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

8. Angle capitalist

Commercial bank

  • 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.

Secondary functions

  • 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.
Types of commercial bank

Public Sector Banks:

These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,
 Nationalized 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
Private sectors Banks: 
In case of private sector banks majority of share capital of the Bank is held by private individuals. These banks are registered as companies with limited Liability.
  • 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.
Industrial Finance Corporations of India (I.F.C.I.)
  • 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.
ObjectiveS
(a) To provide long and medium-term credit to industrial concerns engaged in manufacturing, mining, shipping and electricity generation and distribution.
(b) The period of credit can be as long as 25 years and should not exceed that period;
(c) To grant credit to a single concern up to a maximum amount of rupees one crore. This limit can be exceeded with the permission of the government under certain circumstances;
(d) underwrite and directly subscribe to shares and debentures issued by companies;
(e) assist in setting up new projects as well as in modernization of existing industrial concerns in medium and large scale sector;
Functions
The main functions of I.F.C.I. are as under:-
i) Granting loans and advances for the establishment, expansion, diversification and modernization of industries in corporate and co-operative sectors.
ii) Guaranteeing loans raised by industrial concerns in the capital market, both in rupees and foreign currencies.
iii) Subscribing or underwriting the issue of shares and debentures by industries. Such investment can be held up to 7 years.
iv) Guaranteeing credit purchase of capital goods, imported as well as purchased within the country.
v) Providing assistance, under the soft loans scheme, to selected industries such as cement, cotton textiles, jute, engineering goods,etc.
vi) Providing technical, legal, marketing and administrative assistance to any industrial concern for the promotion, management and expansion of the industrial concern.
vii) Providing equipment to the existing industrial concerns on lease under its ‘equipment leasing scheme’.
viii) Procuring and reselling equipment to eligible existing industrial concerns in corporate or co-operative sectors.
Ix) Rendering merchant banking services to industrial concerns.
Industrial Development Bank of India (IDBI)
  • 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:
As an apex financial institution,
(1)it coordinates the working of other financial institutions.
(2) It assists in the development of other financial institutions.
(3) It provides credit to large industrial concerns directly.
(4) It undertakes other activities for the development of industry.
Objectives
 
