Get AHSEC Class 12 Finance Chapter: 5 DEVELOPMENT FINANCIAL INSTITUTION Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 5 DEVELOPMENT FINANCIAL INSTITUTION Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 5 DEVELOPMENT FINANCIAL INSTITUTION
DEVELOPMENT FINANCIAL INSTITUTION
1. What role do development financial institutions play in the economic development of a country? Give some examples
Ans: Developmental Financial Institutions (DFIs) play a crucial role in the economic development of a country by providing institutional finance to various sectors. In India, several DFIs have been established to cater to different financial requirements, particularly for medium-term and long-term projects.
(a) Industrial Finance Corporation of India (IFCI), 1948: IFCI was one of India’s first development financial institutions, founded in 1948. Its primary focus was to provide medium and long-term finance to industrial projects, supporting industrial growth and modernization.
(b) State Finance Corporations (SFCs), 1951: State Finance Corporations were set up in 1951 to promote industrialization at the state level. It provides financial assistance to small and medium-sized enterprises (SMEs) and industries. It also offers medium and long-term loans to businesses, supporting their growth and development.
(c) State Industrial Development Corporations (SIDCs), 1956: SIDCs were established in 1956 with the objective of promoting industrial growth within specific states. These corporations are responsible for developing industrial infrastructure, providing financial assistance and creating a conducive environment for industries to flourish.
(d) National Bank for Agriculture and Rural Development (NABARD), 1982: While not a traditional DFI, NABARD serves a similar role in the agricultural and rural sectors. NABARD was founded in 1982 to provide Financial support to agriculture-related activities, rural development projects and rural infrastructure. These DFIs facilitate economic development by offering loans, equity investments and other financial services to sectors that are critical for overall growth. By addressing the medium and long-term financial needs of different industries and sectors, DFIs contribute to job creation, technological advancement and the overall progress of the nation’s economy.
2. Discuss the objectives of the Industrial Finance Corporation of India (IFCI)?
Ans: The Industrial Finance Corporation of India (IFCI) was established on July 1, 1948, under the Industrial Finance Corporation of India Act, 1948, It was India’s first development bank. It aimed to provide financial support to medium and large-scale industries. In response to economic reforms in 1991, IFCI transformed from a development bank to a public limited company registered under the Companies Act, 1956, on May 21, 1993. Its headquarter is in Delhi and it operates through regional offices in Mumbai, Chennai, Kanpur and Kolkata.
Objectives of IFCI [AHSEC 2024]
i. Industrial Credit: It provides long and medium-term credit to industrial concerns engaged in key sectors like manufacturing, mining, shipping and electricity generation & distribution, driving economic development.
ii. Project Support: It assists in setting up new projects and modernizing existing industrial concerns in the medium & large-scale sector, fostering technological progress.
iii. Credit Limit: It grants credit to individual concerns, with a maximum limit of INR one crore, which can be exceeded with government authorization, ensuring financial flexibility.
iv. Loan Guarantees: It acts as a credible guarantor for loans, deferred payments and international transactions, bolstering the trustworthiness of Indian companies abroad.
v.Cooperative & Backward Areas: It supports projects in cooperative and backward areas, offering financial aid, expert guidance and managerial support to uplift small-scale industries.
vi. Long-term Credit: It provides credit spanning up to 25 years, facilitating substantial capital infusion and long-term financial stability for companies.
vii. Underwriting Support: It engages in underwriting and direct subscription of shares and debentures, injecting capital and becoming a steadfast shareholder to foster company growth.
3. Explain the key functions of the Industrial Finance Corporation of India (IFCI)?
Or
What are the Financial Assistance /Promotional Activities /Financial Services functions of IFCI?
Ans: IFCI plays a crucial role in supporting various aspects of industrial development through three main categories: A. Financial Assistance B. Promotional Activities and C. Financial Services.
