Development Financial Institutions – AHSEC Class 12 Finance Chapter 5

Here is a comprehensive study note for the AHSEC Class 12 Finance textbook, focusing on Chapter 5: Development Financial Institutions.

Chapter 5:

Development Financial Institutions

Summary Note

This chapter introduces Development Financial Institutions (DFIs), which are specialized financial bodies established to provide medium and long-term finance for the economic development of a country. Unlike commercial banks that focus on short-term lending, DFIs are designed to support industrial and agricultural growth by offering long-term capital.

This chapter focuses on four key DFIs in India:

1. Industrial Finance Corporation of India (IFCI):
   • Establishment: IFCI was the first DFI in India, established on July 1, 1948, under the IFCI Act, 1948. It was set up to provide finance to medium and large-scale industries.
   • Objectives: Its main goals are to provide long and medium-term credit, assist in setting up new projects and modernizing existing ones, guarantee loans, and support projects in cooperative and backward areas.
   • Functions: IFCI’s functions are categorized into:
     • Financial Assistance: Granting loans, subscribing to shares and debentures, and guaranteeing deferred payments.
     • Promotional Activities: Identifying new industrial opportunities, guiding entrepreneurs, and reducing regional disparities.
     • Financial Services: Offering corporate counselling, financing risky projects, and promoting credit rating agencies (like ICRA).
2. State Financial Corporations (SFCs):
   • Establishment: The SFCs Act was passed in 1951, empowering state governments to set up SFCs to meet the financial needs of micro, small, and medium-scale industries in their respective states. The Punjab Financial Corporation (1953) was the first SFC.
   • Objectives: To provide long and medium-term loans (up to 20 years), with a special focus on developing backward areas and small-scale industries, and to widen industrial ownership.
   • Functions: SFCs grant loans, subscribe to debentures, guarantee loans raised by industrial concerns, and act as agents for central and state governments in matters of granting loans.
3. State Industrial Development Corporations (SIDCs):
   • Establishment: SIDCs were formed in the 1960s and 1970s under the Companies Act, 1956, as wholly-owned undertakings of state governments.
   • Objectives: To stimulate industrial growth, especially in the small-scale sector, by developing industrial infrastructure (like industrial parks), promoting entrepreneurship, and providing marketing support.
   • Functions: SIDCs act as catalysts for industrialization in their states. They provide loans and guarantees, develop industrial areas, procure raw materials, and encourage projects in the joint/assisted sector in collaboration with private entrepreneurs.
4. National Bank for Agriculture and Rural Development (NABARD):
   • Establishment: NABARD is the apex DFI for rural and agricultural development. It was established on July 12, 1982, by an Act of Parliament, taking over the functions of the RBI’s Agricultural Credit Department (ACD) and the Agricultural Refinance and Development Corporation (ARDC).
   • Objectives: To provide undivided attention to integrated rural development, act as the centerpiece of the rural credit system, provide supplemental funding, and coordinate the working of all agencies involved in rural development.
   • Functions: NABARD’s functions are categorized into:
     • Credit Functions: Providing refinance facilities (short, medium, and long-term) to cooperative banks, RRBs, and commercial banks for agriculture and rural activities.
     • Regulatory Functions: Inspecting and supervising cooperative banks and RRBs.
     • Developmental Functions: Formulating credit plans, promoting research, providing training, and supporting small industries, artisans, and other rural crafts.

Complete Textual Question Answers

Here are the answers to all the questions given at the end of Chapter 5.

A. Very Short Answer Questions (1 Mark each)

1. In which year was the Industrial Finance Corporation of India established?
   Ans: The Industrial Finance Corporation of India (IFCI) was established in 1948.
2. In which year was the NABARD established?
   Ans: NABARD was established in 1982.
3. Write the full form of NABARD.
   Ans: The full form of NABARD is National Bank for Agriculture and Rural Development.
4. Write the full form of SFCs.
   Ans: The full form of SFCs is State Financial Corporations.
5. Write the full form of SIDCs.
   Ans: The full form of SIDCs is State Industrial Development Corporations.