The main objectives of IDBI is to serve as the apex institution for term finance for industry in India. Its objectives include
(1) Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI , ICICI, UTI, LIC, Commercial Banks and SFCs.
(2) Supplementing the resources of other financial institutions and thereby widening the scope of their assistance.
(3) Planning, promotion and development of key industries and diversifications of industrial growth.
Function
The IDBI has been established to perform the following functions-
(1) To grant loans and advances to IFCI, SFCs or any other financial institution by way of refinancing of loans granted by such institutions which are repayable within 25 year.
(2) To grant loans and advances to scheduled banks or state co-operative banks by way of refinancing of loans granted by such institutions which are repayable in 15 years.
(3) To grant loans and advances to IFCI, SFCs, other institutions, scheduled banks, state   co-operative banks by way of refinancing of loans granted by such institution to industrial concerns for exports
(4) To discount or rediscount bills of industrial concerns.
(5) To underwrite or to subscribe to shares or debentures of industrial concerns.
(6) To subscribe to or purchase stock, shares, bonds and debentures of other financial institutions.
(7) To grant line of credit or loans and advances to other financial institutions such as IFCI, SFCs, etc.
(8) To grant loans to any industrial concern.
(9) To guarantee deferred payment due from any industrial concern.
(10) To guarantee loans raised by industrial concerns in the market or from institutions
(11) To provide consultancy and merchant banking services in or outside India.
(12) To provide technical, legal, marketing and administrative assistance to any industrial concern or person for promotion, management or expansion of any industry.
(13) Planning, promoting and developing industries to fill up gaps in the industrial structure in India.
(14) To act as trustee for the holders of debentures or other securities
Subsidiaries
The following are the subsidiaries of IDBI.
(1)Small Industries Development Bank of India (SIDBI)
(2) IDBI Bank Ltd.
(3) IDBI Capital Market Services Ltd.
(4) IDBI Investment Management Company
Industrial Credit and Investment Corporation of India (ICICI)
  • 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.
Objectives
The ICICI has been established to achieve the following objectives:
(I) To assist in the formation, expansion and modernization of
industrial units in the private sector;
(ii) To stimulate and promote the participation of private capital (both Indian and foreign) in such industrial units;
(iii) To furnish technical and managerial aid so as to increase production and expand employment opportunities;
Functions
The primary function of ICICI is to act as a channel for providing development finance to industry. In pursuit of its objectives of promoting industrial development, ICICI performs the following functions:-
(i) It provides medium and long-term loans in Indian and foreign currency for importing capital equipment and technical services. Loans sanctioned generally go towards purchase of fixed assets like land, building and machinery
(ii) It subscribes to new issues of shares, generally by underwriting them;
(iii) It guarantees loans raised from private sources including deferred payment;
(iv) It directly subscribes to shares and debentures;
(v) It provides technical and managerial assistance to industrial units;
(vi) It provides assets on lease to industrial concerns. In other words, assets are owned by ICICI but allowed to be used by industrial concerns for a consideration called lease rent.
(vii) It provides project consultancy services to industrial units for new
projects.
(viii) It provides merchant banking services
Subsidiaries
1.ICICI Securities and Finance Co. Ltd.
2. ICICI Assets Management Co. Ltd.
3. ICICI Investors Services Ltd.
4. ICICI Banking Corporations Ltd.
5. Credit Rating Information Services of India Ltd. (CRISIL)
6. Technology Development and Information Company of India Ltd.(TDICI)
7. Programmers for the Advancement of Commercial Technology.
8. `Programmer for Acceleration of Commercial Energy Research (PACER)
State Financial Corporations (SFCs)
  • 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.
Objectives
(1) Provide financial assistance to small and medium industrial concerns. These may be from corporate or co-operative sectors as in case of IFCI or may be partnership, individual or joint Hindu family business. Under SFCs Act, “industrial concern” means any
concern engaged not only in the manufacture, preservation or processing of goods, but also mining, hotel industry, transport maintenance of machinery, setting up or development of an industrial area or industrial estate, etc.
(2) Provide long and medium-term loan repayable ordinarily within a period not exceeding 20 years.
(3)  Grant financial assistance to any single industrial concern under corporate or co-operative sector with an aggregate upper limit of rupees Sixty lakhs. In any other case (partnership, sole proprietorship or joint Hindu family) the upper limit is rupees Thirty lakhs.
(4) Provide Financial assistance generally to those industrial concerns whose paid up share capital and free reserves do not exceed Rs.3 crore.
(5) To lay special emphasis on the development of backward areas and small scale industries.
Functions of State Financial Corporation (SFCs)
(1) Grant of loans and advances to or subscribe to debentures of industrial concerns repayable within a period not exceeding 20 years, with option of conversion into shares or stock of the industrial concern.
(2) Guaranteeing loans raised by industrial concerns which are repayable within a period not exceeding 20 years.
(3) Guaranteeing deferred payments due from an industrial concern for purchase of capital goods in India.
(4) Underwriting of the issue of stock, shares, bonds or debentures by industrial concerns.
(5) Subscribing to, or purchasing of, the stock, shares, bonds or debentures of an industrial concern subject to a maximum of 30 percent of the subscribed capital, or 30 percent of paid up share capital and free reserve, whichever is less.
(6) Act as agent of the Central government, State government, IDBI,IFCI or any other financial institution in the matter of grant of loan or business of IDBI, IFCI or financial institution.
(7) Providing technical and administrative assistance to any industrial concern or any person for the promotion, management or expansion of any industry.
(8) Planning and assisting in the promotion and development of industries.
Venture capital funding
  • 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) 
  • 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.
Name of the Venture Capital Fund in India.
  • 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
Angle capitalist
  • 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.
Angels Investing Network in India
1.Chennai Fund
2.Indian Angels Network
3. Mumbai Angels
4. Tie Entrepreneurship Acceleration Program

