Page 164 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 8: Financial Institutions

diversification programmes while the new industries required enormous investment for setting Notes
up gigantic projects in the capital goods sector. However, there were gaps in the banking system
and capital markets which needed to be filled to meet this enormous requirement of funds.

1. Commercial banks had traditionally confined themselves to financing working capital
requirements of trade and industry and abstained from supplying long-term finance.
2. The managing agency houses, which had served as important adjuncts to the capital market,
showed their apathy to investment in risky ventures.
3. Several malpractices, such as misuse of funds, excess speculation, and manipulations were
unearthed. Owing to this, the investors were not interested in investing in the capital
market.
4. There were a limited number of issue houses and underwriting firms that sponsored
security issues.
Hence, to fill these gaps, a new institutional machinery was devised-the setting up of special
financial institutions, which would provide the necessary financial resources and know-how so
as to foster the industrial growth of the country.
The first step towards building up a structure of development financial institutions was taken in
1948 by establishing the Industrial Finance Corporation of India Limited (IFCI). This institution
was set up by an Act I of Parliament with a view to providing medium- and long-term credit to
units in the corporate sector and industrial concerns.

In view of the immensity of the task and vast size of the country, it was not possible for a single
institution to cater to the financial needs of small industries spread in different states.
Hence, the necessity for setting up I regional development banks to cater to the needs of small
and medium enterprises was recognized. Accordingly, the State Financial Corporations Act was
passed in 1951 for setting up state financial corporations (SFCs) in different states. By 1955-56, 12
SFCs were set up and by 1967-68, all the 18 SFCs now in operation came I into existence. SFCs
extend financial assistance to small enterprises.
Even as the SFCs were being set up, a new corporation was established in 1955 at the all-India
level known as the National Small Industries Corporation (NSIC) to extend support to small
industries. The NSlC is a fully government owned corporation and is not primarily a financing
institution. It helps small scale I industries (SSls) through various promotional activities, such as
assistance in securing orders, marketing the products of SSls, arranging for the supply of
machinery, and training of industrial workers.
The above institutions had kept themselves away from the underwriting and investment business
as these were considered to be risky. Due to the absence of underwriting facilities, new
entrepreneurs and small units could not raise equity capital nor could they get loan assistance
owing to this weak financial position. To fill this gap, the Industrial Credit and Investment
Corporation of India Limited (ICICI) was set up in January 1955 as a joint stock company with
support from the Government of India, the World Bank, the Commonwealth Development
Finance Corporation, and other foreign institutions. The ICICI was organised as a wholly
privately owned institution; it started its operation as an issuing-cum-lending institution. It
provides term loans and takes an active part in the underwriting of and direct investments in the
shares of industrial units.
In 1958, another institution, known as the Refinance Corporation for Industry (RCI) was set up
by the Reserve Bank of India (RBI), the Life Insurance Corporation of India (LIC), and commercial
banks with a view to providing refinance to commercial banks and subsequently to SFCs against
term loans granted by hem to industrial concerns in the private sector. When the Industrial
Development Bank of India (IDBI) was Jet up in 1964 as the central coordinating agency in the
field of industrial finance, the RCI was merged with it.

LOVELY PROFESSIONAL UNIVERSITY 159