ROLE OF FINANCIAL INSTITUTIONS
Introduction to Financial Institutions in India which provide financial skims for project management.
1. Commercial bank
2. Industrial Finance Corporations of India (I.F.C.I.)
3. Industrial Development Bank of India (IDBI)
4. Industrial credit and Investment corporation of India (ICICI)
5. Small Industries Development Bank of India(SIDBI)
6. State Financial Corporations (SFCs)
7.Venture capital funding
- Commercial Banks are banking institutions that accept deposits and grant short-term loans and Advances to their customers
- In addition to giving short-term loans, commercial banks also give Medium-term and long-term loan to business enterprises.
- Now-a-days some of the commercial Banks are also providing housing loan on a long-term basis to individuals. There are also many Other functions of commercial banks.
The Banking products/function of commercial banks are of two types.
- Primary functions; and
- Secondary functions.
Primary functions The primary functions of a commercial bank include
- Accepting deposits; and
- Granting loans and advances.
- Issuing letters of credit, travelers cheque, etc.
- Undertaking safe custody of valuables, important document and securities by providing safe deposit vaults or lockers.
- Providing customers with facilities of foreign exchange dealings.
- Transferring money from one account to another; and from one branch to another branch of the bank through cheque, pay order, demand draft.
Public Sector Banks:
- Allahabad Bank
- Andhra Bank
- Bank of Baroda
- Bank of India
- Bank of Maharashtra
- Canara Bank
- Central Bank of India
- Corporation Bank
- Dena Bank
- Indian Bank
- Indian Overseas Bank
- Oriental Bank of Commerce
- Punjab & Sind Bank
- Punjab National Bank
- State Bank of India
- State Bank of Mysore
- State Bank of Patiala
- State Bank of Travancore
- Syndicate Bank
- UCO Bank
- Union Bank of India
- United Bank of India
- Vijaya Bank
- Bank of Punjab Ltd. (since merged with Centurian Bank)
- Centurian Bank of Punjab (since merged with HDFC Bank)
- Development Credit Bank Ltd.
- HDFC Bank Ltd.
- ICICI Bank Ltd
- IndusInd Bank Ltd.
- Kotak Mahindra Bank Ltd.
- Axis Bank (earlier UTI Bank)
- Yes Bank Ltd.
- IFCI was established as a statutory corporation on 1st July 1948 by special Act of Parliament, IFCI Act, 1948.
- It was converted into a public limited company on July 1, 1993.
- Its main object is to provide medium and long term credit to eligible industrial concerns in corporate sectors of the economy, particularly to those industries to which banking facilities are not available.
- The Industrial Development Bank of India was set up in July 1964 as a wholly owned subsidiary of the Reserve Bank of India.
- The purpose was to enable the new institution to benefit from the financial support and experience of RBI.
- After a decade of its working, it was delinked from RBI in 1976, when its ownership was transferred to the Government of India.
- Assisting the development of such institutions and providing credit and other facilities for the development of industry. Thus the role of IDBI may be stated as under:
- Industrial Credit and Investment Corporation of India was established as a joint stock company in the private sector in 1955.
- Its share capital was contributed by banks, insurance companies and foreign institutions including the World Bank.
- Its major shareholders now are Unit Trust of India, Life Insurance Corporation of India and General Insurance Corporation and its subsidiaries.
- To meet the financial needs of small and medium enterprises, the government of India passed the State Financial Corporation Act in 1951, empowering the State governments to establish development banks for their respective regions.
- Under the Act, SFCs have been established by State governments to meet the financial requirements of medium and small sized enterprises.
- Venture capital is a means of equity financing for rapidly-growing private companies.
- Finance may be required for the start-up, development/expansion or purchase of a company.
- Venture Capital firms invest funds on a professional basis, often focusing on a limited sector of specialization (eg. IT, infrastructure, health/life sciences, clean technology, etc.).
- The goal of venture capital is to build companies so that the shares become liquid (through IPO or acquisition) and provide a rate of return to the investors (in the form of cash or shares) that is consistent with the level of risk taken.
- Indian Private Equity and Venture Capital Association (IVCA) is a member based national organization that represents venture capital and private equity firms, promotes the industry within India and throughout the world and encourages investment in high growth companies.
- Aavishkaar India Micro Venture Capital Fund
- Aditya Birla Private Equity Trust
- Axis Venture Capital Trust
- BTS India Private Equity Fund
- Canbank Venture Capital Fund
- Green India Venture Fund
- An angel investor or angel (also known as a business angel or informal investor) is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
- A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.
- Today “angels” typically offer expertise, experience and contacts in addition to money. Less is known about angel investing than venture capital because of the individuality and privacy of the investments, but the Small Business Administration estimates that there are at least 250,000 angels active in the country, funding about 30,000 small companies a year.
