Sidbi.docx

CHAPTER 1 INTRODUCTION

1.1 RESEARCH METHODOLOGY

Research design is descriptive in nature. The study is based on secondary data. The required information is collected from various past studies and other sources like magazines, newspaper, reports and websites which are qualified as reliable.

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1.2 REVIEW OF LIETERATURE

Sharma (2007) in her study of SIDBI in relation to its function especially in relation to dicer financing expressed that bank have done many efforts for the growth and development of SSIs and MSME in Rajasthan. Yadav (2014) stated that SIDBI have done the lot of effort for assisting the small scale unites in Lucknow city but same more awareness is needed to boost up the SSIs in lucknow city. SIDBI should also provide proper path and training to improve the financial conditions of small scale unites in Lucknow city. Sharma (2008) stated is view about rural industrialisation and role of SIDBI in relation to solving the problem of sick small scale unites. According to him SIDBI can play a significant role in development of rural industrialization as well as improving the condition of sick units by refinancing, discounting and rediscounting as well as financial assistance through indirect functions.

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CHAPTER 2

INTRODUCATION TO THE PROJECT

Small Industries Development Bank of India is an independent financial institution aimed to aid the growth and development of micro, small and medium-scale enterprises (MSME) in India. Set up on April 2, 1990 through an act of parliament, it was incorporated initially as a wholly owned subsidiary of Industrial Development bank of India. Currently the ownership is held by 33 Government of India owned / controlled institutions. Beginning as a refinancing agency to banks and state level financial institutions for their credit to small industries, it has expanded its activities, including direct credit to the SME through 100 branches in all major industrial clusters in India. Besides, it has been playing the development role in several ways such as support to micro-finance institutions for capacity building and onlending. Recently it has opened seven branches christened as Micro Finance branches, aimed especially at dispensing loans up to 5 Lakh. It is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities. SIDBI has also floated several other entities for related activities. Credit Guarantee Fund Trust for Micro and Small Enterprises provides guarantees to banks for collateral-free loans extended to SME. SIDBI Venture Capital Ltd. is a venture capital company focused at SME. SME Rating Agency of India Ltd. (SMERA) provides composite ratings to SME.

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Another entity founded by SIDBI is ISARC - India SME Asset Reconstruction Company in 2009, as specialized entities for NPA resolution for SME. SIDBI (small industrial development bank of India) was started with the motto of refinancing as the sole business. RBI considers SIDBI and NABARD as two refinancing institutions. As the main focus always has

been this rather than direct financing, the brand image of SIDBI has not changed in so many years. In the banking sector as a whole, there are too many middle level banks that come in direct contact with the customer and this has been the main reason SIDBI is considered as the last resort for financing. SIDBI almost had a monopoly in refinancing the small scale units but now there have been competition from other commercial banks as well that have started initializing the SME finance like ICICI and SBI. SIDBI has also started tying up with other nationalized and commercial banks in this regard that can help it gain some more visibility and selling the products that need aggressive marketing. SIDBI has a special corporate status because it has got an expertise since 1964 and has been an agent in government schemes and finance is provided considering all expenses related to the project from conceptualization of the project to the successful execution of the project. They target the SME as they are serving the niche market. It is also synonym to developmental banking as they have soft corner for the SME’s and for this section of industry they have liberal policies, promote and develop small scale industries. Helping entrepreneur is also one of the functions and duties of SIDBI. Thus its broad functions are promotion, financing and development of Industries in the small scale sector and Co-ordinating the functions of other institutions engaged in similar activities. SIDBI was established on April 2, 1990. The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be "the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector and for matters connected therewith or incidental thereto. The business domain of SIDBI consists of small scale industrial units, which contribute significantly to the national economy in terms of production, employment and exports. Small scale industries are the industrial units in which the investment in plant and machinery does not exceed Rs.10 million. About 3.1 million such units, employing 17.2 million persons account for a share of 36 per cent of India's exports and 40 per cent of industrial manufacture. 4

In addition, SIDBI's assistance flows to the transport, health care and tourism sectors and also to the professional and self-employed persons setting up small-sized professional ventures. SIDBI retained its position in the top 30 Development Banks of the World in the latest ranking of The Banker, London. As quoted in the May 2001 issue of The Banker, London, SIDBI ranked 25th both in terms of Capital and Assets. State-owned SIDBI provides financial assistance to units in the small-scale sector. SIDBI provides refinance against term loans granted by banks to SSIs, equity assistance, bills financing, project financing and resource support to institutions that are engaged in the development of SSIs. It provides assistance to wide-range of industrial sectors including transport, health care, hotel and tourism and infrastructure. It also provides funds to the professional and self-employed persons setting up small-sized professional ventures.

CHAPTER 3 HISTORY, ACHIVEMENT AND BUSINESS DOMAIN OF SIDBI

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3.1 HISTORY Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act of Indian Parliament, is the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for coordination of the functions of the institutions engaged in similar activities. Small Industries Development Bank of India (SIDBI) was established by Government of India under the Small Industries Development Bank of India Act, 1989 (SIDBI Act) as a wholly owned subsidiary of the IDBI. The Charter establishing it, The Small Industries Development Bank of India Act, 1989 envisaged SIDBI to be "the principal financial institution for the promotion, financing and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector and for matters connected therewith or incidental thereto.

