UNIT – 4
SOURCES OF DEVELOPMENT FINANCE
Government role in providing finance
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TYPES OF INDUSTRIAL FINANCE:
Short Term Finance – Funds required for a period of less than
one year. These funds are usually required to meet variable,
seasonal or temporary working capital requirements.
- borrowings from banks
- trade credit
- installment credit
- customer advance
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Medium Term Finance – The period of one year to five years
may be considered to be medium term finance. This is usually
required for permanent working capital, small expansions,
replacements, modifications etc.,
- issue of shares / debentures
- borrowing from banks and other financial
- ploughing back of profits.
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Long term Finance – The period exceeding 5 years is termed as
long term finance. Long term finance is required for procuring
fixed assets, establishment of new businesses.,
- Issue of shares,
- Issue of debentures,
- Loans from financial institutions,
- Ploughing back of profits (for existing concerns)
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Sources Of Finance:
SSU – the personal funds of entrepreneurs form a substantial
proportion of the total assets. Most of the units are not
corporate units. They run a considerably higher risk.
Sources of Finance is classified into two categories as-
Fixed – State Governments (SFC-State Financial Corporations)
Corporations (SSIC – State Small Industries
Corporation,SIDC – Small Industries Development Corporation)
State Bank Of India
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Working Capital - Commercial Banks
Special Agencies ( SIICOM – State Industrial &
Investment Corporation of Maharashtra, GIIC – Gujarat
Industrial Investment Corporation)
Broadly speaking the various sources from which an
entrepreneur can raise funds are enumerated in its balance
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It is grouped under the following heads:
Internal Source Of Capital –
A. Paid Up Capital – Ordinary shares, Preference Shares,
Deferred Shares and forfeited shares.
B. Reserve Surplus – Capital Reserves, Development
rebate reserves and others.
C. Provisions – Taxation and Depreciation.
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External Source of Capital –
D. Borrowings – from banks, from term lending institutions
like IDBI,IFCI,ICICI,Industrial Development
Corporations etc., from government agencies.
E. Trade Dues and Other Current Liabilities- Sundry
Creditors and others.
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The share distribution of source and of all
companies and profit making companies is the the
companies dependencies on all financial institutions and
banks is to the extent of 40 percent of its total funds and
60 percent on internal sources.
The funds which an industry can raise depends on
its productive activity and its uses ( Gross Fixed Assets ,
Working Capital ).
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Analysis Of Financial Ratios –
Debt Equity ratios, Turnover to net worth ,return on
capital employed, net profit as a percentage of net worth,
dividend paid to shareholders , ratio of current assets to
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Norms for inventory and receivables:
TONDON COMMITTEE –
For an efficient management of assets, this committee
suggested norms for Ram Materials, Stock in Progress, Finished
Goods and Receivables.
These norms represent the maximum level of holding
inventory and receivables in each industry.
Coverage: Applicable to all industrial borrowers including SSI with
aggregate limits in excess of Rs.10 lacs.
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The norms for the 4 kinds of CA are related to –
Cost Of Production
Cost Of Sales, and
If the carryover of any one kind of asset is higher than the
relative normal level, the surplus is treated as excess and any
shortfall is treated as deficit.
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Scientific Approach to Working Capital:
Factors that affect the need for Working Capital
- terms offered by suppliers
- terms offered to customers
- lead time for inventory
- seasonal fluctuations in sales
- level of stock.
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These factors may be used to relate the Balance Sheet items
to sales volume.
It is the relationship that exists between the amount of CA and
CL and the volume of sales.
To develop the model the steps involved to analyze the
working capital are –
1. Analyse the relevant factors of a companies situation.
2. Improvement through observation and experience.
3. Tool for the assessment of the size of WC.
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Effective Financial Management is based on three factors:
1.Analysis of past performance.
2.Planning for future activities.
3.Control of current activity.
The WC has therefore to be managed properly especially by
the SSI’s, because over or under circulation may create
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Project finance means the arrangement of
sufficient funds to finance the development and
construction of a specific project. The ways and means of
financing a project depends upon the type and
development and will vary from project to project.
Project finance is both short term and long term.
It was a fairly simple banking exercise. Of late, the
changes in the economic environment is mainly considered
The figures for total investment, technical
innovation, inflation changes brings forth the importance
of a national approach to project financing.
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The figures for total investment, technical innovation,
inflation changes brings forth the importance of a national
approach to project financing.
The gamut of “feasibility” covers the following areas:
Cost of the project
Organisational and management structure.
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Paradigm Shift in Project Finance:
Equity (Old-Ordinary Shares) – Ordinary shares, Preference
shares, Non-voting shares, Global Depository Receipts,
American Depository Receipts.
Debt (Old – Term loans, Debentures) – Term Loans,
Debentures, Non-Recourse Finance, Zero Coupon/Deep
Discount Bonds, Euro Bonds etc.,
Convertibles( Old – Convertible Debentures) – Convertible
Debentures, Redeemable Cumulative Convertible Preference
Leasing (Old – Financial Leases) – Financial Leases, Operating
Leases, Vendor Leases etc.,
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It refers to the total investment of money, tangible
assets like buildings and intangible assets like goodwill. It is, in a
way aggregate wealth of a unit or a company.
Net Capital refers to excess of total assets to total
It is the sum total of all long term securities issued by
a company and the surpluses not meant for distribution, it
includes only term loans and retained profits.
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Overcapitalisation Vs Undercapitalisation:
If a company raises more capital than is warranted by the
figure of capitalisation or its earning power, it is said to be
A company is under-capitalised when its capital is lower than is
warranted by its earning capacity.
Difference between OC and UC-
1. Rate of Return
2. Earning capacity-Low/high
3. Utilisation- Inefficient/efficient
4. Financial position- Weak/strong.
5. Mkt value of share – less/more.
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Capital Structure of a Company: This is broadly classified into two
Ownership Securities and Creditorship Securities
-Equity Shares - Debentures
- Preference Shares -Simple, Registered,
-Cum/Non-cum, -Secured, Unsecured,
-Reducible/Irred, - Reducible, Irreducible
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Finance for Large Scale Industries:
• By the issue of shares of different types and debentures,
• By ploughing back a part of the profits made by an industry,
• By inviting long term deposits from the public,
• By raising long term loans from public financial institutions.
Equity Shares – It means ownership interest or the interest of
shareholders as measured by capital and reserves.
Debentures – A document under the company’s seal which
provides for the payment of a principal sum and interest at
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Preference Vs. Equity Shares:
• Right of receiving dividend
• Right of receiving back their capital
• Rate and magnitude of dividend
• Voting rights
• Face Value
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Shareholders Vs Debentureholders:
• Nature Of Capital
• Position at winding up
• Rights and privileges
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Lease financing is the easiest way of financing capital
expenditure without going through the time consuming process of
obtaining term loan assistance from financial institutions and
- Manufacturer of Asset
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