B. Short Answer Questions (2 Marks each)

1. State two objectives of the establishment of the Industrial Finance Corporation of India Ltd.
   Ans: Two objectives of the establishment of IFCI are:
   i. To provide long and medium-term credit to industrial concerns engaged in manufacturing, mining, shipping, etc.
   ii. To assist in setting up new projects as well as in the modernization of existing industrial concerns.
2. State two objectives of the establishment of the SFCs.
   Ans: Two objectives of the establishment of SFCs are:
   i. To provide long & medium-term loans repayable within a period not exceeding 20 years to small and medium industries.
   ii. To lay special emphasis on the development of backward areas & small-scale industries.
3. State two objectives of the establishment of SIDCs.
   Ans: Two objectives of the establishment of SIDCs are:
   i. To stimulate the growth of industries in the small-scale sector.
   ii. To aid in facilitating industrial infrastructure development, such as industrial parks and estates.
4. State two objectives of the establishment of NABARD.
   Ans: Two objectives of the establishment of NABARD are:
   i. To give undivided attention and purposeful direction to integrated rural development.
   ii. To act as a centerpiece for the entire rural credit system at the national level.
5. Write two functions of the IFCI.
   Ans: Two functions of IFCI are:
   i. It grants loans or advances to industrial concerns, repayable within 25 years.
   ii. It underwrites the issue of industrial securities like shares, bonds, or debentures.
6. Write two functions of the SFCs.
   Ans: Two functions of SFCs are:
   i. They grant loans or subscribe to debentures of industrial concerns, repayable within 20 years.
   ii. They guarantee loans raised by industrial concerns which are repayable within a period of 20 years.
7. Write two functions of the SIDCs.
   Ans: Two functions of SIDCs are:
   i. They provide loans and guarantees to various companies belonging to different industries.
   ii. They take responsibility for the construction of sheds, development of industrial areas, and provision of various infrastructure facilities.
8. Write two functions of the NABARD.
   Ans: Two functions of NABARD are:
   i. Credit Function: It offers re-finance facilities (short, medium, and long-term) to co-operative banks, RRBs, and other financial institutions.
   ii. Regulatory Function: It undertakes the inspection of co-operative societies and RRBs to ensure their sound functioning.

C. Long Answer Questions (Type-I) (5 Marks each)

1. State the objectives of the establishment of the Industrial Finance Corporation of India Ltd.
   Ans: (This answer is the same as the textual Short Answer Question B.1, but requires more elaboration on each point. You can add details like the types of industries it supports and its role in guaranteeing loans).
2. State the objectives of the establishment of the SFCs.
   Ans: (This answer is the same as the textual Short Answer Question B.2, but should be expanded. Mention the loan limits and the focus on widening ownership-based industries).
3. State the objectives of the establishment of SIDCs.
   Ans: (This answer is the same as the textual Short Answer Question B.3, but should be expanded. Include its role in promoting micro, small, and medium enterprises and providing publicity and marketing support).
4. State the objectives of the establishment of NABARD.
   Ans: (This answer is the same as the textual Short Answer Question B.4, but should be expanded. Mention its role as a provider of supplemental funding and its function in coordinating various rural development agencies).
5. Write the functions of the IFCI.
   Ans: The functions of IFCI can be categorized under three heads:
   • Financial Assistance: Granting long-term loans, subscribing to shares and debentures, guaranteeing loans and deferred payments, and acting as an agent for the government or World Bank.
   • Promotional Activities: Creating industrial opportunities, guiding small and medium entrepreneurs, and helping reduce regional industrial disparities.
   • Financial Services: Providing corporate counselling for financial reconstruction, assisting in foreign collaborations, undertaking the revival of sick units, and financing risky projects.
6. Write the functions of the SFCs.
   Ans: The main functions of SFCs are:
   • Granting loans or subscribing to debentures of industrial concerns repayable within 20 years.
   • Guaranteeing loans raised by industrial concerns.
   • Underwriting the issue of stocks, shares, and bonds by industrial concerns.
   • Guaranteeing deferred payments for the purchase of capital goods.
   • Acting as an agent for the Central & State Government or IFCI in matters of granting loans.
7. Write the functions of the SIDCs.
   Ans: The major functions of SIDCs are:
   • Acting as an instrument to expedite industrialization in their respective states.
   • Providing loans and guarantees to various industries.
   • Developing industrial infrastructure like sheds and industrial areas.
   • Undertaking promotional programs like project identification and entrepreneurial training.
   • Procuring and supplying raw materials to small-scale industries.
8. Write the functions of the NABARD.
   Ans: The functions of NABARD are categorized as:
   • Credit Functions: Providing short, medium, and long-term refinance to banks for agriculture and rural development.
   • Regulatory Functions: Supervising and inspecting Cooperative Banks and Regional Rural Banks (RRBs).
   • Developmental Functions: Formulating credit plans for rural areas, promoting research and technology, offering training and consultancy services, and promoting integrated rural development.