- An idea or plan that is intended to be carried out
- It is a specific activity on which money is spent in the expectation of some returns
- Project can be considered as a proposal
- involving capital investment for the purpose of developing facilities to provide goods and services
- Quantifiable and non quantifiable projects
- Sectoral projects
- Techno- economic projects
- Financial institutions’ projects
- Quantifiable projects are those projects where the benefits can be expressed in quantifiable terms.
- Examples: Industrial development, power generation etc
- Non quantifiable projects are those projects where such a quantifiable assessment of benefits is not possible
- Example: Health, education etc
- Planning Commission has adopted the sectoral basis for project classification so as to allocate the scarce resource at macro levels.
- Agriculture and Allied sectors
- Irrigation and Power sector
- Industry and Mining
- Transport and Communication
- Social services
- Projects can be classified on the basis of techno economic factors like size of the investment, factor intensity etc
- Very useful in facilitating the process of feasibility appraisal.
- Factor intensity oriented classification
- Causation- oriented classification
- Magnitude oriented classification
- Factor intensity oriented classification
- Causation oriented classification
- Magnitude-oriented classification
- Various financial institutions established at the Central and State levels have classified projects into profit and service oriented projects.
- The profit oriented projects can again be classified into New projects, Expansion projects, Modernization project and Diversification projects
- Service oriented projects can be classified into Welfare, Research and Development and Educational projects
Project life cycle
- The Pre- investment stage
- The Construction stage
- The Normalization stage
- First phase in the life cycle
- At this stage, the project idea is developed into an investment proposal on which investment decisions can be taken by the promoters.
- Concerned with setting up of aims and objectives, demand forecasting, selection of best means to achieve the objectives, evaluation of input characteristics, cost benefit analysis.
- This stage will start after the investment decision is taken by the promoters or financiers
- Investment proposal is developed into a tangible project so as to achieve the objectives already laid down
- Resources are invested in building the basic assets
- Main objective at this stage is to produce goods and services for which the project was established.
- Assets created in the second stage are utilized to produce goods and services
- Refers to the process of finding out the most appropriate project from among the several investment opportunities.
- Is concerned with the collection, compilation and analysis of economic data for the purpose of locating possible opportunities for investment.
- Every project has three dimensions
- Inputs, outputs and social costs and benefits
- Input element comprises of what the project will consume in terms of raw materials, manpower, organizational set up etc
- Output component deals with the outcome of the project
- Impact on society- the sacrifice which a society has to make and the benefits that may accrue to the society from the given project.
- Conceiving project ideas
- Choosing the right line of business
- Opportunity seeking
- Decision making process
- A report which provides all the necessary details of the unit proposed to be established.
- It is also used as a tool for anticipating and solving problems that may creep in during the course of running the project at a later stage.
- A blue print of all the activities that an entrepreneur proposes to engage in.
- General information
- Project description
- Market potential
- Capital costs and Sources of finance
- Assessment of working capital requirements
- Financial consideration
- Economic and social consideration
- Name and address of the entrepreneur
- Qualification, experience and capabilities of the entrepreneur
- Profile of the industry to which the project belongs
- Constitution and organizational structure of the enterprise
- Registration certificate whether obtained or to be obtained
- Raw materials
- Skilled labour and personnel requirements
- Disposal of waste
- Transport and communication
- Machinery, equipment
- Manufacturing process and technology
- Research and development
- Demand and supply position
- Cost and price position
- Marketing strategy
- After sales service
- Seasonality and Transportation
- Land and building cost
- Costs of plant and machinery
- Installation charges
- Other miscellaneous assets
- Preliminary expenses
- Contingency provisions against future rise in price
- Margin for working capital
- Owners contribution
- Capital subsidies from State/Central Governments if any
- Loans and deposits to be raised
- Credit limits expected from financial institutions
- Finance from friends and relatives
- Expenditures to be incurred on raw materials
- Expenses on goods under process
- Costs involved in finished goods stock
- Expenses on stores and spares
- Expenses of recurring nature
- A projected profit and loss account should be prepared
- A projected balance sheet and cash flow statement also have to be prepared
- Socio economic benefits that may accrue should be specifically stated.
- Examples: Promotion of employment, export potentials, import substitution, utilization of local resources, development of the area.
- Costs to be incurred for controlling the environmental damage like pollution etc should be mentioned.
- Refers to the critical assessment of a project
- Usually done by financial institutions
- Market feasibility analysis
- Technical feasibility analysis
- Financial feasibility analysis
- Economic feasibility analysis
- Managerial feasibility analysis
- Social feasibility analysis
- A detailed market analysis should be undertaken estimating the supply and demand for the product.
- The anticipated market can be estimated through
- Opinion Polling method- collecting the opinion of the ultimate user
- Life cycle segmentation analysis- estimating the sales of a product at various stages of its lifecycle like introduction, growth, maturity, saturation and decline.
- Refers to the adequacy of the proposed plant and equipment to produce the product as per the required norms.
