Q.Explain the institutional and non-institutional sources of industrial finance available to Indian industries.
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Start your 14-day free trial to unlock the full solution →Industrial enterprises require two broad categories of finance — long-term fixed capital to acquire land, buildings, plant, and machinery, and short-term working capital to fund day-to-day operations such as purchasing raw materials, paying wages, and carrying stocks and receivables — and different sources of finance are suited to each.
Institutional sources are formal financial institutions and markets. Development finance (term-lending) institutions historically provided long-term project loans to industry; at the state level, State Financial Corporations such as the Andhra Pradesh State Financial Corporation extend term finance to industries within the state, while the Small Industries Development Bank of India (SIDBI) specialises in credit and refinance for micro, small, and medium enterprises. Commercial banks are the principal source of working-capital finance for industry and also extend project loans, and the capital market provides finance through the issue of equity shares, preference shares, and debentures to the investing public, as well as through public deposits invited directly by companies.
Non-institutional sources include owned funds contributed by the promoters themselves and retained earnings ploughed back from past profits, both of which carry no fixed repayment obligation but depend on the promoters' own resources or the firm's past profitability; and trade credit extended informally by suppliers, which finances short-term working-capital needs without going through a formal financial institution. Newer sources, such as venture capital funds and non-banking financial companies (NBFCs), have also grown in importance, particularly for financing new and small enterprises that may not yet meet the stricter lending criteria of commercial banks. …
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