Page 279 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 21: Capital Market in India and Working of SEBI

developed state of the capital market and the traditional preference of the banking sector in India to Notes
meet only the working capital requirements of industry and trade. In the last four decades, the DFIs
had largely succeeded in meeting their primary objective of providing funds for industrial investment.
They had also tried to channel increasing flow of assistance to industrially less-developed and
backward areas. Besides, they had attempted a wide range of promotional activities including :
(a) a major thrust towards entrepreneurship development programmes;
(b) identifying industrial promotion needs of deserving segments of the industrial sector and
evolving measures for their growth; and
(c) providing avenues for commercialisation of indigenous resources.
Broadly, all-India development financial institutions looked after the needs of large industrial
enterprises; and state level institutions (SFCs and SIDCs) were meeting the financial requirements of
the small and medium sector enterprises in the respective areas of their jurisdiction.
DFIs accounted for a major share of corporate debt, with increasing reliance of the corporate sector
on them, DFIs had representation in the boards of management and also had a say in internal
management of companies.
DFIs had been increasing their share in the equity of the private corporate sector, through the use of
the convertibility clause and through their underwriting commitments. Along with investment
institutions (LIC, GIC and UTI) their equity holdings in most major companies were considerable.
They could and often did influence mergers and acquisitions.
21.3 Non-Banking Finance Companies (NBFCs)

In recent years, non-banking finance companies variously called as “finance corporations”, “Loan
Companies”. “Finance Companies”, etc., have mushroomed all over the country. These finance
companies, with very little capital of their own — often less than ` 1 lakh — have been raising
deposits from the public by offering attractive rates of interest and other incentives. They advance
loans to wholesale and retail traders, small-scale industries and self-employed persons. Bulk of their
loans are given to parties which do not either approach commercial banks or which are denied credit
facilities by the latter. The finance companies give loans which are generally unsecured and the rate
of interest charged by them may range anywhere between 24 to 36 per cent per annum. Besides
giving loans and advances to the small sector, NBFCs, in coporated under the companies Act 1956,
run chit funds, purchase and discount hundis, and have also taken up merchant banking, mutual
funds, hire-purchase, leasing, etc.
Historically, after Independence, all-India financial institutions like IFCI, ICICI, IDBI and others played,
a very important role in providing medium and long term credit to various sectors of the economy.
st
By the beginning of the 21 century, these financial institutions - called variously as public sector
term lending financial institutions, development financial institutions, etc. - declined in importance
and some of them disappeared (ICICI and IDBI) and some were wound up (IDBI). Some specialized
lending and refinance institutions like Import Export Bank of India, National Housing Bank (NHB),
NABARD, SIDBI and Tourism Finance Corporation of India have continued to grow in importance
by generally providing refinance to banks and other financial companies. LIC is also a financial
institution which deploys its assets largely in marketable securities. State Finance Corporations (SFCs)
and State Industrial Development Corporation (SIDCs) and North Eastern Development Finance
Corporation Ltd. (NEDFI) are notified public sector financial corporations. All these non-banking
financial institutions are mostly government-owned and they have been providers of long-term project
loans.
Other non-banking institutions include wide variety of intermediaries such as insurance companies,
non-banking financial companies, primary dealers, capital market intermediaries such as mutual
funds.
RBI itself accepts the attractiveness of NBFCs : “Simplified sanction procedures, orientation towards
customers, attractive rates of return on deposits and flexibility and timelines in meeting the credit

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