards which are statutory organizations set up under State legislation, 2,320 institutions registered under Societies Registration Act, 1860 and 29,813 Cooperative Societies registered under State Co-operative Societies Act. KVIC also assists individuals through State KVI Boards. KVI programmes now cover more than 2.1 lakh villages in the country. Some of the notable developments in KVI activities during 1991-92 are extension of special programme aimed at intensive development of KVI through area approach under tie up with District Rural Development Authority(DRDA) to more number of districts, improvement and upgradation of KVI technology and quality of products, establishment of linkage with an export company for exporting KVI technology on hand made paper and gurkhandsari on turnkey basis, initiation of steps for tapping distribution network of big business houses for marketing KVI products, introduction of fabric painted khadi ready-made garments, development of modified version of new model charkha by replacing all its metal parts with high quality nylon and reinforced fibre material and development of mini honey processing unit. 30

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11. NATIONAL SMALL INDUSTRIES CORPORATION LTD The National Small Industries Corporation Ltd. (NSIC) was set up by the Government of India in 1955, with the objective of promoting and developing small scale industries in the country. Various activities undertaken by NSIC include supply of indigenous and imported machines on easy hire-purchase and lease terms, marketing of the products of small industries on consortia basis, export marketing of small industries products, developing export worthiness of small scale units, enlistment of small scale units for participation in Government stores purchase programme, development and modernization of prototypes of machines, equipment and tools, supply and distribution of indigenous and imported raw materials, training in various technical trades and cooperation with other developing countries in setting up of small scale projects on turn-key basis. Formerly, the Corporation had four subsidiary corporations at Delhi, Mumbai, Calcutta and Chennai. However, since 1961, all the subsidiary corporations have been amalgamated with the main Corporation, and three Branch Offices have been set up at Mumbai, Calcutta and Chennai. The Delhi subsidiary corporation has been merged with the parent Corporation, and its work is looked after by a separate Delhi Cell set up in it. The National Small Industries Corporation provides a complete package of financial assistance and support in the following areas: Supply of both indigenous and imported machines on easy hire purchase terms. Special concessional terms have been introduced for units promoted by entrepreneurs from weaker sections of the society, women entrepreneurs, ex servicemen and those units located in the backward areas. Marketing of Small Industries products within the country. 31

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Enlisting competent units and facilitating their participation in Government Stores Purchase Programme. Developing prototypes of machines, equipment and tools which are then passes on to Small Scale Units for commercial production. Technical training in several industrial trades, with a view to create technical culture in the young entrepreneurs. Development and upgradation of technology and implementation of modernization programmes. Supply and distribution of indigenous and improved raw materials. Supply of both indigenous and imported machines on easy lease terms to existing units for diversification and modernization. Providing of Common Facilities through Prototype Development & Training Centres. Setting up Small Scale Industries in other developing countries on turnkey basis. With a view of giving a fillip to development efforts and to supplement the activities of state small industry corporation and district industries service institutes, the NSIC has opened its office in some of the state in which the (NSIC) Corporation has been hitherto under-represented. In the central region, office has been opened in Bhopal and Raipur in Madhya Pradesh. Four development executives and six field inspectors have been recently posted in the backward areas of the western regions to serve as Contact points And to work in close co-operation with DICs and other 32

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developmental agencies in the area of these, three field inspectors have been posted in Raigad, Ratnagiri, Satara, Yeotmal, Chandrapur, bhandara, Buldhana, Aurangabadh, Nanded, Beed, Osmanabad, etc.- All backward district in Maharashtra. The NSIC has taken up the challenging task of promoting and developing small industries almost from the scratch and has adopted an integrated approach to achieve its socio-economic objectives. It has created a proper industrial atmosphere and has infused confidence in the small entrepreneurs to prepare schemes for the manufacture of products or identify he balancing equipment for purpose of modernization and/ or diversification. The NSIC, Therefore, supplies machinery and equipment, marketing input and technical support to small units. Over the years and particularly during the decade, the NSIC, with its deliberate and concentrated efforts. He develop an unsurpassed reputation of an effective and efficient nodal agency for providing assistance to the vibrant small-scale sector. All these year, through its dynamic approach and the package of assistance, it has been significantly contributing to the development of entrepreneurs, building up of strong industrial base, spreading of technical culture, promoting balance regional growth, development of rural and backward areas, etc., as well as in employment generation, in all parts of the country

