Industrial Finance Corporation of India (IFCI)

The Industrial Finance Corporation of India (IFCI), popularly known as IFCI, is amongst the first development financial institutions (DFIs) established in India. Set up shortly after independence, it addressed the long-term financing needs of industrial enterprises.

At UPSC, it is important to understand the role and functions of IFCI in the context of development banking, industrial finance, and planned development.

Establishment of IFCI

• The Industrial Finance Corporation of India came into existence in 1948, pursuant to the enactment of a specific Act of Parliament. It was the first development finance institution to be set up in India.
• India at the time faced a severe shortage of capital, technology, and infrastructure. Moreover, commercial banks were not inclined to provide long-term loans for industrial investments.
• IFCI, therefore, was set up as a development finance institution, with the mandate to provide medium and long-term loans to enterprises. In other words, the focus was on supporting industrialization in India.

Objectives of IFCI

The main objective of IFCI is said to have been to provide long-term financial assistance to industries. However, its broader objective was to aid in mobilizing finance for industrial enterprises.

Amongst others, the functions of IFCI included:

• Providing medium and long-term loans to industries;
• Providing guarantees for loans and deferred payments;
• Underwriting and subscription to shares, debentures, and other securities;
• Assisting in industrial finance projects, through the aforementioned;
• Encouraging capital formation and industrialization.

Development Role Played by IFCI

IFCI not only served as a financial institution, but also played a developmental role by aiding in projects that might not have been economically viable, but were essential for industrial development.

For example, during the initial phases of planned development, it provided loans for projects in:

• Steel
• Cement
• Chemicals
• Engineering
• Textiles
• Heavy industries
• Power
• Other infrastructure-intensive economic activities

These projects paved the way for industrialization, creating employment and boosting the industrial base of the country.

In addition, it is understood that the lending agenda of IFCI complemented India’s economic planning, by promoting industrialization in consonance with the Five-Year Plans in place. As such, the institution also helped in aligning finance with economic planning.

IFCI and Commercial Banks: Complementary Roles

IFCI worked in tandem with commercial banks to bridge the gap in long-term financing of projects.

• While commercial banks provided short-term working capital loans, IFCI specialized in long-term project financing.
• In addition, banks could also participate in projects developed by IFCI through co-financing arrangements, wherein the risks of default were shared.

This collaboration had several benefits, including:

• Sharing of risks;
• Additional lending avenues for banks;
• Better risk assessment and mitigation by IFCI;
• Broader industrial financing coverage;
• Overall strengthening of institutional capabilities in financing industries.

Financial Instruments Used by IFCI

Various financial instruments were used by IFCI in order to finance industrial enterprises, including:

• Direct Loans: These were in the form of medium and long-term loans.
• Subscription to Securities: This involved purchasing of bonds, shares, and other financial instruments issued by enterprises.
• Underwriting: This refers to provision of guarantee in respect of public issues of bonds and shares by enterprises.
• Guarantees: IFCI provided guarantees with respect to loans and deferred payments, including imports of capital goods.

Post-Liberalization Changes and the Institutional Structure of IFCI

The economic reforms of 1991 led to changes in the capital market scenario in India. Enterprises started relying less on development financial institutions for project finance, particularly for large-ticket loans.

• In particular, the liberalization of the Indian economy led to changes in laws, rules, and regulations with respect to finance, including greater reliance on market forces.
• As such, the role of IFCI also changed. It even transitioned into a company, as per the Companies Act, with the objective of transforming itself.

Challenges Facing IFCI

Like many other development financial institutions, IFCI also faced several challenges, which tended to affect its financial position and credibility.

Some of the problems it faced included:

• Asset-liability mismatch;
• Large amount of NPAs;
• Long gestation period of projects;
• Impact of economic slowdown on loans;
• Issues relating to governance and operations; and
• Limited alternate sources of funding, particularly after reforms.

These challenges impacted the operations of IFCI, with the challenges of balancing developmental and commercial roles proving to be the most difficult.

Regulatory and Institutional Framework

• IFCI is a part of the larger financial sector, wherein it falls under the regulatory supervision of the Reserve Bank of India, as the case may be.
• By virtue of the institutional design and mandate, it operates in consonance with the broader financial sector development framework.

Significance of IFCI for UPSC

IFCI is important for UPSC exams, as it provides insight into the evolution of financial markets in India. More specifically, it provides a greater understanding of the following issues:

• Why did India face a shortage of long-term capital?
• What options were available to industrial enterprises?
• How did DFIs such as IFCI contribute to industrialization?
• How did the shift towards a market-driven economy impact institutions such as IFCI?

Essentially, IFCI has a bearing on questions pertaining to development financial institutions and industrial finance, as well as banking and financial sector reforms.

FAQs on IFCI

When was IFCI established?

IFCI was established in 1948, pursuant to the enactment of a special Act of Parliament.

Why was IFCI set up?

IFCI was set up in order to provide long-term loans to industrial enterprises.

What role did IFCI play?

The primary role played by IFCI was to provide long-term project finance, along with guarantees and underwriting facilities to enterprises.

How was IFCI different from commercial banks?

Commercial banks focused on providing short-term working capital finance, whereas IFCI specialized in long-term project financing.

Why did IFCI lose its importance after liberalization?

After liberalization, capital markets witnessed developments wherein enterprises accessed alternate sources of long-term finance. As such, institutions such as IFCI, which were set up earlier, lost relevance.