A. FINANCIAL ASSISTANCE: i. IFCI provides long-term loans and advances to industrial businesses that are payable within a span of 25 years. Additionally, it can convert a portion of these loans into equity shares if it chooses to do so.
ii. The corporation helps industries by underwriting their securities, which includes shares, bonds, or debentures, that need to be sold within 7 years.
iii. IFCI directly invests in the shares and debentures of public limited companies.
iv. When industrial businesses seek loans from banks, IFCI can provide a guarantee, making it easier for these businesses to secure loans on favorable terms.
V. IFCI also offers guarantees for deferred payments when Industries buy capital goods either domestically or internationally.
vi. Acting as an agent of the central government or international organizations like the World Bank, IFCI assists in managing loans granted to industrial businesses.
These financial assistances are provided for:
(a) Establishing new industrial ventures.
(b) Expanding or diversifying existing businesses.
(c) Modernizing and upgrading current operations.
(d) Fulfilling ongoing financial obligations and working capital needs of industrial concerns.
B. PROMOTIONAL ACTIVITIES:
i. IFCI plays a role in identifying opportunities for new industrial endeavors, thus contributing to industrial growth.
ii. The corporation aids in the development of small and medium-sized enterprises by guiding them. through the project identification, preparation and implementation processes.
iii. IFCI actively contributes to boosting industrial growth and reducing regional economic disparities.
iv. It has been pivotal in establishing key entities in areas like stock exchanges, entrepreneurship development, consultancy organizations and education and skill enhancement.
V. In partnership with the Indian government, IFCI has allocated venture capital funds to support entrepreneurial activities among the scheduled caste.
vi. IFCI also serves as a primary agency for a credit enhancement guarantee scheme aimed at encouraging entrepreneurs from disadvantaged backgrounds.
C. FINANCIAL SERVICES:
i. IFCI offers corporate counseling for financial restructuring, helping struggling businesses to get back on track.
ii. It assists businesses in negotiating terms and conditions for collaborations with foreign partners.
iii. IFCI plays a critical role in revitalizing financially distressed companies.
iv. The corporation is even willing to finance riskier projects that might not easily find funding elsewhere.
V. IFCI has taken steps to support informed investment decisions by promoting the establishment of ICRA Ltd, a credit rating agency.
vi. It has also set up a Management Development Institute to provide training in modern management techniques to entrepreneurs and individuals from both the public and private sectors. Thus, IFCI plays an essential role in fostering the growth of industries by offering financial assistance, promoting industrial opportunities and providing a range of financial services to the diverse needs of businesses.
4. What is meant by SFCS? What are its objectives and functions? [AHSEC 2024]
Ans: The State Financial Corporations Act of 1951 empowers Indian states and union territories to establish State Financial Corporations (SFCs) to provide financial aid to micro, small and medium-scale industries. SFCS offer loans to various types of businesses, including individual trading concerns, partnership firms and both private and public limited companies.
Currently, there are 18 SFCs in India. Among these, 17 were established under the State Financial Corporations Act of 1951. The Tamilnadu Industrial Investment Corporation Limited, initially formed under the Companies Act of 1949, now functions as an SFC. Notably, the Punjab Financial Corporation was the country’s first SFC, established in February 1953.
Objectives of State Financial Corporations (SFCs): [AHSEC 2024]
i. Providing Long & Medium-Term Loans: SFCs aim to provide industrial concerns with loans repayable within a maximum period of 20 years.
ii. Setting Financial Assistance Limits: These corporations extend financial aid with an upper limit of Rs. 60 lakhs for corporate and cooperative sector enterprises, while the limit is Rs. 30 lakhs for other entities such as partnerships and Hindu Undivided Families.
iii. Supporting Smaller Businesses: SFCs focus on assisting industrial concerns with paid-up share capital and free reserves not exceeding Rs. 3 crores.
iv. Promoting Regional Development: SFCs emphasize the development of backward areas and the growth of small-scale industries to foster overall economic progress and create employment opportunities.
v. Encouraging Ownership Diversity: The objective includes promoting wider ownership in industrial ventures.
vi. Engaging in Refinancing and Equity Finance: SFCS participate in refinancing and equity finance activities on behalf of SIDBI.
vii. Diversified Support to Various Sectors: These institutions provide financial assistance to a wide range of sectors, including road transport, tourism, healthcare and emerging fields like floriculture and poultry Farming.
