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Cooperative Credit /
Cooperative Banks
Nature of Development Banking
- Originated with enactment of Cooperative Credit Societies
Act 1904.
- Establishment of Cooperative Central banks in 1912.
- Objective: Attracting deposits from non-agriculturists,
Using excess funds of some societies temporarily to make
for shortage in other banks, and to supervise and guide the
affiliated societies.
- State Cooperative Apex Bank was established according to
the recommendations of Maclagan Committee.
D F Is (57 DFI as on by the end of 2007 financial year)

Developmental Banks

All India Level Institutions State Level Institutions Other Institutions

All India
Specia-
Devpt.
lised FIs
Banks
Exim Bank
IDBI
RCTFC SFCs SIDCs
IFCI
TFCI
IIBI
IDFC
SIDBI
NEDFC
ICICI
Invest-
ment Refinance
Institutions Institutions ECGC DICGC
UTI NABARD
LIC NHB
GIC
DFIs
A.All India Level
Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India Ltd (IFCI)
Small Industries Development Bank of India (SIDBI)
Industrial Credit and Investment Corporation of India Ltd. (ICICI)
Life Insurance Corporation of India (LIC)
General Insurance Corporation (GIC)
Unit Trust of India (UTI)
National Housing Bank (NHB)
Export –Import Bank of India (EXIM Bank)
NAtioanl Bank for Agriculture and Rural Development (NABARD)
Industrial Investment Bank of India Ltd. (IIBI),
Infrastructure Development Finance Company Co. Ltd (IDFC)
Risk Capital and Technology & Information Company of India Ltd. (RCTFC)
Technology Development and Information Company of India Ltd. (TDICI)
North-eastern Development Finance Corporation (NEDFC)
Tourism Finance Corporation of India Ltd. (TFCI)
Indian Renewable Energy Development Agency (IREDA)
DFIs
B. State Level (IDBI is the apex institution which
coordinates the activities of all other DFIs at the national
and State levels)
State Financial Corporations (SFCS: 18 in operation)
State Industrial Development Corporation (SIDCs: 28 in
operation)
Technical Consultancy Organization (TCOs: 17 in operation)

C. Others
Export Credit Guarantee Corporation (ECGC)
Deposit Insurance and Credit Guarantee Corporation
(DICGC)
Project Identification

A Project is a proposal for capital investment to develop


facilities to provide goods and services.

The investment proposal may be for setting up a new unit,


expansion or improvement of existing facilities.

The project idea can be conceived either from the input or


output side.
Input-based projects are identified on the basis of
information about agricultural raw materials, forest
products, animal husbandry, fishing products, mineral
resources, human skills and new technical processes
evolved in the country or elsewhere.

Out-based projects are identified on the basis of needs


of the population as revealed by family budget studies
or industrial units as found by market studies and
statistics relating to imports and exports.
Contents of Business plan
• Define business clearly
• Identify target market
• Understand industry in which product compete
• Outline management abilities
• Outline financial frame work
• Do not consider unrealistic market projections
• Consider source of risk
• Length should be 25 to 30 pages
• Use simple clear language
• Aim business plan for non-specialists
The Stages of Project Selection
1. Acquiring motivation
2. Identification of various project ideas
3. Preliminary screening
4. Evaluation of project idea:
Market analysis:
Financial analysis: Inflow and Outflow;
Technical analysis:
Economic analysis:
Ecological analysis:
Social cost benefit analysis.
5. Project report
Step 1 : Acquiring Motivation