3.2 ACHIVEMENT

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SIDBI retained is position in the top 30 development bank of the world in the latest ranking of the banker, London. As per the May 2001 issue of the Banker, London, SIDBI ranked 25th both in terms of Capital and Assets Credit guarantee fund trust for micro and small Enterprise popularly known as CGTMSE is widely being used by many PSU bank and private sector bank to fund MSME sector. During the year 2002-03 the aggregate sanction and disbursement of SIDBI amounted to 10904crore and 6789crore respectively. SIDBI has been permitted to rise finance up to 2730crore the year 2013 owned by the Reserve Bank OF India.

3.3 BUSINESS DOMAIN OF SIDBI The business domain of SIDBI consists of Micro, small and Medium Enterprises (MSMEs), which contribute significantly to the national economy in terms of production, employment and exports. MSME sector is an important pillar of Indian economy as it contribute greatly to 7

the growth of Indian economy with a vast network of around 3crore units, creating employment of about 7crore, manufacturing more than 6000 products, contributing about 45% to manufacturing output and about 40% of exports, directly and indirectly. In addition, SIDBI’s assistance also flows to the service sector including transport, health care, tourism sector etc. SIDBI among Top 30 development banks of the world. SIDBI retained its position in the top 30 development banks of the world in the ranking of the banker, London. As per the May 2001 issue of the Banker, London , SIDBI ranked 25th both in terms of capital and assets . In its endeavour towards holistic development of the MSME sector, SIDBI adopts a ‘credit plus’ approach wherein, besides credit, the bank also provides grant support for the promotion and development (P&D) of the sector to make it strong, vibrant and competitive. The P&D activities of the bank include Micro Enterprise Promotion, Entrepreneurship Development, Cluster Development, Capacity Building of the MSME Sector, promoting responsible finance among micro finance institution, sustainable finance to MSMEs including Energy Efficiency, Environment Protection, etc. Cumulative disbursements as at end March 2014 have crossed 3260 trillion ($ 40.75 trillion) benefiting more than 32 million persons in the MSME sector. The total outstanding portfolio as at end march 2014 aggregated 612.71 billion ($7.66 billion). SIDBI also function as a Nodal/ Implementing Agency to various ministries of Government of India viz. Ministry of finance, Ministry of Textiles, Ministry of commerce and industry, Ministry of Food Processing and Industry, etc. SIDBI has taken the initiative to promote several institution viz. Credit Guarantee Fund Trust for Micro and Small Enterprises, SIDBI Venture Capital, SME Rating Agency of India Ltd and India SME Technology Services Ltd., for the benefit of the MSME sector.

CHAPTER 4 OBJECTIVES AND FUNCTION

4.1 OBJECTIVES

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In the setting up of the SIDBI, the main purpose of the government was to ensure large flow of assistance to the small-scale units. To meet this objective, the immediate trust of the SIDBI was on the following measures: i.

initiating steps for technological upgradation and modernization of existing units:

ii.

expanding the channels for marketing of products of the small scale sector:

iii.

Promotion of employment-oriented industries, especially in semi-urban areas to create more employment opportunities and thereby checking migration of population to urban areas.

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CHAPTER 5 PROJECT FINANCING

Project financing being another area where SIDBI finance the whole project that is innovative, economically and financially feasible and unique which would lead to a birth of an industry in the near future. Under the direct financing of projects, through the sanctions decline a bit during the last year, the disbursement showed an increase during the corresponding year.

PROJECT FINANCING SCENARIO OF SIDBI Besides good track record in the total sanction and disbursements, SIDBI has performed party well in rationalizing of all its existing schemes and programmes in a bid to simply the procedures, streamline the credit delivery mechanism and enhance the customer base. The modus operandi adopted by SIDBI in streamlining its operations is either merging the existing schemes with related schemes servicing the same target market or extending the different schemes to the target market of only one or two scheme. For instance, pursuant to the announcement by the ministry of small scale industry, government of India, units assisted under national Equity fund scheme have also been made eligible for availing subsidy under credit linked capital subsidy scheme provided other terms and conditions of the same were satisfied. Secondly, in an effort to simplify procedures, SIDBI has developed an electronic workflow which integrates and automates the main credit functions of sanctions, documentation and disbursement. This process is known as direct credit process. The system has generated spectacular results in standardizing the processes and reducing the transaction of time. The real measure of operational excellence for a customer focused bank is transaction time taken from application of loan to the ultimate disbursement of the same. SIDBI has this exceptional method of appraising the proposals interested in acquiring credit from the bank. I.

The loan procedure in SIDBI is handled first by pre-sanction department which is similar to all the other banks as well. The process starts from initial screening where

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feasibility of the project is checked with keeping in mind the profile of the management. Emphasize is laid on the promoters capacity to manage.

Once the project idea passes the 3 C’s test and the feasibility scan, it goes through the appraisal by CART system which is a unique credit appraisal system set by the in-house system in SIDBI. CART analyzes credit-worthiness of an applicant. The system has a twolevel security- a creator and a checker who can also be the same person. CART allows for three basic forms the appraisal, documentation of verification and the disbursement note on approval. SIDBI has developed expertise in quick appraisal of small credit proposal of existing well performing units (up to RS 50 Lac) through the credit appraisal &rating tool (CART) model. The same model shall be suitably modified by SIDBI to cover green field projects, working capital assessment and composite loan. II.

For tiny unites, individual banks may develop suitable rating model for quick appraisal. SIDBI will also develop a simplified appraisal model for adoption by banks. SIDBI has developed certain automated systems for loan documentation processes, and the same may be offered to the banks. After studying the processes, if the banks are interested they may effect the necessary modifications.

III.

After the CART system, comes the branch credit committee that is “centralized the loan processing cell”. This cell decided on the final feasibility of the projects and thus, the loan/ credit is granted for that project.

IV.

Documentation is the last step of the credit grant process.