Functions of State Financial Corporations (SFCs):
i. Loan and Debenture Provision: SFCs grant loans or subscribe to debentures for industrial concerns, typically with a repayment period of up to 20 years, including the option to convert debt into equity.
ii.Loan Guarantees: These corporations offer guarantees for loans repayable within 20 years taken by Industrial concerns.
III. Securities Underwriting: SFCs underwrite the issuance of stocks, shares and bonds by industrial concerns to help them raise capital.
iv. Deferred Payment Guarantees: They guarantee deferred payments related to the purchase of capital goods by industrial concerns.
V. Investing in Stocks and Shares: SFCs subscribe to or purchase stocks, shares, bonds, or debentures of industries, up to a maximum of 30% of their subscribed capital.
vi. Agency Services: SFCs act as agents for Central and State Governments, IFCI and other financial institutions, especially in matters related to granting loans.
vil. Technical and Administrative Assistance: They provide support to industrial concerns for the promotion, management and expansion of their operations.
viii. Industry Promotion and Development: SFCS contribute to the planning and development of various industries, which in turn supports the growth of small-scale industries.
ix. Sales Support: These corporations assist small-scale industries by providing sales backup to aid in their development.
x .Financial Assistance Methods: SFCS offer a variety of financial assistance methods, including term loans, direct equity and debenture subscriptions, loan and deferred payment guarantees, bill discounting and seed or special capital.
Thus, we can conclude that State Financial Corporations (SFCs) have clear objectives and perform a range of functions aimed at providing financial support to industrial concerns and fostering industrial development.
5. What do you mean by State Industrial Development Corporations (SIDCs)? What are its objectives and functions?
Ans: State Industrial Development Corporations (SIDCs) were established in the 1960s and early 1970s under the Companies Act, 1956, as wholly-owned entities of state governments. They serve as catalysts for promoting medium and large enterprises, aiding industrial growth and developing infrastructure in their states or union territories. With 28 operating in India, some also function as Small Industries Development Corporations (SFCs) to assist small and medium enterprises. Moreover, 7 SIDCs focus on infrastructure and extension services for the small-scale sector’s advancement.
Objectives of SIDCS:
I. Growth of Small-Scale Sector: The primary objective of SIDCS is to drive growth in the small-scale sector by extending loans to medium and large industrial units.
ii. Entrepreneurship and Skill Development: SIDCS contribute to fostering entrepreneurship and enhancing skill development.
iii. Facilitating Infrastructure Development: They play a role in facilitating the development of industrial infrastructure.
iv. Promoting Micro, Small and Medium Enterprises: SIDCs aim to promote micro, small and medium enterprises within their jurisdictions.
V. Providing Marketing Support: SIDCS focus on offering publicity and marketing support to industries.
Functions of SIDCs:
i. Accelerate Industrialization: SIDCS serve as instruments to accelerate industrialization in their respective states.
ii. Financial Support: They provide loans and guarantees to various companies across industries.
ili. Infrastructure Development: SIDCs take on responsibilities such as constructing sheds, developing industrial areas and providing necessary infrastructure.
iv. Promotional Programs: They engage in identifying projects, conducting techno-economic surveys, feasibility studies and entrepreneurial training.
v. Raw Material Procurement: SIDCS procure and supply raw materials from domestic and international markets to support small-scale industries.
vi. Marketing Assistance: They implement schemes for effective marketing assistance to diverse industrial units.
vii. Working Capital Solutions: They address working capital issues faced by various industrial units.
viii. Support to Women Entrepreneurs: SIDCs actively promote and support industrial ventures run by women entrepreneurs.
ix. Skill Development Centers: SIDCs establish Skill Development Centers to train workers in various skills, ensuring a skilled labor pool for small-scale industries.
X. Financial Assistance: SIDCs extend financial support through rupee loans, share/debenture subscriptions, guarantees and inter-corporate deposits.