D. Long Answer Questions (Type-2) (8 Marks each)

1. State the objectives and the functions of the NABARD.
   Ans: (This is a comprehensive question. For the answer, combine the detailed answers from C.4 and C.8. First, list and explain the objectives of NABARD, such as integrated rural development and acting as the apex rural credit body. Then, list and explain its three main categories of functions—Credit, Regulatory, and Developmental—with specific examples for each.)

Previous Year AHSEC Question Answers (2015-2025)

Short Questions (1-2 Marks)

• Write the full form of IFCI. (AHSEC 2015)
  Ans: The full form of IFCI is Industrial Finance Corporation of India.
• In which year was the State Financial Corporations Act passed? (AHSEC 2016)
  Ans: The State Financial Corporations (SFCs) Act was passed in 1951.
• Write the full form of NABARD. (AHSEC 2017, 2020)
  Ans: The full form of NABARD is National Bank for Agriculture and Rural Development.
• Mention two objectives of SIDCs. (AHSEC 2018)
  Ans: Two objectives of SIDCs are: (i) To stimulate the growth of industries in the small-scale sector, and (ii) To aid in facilitating industrial infrastructure development.
• When was NABARD established? (AHSEC 2022)
  Ans: NABARD was established on July 12, 1982.

Long Questions (5-8 Marks)

• Explain the objectives of IFCI. (AHSEC 2017)
  Ans: (This answer is the same as the textual Long Answer Question C.1. Please refer to that answer above).
• Discuss the functions of NABARD. (AHSEC 2019)
  Ans: (This answer is the same as the textual Long Answer Question C.8. Please refer to that answer above).
• Discuss the objectives and functions of State Financial Corporations (SFCs). (AHSEC 2021)
  Ans: (For this answer, combine the detailed answers from C.2 and C.6. First, explain the objectives of SFCs, focusing on providing long-term finance to small and medium industries and developing backward areas. Then, detail their functions, such as granting loans, guaranteeing payments, and underwriting issues).

10 Most Important Questions

1. What is a Development Financial Institution (DFI)?
   Ans: A DFI is a specialized financial institution established to provide medium and long-term capital for economic development, particularly for the industrial and agricultural sectors, which commercial banks may not cater to.
2. Which was the first DFI established in India?
   Ans: The Industrial Finance Corporation of India (IFCI), established in 1948, was the first DFI in India.
3. What is the primary difference between SFCs and SIDCs?
   Ans: The primary difference is that SFCs are mainly financing agencies for small and medium industries, while SIDCs are primarily promotional and infrastructural development agencies, though they also provide finance.
4. What is the apex institution for agricultural and rural finance in India?
   Ans: The National Bank for Agriculture and Rural Development (NABARD) is the apex institution for agricultural and rural finance in India.
5. Mention two promotional functions of IFCI.
   Ans: Two promotional functions of IFCI are: (i) discovering opportunities for promoting new enterprises, and (ii) helping develop small and medium-scale entrepreneurs by providing guidance.
6. What are the three main categories of functions performed by NABARD?
   Ans: The three main categories of functions performed by NABARD are: (i) Credit Functions, (ii) Regulatory Functions, and (iii) Developmental Functions.
7. Why were State Financial Corporations (SFCs) established?
   Ans: SFCs were established to meet the need for financial assistance of micro, small, and medium-scale industries at the state level, as national-level institutions like IFCI focused on large-scale industries.
8. How do SIDCs promote industrialization?
   Ans: SIDCs promote industrialization by developing industrial infrastructure like industrial parks, providing financial assistance, undertaking entrepreneurial training, and acting as nodal agencies for state governments.
9. What does ‘refinance’ mean in the context of NABARD’s functions?
   Ans: ‘Refinance’ means NABARD provides funds to other financial institutions (like commercial banks, RRBs, and cooperative banks) against the loans they have already given for agricultural and rural purposes, thus replenishing their funds to allow for further lending.
10. Which institutions did NABARD take over upon its establishment?
    Ans: Upon its establishment in 1982, NABARD took over the activities of the Agricultural Credit Department (ACD) and Rural Planning and Credit Cell (RPCC) of the RBI, and the Agricultural Refinance and Development Corporation (ARDC).