Project

  • 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
Classification of projects
  • Quantifiable and non quantifiable projects
  • Sectoral projects
  • Techno- economic projects
  • Financial institutions’ projects
Quantifiable and non quantifiable 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
Sectoral projects
  • Planning Commission has adopted the sectoral basis for project classification so as to allocate the scarce resource at macro levels.
Accordingly a project may fall into any one of the following sectors:
  • Agriculture and Allied sectors
  • Irrigation and Power sector
  • Industry and Mining
  • Transport and Communication
  • Social services
Techno- economic projects
  • 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.
They can be further classified into
  • Factor intensity oriented classification
  • Causation- oriented classification
  • Magnitude oriented classification
  • Factor intensity oriented classification
                1. Project is classified on the basis of factor intensity.
                2. Example: capital intensive or labour intensive
  • Causation oriented classification
                1. Cause for the starting a project forms the basis for classification
                2. Example: If availability of certain raw materials is the proximate cause for starting a project, the project is classified as raw materials based. On the other hand, the demand for goods and services forms the basis for starting a project, then it is classified as demand based.
  • Magnitude-oriented classification
                1. Size of the investment form the basis of classification
                2 .Projects may be classified into large scale, medium scale and small scale depending on the quantum of project investment.
Financial Institutions Projects
  • 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
Pre investment 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.
Construction stage
  • 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
Normalization stage
  • 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

Project identification

  • 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.
Characteristics of a project
  • 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.
Steps in project identification
  • Conceiving project ideas
  • Choosing the right line of business
  • Opportunity seeking
  • Decision making process

Project report

  • 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.
Contents of the project report
  • General information
  • Project description
  • Market potential
  • Capital costs and Sources of finance
  • Assessment of working capital requirements
  • Financial consideration
  • Economic and social consideration
General information
  • 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
Project description
  • Site
  • Infrastructure
  • Raw materials
  • Skilled labour and personnel requirements
  • Consumables/utilities
  • Disposal of waste
  • Transport and communication
  • Machinery, equipment
  • Manufacturing process and technology
  • Research and development
Market potential
The following aspects relating to market potential should be give in the report:
  • Demand and supply position
  • Cost and price position
  • Marketing strategy
  • After sales service
  • Seasonality and Transportation
Capital costs and sources of finance
Capital costs
  • 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
Sources of Finance
  • 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
Assessment of working capital requirements
  • 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
Financial consideration
  • A projected profit and loss account should be prepared
  • A projected balance sheet and cash flow statement also have to be prepared
Economic and social consideration
  • 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.

Project appraisal

  • Refers to the critical assessment of a project
  • Usually done by financial institutions
Various analysis
  • Market feasibility analysis
  • Technical feasibility analysis
  • Financial feasibility analysis
  • Economic feasibility analysis
  • Managerial feasibility analysis
  • Social feasibility analysis
Market 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.
Technical feasibility analysis
  • 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
Financial feasibility analysis
  • 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 feasibility analysis
  • 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
Managerial feasibility analysis
  • 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
Social feasibility analysis
  • 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
  • Stabilization
  • Innovation or Decline

New venture development  Stage

  • Creativity and assessment
  • Resource base analysis
  • Networking including vertical marketing
  • Vision, Mission, Objectives, Strategies & Tactics

Start-up Stage

  • Formal Business plan
  • Searching for capital (Analyse the risks)
  • Marketing research
  • Developing a working team
  • Identifying any core competencies for Competitive Advantage

Growth Stage

  • 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
Control

  • Does the control system imply trust?
  • Does the resource allocation system imply trust?

Responsibility

  • Creating a sense of responsibility that establishes flexibility, innovation, and a supportive environment.
  • Tolerance of failure

Moral failure

  • Personal failure
  • Uncontrollable failure

Change

  • 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.
Stabilization Stage

  • 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)

Conclusion

  • ALL STAGES ARE STRATEGIC POINTS OF THE VENTURE HENCE A NEED FOR SPECIFIC STRATEGIES FOR EVERY STAGE!

Financial Institutions

  • 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

  • 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.

Patents

  • 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’

Trademarks

  • 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)

Copy right

  • 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