Unit 4 Institutional Financing

Introduction:
The economic development of any country depends upon the extent to which its financial system
efficiently and effectively mobilizes and allocates resources. There are a number of bank and financial
institutions that perform the functions one of them is the development bank. Development bank are
unique financial institutions that perform the special task of fostering the development of a nation,
generally not undertaken by other banks.
Development banks are financial agencies that provide medium and long term financial assistance and
act as catalytic agents in promoting balanced development of the country. They are engaged in promotion
and development of industry, agriculture and other key sectors. They also provide development services
that can aid in the accelerated growth of an economy.
The objectives of development banks are as follows.
1. To serve as an agent of development in various sectors, namely industry,agriculture and international
trade.
2. To accelerate the growth of economy
3. To allocate resources to high priority areas.
4. To foster rapid industrialization , particularly in the private sector
5. To develop entrepreneurial skills
6. To promote the development of rural areas.
7. To finance housing, small scale industries, infrastructure And social
utilities.
Industrial Development bank of India:

Industrial Development bank of India (IDBI) was constituted under the Industrial Development Bank of India
Act, 1964 as a Development Financial Institution and came into being as on July 01, 1964 vide GoI notification
dated June 22, 1964. It was regarded as a Public Financial Institution in terms of the provisions of Section 4A
of the Companies Act, 1956. It continued to serve as a DFI for 40 years till the year 2004 when it was
transformed into a Bank.
Towards achieving the faster inorganic growth of the Bank, IDBI Bank Ltd., a wholly owned subsidiary of
IDBI Ltd. was amalgamated with IDBI Ltd. in terms of the provisions of Section 44A of the Banking
Regulation Act, 1949 providing for voluntary amalgamation of two banking companies. The amalgamation
became effective from April 02, 2005.
The United Western Bank Ltd. (UWB), a Satara based private sector bank was placed under moratorium by
RBI. Upon IDBI Ltd. showing interest to take over the said bank towards its further inorganic growth, RBI
and Govt. of India amalgamated UWB with IDBI Ltd. in terms of the provisions of Section 45 of the Banking
Regulation Act, 1949. The amalgamation came into effect on October 03, 2006.
Objectives of IDBI
The main goals of IDBI (Industrial Development Bank of India) are:
1. To provide financial support to industrial businesses for their growth and development.
2. To assist organizations involved in managing and expanding industries.
3. To conduct research and surveys to promote industrial development.
Functions of IDBI
IDBI plays an important role as the top development bank in India, coordinating the activities of other
development banks and financial institutions in the capital market. Its main functions focus on providing
financial assistance and promoting industrial growth. These functions can be divided into two categories:
1. Financial Assistance
Direct Assistance:
 IDBI offers direct loans and advances to industries without any limit on the amount.
 It guarantees loans obtained by industries from cooperative banks, scheduled banks, the Industrial
Finance Corporation of India (IFCI), and other recognized financial institutions.
Indirect Assistance:
 IDBI refinances long-term loans (3 to 25 years) provided by financial institutions like IFCI and State
Financial Corporations to industries.
 It also refinances short-term loans (up to 10 years) provided by State Industrial Development
Corporations (SIDCs), commercial banks, and cooperative banks.
 IDBI supports financial institutions by purchasing their shares and bonds, helping them secure
additional funds.
2. Developmental Activities of IDBI
IDBI undertakes several initiatives to promote industrial and economic development in India. These activities
can be categorized as follows:
a) Promotional Activities
To support its developmental role, IDBI carries out various promotional activities, including:
 Running development programs for entrepreneurs.
 Providing consultancy services to small and medium enterprises (SMEs).
 Organizing programs for voluntary organizations engaged in uplifting underprivileged sections of
society.
 Promoting entrepreneurship, self-employment, and wage employment for weaker sections in the
industrial sector through voluntary agencies.
 Supporting science and technology initiatives.
 Establishing entrepreneur parks.
 Encouraging energy conservation.
 Setting up shared quality testing centers for small industries.
b) Technical Consultancy Organizations (TCOs)
IDBI, in partnership with other national financial institutions, has established a network of Technical
Consultancy Organizations (TCOs) across the country. These organizations aim to provide consultancy and
advisory services at affordable costs, especially for new and small entrepreneurs.
 TCOs assist entrepreneurs with project selection, planning, analysis, and appraisal.
 They also support project implementation, monitoring, and control.
c) Entrepreneurship Development Institute (EDI)
Recognizing that entrepreneurship drives industrial development, IDBI played a key role in setting up
Entrepreneurship Development Institutes (EDIs).
 These institutes aim to promote entrepreneurship and provide training to individuals.
 IDBI also funds studies and research projects that are important for industrial growth and development.
Modus Operandi/ operations:
Modus Operandi / Operations
IDBI Bank ensures that its resources are used for socially beneficial purposes by creating policies and
schemes to guide its executives in providing financial assistance. Below is an overview of the main policies:
Sanction and Monitoring of Projects

 Financial assistance is approved only if the project meets all required criteria.
 IDBI monitors the progress of projects to ensure that funds are used for their intended purposes.
 The bank tracks whether the project is on schedule and within the estimated time and cost.

Policy on Industrial Projects

 IDBI supports projects requiring large capital investments or advanced technology.

 Priority is given to projects initiated by entrepreneurs in underdeveloped areas.
 Financial assistance is provided for new projects as well as for the expansion, modernization, or
renovation of existing units.

Policy on Types of Assistance

IDBI offers financial support in various forms, including:

 Equipment financing.
 Corporate loans.
 Working capital loans.
 Direct discounting of bills.
 Equipment leasing.
 Venture capital funding.
 Refinancing loans for medium-scale industries.
 Rediscounting of bills.

Policy on Size of Assistance

 IDBI primarily supports small and medium-sized projects.

 The amount of assistance depends on the type of support. For example, corporate loans can cover up
to 70% of the cost of capital goods or raw materials, with a minimum loan amount of ₹5 crore.
 Policy on Loan Security
The type of financial assistance determines the security required:

 Corporate loans: Secured through a demand promissory note and a charge on movable and
immovable assets, with a 30% margin.
 Hypothecation: Loans may be secured by hypothecating raw materials or components bought with
the loan.
 Pledge of market securities: Requires a 50% margin based on the average market price over the last
six months.
 Personal guarantees: Provided by promoters or directors if deemed necessary.