• Influences
– Culture
– Sub-Culture
– Family / Peers / Education
• Support
– Govt.
– Financial institutions
• Venture Capital/Banks etc.
Step 2 : Identify and Evaluate Opportunity
Opportunity Analysis: It should include A description
of the product or service; an assessment of the
entrepreneur and the team; specification of all the
activities and resources; sources of capital; as well as
its growth.
The assessment of the opportunity requires answering the
following questions:
- What market need does it fill?
- What personal observations have you experienced or
recorded with regard to that market need?
- What social condition underlies this market need?
- What market research data can be marshalled to describe.
Is it a good idea? 5 questions to ask
• Is the number of potential customers, in other words the
market, large and growing?
• Who is your customer and what is his or her problem,
specifically, that you plan to solve?
• How are these people currently solving their problem, that
is, what is your competition?
• How much better or cheaper are you than your potential
customers' current solution, and can you maintain that
advantage?
• And, most importantly: are you and your team suited to
this task - do you have the right knowledge and network in
this industry? Are you passionate about the problem or
industry?
Created need Garment
Solving the problem Mixie
Creating the problem Mixie with larger cap
New application Roofing sheets
Modification Mixie with top handle
Special Feature Remote Control
Manipulation of Technology (miniature Roof top Green Houses
version)

Tailor-made Opportunities based on Foolproof Security Systems


Technologies
Waste Utilization Compost from Market Waste

Cooking High Speed Cooker


Criteria
– Market Issues
– Potential
– Profit Margins
– Competitors: Barriers to entry
– Financial Issues
Capital Required
Taxation
ROI
Market analysis: Target customer, size of market,
competition level, product differentiation, durability of
competitive advantage
Financial analysis: Inflow and Outflow; Project evaluation
techniques; Financial analysis-Ratios: Liquidity, Capital;
BEP.
Technical analysis: Capacity of plant; flexibility of plant;
availability of technology; Inputs; Location; layout of
project; cost of production; quality testing and improving
methods.
Economic analysis: Economic effect; and net foreign
exchange effect.
Ecological analysis: Extent of pollution and expected
measures by the firm.
Social cost benefit analysis: Benefits and Costs
Step 3 : Develop Business Plan

Business plan is the description of the future direction


of the business.
• Provides promoters with logical framework within
which to plan and pursue a business strategy
• Basis for discussion with 3rd parties such as Govt.,
Banks, Investors
• Benchmark against which actual performance can be
measured and reviewed.
Step 4 : Determine the Resources Required
• Men
• Plant & Machines
• Land & Building
• Materials
• Money / Funding
Debt: Friends, relatives, indigenous banks, banks,
financial institutions, public deposits, debentures, private
equity, venture capital.
Equity: Equity and own funds
Step 5 : Manage the Enterprise
• Planning
– Decision Making/ Operational & Strategic
– Budgets, P&L, B/S, Cash flow
• Organising
– Division of Work/ Org. Structure
– Allocating resources
• Leading
– Delegation / Motivation
• Control
– Performance Evaluation / Review
Promoters contribution
- Promoters contribution fixed at 22.5 per cent of the project cost.
- Concessional Norms: Available in terms of the location of the
project.
‘A’ areas: No industry Districts
‘B’ areas: Districts where industrial activity has started
‘C’ areas: Districts with industries are sufficiently well-developed
- Concession in promoters contribution:
‘A’ areas: 17.5 per cent
‘B’ areas: Projects above Rs. 25 crore in ‘B areas – 17.5 per cent
‘C’ areas: 20 per cent
- Concessional norms are allowed purely at the discretion of the
financial institutions
- Contribution may vary depending up on the risk of the project.

- Deserved entrepreneurs who are unable to contribute can avail


seed capital assistance from State Financial Corporations (up
to specified limit), Industrial Development Bank of India, Risk
Capital and Technology Corporation of India Ltd., or Small
Industries Development Bank of India (depending up on the size
of the project Rs. 10 to Rs.30lakhs).
- For the purpose of promoter’s contribution, investments made
by mutual funds are considered if they are covered by non-
disposal / buy-back clause.
Determination of the Equity Capital to be
raised from public
Eg: Project Cost: Rs. 10 crores; Promoters’ contribution is 22.5 per
cent; Debt-equity ratio 2:1.