In order to purpose the stringent risk management in providing loan assistance, the SIDBI has adopted risk management system in line with the credit risk management (CRM) policy and comprehensive credit risk management system and operational risk management systems, developed by CRISIL Ltd. Its credit risk management system lays down the bank’s risk philosophy and cover inert alia, the credit risk organization, risk measurement, exposure limit framework, and pricing of the loan. In addition to the CART, the bank has developed some software tools known as Risk assessment models for credit risk rating of various borrower segments. There is also a risk management committee comprising senior executives of the bank which guides the risk management functions of the bank and also overseas and monitors the effective implementation of the CRM policy.

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The metal of efficient risk management system is measured through the efficient recovery of dues and cubing of non-performing assets (NPA’s) to the greatest possible extents. As far as SIDBI’s risk management system is concerned, it has an important tool of assets management in which due emphasis is given on credit monitoring in the following ways:

 As a part of the intensive monitoring system, slippages of accounts into NPA category are being restrained by identifying stressed assets periodically. In addition SIDBI has designed a system of identification of trigger points to help regional offices and branch offices to contain individual accounts from slippage into NPA category along with in indicative list of early warning signals.  It has set up well defined distribution of monitoring responsibilities required at branch level, zonal level and at head office depending on loan size and monitoring.  It has set up default review committees at branch and zonal offices to review all direct finance cases at monthly intervals.  Finally, it has established a system of study of “failure-cause analysis” in respect of fresh NPA cases for taking preventative measures.

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CHAPTER –6

ASSOCIATES/SUBSIDIARIES OF SIDBI 9.1 CREDIT GUARANTEE FUND TRUST FOR MICRO AND SMALL ENTERPRISES (CGTMSE)

Credit to micro and small enterprises sector is generally perceived as high risk lending more, so when there is absence of any collateral. In order to encourage banks to lend more to this sector, government of India and SIDBI have a setup the credit guarantee fund trust for small and micro enterprises (CGTMSE) in July 2000, to provide credit guarantee support to collateral free/ third – party guarantee free loans up to 200 lakh extended by banks and lending institution for micro and small enterprises (MSEs) under its credit guarantee scheme (CGS).

9.2 INDIA SME ASSET RECONSTRUCTION COMPANY LTD (ISARC)

India SME Asset Reconstruction Company ltd (ISARC) was set up in 2009 by SIDBI along with lending public sector banks. Its objective is to acquire NPAs,inter -alia in MSME sector and catalyse speedy restructuring of potentially viable units and liquidation of unviable units, so that productive use of the assets in maximized.

9.3 INDIA SME TECHONOLOGY SERVICE LTD (ISTSL)

A major challenge for the MSME sector is the need for keeping itself abreast with the changing technology to remain competitive. To address the challenge India SME Technology Services Limited (ISTSL) was set up in November 2005 by sibi along with Indian bank, oriental bank of commerce, Indian overseas bank and state bank of india, provide a platform for MSME to tap opportunities at the domestic and global level for acquisition of modern technologies. ISTSL offers various technical services to MSMEs with a focus on promotion of energy efficient, environmental friendly technologies in the MSME sector. Efforts are being made to facilitate reduction in green house gases in the MSME sector. 13

In order to strengthen and accelerate the process of technological modernisation in the MSME sector, ISTSL has entered into partnership with various national and international organisations engaged in similar activities. ISTSL took up the project for implementing energy efficient technologies in stainless steel re-rolling cluster of Jodhpur, in association with KFW Germany. The project is now being taken up for implementing clean development mechanism (CDM) project by implementing energy efficient measures, which are expected to generate CDM revenues, besides reducing the cost of fuel being consumed by the units.

9.4 SEMRA RETAINGS LIMITED

SIDBI along with lending public, foreign and private sector banks and Dun and Bradstreet Information service India private limited (D&B) set up samara ratings limited (then SME rating agency of limited) in sep 2005, as an SME focused credit rating agency to provide comprehensive, transparent and reliable rating and risk profiling since then, SMERA has assigned over 45900 rating to corporate/ instruments. In year 2011, SMERA received its registration from the Securities and Exchange Board of India (SEBI) to rate the debt instruments. SEMRA also received the accreditation from Reserve Bank of India (RBI) in the year 2012 as an External Credit Assessment Institution (ECAI) under BASEL-II norms for undertaking bank loan ratings. Within span of 4 years, SMERA has rated more than 3000 bank loans and debt instruments. SMERAs pioneering work is globally recognized. SIDBI was awarded ‘outstanding development project award’ in SME Development Category for setting up SMERA by the association of development financing institutions in Asia and the pacific (ADFIAP) SMERA has entered into MoUs with over 40 banks, financial institutions and trade association of country. SEMERA has a huge corporate database that provides accurate industry- wise benchmarks and insights. SMERAs transparent, rigorous and efficient rating process ensures fair rating and high quality rating report. Mr R M Malla, Ex- chairmen & Managing Director of SIDBI and IDBI Bank is currently the chairmen of SMERA Mr sankarchakraborti is the Chief Executive Officer of SMERA Sankar has more than two decades of experience in business information, data & risk management solutions, financial research and credit rating.

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SMERA employs a rich mix of professionals which includes MBAs, CAs, FRMs, Economists, Statisticians and Engineers. SMERA has its Registered and head office in Mumbai branches at 9 cities and representative in more than50 clusters across India.