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12. STATE INDUSTRIAL DEVELOPMENT CORPORATIONS The state industrial development corporations (SIDCs) were established under the companies Act, 1956 in the sixties and yearly seventies as wholly-owned state government undertakings for promotion and development of medium and large industries. SIDCs act as catalysts for industrial development and provide impetus to further investment in their respective states. SIDCs provided assistance by way of other loans, underwritings, direct subscription to shares/ debentures and guarantees. They undertake a variety of promotional activities such as preparation of feasibility reports, industrial potential surveys, entrepreneurship development programs and developing industrial areas/ estates. SIDCs are also involved in setting up of medium and large industrial projects in joint secretary in collaboration with private entrepreneurs are as wholly owned subsidiaries. The SIDCs activities have now widened to include equipment leasing, providing tax benefits under state governments package scheme of incentives, merchant banking service and setting-up of mutual funds. Some of the SIDCs offer a package of development services such as technical guidance, assistant in plant location and coordination other agencies. The SIDCs are agent of IDBI and SIDBI for orating its seed capital scheme. Under the scheme, equity types assistance is provided to deserving first generation entrepreneurs who posses necessary skills but lack adequate resource required towards promoters contribution. 34

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The major functions of these cooperation included
Providing risk capital to entrepreneurs by way of equity participation and seed capital assistance; Grant of financial assistance to industrial units by way of loans, guarantees and of late, finance by some corporations; Administering incentive schemes of central/state governments; Promotional activities such as identification of project ideas through industrial potential surveys, preparation of feasibility reports, selection and training of entrepreneurs; and Developing industrial area/estates by providing infrastructure facilities.

13. STATE SMALL INDUSTRIES DEVELOPMENT CORPORATIONS The state small industries Development Corporations (SSIDCs) established under the Companies Act, 1956, are state /government undertakings, responsible for catering to the needs of the small, tiny and cottage industries in the state/union Territories under their justification. Some of the important activities undertaken by SSIDCs includes :- (1) Procurement and Distribution of scarce Raw material, (2) Supply of machinery on hire purchase basis, (3) providing assistance for marketing of the product of small scale units, (4) Construction of industrial estates/sheds, providing allied infrastructure facilities and their maintainenace, (5) extending seed capital assistance on behalf of the State Governments, and (6) providing management assistance it production units. 35

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SSIDCs are gearing up to change themselves from raw material distributors to organizations that will take care of various aspects of small industry development marketing. 14. STATE FINANCIAL CORPORATIONS State Financial Corporations (SPCs), operating at the state-level, form an integral part of the development financing system in the country. They function with the objective of financing and promoting small and medium enterprise for achieving balanced regional socio-economic growth, catalyzing higher investment, generating greater employment opportunities and widening the ownership base of industry At present, there are 18 SFCs in the country, 17 of which were set up under the SFCs Act, 1951.Tamilnadu industrial investment corporation Ltd., set up in 1949, under the companies Act as madras industrial investment corporation also function as a full-fledged SFC. SFCs extend financial assistant to industrial units by way of term loans, direct subscription to equity/debentures, Guarantees, and discounting of bills of exchange. SFCs operate a number of schemes of refinance and equity type of assistance formulated by IDBI/SIDBI which include scheme for artisans, special target groups like SC/ST, women, ex-servicemen, physical handicapped, etc., and for transport operations, setting up hotels, tourism-related activities, hospitals and nursing homes, etc., Over the years the SFCs have extent their activities and coverage of assistance. 36

