Industrial Finance: Sources and Institutions

Setting up and running an industrial enterprise requires two broad kinds of capital: fixed capital, needed for land, buildings, plant, and machinery, which is committed for the long term; and working capital, needed for day-to-day operating expenses such as raw materials, wages, and short-term credit to buyers, which turns over repeatedly within the operating cycle. Industrial finance refers to the sources and institutions through which enterprises raise both kinds of capital.

Sources of finance.

• Owned capital: funds contributed by the promoters/owners themselves, equity shares issued to the public, and retained earnings (profits ploughed back into the business rather than distributed as dividends). Owned capital carries no fixed repayment obligation and forms the risk-bearing base of the enterprise.
• Borrowed capital: funds raised through debentures/bonds (fixed-interest debt instruments issued to the public or institutions), term loans from banks and financial institutions (medium- to long-term loans typically used for fixed-capital needs), public deposits accepted directly from investors, and trade credit from suppliers. Borrowed capital carries a fixed interest obligation regardless of the firm's profit performance.
• Capital market: the stock exchanges and the primary market for new share/debenture issues (Initial Public Offerings, rights issues, and further public offers) allow established as well as growing companies to raise fresh long-term capital directly from investors.

Institutions providing industrial finance.

• Commercial banks provide working capital finance (cash credit, overdraft, bill discounting) and, increasingly, term loans for fixed-capital needs as well.
• All-India development finance institutions were set up specifically to provide medium- and long-term finance to industry where commercial banks were historically reluctant to lend for long tenures — notable examples include the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI), and the Small Industries Development Bank of India (SIDBI), which focuses specifically on MSME finance.
• State-level financial institutions provide finance for industries within a particular state; Gujarat's own state-level institution, the Gujarat Industrial Investment Corporation (GIIC), along with the Gujarat State Financial Corporation in its earlier years, has historically supported medium and large industrial projects within the state, alongside the Gujarat Industrial Development Corporation (GIDC), which develops industrial estates and infrastructure (land, power, water) for new units to locate in. …