This article throws light upon the top two sources of term loan. The sources are: 1. Specialised Financial Institutions 2. Commercial Banks.
Term Loans: Source # 1.
Specialised Financial Institutions:
The need for establishing financial institutions was felt in many countries immediately after the Second World War in order to re-establish their war shattered economies. In under-developed countries, the need for such institutions was much more due to a large number of organisational and financial problems inherent in the process of industrialisation.
As early as 1918, the Industrial Commission had recommended the establishment of a financial institution in India. After independence a number of financial institutions have been Set up at all India and regional levels for accelerating the growth of industries by providing financial and other assistance required.
These specialised financial institutions are also called Development Banks because they provide not only finances but also help in promotion of new enterprises.
These institutions have to play a very significant role in the industrial development of our country for the following reasons:
(i) Absence of organised capital markets,
(ii) Lack of entrepreneurial talent,
(iii) Low capital formation,
(iv) Shyness of capital, i.e., people prefers to invest only in traditional areas and is reluctant to take risk in new ventures.
(v) Inadequacy of financial facilities to meet huge requirements of funds for industrial development, and
(vi) Planned economic development to achieve the socio-economic objectives.
At present there are four important financial institutions at the national level i.e., the Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), and Industrial Reconstruction Corporation of India (IRCI) now called Industrial Investment Bank of India Ltd (IIBIL).
In addition, there are 19 State Financial Corporations (SFCs) and 24 State Industrial Development Investment Corporations. Apart from these specialised financial institutions, commercial banks, industrial co-operatives, small industrial development corporations, Unit Trust of India, Life Insurance Corporation.
National Industrial Development Corporation, etc. also provide finances for the development of industries in the country. Besides these institutions commercial banks provide short term as well long term finances. The Reserve bank of India is also providing industrial finance through other financial institutions.
There are some international financing institutions like World Bank and its affiliates such as International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC) and Asian Development Bank (ADB).
All these institutions also provide industrial finance, some through member countries while others directly to the enterprises. The help rendered by all such institutions has accelerated the pace of industrialisation.
There are many advantages of raising loans from the specialised financial institutions, such as:
(a) Availability of finance for development schemes.
(b) Reasonable security requirements.
(c) Availability of finance during periods of depression.
(d) Easy repayment facility
(e) Underwriting facility.
Such institutions help in promoting new companies; expansion and development of existing companies and meeting the financial requirement of companies during economic depression.
Term Loans: Source # 2.
Commercial banks normally concentrated on providing short-term financial assistance to industrial sector. The working capital needs of industrial enterprises were met. A massive investment in industries during second plan and after changed the priority of bank lending. The industrial sector required huge funds for long-term financing. The financial institutions could not cope with this demand.
The commercial banks came into the picture for filling the gap between demand and supply of long term requirements. The banks started giving term loans to meet long-term needs of the industry. The refinance scheme of IDBI encouraged more term lending by commercial banks. The bank managements now feel that they can extend long term credit without distorting the principle of liquidity.
The commercial banks are assisting industrial units by granting term-loans, subscribing to shares and debentures of corporate units and underwriting securities issued of these companies.