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The capital requirements of industry on the basis of its use can be divided into two categories:

1.Fixed capital

2.Working capital

Fixed capital is the core of modern industry whose operations, by and large, are capital-intensive in nature. It is used to provide the necessary means of production to the industrial units. Working capital provides all the expenses that are necessary in order to make and sell the product or service offered. It is either invested in stocks of raw materials, finished products, loose tools and spare parts or is needed for granting credit to customers, or for meeting day-to-day administration and other expenses. The fixed capital is essentially of a long-term nature. On the other hand, the working capital is of a short-term nature.


To meet its requirements, the private corporate sector raises finance from different sources. These sources can be classified into two categories, viz. internal sources and external sources.

Internal Sources

»Paid-up capital (Internal)

»Reserves and surplus


External Sources

»Paid-up capital (External)


»Trade dues and other current liabilities

Relative Importance:

During the initial course of industrial development, internal sources financed a major part of the industrial needs in the country. The entrepreneurs raised finance loans today from their own savings, got some help from friends and those members of the public who could repose their trust in them. For their working capital requirements, the entrepreneurs depended upon local bankers.

This system of industrial finance could prevail under the circumstances when the size of a viable unit used to be relatively very small. With the advance of science and technology, and in the face of growing competition, both domestic and international, the size of industrial units began to expand, capital came to acquire a more significant role as a factor of production, it came to replace labor, and automation developed. Industry could no longer depend on its own resources. External sources of finance came to play greater role.


Meanwhile, the Government had set up a number of State-owned financial institutions to meet the capital needs of industries in the country. The entry of specialized financial institutions, which was considered essential in view of the rapid technological and scientific advances in industry, has totally transformed the industrial finance scene.

At present, external sources have become the more important form of industrial finance in the country. This conclusion is proved by a study of 1,947 large, non-financial, non-Governmental public limited companies for the year 1999-2000. the study undertaken by the Reserve Bank of India loans today revealed that about two-thirds of total funds of companies covered by the study have been mobilized from external sources.

The composition of external sources has undergone a change with about 47 percent of such resources being raised by way of borrowings and about 27 percent from the capital market. As for the internal sources, retained profits and depreciation claimed equal share.


The first of these term financing institutions to be set up was the Industrial Finance Corporation of India (IFCI). It was established in 1948. The Government of India, the RBI and financial institutions jointly owned it. The objective was to make long-term credit available to public limited companies and industrial co-operatives.

The IFCI has since been converted into a public limited company from July 1, 1993. The entire operations and business of the IFCI now vest in a new company – the Industrial Finance Corporation of India Limited. This will enable this organization to reshape its business strategies with greater authority, tap the primary market for funds, expand it equity base, and provide better customer services. The major activities of the IFCI are:

»Project financing assistance is available to industrial and service concerns in the form of rupee loans, foreign currency sub-loans underwriting and direct subscription to shares / debentures, and guarantees for deferred payments and foreign currency loans.

»Assistance is provided for setting up new units and expansion, diversification and modernization of existing ones.

»Other activities of the IFCI include merchant banking and advisory services, aiding traders by equipment credit and leasing, suppliers and buyers’ credit, procurement credit, and loans to leasing and the hire-purchase concerns.

With a view to supplementing its main function of assisting industrialization of the country, IFCI has promoted / participated in the establishment of the following institutions, among others:

»Investment Information and Credit Rating Agency of India Ltd.

»IFCI Venture Capital Funds Limited

»Over the Counter Exchange of India Limited

»National Stock Exchange of India Limited

»Stock Holding Corporation of India Limited

Meanwhile, IFCI has promoted three subsidiaries, viz. IFCI Financial Services Limited, IFCI Investor Services Limited, and I-Fin. It is also planning to set up a clearinghouse for securities such as shares, debentures, bonds, etc. it has also put in application with the Reserve Bank of India for setting up a commercial bank. The IFCI also plans to diversify into insurance, asset management and stock broking.

Of late, the IFCI has run into problems. Its capital adequacy ratio is perilously close to ‘unsatisfactory’. The D. Basu Committee identified the following as the factors for the downslide:

»Change in the external environment for commodity companies

»A depressed capital market

»A change in the operating environment for DFIs


IIBI has taken over the functions of the Industrial Reconstruction Bank of India (IRBI) that was established in 1985, with the main objective of rehabilitating sick units. Under the IRBI Act, while the institution’s main objective was nursing sick units back into viability, it was also given the opportunity to grow into a development bank. The Act stipulated that 40 percent of the business could be term lending for industrial development, while 60 percent would continue to be earmarked for rehabilitation of sick industrial units. From March 1991, the government removed the stipulation of setting aside 60 percent funding for sick units. Technically, IRBI assumed the status of a full-fledged financial institution, putting it on equal footing with the IDBI or the ICICI.

The Bank has been reconstituted as the Industrial Investment Bank of India. The change in constitution will provide flexibility and consequent ability to it to function as a development financial institution and respond to the rapidly changing financial system.

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