- Requires a careful and thorough assessment of the various inputs of the project like land, machineries, labour, transportation, fuel, power etc
- Appraisal of the financial viability of the project.
- Requires the scrutiny of the following
- Cost of the project and means of financing
- Cash flow estimates
- Projected balance sheets
- Economic viability depends on profitability
- Economic viability can be assessed through projections of profitability for a period ranging from 3-10 years.
- Calculation of certain ratios like pay back period, average rate of return, break even sales
- Educational background of promoters
- Previous experience in the field of managerial competence
- Possession of entrepreneurial talent
- Honesty, integrity and reputation of promoters
- Possession of the adequate knowhow of the business
- Whether the project offers large employment potential?
- Whether it is located in a backward and less developed area?
- Whether it would stimulate small and supporting industries in the region?
- Any environmental threats?
ENTREPRENEURSHIP VENTURE LIFE CYCLE
Key Issues about the Venture Cycle
- There are static and dynamic forces which need a special attention of the entrepreneur
- Entrepreneur needs to manage for changes and not changes
- The growth stage of the venture is more sophisticated with competition and dilemmas
- At a certain stage, you need to decide whether to do more innovation or allow decline
The Entrepreneurial Company in the Twenty-First Century
- Major Challenges:
- Building dynamic capabilities that are differentiated from those of emerging competitors
- Internal—utilization of the creativity and knowledge from employees
- External—the search for external competencies to complement the firm’s existing capabilities.
Stages of the VC – Model
There are five key stages (just typical)
- New Venture Development
- Start-up Activities
- Growth of the Venture
- Innovation or Decline
New venture development Stage
- Creativity and assessment
- Resource base analysis
- Networking including vertical marketing
- Vision, Mission, Objectives, Strategies & Tactics
- Formal Business plan
- Searching for capital (Analyse the risks)
- Marketing research
- Developing a working team
- Identifying any core competencies for Competitive Advantage
- Any modification on the operating strategy
- Positioning and re-positioning
- Knowing more details about he competitors (Survival of the fittest)
- Understanding the Growth Stage
Key Factors During the Growth Stage
- Does the control system imply trust?
- Does the resource allocation system imply trust?
- Creating a sense of responsibility that establishes flexibility, innovation, and a supportive environment.
- Tolerance of failure
- Personal failure
- Uncontrollable failure
- Managing Paradox and Contradiction
Bureaucratization versus decentralization
Environment versus strategy
Strategic emphases: Quality versus cost versus innovation
- Confronting the Growth Wall
1.Successful growth-oriented firms have exhibited consistent themes:
2.The entrepreneur is able to envision and anticipate the firm as a larger entity.
3.The team needed for tomorrow is hired and developed today.
4.The original core vision of the firm is constantly and zealously reinforced.
5.“Big-company” processes are introduced gradually as supplements to, rather than replacements for, existing approaches.
6.Hierarchy is minimized.
7.Employees hold a financial stake in the firm.
- Increased competition
- High bargaining power of customers
- Saturation of the market
- The entrepreneur needs to think where will the business be in the near future
- It is a stage preceding a great dilemma: to innovate or exit the business
Innovation or Decline? stage
- Without innovation the clear option is ‘death’
- Possibility of acquiring or being acquired
- Might design new products for new markets (Diversification)
- ALL STAGES ARE STRATEGIC POINTS OF THE VENTURE HENCE A NEED FOR SPECIFIC STRATEGIES FOR EVERY STAGE!
- Industrial Finance Corporation of India (IFCI)
- The National Bank for Agriculture and Rural Development
- Small Industries Development Bank of India
- Life Insurance Corporation of India
- Export Import Bank of India
- National Small Industries Corporation (NSIC)
- State Industrial Development Corporation
- State Financial Corporation
- Intellectual property is the exclusive prerogative of the person who thinks and conceives it.
- No formal definition is found prescribed for intellectual property.
- Any patents, trademarks, copyrights or trade secrets held by the entrepreneur.
- A patent is a contract between the Government and an inventor.
- In exchange for disclosure of the invention, the government grants the inventor exclusivity regarding the invention for a specified period of time.
- At the end of this time, the government allows others to freely use the invention and it becomes the part of the public domain
- In India Patents are governed by the Patents Act, 1970
- A patent does not protect an idea but it protects the invention.
- The term invention is defined in the Patents Act as ‘ a new product or process involving an inventive step and capable of industrial application’
- A trademark is a word, figure, numeral, design or a combination of any of these used to identify and distinguish the goods and services of a business from those marketed by others.
- Trademarks in India are protected under statutory law (Trade Marks Act)
- Right given to prevent others from printing, copying or publishing any original works of authorship.
- Copyright Act, 1957 along with Copyright Rules 1958 is the governing body for copyright protection in India.
The Intellectual Property protected under Copyright laws
- Literary works
- Dramatic works
- Musical works
- Artistic works
- Cinematographic Films and Sound recordings