By industrial finance we mean the organization of various types of finance needed by industries for their activities connected with the production of goods and services. Production activities include construction of buildings, purchase of machines, their repair, purchase of raw materials, engagement of laborers etc. For the performance of these activities, three types of finances are needed such as long-term, medium-term and short-term.
Source of Industrial Finance
The sources of finance for large- scale industries are as follows:
1. Shares and Debentures: A large part of fixed investments comes from different types of shares such as ordinary, cumulative and non-cumulative preference shares.
From time to time industrial companies get long-term finance through the issue of debentures. The buyers of these debentures are the creditors of companies. They get a fixed rate of interest on the money invested in debentures. For this reason debentures are safer investments.
2. Public Deposits: In some parts of the country (e.g. Bombay, Ahmedabad) a system of public deposits prevails. Under this system, people keep their money as deposit with these companies for a period of six months or a year. Depositors receive a fixed interest. They can demand the refund of money at any time. This money is used by the companies to meet their needs of working capital. But this source of finance is unreliable because depositors can seek refund at any time. With the growth of banking habits and increase in dealings with financial institutions, the importance of public deposits as a source of finance is slowly declining.
3. Loans from Banks: Commercial banks can and do provide funds for working capital. Loans are given against the guarantee of government securities with companies. Loans are advanced in the form of overdraft and cash.
4. Managing Agency System: Under this system an individual finance the initial stage of the establishment of industries and manage many activities of the company thus established. Very often, one managing agent controls more than one concern and uses funds of one concern to meet the needs of others under him.
In the past when there was great shortage of industrial finance, managing agents did render a valuable service for the promotion of industries within the country. In course of time, however, the system developed certain drawbacks, and in 1970 the Government abolished the system.
5. Indigenous Bankers: In spite of establishment of new financial institutions indigenous bankers have advanced financial help to a few large-scale industries both for fixed capital and working capital. But they mainly provide finance to small-scale industries. These bankers charge a very heavy rate of interest. To-day, the importance of this source is on the decline.
6. New Institutions for Industrial Finance: These institutions may be grouped under the broad heading of development banks. Established with the help of the Government to fill in the gaps in industrial finance and to promote the objectives of planning, these institutions cater to the needs of large and small industries. The new institutions supplying industrial finance are IFCI, SFC, IDBI, ICICI, NIDC, UTI and LIC etc.
Sources of Finance for Small Industries
Small industries need three types of finance—long-term finance for machinery, medium-term finance for repair and replacement of equipment and short-term finance for purchase of raw materials etc.
Moneylenders still an important source of finance for small-scale industries. In urban areas, small industries draw finance from indigenous bankers and corporate investment banks. Recently started by the Government, Industrial Corporation also provides finance to these industries. In addition, the state government also lends money under various State Assistance Acts.
Commercial banks too have become an important source of finance.
Realizing the limitations such as the urban orientation of commercial banks, the government established regional rural banks to meet the credit needs of rural cultivators, artisans and small traders, State Financial Corporations have been established to solve the financial difficulties of small-scale industries.