9.5 RECEVAIBLES EXCHANGE OF INDIA Ltd (RXIL)

Receivables Exchange Of India Ltd (RXIL) is a joint venture promoted by Small Industries Development Bank of India (SIDBI) and National Stock Exchange of India Ltd (NSE). RXIL has been incorporated under the companies act, 2013 on February 25, 2016. RXIL has launched India’s First Trade Receivables Discounting System (TReDS) – an online platform for financing of receivables of Micro, Small and Medium Enterprises on January 09, 2017 based on the guidelines issued by RBI on December 03, 2014. TReDS is an electronic institutional mechanism for facilitating the financing of trade receivables of MSMEs through multiple financiers. The TReDS platform will unable discounting of invoice/bills of exchange of MSME sellers against large corporate including Govt. Departments and PSUs, through an auction mechanism , to ensure prompt realisation trade receivables at competitive market rates. TReDS platform of RXIL is expected to catalyst in the growth of MSMEs by bringing in transparency in the business eco-system and addressing the issue of delayed payments for MSMEs.

9.6 MICRO UNITS DEVELOPMENT REFINANCE AGENCY LTD. (MUDRA) Micro units development and refinance agency ltd. (MUDRA) has been setup for ‘Funding the Unfunded’ micro enterprises in the country. MUDRA will refinance all banks, micro finance institution (MFIs) and other lending institution which are in the business of landing to micro / small business entities , engaged in manufacturing , trading and service activities. Thus MUDRA will strengthen the last mile financial institution by extending refinance and other development support to expand their outreach. Thus will in turn help micro business across the length and breadth of the country. MUDRAs mandate also include developing the micro enterprise sector into a viable economic sector for which various developmental interventions including financial/business literacy programmes are planned. PradhanMantri Mudra Yojana (PMMY),a scheme to finance income generating small business enterprises was launched on 08 April, 2015 by the Hon’ble Prime Minister , 15

whereby all banks are required to finance micro entrepreneur upto 10 lakh MUDRA loans are available in three categories. For small business, loans up to 50000/- is available under the shishu category; beyond 50000 and up to 5 lakh under the ‘KISHOR’ category and beyond 5 lakh and up to 10 lakh under ‘TARUN’ category. PMMY loans will be extended by all banks such as PSU banks, Regional Rural Banks (RRBs), cooperative banks, private sector banks, foreign banks, micro finance institution and non-banking finance companies. Any Indian citizen who has a business plan for income generating micro/small business activity in manufacturing, processing, trading and service sector, and whose credit need is less than 10 lakh an approach a bank /MIF for availing of MUDRA loans under PMMY, or an apply online through website of stand up India.

9.7 SIDBI VENTURE CAPITAL LIMITED (SVCL)

SIDBI venture capital limited (SVCL) a wholly owned subsidiary of SIDBI was set up in July, 1999 SVCL is an assets management company, presently having venture capital funds under management viz the national venture fund for software and information technology industry (NFSIT), SME growth fund (SFG) India opportunities fund (IOF) Samridhi Fund (SF) Tex Fund (TF) Maharashtra state venture fund (MS Fund) and West Bengal MSME VC Fund (WB Fund)

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CHAPTER 7 SCHEME OF SIDBI

small sector (i.e. proprietary, partnership company, cooperative society etc.) for infrastucture development all forms of organisation such as public, private ltd. SIDBI, primarly refinancing institution has offered various direct as well as indirect (through refinance to the financial institution) strat up term loan facilities to the small enterpreneurs. This include the following :10.1 GENERAL SCHEME Purpose – for setting up new small scale unit and for all activities eligiable for assistance under the scheme including profesionals practise/ consultancy ventures and service sector units such as tourism related activities / hospitals/ nursing home/ hotels/ marketing and indusrical infrasturcture projects. Eligibility – all forms of organisation in the small scale sector (i.e. propritory, partnership company, cooperative society etc.) for infrastucture development all forms of oraganization such as public, private ltd. 10.2 SCHEMES FOR COTTAGE, VILLAGE AND TINY INDUSTRIES Purpose- assistance for equipments or working capital as also for shed. Eligibility- artisans, village and cottage industries and small industries in tiny sector. Limit – not to exceed than 0.5 million rupees. 10.3 SCHEMES FOR SC/ST AND HANDICAPPED Purpose – assistance for equipments or working capital Eligibility – SC/ST and Physically Handicapped persons Limit – not to exceed than 0.5 million rupees.

10.4 SCHEMES FOR SMALL ROAD TRANSPORT OPERATED (SRTO’S) 17

Purpose – to meet expenditure towards cost of chassis, building initial taxes/ insurance and working capital. Eligibility – small road transport operators. Limit – need based. 10.5 NATIONAL EQITY FUND SCHEME Purpose – to meet gap in prescribed minimum promoter’s contribution and in equity. Eligibility – small enterpreneur for setting up new projects and existing in small scale sector and rehabilitation of potentially vible sick SSI units irrespective of the location, satisfying the investment ceiling prescribed for tiny enterpreneur undertaking expansion, modernization, technology up gradation and diversification. Limit – cost of projects not to exceed Rs. 1 million, soft loan limit 25% of cost of projects subjects to max Rs. 2,50,000 per projects service charges 1% p.a. on soft loan. 10.6 MAHILA UDYAM NIDHI Purpose – to meet a gap in prescribed minimum promoter’s contribution or in equity. Eligibility – small enterpreneurs for setting up new projects in small-scale sector and rehabilitation of potentially vible sick SSI units irrespective of the location. Enterprises would include all industial units and service industries satisfying the investment ceiling prescribed for tiny enterpreneurs. 10.7 SELF EMPLOYMENT FOR EX- SERVICEMEN Purpose- for setting up small scale industrical projects including service industries and specified transport activities which are eligible for finance as per SSI norms. Eligibility – ex-serviceman sponsored by director general, ministry of defense, government of India. Limit – scheme operated through SFC’s twin function of project not to exceed than 1.5 million, soft loan limited to meet gap in equity subject to a maximum of Rs. 2,25,000 per project.

