INSTITUTIONAL .PROCUREMENT OF FINANCE-3 Commerce std 1 & 12 GSEB

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CHAPTER – 15 : INSTITUTIONAL .PROCUREMENT OF FINANCE-3

Institutional Procurement of finance

Businessmen get finance from people. This finance is inadequate and costly (it means, having high rate of interest). So, businessmen procure finance from institutions too. Com­pany, Co-operative society, Public enterprise and Joint enterprise units and institutional forms of business units like them are obtaining finance mostly from financial institution, e.g. lending from Industrial Development Bank of India (I.D.B.I.) is an institutional pro­curement of finance.

Purposes

(1)       Financial institutions are studying, business activities professionally and provide finance to businessmen who are taking risk calculatively.

(2)       Institutes provide finance for the purpose of remunerative capital creation.

(3)       Financial institutes provide finance to remove the inadequacy of financial resources.

(4)       institutional finance is given with the purpose of developing small but profitable business units.

(5)       Institutes provide finance to businessmen to spread the advantages of government policies.

Types of finance provided by financial institution

Types of finance are as follow

(1)       Through shares : Financial institutes provide financial resources by subscribing for the shares of the big amount at the time of the incorporation of companies, by taking that many shares which can make the collection of minimum capital possible through under­writing, by subscribing for shares of present companies at the time of their expansion, development and diversification.

(2)       Through Debentures / Bonds : By assuring about the safety of money, financial institutes take secured debentures / bonds so as to provide financial resources. As financial institutes subscribe for. big amount they assume the charge of representatives-trustees on behalf of debenture / bond holders and remain acquainted with the working of business unit. If required, they work as an effective factor in the management of the company.

(3)       Through loans : Financial institutes provide long-term finance especially through secured lending. Financial institutes provide unsecured loans in very rare cases. Financial institutes get personal security of businessmen in the event of providing this type of loan.

(4)       In the form of service : Sometimes business units do not get technical and expert services. For that, they have to spend big amount. Business units may earn high profit if they get these services. Financial institutes pay directly to those persons or institutes who provide these services and see that they give the required services to the business units.

(5)       In the form of security : Financial institutes sometimes manage to provide finance indirectly to the companies. Financial institutes take care of their safety and then give guar­antee to the other institutes who are providing finance to the business units.

Finance company

We have seen that finance is an instrument for business. Businessman procures finance by carrying the burden of interest for the payment of debts as he is purchasing machinery or loose tools. Companies supplying finance is also in existence like those for machines and loose tools. Banks provide lion’s share in providing this instrument, viz. finance. We have discussed in detail the banking finance companies. There are finance companies also which do not provide banking services. They are known as non-banking finance companies. These companies also are providing this instrument namely finance. The types and forms of finance companies are just like other companies but finance is such an instrument which can lead business unit and economy to serious and long-term implications. So the forms and working methods of finance companies become distinct. The distinguishing features are as under :

(1)       Central bank of the country continuously and minutely watch the financial compa­nies. It regulates them, if required.

(2)       Central bank takes care for utilising the financial sources for desirable ways and means.

(3)       Financial institutes have to maintain equilibrium between profitability and safety as they are tempted to earn more profit at, the cost of safety.

(4)       Financial companies have their own shareholders and lenders. They ask for more return than the current rate. On the other side, financial companies have to maintain equi­librium between profitability and safety, so they require experts in management.

Non-Banking Finance Companies : NBFC :These companies, as their name suggests are providing required finance to businessmen but do not provide banking services. Banking services are providing liquidity to businessmen and society and are managing paper money like cheques, drafts. These services are not provided by non-banking finance companies. It works purely for finance. They lend through policies of hire-purchase sys­tem, installment system, secured loans or personal securities to those citizens who want to purchase durables like vehicles, buildings, televisions. For increasing their business and for providing safety to their lending non-financial services are rendered. The transactions of non-banking financial companies are distinct, as stated above. So, the central bank of the country keeps watch over their working. These institutes are of various types from various viewpoints, out of which we will study Investment Trusts and Mutual Fund companies. Besides, lending to small businesses by finance companies will also be seen.

Investment Trusts : Trusts are formulated mostly for non-business purposes. Some trusts are formulated for business purposes. Trust is such a form in which confidentiality can be maintained. Comparatively, they are run by fewer persons. Investment trusts are investing for long-term in business units and elsewhere as their name suggests. For this they get finance from persons and institutes which want to invest for long-term. In countries like India, investment trusts are established by the big industrial houses. They invest for long­-term in their controlled companies through these trusts. The surplus funds of any company controlled by them are. invested in these investment trusts. After that, trusts invest funds in those controlled companies which are in need of finance. Unit Trust of India is an invest­ment trust.

Mutual Funds : Most of the investment trusts are investing in long-term securities by accepting money through mutual funds from those who want to invest for long term. Today, ­five hundred plus mutual funds are active in India. Investment is made in equity shares, long-term maturing but high rate of interest yielding debentures / bonds, government loans and other long-term securities. Small investors are unable to understand which long-term securities are safe and remunerative. Mutual funds give guarantee and trust to these inves­tors that they will invest in safe and reliable securities by collecting money from them. It is inevitable that mutual funds are managed very’ efficiently, dynamically and on professional standards.

Institutional lending for small business

The needs of small business are few. So, financial institutes do not get enough return on ending to pay for managerial expenditure and profit. So, they are eager to lend to big businessmen if chances are there. Government wants to fulfill the purpose of equal distribution ­of wealth which is expected of a welfare state government by developing the small businessmen. In this situation, government gives incentives to finance institutes for lending to small business. Institutes are coming forward to lend to small businesses for getting gains of incentives.

As a businessman runs a small business he comes under the control of finance insti­tutes. So, non-performing assets which means in accounting language bad or doubtful debts are created at low level. Small businessmen are regular in interest payment on borrowings. If the amount of installments is kept small for the repayment on borrowings. small businessman ­pays them regularly. Finance institutes provide services of book keeping and financial management if small businessman has inadequate skill of them. By providing these ser­vices, on one side small businessmen become capable and on the other side, their lending become safe and remunerative.

Special financial help rendered to the industries in rural, backward and hilly areas

Industrialists don’t start industries on their own in rural, backward and hilly areas as they are depending upon market forces. There are no attractive profit making markets in these areas. Capable personnel required to run industries which are available in a very few number in these areas. The facilities of roads, water, electricity-supply are less in these areas. One of the many purposes of welfare state is to have equal economic development of all the areas of a country. So, to reduce the lop-sided development, government gives spe­cial financial help to start and to support the existing industries in these areas. The help mainly is of the following types:

(1)       The rate of interest on borrowings is kept at a very low rate.          

(2)       Government sees to it that easy availability of financial resources to purchase mostly and, factory shades and other properties is made possible and their sales prices are kept low. By this way, it gives financial help.

(3)       By giving relief in taxes government gives special financial help to industries.

(4)       Sometimes, government sees that the financial management of industries is run efficiently by providing experts for financial management and book-keeping to the industries established in these areas.

(5)       Special financial help is also given by arranging for low amount of installments for the repayment of borrowings and various types of relief and simplicity for the payment of installments are also arranged.

(6)       Many a time Government society, if industries are established in rural, backward and hilly areas.

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