Debt: Rs.1,00,00,000 x 1/3 = Rs.66,66,667


Equity: Rs.1,00,00,000 x 2/3 = Rs.33,33,333
Promoters contribution (Rs.1,00,00,000 x 0.225 ): Rs.22,50,000
Equity to be raised: Equity capital – Promoters contribution
Rs.33,33,333 – Rs.22,50,000 = Rs. 10,83,333
Guidelines for Financing
- Priority should be given projects contributing to:
Agriculture & rural development Projects locating in rural
areas
Generation of employment Export oriented
Advanced technology New material modernization
Infrastructural facilities (including rural areas infrastructure)
Export intensive and thrust industries for export development
Imports substitution (including requiring additional capacity)
Commercially proven indigenous technology
Upgradation of technology of existing units
Projects involving Energy conservation and utilisation of non-
conventional sources of energy
Projects by new entrepreneurs
Technocrats and non-resident Indians.
- Projects should not fall under negative list:
Cigarettes Beer and Alcohol
New jute mills Power looms (for mfg of items
reserved for handloom) Fan and V Belts
LP Gas cylinders HDPE woven socks
Bright bars Tin and metal containers
Drums and Barrels Playwood
Calcium carbide Hamilton poles
Tabular poles AAC/CSR conductors
Hand operated sewing machines
Conveyor belting (rubber and PVC based)
Toilet and Cosmetics preparations
Commercial and decorative veneers
Blackboards and flush doors
Process of Evaluation of Application

- Preliminary meeting should be fixed with the FI


- Submit application for term loan (if DFI agrees to consider the
proposal)

- The loan application would require details of promoters’


background, technical skills, relevant experience and
financial soundness
- The market research study for the project has to establish the
contribution of the project to existing and estimated
demand.
- Aspects of technical, financial, and economic would be
covered.
- Cash flow statements for 7 to 10 year period would be
required
- The land for the project, plans foe building and quotations
for the machinery from two manufacturers.
- The production process has to be depicted.
- Estimated working capital need to be given.
- Submit MoU, AoA, Certificate of incorporation, latest
annual report and statement of accounts in any have to be
filed.
- Documents of guarantor company need to be enclosed.
Appraising Term Loans
Financial structure of financing emerges after taking into
account:
- Promoters’ contribution
- Debt equity ratio (3:1 for small industrial units and 2:1 for
medium and large firms)
Equity: Includes loans from friends, relatives, and capital
incentives
- Debt service coverage ratio (DSCR): 1.6 to 2 times
- Security margin: 25 per cent (Fixed deposits)
Terms and Conditions for Grant of Loans
- Clean title of land as security
- Insurance of assets, building, and machinery separately
- Scrutiny of AoA (It does not contain covenants of the FIs)
- Lien on all fixed assets
- Personal and corporate guarantees of major shareholders and
associate concerns
- Undertaking from promoters to finance shortfalls in funds (cost
overrun)
- Approval of appointment of managerial personnel by DFI
- Further capital expenditure only on the approval of DFI
- Payment of dividend and issue of bonus shares subject to the
approval period of the FI
- Undertaking for non-disposal of promoters’ shareholding for a
period of 3 years.
After the loan is sanctioned, the
requirements to be met are:
- Acceptance of terms and conditions of loans
- Deposit of legal charges
- Details for plot or land for project
- Search report and title seeds for the land
- General body resolution for creation of charge over assets
- Pollution clearance
- Legal documents to create a charge in proposed assets
- Personal guarantees and undertakings along with income tax
and wealth tax clearance of the promoters and director
- Architects and auditor’s certificate for civil construction.
Disbursement of Loan
- Stamp duty and registration fee have to be paid
- Subscribed and paid-up capital is to be brought in by the
promoters as required by DFI
- Creation and registration of charge on the present and
future assets of the company
After the above requirements are complied with,
disbursement made on the basis of assets created at the site.
In case of large projects, disbursement are need –based, and
promoters have to bring in their entire contribution first.
In some case bridge loan is granted against bank guarantee
(when there is no physical inspection is possible).
Disbursement is made after physical verification of assets
created.
SOURCES OF FUNS OF DFIs