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Service charges- 1% p.a. during moratorium period thereafter, interest at 6% p.a. on soft loan.

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CHAPTER – 8

SOURCES OF LONG TERM FINANCE

As the name suggests, Long term financing is a form of financing that is provided for a period of more than a year. Long term financing services are provided to those business entities that face a shortage of capital. There are various long term sources of finance. It is different from short term financing which is normally used to provide money that has to be paid back within a year. The period may be shorter than one year as well.

SOURCES The sources of long-term finance refer to the institutions or agencies from, or through which finance for a long period can be procured. As stated earlier, in case of sole proprietary concerns and partnership firms, long-term funds are generally provided by the owners themselves and by the retained profits. But, in case of companies whose financial requirement is rather large, the following are the sources from, or through which long-term funds are raised. 9.1 Capital Market 9.2 Special Financial Institutions 9.3 Mutual Funds 9.4 Leasing Companies 9.5 Foreign Sources 9.6 Retained Earnings

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11.1 CAPITAL MARKET

Capital market refers to the organization and the mechanism through which the companies, other institutions and the government raise long-term funds. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issuing various securities such as shares debentures, bonds, etc. For trading of securities there are two different segments in capital market. One is primary market and the other is secondary market. The primary market deals with new/fresh issue of securities and is, therefore, known as new issue market. The secondary market on the other hand, provides a place for purchase and sale of existing securities and is known as stock marketorstockexchange. The new issue market primarily consists of the arrangements, which facilitates the procurement of long-term finance by the companies in the form of shares, debentures and bonds. The companies usually issue those securities at the initial stages of their formation and so also later on for expansion and/or modernization of their activities. However, the selling of securities is not an easy task, as the companies have to fulfill various legal requirements and decide upon the appropriate timing and the method of issue. Hence, they seek assistance of various intermediaries such as merchant bankers, underwriters, stockbrokers etc. to look after all these aspects. All these intermediaries form an integral part of the primary market. The secondary market (stock exchange) is an association or organization or a body of individuals established for the purpose of assisting, regulating and controlling the business of buying, selling and dealing in securities. It may noted that it is called a secondary market because only the securities already issued can be traded on the floor of the stock exchange. This market is open only to its members, most of whom are brokers acting as agents of the 21

buyers and sellers of securities. The main functions of this market lie in providing liquidity (ready encashment) to securities and safety in dealings. It is because of the availability of such facilities that people are ready to invest in securities.

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11.2 SPECIAL FINANCIAL INSTITUTIONS (SFI)

A number of special financial institutions have been set up by the central and state governments to provide long-term finance to the business organizations. They also offer support services in launching of the new enterprises and so also for expansionand modernization of existing enterprises. Some of the important ones are Industrial Finance Corporation of India (IFCI), Industrial Investment Bank of India (IIBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), Infrastructure Development Finance Company Ltd. (IDFC), Small Industries Development Bank of India (SIDBI), State Industrial Development Corporations (SIDCs), and State Financial Corporations (SFCs), etc. Since these institutions provide developmental finance, they are also known as DevelopmentBanksor Development Financial Institutions (DFI). Besides these development banks there are a few other financial institutions such as life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC) and Unit Trust of India (UTI) which provide long-term finance to companies and subscribe to their share and debentures. The main functions of these institutions are: (i) To grant loans for a longer period to industrial establishment; (ii) To help the establishment of business units that require large amount of funds and have long gestation period; (iii) To provide support for the speedy development of the economy in general and backward regions in particular; (iv) To offer specialized services operating in the areas of promotion, project assistance, technical assistance services and training and development of entrepreneurs; (v) To provide technical and professional management services and help in identification, evaluation and execution of new projects.

Let us have a brief idea about some of the Special Financial Institutions.

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(A) Industrial Finance Corporation of India (IFCI)

It is the oldest SFI set up in 1948 with the primary objective of providing long-term and medium-term finance to large industrial enterprises. It provides financial assistance for setting up of new industrial enterprises and for expansion or diversification of activities. Italso provides support to modernization and renovation of plant and equipment in existing industrial units. It can grant loan or subscribe to debentures issued by companies repayable in not more than 25 years. It can also guarantee loans raised from other sources or debentures issued to the public, and take up underwriting of the public issue of shares and debentures by companies. For ensuring greater flexibility to meet the needs of the changing financial system IFCI now stands transformed to IFCI Ltd. with effect from 1 June 1993.

(B) Industrial Credit and Investment Corporation of India (ICICI)

It was setup in 1955 for providing long-term loans to companies for a period up-to 15 years and subscribe to their shares and debentures. However, the proprietary and partnership firms were also entitled to secure loans from ICICI. Like IFCI, the ICICI also guarantees loans raised by companies from other sources besides underwriting their issue of shares and debentures. Foreign currency loans can also be secured by companies from ICICI. In the context of the emerging competitive scenario in the finance sector, ICICI has merged with ICICI Bank Ltd., with effect from 3 May 2002. Consequent upon the merger, the ICICI group’s financing and banking operations have been integrated into a single full service banking company.

