Industrial

Refers to a company or firms that engages largely or exclusively in the manufacture of products. An
industrial company, for example, makes a good, which it then sells either to retailers or directly to
consumers

Source of Industrial Finance

Industrial Finance may be required for short period or for long period. It may be raised by investment of
proprietors as ownership funds or by borrowings. The various sources of finance may be broadly
classified as under:

1. Ownership Funds - It includes owner’s investment as sole proprietor or partners of a firm. In

companies it is raised by issue of shares, ploughing back of profits, depreciation policy, dividend policy,
reorganization and price mechanism.

2. Borrowed Funds - There are external sources of business. It includes borrowings from relatives and
other sources by sole owners and partners of business. In companies borrowed funds include
debentures public deposits, banks, insurance companies and special financial institutions.

Ownership Funds

1. Shares

- The share capital of a company is dividend into small units called shares. A person who buys a share is
called the shareholder or member of the company.

- The share capital forms a part of proprietary or ownership funds and used for financing the long-term
requirements, the fixed capital and the fixed part of the regular working capital. It need not be repaid
during the time of the company.

2. Ploughing Back of Profits

- Like all individuals, companies also save a portion of their profits to be used to meet future needs.
When the profits earned by a company, instead of being fully distributed to shareholders in the form of
dividends, a portion is retained in the business as additional capital, it is known as ploughing back of
profits.

Borrowed Funds

This is divided into two sector:

a) Financial Institution

b) Non Banking Institutions/ Non Banking Finance Companies

Financial Institution

1. Banking Institutions:

- A bank is an institution which deals in money and credit. It accepts deposits from the public and lends
to the borrowers. The Banking Regulation Act. 1949 defines banking as “the accepting, for the purpose
of lending or investment, of deposits of money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise”.

2. Commercial Banks:

- They perform the usual banking functions of mobilizing deposits and providing credit.

3. Cooperative Banks:

- They are organized on the principles of cooperation to encourage thrift and savings amongst members.
They are usually formed by low and middle income groups in urban and rural areas.

4. Agricultural Banks:

- They provide financial assistance to farmers. Generally, loans are provided against mortgage of
agricultural land. Regional Rural Banks were set up to provide credit and deposit facilities to farmers,
agricultural labor and small entrepreneurs in rural areas.

5. Merchant Banks:

- These banks manage and underwrite new issues of securities. They undertake credit syndication,
advise companies on fund raising and other financial matters etc.

6. Indigenous Banks:

- In rural and semi urban areas, moneylenders carry on banking business in a traditional manner and
usually charge a high interest rate.

7. Central Bank :

- The Bangko Sentral ng Pilipinas (lit. Central Bank of the Philippines; commonly abbreviated as BSP in
both Filipino and English) is the central bank of the Philippines. It supervises and regulates the entire
banking system.

Non Banking Institutions/ Non Banking Finance Companies

1. Loan Companies:

Lend money to companies and individuals. Eg: Housing finance companies

2. Investment Companies:

These companies mobilize savings and invest them in industrial securities. They provide the benefits of
diversification of risk and a steady return to investors.

3. Leasing Companies:
They provide loans to small firms and individuals who want to buy new machines and equipment.

4. Chit Funds:

Under this scheme the promoter collects subscriptions at specified time periods from enrolled members
and the amount so collected if handed over to a member on rotation.

5. Housing Finance Companies:

HUDCO is a national level institution which gives loans to individuals and societies for building houses
and flats

Foreign Investment

- The rate and extent of effective utilization of foreign capital inflow.

- Flows of capital from one nation to another in exchange for significant ownership stakes in domestic
companies or other domestic assets.

A country has an investment program which exceeds domestic saving, this domestic saving gap can be
closed by foreign savings.

Two sources of Foreign Savings

1. Loans

2. Direct Investment

Direct Investment

- Refer to investments made by private individuals or private corporations abroad. When companies
make physical investments and purchases in buildings, factories, machines and other equipment outside
their home country.

3 Forms of Direct Investment

1. Purely Financial Investment

- Is one in which foreigners buy stock certificates of local company or purchase the bonds of a company

2. Joint Venture

- Is often a corporate partnership between the host country and foreigner investor.

3. Fully-owned subsidiary of a Foreign group

- is 100% foreign controlled. An independent company may be set up, which is wholly owned by another
company located in a foreign country.

Benefits of Foreign Direct Investment

a) as a source of capital
b) as a source of know-how or technology
c) as a source of process or product innovation
d) as a source of employment
e) as a source of complementary beneficial effect

Cost of Foreign Investment

a) Competition with domestic enterprises

b) Competition with Domestic credit
c) Foreign investments take out more profits than they bring in as capital
d) They do not bring in enough new employment
e) Exploitation of natural resources by foreign investment
f) Some practices of foreign investors work against the national interest of the host country