Understanding ‘Institutional Financing’.
Traditionally, the role of commercial banks in providing long-term finance to industries in India has been very negligible. So, the Government of India has set up a number of special finance institutions to provide long-term finance to industry with the object of stimulating industrial development of the country by cheapening and widening the channels of industrial finance. These include the Industrial Finance Corporation, the Industrial finance. These include the Industrial Finance Corporation, the Industrial Credit and Investment Corporation, State Financial Corporations, the Industrial Development Bank of India and the Industrial Reconstruction Bank of India.
These institutions provide long-term finance to new as well as existing companies. These institutions do not provide only finance to industrial concerns but provide promotional, technical and managerial services. They take initiative in locating and filing the gaps in the industrial structure of the country. Assistance, direct subscription to company securities underwriting of new security issues, grant of loans, guaranteeing of deferred payments against imports of capital goods. They sanction long-term loans at low rate of interest. Some of these institutions, particularly the ICICI provide technical know-how to all eligible companies on the advice of experts on the planning and execution of projects. These institutions assist companies which are financially sound and credit-worthy so, they receive boost in the market in marketing their goods. These institutions ensure that the assistance provided is used for the declared purpose by the recipient companies.
The main advantages of institutional finance are as follows:
I. Finances are available to companies for modernization and expansion purposes at reasonable interest rates so as to make the companies to develop a sound and balanced capital structure without depressing dividends on equity shares.
II. These institutions either directly subscribe to or underwrite the share or debentures of new companies. Thus risk as well as loan capital is made available easily.
III. Financing of companies by these institutions increase the credit worthiness of these companies as they provide finance only after carrying out a through investigation.
IV. Loans and guarantees in foreign currency and deferred payment facilities are available for the import of necessary machinery and equipment.
V. The rate of interest and repayment procedures are convenient and economical.
VI. Apart from finance, these institutions provide expert guidance and advice for the successful planning and administration of projects.
Limitations of Institutional Finance
However, institutional finance may involves the following limitations – they are always scarce and therefore, they require proper planning and control in order to achieve the best out of the funds available. Thus, the scope of financial management includes raising of sufficient funds and their efficient use.
In the modern money – using economy, the importance of finance has increased manifold due to large scale operations and use of capital intensive techniques of production and distribution. Finance function puts a limit on all other activities e.g. marketing, personnel, production etc. in the business. The success of a business very much depends on the financial success in a business enterprise.