(C) Industrial Development Bank of India (IDBI)

It was set up in 1964 as asubsidiary of Reserve Bank of India for providing financial assistance to all types of industrial enterprises without any restriction on the type of finance and the amount of funds. It could also refinance loans granted by other financial institutions and offer guarantees for the loans raised from the capital market or scheduled banks. It also discounts and rediscounts the commercial bills of exchange and undertakes underwriting of the public issues. IDBI, like ICICI, has also transformed into a commercial bank and has been retitled as IDBI Ltd. with effect from 1 October 2004 with IDBI Bank merged into it.

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(E)Industrial Investment Bank of India (IIBI)

The erstwhile IndustrialReconstruction Bank of India (IRBI), an institution which was set up for rehabilitation of small units has been reconstituted in 1997 as Industrial Investment Bank of India. It is a full-fledged all purpose development bank with adequate operational flexibility and autonomy. After the reconstruction its focus has changed from rehabilitation finance to development banking.

(D) Small Industries Development Bank of India (SIDBI)

It was set up in 1990as a principal financial institution for the promotion, financing and development of small-scale industrial enterprises. It is an apex institution of all the banks providing credit facility to small-scale industries in our country. It offers refinancing of bills, rediscounting of bills, and several other support services to Small Scale Industries (SSI). It undertakes a wide range of promotional and development activities for improving the inherent strength of SSI units and creating avenues for the economic development of the rural poor.

(E) State Financial Corporations (SFCs)

In order to provide financial assistanceto all types of industrial enterprises (Proprietary and partnership firms as well as companies) most of the states of our country have set up SFCs. The primary objective of these corporations is to accelerate the pace of Industrial development in their respective states. SFCs provide finance in the form of long-term loans or through subscription of debentures, offer guarantee to loans raised from other sources and take up underwriting of public issues of shares and debentures made by companies. However, they cannot directly subscribe to the shares issued by the companies. The SFC (Amendment) Act, 2000 has provided greater flexibility to SFCs to cope with the changing economic and financial environment of the country.

(F) State Industrial Development Corporations (SIDCs)

These corporationswere set up in 1960s and early 1970s by most state governments for promotions and development of medium and large-scale industries in their respective states. 25

In addition to providing financial assistance to industrial units, they also undertake a variety of promotional activities. They also implement the various incentive schemes of the central and state governments.

(G) Other Financial Institutions

Apart from the above special financial institutions,there are a few other organizations, which act as important source of long-term finance. These are:  Life Insurance Corporation of India (LIC):It was set up in 1956 on nationalization of life insurance business in India. Primarily it carries on the business of life insurance and deploys the funds in accordance with national priorities and objectives. It invests mainly in government securities and shares, debentures and bonds of companies. It also extends financial assistance to banks and other institutions for social development and infrastructure facilities. It also underwrites new issues of shares and grant loans to the corporate sectors. Its performance with regard to assistance to corporate sector has been significant both in terms of sanctions and disbursements.  General Insurance Corporation of India (GIC):It was established in 1973 on nationalization of general insurance business in India. Like LIC, its investment priority is socially oriented sectors of the economy, and invests its funds in government securities and share and debentures of companies. It also provides term loans and underwriting facility to new and existing industrial undertakings.  Unit Trust of India (UTI):It was set up in 1964 as an investment trust with capital of Rs.5crore subscribed by Reserve Bank of India, LIC, State Bank of India and other financial institutions. It has been playing an important role in mobilizing the savings of the community through sale of units under various schemes (most well-known being US-64 and master shares) and channelizing them into corporate investments. It has also been extending financial assistance to the companies by way of term loans, bills rediscounting, equipment leasing and hire purchase financing.

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 Export and Import Bank of India (EXIM Bank):The Export and Import Bank of India was set up on January, 1982 to take over the operations of international finance wing of the IDBI and act as an apex institutions in the field of financing foreign trade. The main functions of the Bank are: (i)

Financing of export and import of goods and services;

(ii)

Granting deferred payment credit for medium and long term duration;

(iii)

Providing loans to Indian parties to enable them to contribute to share capital of joint ventures in foreign countries and;

(iv)

Extending refinance facilities to commercial banks in respect of export credit. Recently it has introduced production equipment finance programme under which it provides rupee term finance to export oriented units for acquisition of equipment. Apart from these, the EXIM Bank also undertakes merchant banking and development banking functions as considered necessary to finance promotional activities and providing counseling services to persons engaged in export-import business.

 Venture Capital Institutions:Venture Capital is a form of equity finance designed especially for funding high risk and high reward projects of young entrepreneurs. It helps them to turn their research and development projects into commercial ventures by providing them the initial capital and managerial assistance. The initial capital is provided in the form of equity participation through direct purchase of the share and debentures of the enterprise set up for the purpose. The institutions providing venture capital also actively participate in the management of the entrepreneurs’ business. By actively involving and supporting the enterprises, they able to protect and enhance the value of their investment.

The development of venture capital institutions is of recent origin in India. The concept was formally introduced in 1986-87 when the Government announced the creation of a venture fund to be operated by IDBI. It was followed by ICICI, IFCI and two public sector banks (State Bank of India and Canara Bank) who set up separate companies for the purpose. Some state government controlled developmentfinancial institutions viz., Gujarat Industrial Investment Corporation and Andhra Pradesh State Corporation also promoted their venture capital companies. In 1992-

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93, SIDBI also set up a venture capital fund for providing financial assistance for innovative ventures in small-scale sector.