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Objectives and Functions
The main function is to provide term loans for the acquisition of land, building, plant and machinery, pre-ops and other assets. Promotion of self employment. To encourage new and technically/professionally qualified women entrepreneurs in setting up industrial project. To finance expansion, modernization and upgradation of technology in the existing units To provide financial assistance for the rehabilitation of sick units finance by the delhi financial corporation. To assist for the promotion or expansion of industry by the rural and urban artisans. To provide finance assistance for transport vehicles strictly for captive use, depending on the requirement of the projects. Providing seed capital assistance under the scheme for industrial development bank of India. Providing soft-terms loan to cover the equity gap to help small-scale industrial units. Undertaking the various promotional activities including the organization of entrepreneurial development programs and seminars etc., To promote development institutions in the state/region which will accelerate the process of socio-economic growth.

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SEED CAPITAL

MEANING :Seed capital is needed to get most businesses off the ground. It is considered a high-risk investment, but one that can reap major rewards if the company becomes a growth enterprise. This type of funding is often obtained in exchange for an equity stake in the enterprise, although with less formal contractual overhead than standard equity financing. Banks and venture capital investors view seed capital as an "at risk" investment by the promoters of a new venture, which represents a meaningful and tangible commitment on their 38

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part to making the business a success. Frequently, capital providers will want to wait until a business is a little more mature before making the larger investments that typify the early stage financing of venture capital funding. SEED CAPITAL FOR SBI ENTREPRENEUR The State Bank of Indias new scheme SMILE might bring a smile to the face of entrepreneurs. Under the scheme the bank will provide interest-free seed capital of about Rs 10 lakh to aspiring entrepreneurs. The scheme aims to benefit the small and medium enterprises (SMEs) of the nation, especially when the sector has not been able to raise enough funds during the financial crisis. Presently, the loan amount given by the banks comprises 70-80 per cent of the project cost and is given only when the entrepreneur has enough capital to invest. But with the new scheme SBI will provide seed capital. There will not be any changes in loan terms and interest rates. Though there will be no interest charged on the seed capital and the amount can be repaid after repaying the loan. SBI LAUNCHES NEW SCHEME TO ENCOURAGE SMEs State Bank Of India (SBI) Has Launched A New Scheme, SBI Smile which will provide interest-free seed capital of up to Rs.10 lakh to budding entrepreneurs. The scheme is 39

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specially targeted to encourage small and medium enterprises and will be in place initially for one year, after which the bank could extend it, depending on the situation. Currently, banks give loans to the entrepreneurs only if they have a substantial capital to invest. The loan amount is around 70-80 percent of the total project cost. Under the new scheme, SBI will provide the seed capital and entrepreneur will also be able to seek a loan. Loan terms & interest rates will be determined as per the existing guidelines. The bank will offer a five-year moratorium on paying the seed capital amount. The bank, however, has not set any target for the amount it will expend under the scheme.

VENTURE CAPITAL

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MEANING :Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity. VENTURE CAPITAL OF SBI AND HDFC IN COLLABORATION :The Housing Development Finance Corporation Ltd (HDFC) jointly with State Bank of India (SBI) launched a venture capital fund, which will take equity stake in real estate projects in the country. HDFC Property Fund will start with a targeted fund size of Rs1,000 crore capital, which will be privately placed with banks, insurance companies, corporates and high net worth individuals (HNIs). With foreign direct investment now allowed in the real estate industry, the fund could at a later date attract foreign investment. At this point of time, however, the fund is meant for domestic investors. This private equity arm investing in the Indian real estate market follows the Securities and Exchange Board of India (SEBI) having removed real estate from the negative list for investments by venture capital funds. 41

