Special Financial Institutions (SFI)
After independence, a large number of financial institutions have been established in India with the primary objective to provide medium and long-term financial assistance to industrial enterprises. Institutions like Industrial Finance Corporation of India (IFCIs), Industrial Reconstruction Bank of India, State Financial Corporation (SFCs), State Industrial Development Corporation (SIDCs), have been established to provide financial support to set up new enterprises as well expansion and modernisation of the existing enterprises.
These financial institutions grant loans for a maximum period of 25 years. These loans are covered by mortgage of companies property or hypothecation of stocks shares, etc. The major benefit derived from such loans are:
- The rate of interest payable is lower than the market rate.
- The amount of loan is large.
However, it involves a number of legal and technical formalities and also the negotiation period is usually long. The financial institutions often nominate one or two directors ton have some degree of control over the utilisation of funds and the functioning of the company.
Borrowing From Commercial Banks
Traditionally, commercial banks in India were not granting long-term loans. They were granting loans only for a short period not extending beyond one year. But recently they have started giving loans for a period of 3 to 5 years.
Normally they give term loans for one or two years. The period is extended at intervals and in some cases loan is given directly for 3 to 5 years. Commercial banks provide long-term finance to small-scale units in the priority sector.
The merits of long-term borrowing from banks are:
- It is a flexible source of finance as loan amount can be increased as per the business need and can be returned in advance when funds are not needed.
- Banks keep the financial operations of their clients secret.
- Time and cost involved are lower as compared to issue of shares, debentures, etc.
- Banks do not interfere in the internal affairs of the borrowing concern.
- Loans can be paid back in easy installments.
- In case of small-scale industries and industries in villages and backward areas, the interest charged is very low.
Following are the limitations of long term borrowing from commercial banks:
- Banks require personal guarantee or pledge of assets while granting loans. So the business cannot raise further loans on these assets. Thus, it reduces the borrowing capacity of the borrowers.
- In case the short-term loans are extended again and again, there is always uncertainty about their continuity.
- Too many formalities are to be fulfilled for getting term loans from banks. These formalities make the borrowings from banks time consuming and inconvenient.