BANKS

In the previous lesson you learnt that commercial banks usually provide short-termfinance to business firms in the form of loans and advances, cash credit, overdraft etc. But now-a-days, most of the commercial banks have also started term lending (long and medium term) and providing need based finance of different time periods to firms of all sizes. Consistent with the policy of liberalization, the banks have been allowed to evolve their own methods of assessing financial needs of the borrowers and extend them the term loans for larger size and longer periods. Some of the banks have also started their industrial branches to finance exclusively to industrial enterprises. Thus, the commercial banks also now act as an important source of medium term and long term finance for the business. You know that a large number of cooperative banks are now being operating in our country. These banks have the license from the RBI to operate like commercial banks. They also sometimes provide long-term finances to small and medium scale cooperative industrial units like Sugar factories, food-processing units etc.

NON-BANKING FINANCIAL COMPANIES

You must have heard about various housing finance companies, investment companies, vehicle finance companies etc. operating in private sectors different parts of our country. These companies are categories under Non-Banking Financial Companies, because they perform the twin functions of accepting deposits from the public and providing loans. However they are not regarded as banking companies as they do not carry on the normal banking activities. They raise funds from the public by offering attractive rate of interest and give loans mainly to the wholesale and retail traders, small-scale industries and selfemployed persons. The loans granted by these finance companies are generally unsecured and the interest charged by them ranges between 24 to 36 percent per annum. Besides giving loans and advances, the NBFCs also have purchase and discount funds, undertaken merchant banking, housing finance, lease financing, hire purchase business etc. In our country, NBFCs have emerged as an important financial intermediary due to simplified loan sanction

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procedure, attractive rate of return on deposits, flexibility and timeliness in meetingthe credit needs of the customers.

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11.3 MUTUAL FUNDS

A mutual fund is a "professionally" managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors. On the negative side, investors in a mutual fund must pay various fees and expenses. It remains unclear whether mutual fund management can reliably produce an increase in investment returns exceeding these fees and expenses. Primary structures of mutual funds include open-end funds, unit investment trusts, and closed-end funds. Exchange-traded funds (ETFs) are open-end funds or unit investment trusts that trade on an exchange. Mutual funds are also classified by their principal investments as money market funds, bond or fixed income funds, stock or equity funds, hybrid funds or other. Funds may also be categorized as index funds, which are passively managed funds that match the performance of an index, or actively managed funds. Hedge fundsare not mutual funds; hedge funds cannot be sold to the general public and are subject to different government regulations.

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FEATURES OF MUTUAL FUNDS

The essential features of mutual funds are as follows: 1. It is a trust into which a number of investors invest their money in the form of units to form a large pool of funds. 2. The amount is invested in securities by the managers of the fund. 3. The amount is invested in different securities of reputed companies to ensure definite and regular income. Thus, it helps in minimizing the risk. 4. The mutual fund schemes often have the advantages of high return, easy liquidity, safety and tax benefits to the investors. 5. The net income received on the investments of the fund is distributed over the units held. 6. The managers of the fund are obliged to redeem the units on demand or on the expiry of a specified period.

EXPENSE Investors in a mutual fund pay the fund's expenses. Some of these expenses reduce the value of an investor's account; others are paid by the fund and reduce net asset value. These expenses fall into five categories:

 Management fee The management fee is paid by the fund to the management company or sponsor that organizes the fund, provides the portfolio management or investment advisory services and normally lends its brand to the fund. The fund manager may also provide other administrative services. The management fee often has breakpoints, which means that it declines as assets (in either the specific fund or in the fund family as a whole) increase. The fund's board reviews the management fee annually. Fund shareholders must vote on any proposed increase, but the fund manager or sponsor can agree to waive some or all of the management fee in order to lower the fund's expense ratio. Index funds generally charge a lower management fee than actively-managed funds.

 Distribution charges 31

Distribution charges pay for marketing, distribution of the fund's shares as well as services to investors. There are three types of distribution charges. 

Front-end load or sales charge. A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased. It is expressed as a percentage of the total amount invested or the "public offering price", which equals the net asset value plus the front-end load per share. The front-end load often declines as the amount invested increases, through breakpoints. The front-end load is paid by the investor; it is deducted from the amount invested.



Back-end load. Some funds have a back-end load, which is paid by the investor when shares are redeemed. If the back-end load declines the longer the investor holds shares, it is called a contingent deferred sales charges (CDSC). Like the front-end load, the backend load is paid by the investor; it is deducted from the redemption proceeds.



Distribution and services fee. Some funds charge an annual fee to compensate the distributor of fund shares for providing ongoing services to fund shareholders. In the United States, this fee is sometimes called a 12b-1 fee, after the SEC rule authorizing it. The distribution and services fee is paid by the fund and reduces net asset value.

Distribution charges generally vary for each share class.

Securities transaction fees incurred by the fund A mutual fund pays expenses related to buying or selling the securities in its portfolio. These expenses may include brokerage commissions. These costs are normally positively correlated with turnover.

 Shareholder transaction fees Shareholders may be required to pay fees for certain transactions, such as buying or selling shares of the fund. For example, a fund may charge a flat fee for maintaining an individual retirement account for an investor. Some funds charge redemption fees when an investor sells fund shares shortly after buying them (usually defined as within 30, 60 or 90 days of purchase); redemption fees are computed as a percentage of the sale amount. Shareholder transaction fees are not part of the expense ratio.

