What is industrial finanace? What is need and importance of industrial finanace? discuss it sources.

What is industrial finanace? What is need and importance of industrial finanace? discuss it sources.



Industrialization has an important role to play in the process of economic development, The importance of industrialization as a means for achieving

, rapid growth and prosperity had been recognized in the development strategy of independent India. The programme of

industrialization in India was started with the second five-year plan by realizaroy the need of the economy The new industrial policy of 1991 effested some very fundamental policy charges such as near abolition of licensing, easing of the rigors of MRTP and FERA, reduced list of industries for the public sector, automatic approvals of foreign technology agreements and for 51% foreign equity, private investment in infrastructure, new liberal and location policy for industry, freer import of capital geois, deregulation in small scale industrial units, and radically liberal policy measures for attracting Foreign Direct Investment (FDI), new

technology and Non-Resident Indian investment of the taal vans and advances granted by commercial banks, industry (large and medium) rescives roughly 43 percent. The banks extend to industries the facility of hypothecation and often clean advances, The major industries financed by the banks are cotion, rayon, nylon and silk textiles, gur, lightengineering industries, vegetable oil crushing and relining, chemicals, paper and paper products, rubber and rubber products, plantations etc. sugar andpharmaceuticals,

What is industrial FINANACE


Every country felt the need to accelerate the rate of development in post world war era.Some countries were directly involved in war while many others were indirectly affected by for developmental activities was not sufficient to meet therequirements of industry.  There was a need for reconstructing economics at a faster speed. The existing machinery was a need to set up such institutions which could take up promotional activities besides financing. In this background industrial finance was needed for the following reasons :

1. Lay Foundations for Industrialisation

A number of countries got independence from colonial rule. Their economies needed to be rehabilitated. Other underdeveloped and developing countries too needed to accelerate the of industrialisation. To lay a solid foundation for growth, establishment of certain key

industries such as cement, engineering, machine making, chemicals, etc. is essential. Private entrepreneurs were not forthcoming to invest in these vital areas due to risk involved and long gestation period in those industries. Moreover, it was beyond the means and capacity of private individuals to take up these projects. They needed special facilities from institutions which could extend long-term help. The governments of underdeveloped countries set up developmental institutions to fill the vacuum.

2. Meet Capital Needs

There was a dearth of capital needed to foster industrial growth in underdeveloped

countries. Owing to the low level of income of the people there were no sufficient surpluses for capitalisation. There was a need for institutions which could meet this gap between demand and supply for capital.

3. Need for Promotional Activities

Besides capital needs, underdeveloped countries suffered from lack of expertise,

managerial and technical know-how. Developmental banks could take up this job and provide managerial and resources and skills.

4. Help Small and Medium Sectors

The large scale was, to some extent, able to meet its needs. There was a need to mitigate sufferings of small and medium size industries which form a sizeable sector of the industrial economy. Despite the important role played by these sectors they experience scarcity of capital owing to the apathy of investors to invest their savings because of their credit- worthiness and profitability. There was a need for special institutions to help these sectors in

playing vital role in the industrialisation of developing and underdeveloped countries.


(a) Domestic Capital Formation

The planners, in the fifties, had recognized that the material shortage of capital in relation to labour was the principal constraint to the industrial growth. It was envisioned that increased capital formation would contribute for more industrial output & a 'virtuous circle of growth. Gross Capital Formation (GCF) is estimated across three types of assets, viz construction, machinery and equipment. The GCF, adjusted for errors and omissions, termed as aggregate investment or Gross Domestic Capital Formation (GDCF), A positive association is hypothesized between the capital formation and the industrial production.

(b) Foreign Direct Investment

Foreign investment can be classified as foreign direct investment (FDI) and foreign

portfolio investment. International investment in financial assets such as shares, debentures and bonds, is called portfolio investment. Foreign investment in real assets is called foreign direct investment (FDI). Multinational corporations (MNCs) are the chief source of foreign direct investment in real assets. Real assets consist of physical things such as factories, land, capital goods, infrastructure and inventories. Multinational corporations may collaborate in joint ventures with host country enterprises or may have fully owned subsidiaries in host countries. Such investments are called foreign direct investments.

(c) Primary Issues in the Capital Market

Capital market constitutes primary (new issues market) and secondary (stock) market. The primary market helps public and private sector companies in raising finance mainly for their new projects, expansion, modernization, acquisition etc. The secondary market provides liquidity for the financial instruments (equity, preference shares and debentures/bonds)

through adequate marketability and price continuity. The array of financialinstitutions also have played crucial role in meeting long-term credit needs of the industrial sector

(d) Bank Credit

Banks are the dominant financial intermediaries in developing countries including India. Bank credit is considered as an important source of industrial finance. The dependence on bank for finance could vary according to the size of the companies. The small-scale industrial

units have increased their dependence on banks for loans because they have virtually no access to the capital markets.