The drawbacks of industrial finance in India
The following are some of the important drawbacks of industrial finance in India:
1. Backward Financial System:
One of the important drawback of industrial finance in India is that it is not yet developed fully, the extent of capital market which is a source of long term finance including equity and debt is quite small. It also fails to provide risk capital in adequate quantity. The development of non-bank financial intermediaries is also very poor.
Very little arrangement is made about venture capital which usually makes risky investment for high returns. The system is very much
inadequate in respect of financial deepening which can be measured as a ratio of liquid liabilities to GNP. All these indicators reflect about the undeveloped financial system prevailing in our country.
2. Paucity of Funds:
Another shortcoming of industrial finance is that it is grossly inadequate for the continuously growing and large requirements, especially to meet the needs of large industries. Moreover, the small industries are also facing shortage of finance in a acute manner. Besides, the securing and servicing of foreign funds are becoming difficult and expensive. Thus as a result of paucity of fund the expansion of industries is becoming very difficult.
3. Unsatisfactory Interest Structure:
The interest rate structure for different types loans like short term, medium term and long term are more or less unsatisfactory. These rates are not appropriate and are not properly aligned with one another and these rates are largely distorted and does not attain demand supply equality for capital. Indigenous money lenders also charges high rate of interest from small and village industries distorting the market interest rate structure.
4. Lack of Adequate Capital Formation:
Industrial finance usually suffers from lack of adequate capital formation. There are inherent difficulties of mobilizing the quantum of incremental rural incomes which could have been utilized for financing rural industries.
5. Difficulties of Small Industries:
Small industries located both in urban and rural areas are facing serious problem in realizing adequate finance. The problems faced by SSIS are varied. Firstly, them are lack of institutional finance available to SSI units. Even till to day financial corporations exclusively meant for SSI units have not yet been set up in all the states of the country. Secondly, in meeting the short term needs of SSI Units, banks and other financial institution demand adequate security acceptable to them showing least, regard to potentials and other qualities of SSI units reducing the credit worthiness of these units.
Thirdly, in respect long term capital also, i.e., in raising share capital, SSI units are getting less favour as compared to that of large industries. Finally, whatever financial support are available informal and indigenous sources of industrial finance to SSI units are considered to be small and costly considering the high rate of interest changed by these lenders.
Thus the industrial finance as a system in India has been suffering from several drawbacks. Accordingly, it is found to be inadequate, undeveloped following unsatisfactory interest structure and less friendly to small reach and tiny industrial units.
Remedial Measures:
As the industrial finance set up in India suffers from serious shortcomings thus serious attempts should be made to improve the set up and to remove its shortcomings.
The following are some of remedial measures suggested for the purpose:
1. Strengthening the Domestic Source of Finance:
In order to improve the system of industrial finance, the domestic sources of finance need to be strengthened and expended. Therefore. reliance on foreign aid needs to be reduced gradually because of its unreliable character.
2. Diversity Sources:
In order to tone up industrial finance, sources of this finance should be diversified by setting up new institutions and expanding the existing ones. Thus the banking institution including regional rural banks, cooperative banks, and non-banking financial institutions need to be expanded for the purpose. Moreover, to expand the scope of long term finance, securities market needs to be developed and strengthened.
3. Expanding Market-finance:
Strengthening of industrial finance in India requires expansion of market finance which includes setting up of market related institutions, and extension of market- based institutions. These requires development of capital market, development of financial instrument, to promote financial deepening of the system, promoting market finance as a good signaling device and finally to attract household savings, especially from the rural untapped areas.
4. Improvement of Banking Institutions:
In order to improve the quantity and quality of industrial finance, banking institutions need to be improved and strengthened. This requires reforming the banking structure and its activities improving the management of banks and upgrade the quality of banking personnel and the internal system followed by banks also needs to be improved.
5. Strengthening NBFIs:
In order to tone up industrial finance, the non-banking financial institutions needs to be strengthened by setting up new units NBFIs, and also toning up the existing ones by developing appropriate legal framework. Development of long term finance institutions. Mutual fund industry etc. and establishing proper monitoring framework can strengthen this sector of industrial finance.
6. Encouraging Foreign Capital:
Considering the paucity of domestic finance, arrangement be made for smooth flow of foreign capital. In this respect, inflow of foreign direct investment in more important than the entry of portfolio of investment. Foreign capital should also facilitate entry of advanced technology and improved business practices.
7. Benefitting Small Industries:
Industrial finance set up should benefit the small scale industrial units adequately, without discriminating their stature.