- Equity share capital


- Preference share capital
- Bonds
- Government
- Refinance facility
- Special finance
Form of Loans
- Rupee loans
- Foreign currency loans
- Rupee plus foreign currency loans

Operations and Trends


- DFIs can choose become a bank or NBFC
- Uniform supervisory regime for banks and NBFCs (on-
site and off-site monitoring; and periodic external
auditing.
- Consolidation
Assistance Sanctioned and Disbursement by DFI
Year Sanctions Growth Disbursements Growth
Rate (%) Rate (%)
1990-91 191961.0 32.8 128101.0 32.9
1991-92 223148.0 16.2 162729.0 27.0
1992-93 331933.0 48.8 231525.0 42.3
1993-94 409870.0 23.5 266243.0 15.0
1994-95 578324.0 41.1 335772.0 26.1
1995-96 599363.6 3.6 386979.7 15.3
1996-97 501418.2 (-) 16.3 429427.4 11.0
1997-98 749355.0 49.4 536560.1 24.9
1998-99 837943.5 11.8 583947.2 8.80
1999-00 1043407.6 24.5 684804.2 17.3
Cumulative
upto end March
6181747.2 4354065.1
2000
Critical Assessment of DFIs

The role of DFI has been praiseworthy in the following areas:


- Promotion of SSIs
- Promotion of Entrepreneurs
- Development of Backward Areas
- Industrial Development
- Investment substantial portion of equity
- Maintained sound financial position
The weaknesses of DFIs rare many. The major among
them are:
Low profitability
The act like a cartel (with investment banks)
More Government control & political influence
Shows interest in purchase of shares than providing initial
capital or underwriting issue
Regional imbalance (huge funds given to in 1994-95:Gujarat,
Maharastra, Tamil Nadu, West Bengal)
Not able to tackle growing sickness.
Seizing assets of borrowers in case of overdue (particularly
SFCS)
Directors (nominees from DFIs) not playing proactive role in
running the companies successfully.
Narasimham Committee on DFIs
Submitted report in 1991has both appreciation and criticism:
Appreciation:
- Successful in meeting their primary objective of providing
funds for industrial investment.
- Successful in channalizing assistance industrially less
developed states and backward areas.
- Build image (extent corporate sector relay on DFI)
- Increasing their share in equity of the Pvt. Sector
- Represented in the Boards of mgt. of companies and
played a major role in M&A
Weaknesses
- Licensing Policy: DFIs induced to finance unviable projects
by entrepreneurs without proven competence, and unwanted
relaxation in the appraisal standards.
- Govt. Policy: DFIs forced to provide financial support to
sick units against their better commercial judgments
- State level DFI working as wings of State Governments
rather than as autonomous financial institutions
- No Competition: Total Absence of Competition to DFIs
- Consortium Finance: DFIs have been operating almost like
a cartel – since different FIs join together and offer
consortium finance
Recommendations
- Ownership pattern of DFI should be broad based, like that
of ICICI
- Government should workout an action plan to be
implemented in the next 3 years which would usher in a
measure of autonomy of the DFIs in matters of internal
consideration
- Appointment of Chief Executives of DFIs (banks) should be
men of proven professional competence and should be
selected on the recommendations of a panel of eminent
persons.
- The Boards of DFIs should include representatives from the
industrial sector.
- Break the between SFCs and state government to improve the
efficiency of SFCs (take the only no. of projects that they can
efficiently follow up)
- DFIs should raise funds from the capital market at the market
rates. Also mobalise savings from household sector through
introduction of new schemes that should conflict with the
commercial banks.
- Each DFIs should have the sole responsibility (experts
committee) in loan sanctions. And supervise their own loan
implementation.
- The present system of consortium funding should be given up.
- The role of IDBI should be changed. It should retain only its apex
refinancing role and its direct lending function should be
transferred to a separate institution which would be incorporated
as a company.
- DFIs should lend support to existing management.