Long-term and medium-term loans can be secured by companies from financial institutions like the Industrial Finance Corporation of India, State level Industrial Development Corporations, etc. These financial institutions grant loans for a maximum period of 15-20 years against approved schemes or projects.
The Government of India, in order to provide adequate supply of credit to various sectors of the economy, has evolved a well-developed structure of financial institutions in the country. These financial institutions can be broadly categorised into ‘All India institutions’ and ‘State level institutions’, depending upon the geographical coverage of their operations.
At the national level, they provide long and medium term loans at reasonable rates of interest. They subscribe to the debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred payments, etc. Though, the State level institutions are mainly concerned with the development of medium and small scale enterprises.
Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company's property or assignment of stocks, shares, gold, etc. A wide variety of financial institutions have been set up at the national level in India. They cater to the diverse financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFC ; investment institutions like LIC, GIC, UTI; etc. More information can be found at-
Loans from Commercial Banks
Banks today are slowly but surely adopting a more progressive and forward looking outlook. With the help of better technology, risk prediction and management strategies and tools, as well as the sheer number of positive Small and Medium Enterprises (SME) growth stories, banks are extending a strong lending hand to SMEs. In its broadest definition, the banking sector includes commercial and investment banks, leasing companies, microfinance institutions (MFIs), and other related institutions. MFIs have emerged to serve the smallest of these enterprises, while banking institutions have typically concentrated on large corporations and now the focus has turned to SME’s.
The Reserve Bank of India (RBI) is the supreme monetary authority responsible for controlling the banking system in the country. The scheduled banks comprise scheduled commercial banks and scheduled cooperative banks. Further, the scheduled commercial banks in India are categorised into five different groups according to their ownership and/or nature of operation:- (i) Nationalised Banks; (ii) State Bank of India and its associates; (iii) Regional Rural Banks (RRBs); (iv) Foreign banks; and (v) Other Indian private sector banks. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Co-operative Banks. Medium-term loans can be raised by companies from commercial banks against the security of properties and assets. Funds required for modernization and renovation of assets can be borrowed from banks. This method of financing does not require any legal formality except that of creating a mortgage on the assets.
Recognizing the importance of the SME sector, RBI has issued the following guidelines
1. Ensuring credit to the MSME sector as part of the priority sector lending by banks
2. Earmarking credit for micro enterprises within overall lending to micro and small enterprises.
3. Opening specialized SME branches
4. Enhancing the limit for computation of the aggregate working capital requirements on the basis of minimum 20% of the projected annual turnover.
5. Adopting a cluster-based approach for SME financing by banks.
6. Reviewing the progress in achieving at least 20% YoY growth in credit to SMEs by the boards of banks.
There are working capital needs or short term financing needs which can be met through various financial products offered by Indian or Foreign banks. The key ones have been highlighted below
Companies buy raw materials, components, stores and spare parts on credit from different suppliers. Generally suppliers grant credit for a period of 3 to 6 months, and thus provide short-term finance to the company. Availability of this type of finance is connected with the volume of business. When the production and sale of goods increase, there is automatic increase in the volume of purchases, and more of trade credit is available.
The amounts due to a company from customers, on account of credit sale generally remain outstanding during the period of credit allowed i.e. till the dues are collected from the debtors. The book debts may be assigned to a bank and cash realised in advance from the bank. Thus, the responsibility of collecting the debtors' balance is taken over by the bank on payment of specified charges by the company. This method of raising short-term capital is known as factoring. The bank charges payable for the purpose is treated as the cost of raising funds.
Discounting Bills of Exchange
This method is widely used by companies for raising short-term finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount them with commercial banks on payment of a charge known as bank discount. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The amount of discount is deducted from the value of bills at the time of discounting. The cost of raising finance by this method is the discount charged by the bank.
Bank Overdraft and Cash Credit
It is a common method adopted by companies for meeting short-term financial requirements. Cash credit refers to an arrangement whereby the commercial bank allows money to be drawn as advances from time to time within a specified limit. This facility is granted against the security of goods in stock, or promissory notes bearing a second signature, or other marketable instruments like Government bonds. Overdraft is a temporary arrangement with the bank which permits the company to overdraw from its current deposit account with the bank up to a certain limit. The overdraft facility is also granted against securities. The rate of interest charged on cash credit and overdraft is relatively much higher than the rate of interest on bank deposits.
List of important Banks and Financial institutions in India
Other important links of various Indian banks along with their contact details are provided in the below links-