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 Fund services charges A mutual fund may pay for other services including: 

Board of directors or trustees fees and expenses



Custody fee: paid to a custodian bank for holding the fund's portfolio in safekeeping and collecting income owed on the securities



Fund administration fee: for overseeing all administrative affairs such as preparing financial statements and shareholder reports, SEC filings, monitoring compliance, computing total returns and other performance information, preparing/filing tax returns and all expenses of maintaining compliance with state blue sky laws



Fund accounting fee: for performing investment or securities accounting services and computing the net asset value (usually every day the New York Stock Exchange is open)



Professional services fees: legal and auditing fees



Registration fees: paid to the SEC and state securities regulators



Shareholder communications expenses: printing and mailing required documents to shareholders such as shareholder reports and prospectuses



Transfer agent service fees and expenses: for keeping shareholder records, providing statements and tax forms to investors and providing telephone, internet and or other investor support and servicing



Other/miscellaneous fees

The fund manager or sponsor may agree to subsidize some of these charges. Expense ratio The expense ratio equals recurring fees and expenses charged to the fund during the year divided by average net assets. The management fee and fund services charges are ordinarily included in the expense ratio; front-end and back-end loads, securities transaction fees and shareholder transaction fees are normally excluded. To facilitate comparisons of expenses, regulators generally require that funds use the same formula to compute the expense ratio and publish the results. No-load fund

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In the United States, a fund that calls itself "no-load" cannot charge a front-end load or backend load under any circumstances and cannot charge a distribution and services fee greater than 0.25% of fund assets

 Controversy regarding fees and expenses Critics of the fund industry argue that fund expenses are too high. They believe that the market for mutual funds is not competitive and that there are many hidden fees, so that it is difficult for investors to reduce the fees that they pay. They argue that the most effective way for investors to raise the returns they earn from mutual funds is to invest in funds with low expense ratios. Fund managers counter that fees are determined by a highly competitive market and, therefore, reflect the value that investors attribute to the service provided. They also note that fees are clearly disclosed. TYPES OF MUTUAL FUND

Keeping in view the investment objectives of the investors the mutual funds usuallyhave a large variety of schemes such as equity fund, debt fund, balanced fund, growth fund, income fund, liquid fund, tax saver fund, index fund and so on. These schemes are broadly classified into two categories as follows:

(a) Open Ended Funds: These funds have no fixed corpus and period. Such fund continuously offer units for sale and is ready to buy back the units surrendered. In other words, investors are free to buy from, or sell to, the trust any number of units at any point of time at prices which are linked to the net asset value (NAV) of the units.

(b) Close Ended Funds: In case of these funds, subscriptions from the investors are collected during a specified time period and have a fixed corpus. Not only that, the investors cannot redeem their units till the specified maturity date. However, to provide liquidity, these are listed on the stock exchange and the investors can purchase and sell through the brokers at the market price without any difficulty. It may be noted that Unit Trust of India was the first mutual fund started in India as early as 1964. Later, LIC, GIC and some nationalized banks also launched their mutual funds with 34

high degree of success. However, during post liberalization era, many private sector mutual funds have entered the fray. To mention a few, these are: Birla Sun Life, HDFC, HSBC, ICICI Prudential, DSP Merrill Lynch, DBS Chola Mutual Fund.

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CHAPTER 9

CONCLUSION

The main objective of SIDBI is to provide financial assistance to all Small scale Industries(SSI) throughout India. SIDBI motive is promoting industrial development in India, it emphasizes on the development of the Small and Medium Scale Industries not to earn much profits. The maximum shares of profits of SIDBI are transferred to reserves. It can have more debt capital, hence the large portion of profits are utilized for the payment of interest to long-term securities.

The importance of small and medium enterprises in any economy cannot be overlooked as they form a major chunk in the economic activity of nations. The singular contribution of SMEs in on account of their unique characteristics.Their role in the economic activities is been benefited in both tangible and intangible ways, it is pertinent to mention that small industrial development bank of India has achieved landmark results in the domain of small and medium enterprise financing and fulfilling their credit requirements time to time in various forms such as long term project finance, working capital finance, bill discounting, etc. however considering the level of appetite for credit facilities of Indian small and medium enterprises, private and public sector banks in India need to work out an unique and innovative model of financing to this vital sector (SME) of Indian economy.

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Chapter 10 Bibliography Books refer

 Small and Medium Enterprises  CASE STUDY: SIDBI – A Successful Financial Institution in SME Financing WEBSITES PREFERED TO…..  https://www.google.co.in/search?source=hp&ei=NNETWr3PLsua8wWskZzgBQ&q= SIDBI+IS+ROLE+OF+LONG+TERM+FINANCIAL+PROVISION&oq=SIDBI+IS+ ROLE+OF+LONG+TERM+FINANCIAL+PROVISION&gs_l=psyab.3...2067.22170.0.28711.0.0.0.0.0.0.0.0..0.0....0...1c.1.64.psyab..0.0.0....0.08KZc2VnEuY  https://www.google.co.in/search?ei=UtETWvWSIYKw8QWHxIuoBg&q=SIDBI+IS +ROLE+OF+LONG+TERM+FINANCE&oq=SIDBI+IS+ROLE+OF+LONG+TER M+FINANCE&gs_l=psyab.3...110817.113740.0.115023.0.0.0.0.0.0.0.0..0.0....0...1c.1.64.psyab..0.0.0....0.Lf2XSFZMCTo  https://www.google.co.in/search?ei=xtETWundLoP28gXIiYTQDg&q=SIDBI+&oq= SIDBI+&gs_l=psy-ab.3...50697.53314.0.54162.0.0.0.0.0.0.0.0..0.0....0...1c.1.64.psyab..0.0.0....0.bnf-852u7Ks  https://www.google.co.in/search?ei=_tETWvyLBIyA8wWlha6YBA&q=SIDBI+IN+ SHORT+TERM&oq=SIDBI+IN+SHORT+TERM&gs_l=psyab.3...19859.25194.0.26471.0.0.0.0.0.0.0.0..0.0....0...1c.1.64.psyab..0.0.0....0.Eq3jzcGWPWg

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