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ICICI Ventures, the venture capital arm of the group, has also set up aRs 5,000-crore property fund for investment in Indian real estate. HDFC Ventures Trustee Company Ltd and an asset management company, HDFC Venture Capital Ltd, have been incorporated for the fund, with HDFC holding a 80 per cent stake and SBI, the balance 20 per cent. This fund would invest in equity and equity linked instruments of companies engaged primarily in real estate in major cities in India, stated the companys press release. HDFC could at a later date look at diluting its holding in the VC company. HDFC has targeted a corpus of Rs 750 crores with a green shoe option to retain an additional Rs 250 crores. The housing finance major has started marketing the fund and has received positive response from various banks. The minimum investment has been pegged at Rs 5 crore in this 7-year closed-ended fund, which has no put or call option for early exit. Real estate projects usually take about three to four years to complete, said Deepak Parekh, chairman HDFC, adding that a 7-year closed fund would enable re-investment of capital invested in the fund. HDFC hopes to capitalise on its relationship with real estate developers, and has identified about 8 to 10 projects to start with. Today HDFC offers loans to builders, which said Parekh would continue. The debt funding to developers would be undertaken at arms length from the AMC, he added. Real estate developers though optimistic, said the advent of the fund would not help 42

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increase the number of real estate development undertaken unless supply and infrastructure are improved. K G Krishnamurthy, senior general manager, would head the fund as CEO and managing director. The funds first scheme HI-REF, will invest in three broad classes of companies including projects which are complete, those in the development stage and those in the planning stage. The latter with a lead time to commercial deployment being 3 to 6 years, would offer the highest amount of return but carry greater risk. Returns from the real estate sector exceed those for most other investment alternatives in the market. Yields on commercial real estate across metros in India are higher than those prevalent in global real estate markets, said HDFC. Worldwide real estate represents a substantial share of fund allocations by institutional investors. With the increase in professional players entering the real estate business coupled with the recent boom, there has been a lot of demand from investors for a real estate investment scheme, said RenuSudKarnad, executive director, HDFC who would be the non-executive chairperson of HDFC Venture Capital Ltd. 43

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ANGEL INVESTOR

MEANING :An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital, as well as to provide advice to their portfolio companies. Angel Investors are generally affluent people who operate as independent investors in small business. Although they usually favor small startup businesses, they may also invest in currently operating small companies that are looking to expand. 44

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Unlike Venture Capitalists, who invest other peoples money from an investment pool, or fund, Angel Investors invest their own personal money, although the legal entity could be a trust, foundation, corporation, business, or the like. However, today there are more Angel Investors "pooling" their money into small groups, or joint venturing to spread the risk when making larger investments. Angel Investors tend to fill the gap between self-financing (self, family & friends) and Venture Capitalists, who typically are not interested in investing the smaller amounts invested by Angels. The total annual U.S. investment by Angel Investors is almost as much as the total amount invested by Venture Capitalists, but Angel Investors invest this much in about 10 times as many businesses. WHO ARE ANGEL INVESTORS ? Often they are retired business people, or affluent executives. In many cases these investors are as interested in the process of Angel Investing as they are in the money. They feel they have something to offer as mentors and coaches, and in many cases they fill an important need in the small business they invest in. However, there are requirements for becoming a professional "Investor." All Angels must be "accredited" investors, as required by Regulation D of the Securities and Exchange Commission (SEC). 45

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This is to assure that the investor is financially sophisticated and is unlikely to create longterm issues for the economy. Small Industries Development Bank of India (SIDBI) was established as wholly owned subsidiary of Industrial Development Bank of India (IDBI) under the small Industries Development of India Act 1989. It is the principal institution for promotion, financing and development of industries in the small-scale sector. It also coordinates the functions of institutions engaged in similar activities. For this purpose, SIDBI has taken over the responsibility of administrating Small Industries Development Fund and National Equity Fund from IDBI. Capital. SIDBI started its operations from April 1990 with an initial authorised capital of Rs. 250 crore, which could be increased to Rs. 1000 crore. It also took over the outstanding portfolio of IDBI relating to small scale sector held under Small Industries Development Fund as on March 31,1990 worth over Rs. 4000 crore.

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