6. What is NABARD? When was it formed? Discuss its objectives and functions? [AHSEC 2024]
Ans: The National Bank for Agriculture and Rural Development (NABARD) was established on July 12, 1982, under an Act of Parliament. It serves as an apex institution, providing and regulating credit for the development of agriculture, small-scale industries, cottage industries, handicrafts and other rural economic activities. NABARD took over the functions of the Agricultural Credit Department (ACD), Rural Planning and Credit Cell (RPCC) of RBI and Agricultural Refinance and Development Corporation (ARDC). Its headquarters is in Mumbai, with branches nationwide.
Objectives of NABARD:
i. Integrated Rural Development Focus: NABARD aims to provide dedicated attention and focused guidance to integrated rural development initiatives.
ii. National Rural Credit Hub: It serves as a central entity for the entire national rural credit system, coordinating its activities effectively.
iii. Additional al Funding: NABARD acts as a source of additional funding for rural credit institutions, bolstering their resources.
iv. Support for Rural Industries: The organization facilitates investment credit for small industries, village/cottage industries, handicrafts, artisans and farmers.
V. Enhanced Credit System: NABARD contributes to improving the credit distribution system through tasks like building institutions, revitalizing credit organizations and training bank staff.
vi. Refinance Facilities: It provides refinance facilities to various financial entities like SLDBs, SCBS, RRBs and commercial banks, aiding rural development endeavors.
vii, Regional Coordination: NABARD coordinates the efforts of diverse agencies engaged in rural development at the regional level. It also maintains connections with the Government of India, RBI, state governments and other national policy-making institutions.
viii. Project Oversight: The organization conducts inspections, monitoring and evaluations of projects that receive refinance support from NABARD.
7. Explain the factions of NABARD. [AHSEC 2024]
Ans: The functions of NABARD can be discussed under three heads:
A. Credit Functions
B. Regulatory Functions
C. Developmental Functions
A. CREDIT FUNCTIONS:
i. Refinance Facility: NABARD provides short-term credit to cooperative banks and financial institutions to promote agricultural produce marketing, distribution of agricultural inputs and activities of cottage and small-scale industries.
ii. Medium-term Credit: NABARD offers medium-term credit (1.5-7 years) to State cooperative banks and Regional Rural Banks (RRBs).
iii. Long-term Credit: NABARD extends credit up to 25 years to State cooperative banks, RRBS, Land Development Banks and Commercial Banks.
iv. Conversion Facilities: It offers conversion facility up to 7 years to State cooperative banks and RRBS during draughts, famine, or natural calamities.
V. Credit to State Government: NABARD provides credit to state governments for up to 20 years to support their investment in cooperative credit societies.
vi. Share Capital: NABARD invests in securities or subscribes to share capital of institutions focused on agriculture and rural development.
B. REGULATORY FUNCTIONS:
i. Inspection Authority: NABARD inspects cooperative societies (excluding primary societies) and RRBs, authorized by Banking Regulation Act 1949.
ii. Branch Facilitation: It assists in opening branches of RRBS and cooperative societies through the Reserve Bank of India.
iii. Return Copies: RRBs and cooperative banks sharing returns with RBI must provide copies to NABARD.
iv. Information Authority: NABARD holds the authority to request information and statements from Cooperative Banks and RRBs.
C. DEVELOPMENTAL FUNCTIONS:
i. Credit Planning and Enhancement: NABARD formulates credit plans, enhances research, introduces credit delivery innovations and improves skills of beneficiaries and client banks.
ii. Coordination and Expertise: It coordinates rural credit agencies, develops agricultural and rural problem- solving expertise and aids Government, RBI and other institutions in rural development.
iii. Training and Capital Assistance: NABARD facilitates training, research and assists State Governments in contributing to eligible institutions’ share capital.
iv. Counseling and Consultancy: The institution offers counseling, consultancy and conducts training programs for rural entrepreneurs.
V. Integrated Rural Development: NABARD promotes Integrated rural development, backing small industries, cottage industries, village industries and rural artisans using credit and non-credit approaches.
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