Sources of Corporate Finance — Secretarial Practice STD 12 Commerce / Arts — Question

Financial Institutions provide debt capital to business enterprises and their need and importance may be as follows:
(i) To develop a sound capital market:

• Financial Institutions help in developing a sound financial capital market.
• They help in promoting and financing business enterprises either by underwriting issues or by subscribing to shares.

(ii) To mobilize financial resources:

• Financial, institutions mobilize the scattered savings, merge them and provide the same to industries.
• Capital is reluctantly provided to new ventures.
• Financial Corporations have become important for the economic development of economically backward countries that fail to mobilize financial resources for development.

(iii) Capital Formation:

• The rate of capital formation is very low in developing countries due to low per capita income and a lack of sufficient savings.
• The gap between saving and investment is filled by financial institutions.

(iv) Planned Economy:

• Financial institutions play an important role in the planned economic development of the country.
• The projects of national importance are taken up by them.
• Scarce finance resources are utilized at the optimum level.
• Certain basic industries like iron and steel, cement, etc. are developed by the government through these institutions.

(v) Financing Small Business:

• Special Corporations like SIDBI have been established for financing small-scale industries.
• The problems related to small business are of different nature which is tackled by such setup corporations.

(vi) Foreign Exchange Need:

• Foreign exchange requirement is also one of the needs of such institutions.
• They provide long-term loans in foreign curries.

(vii) Government taxation policy:

• Business enterprises depend more on debt capital as investment/amount paid against debt is tax-deductible expenditure.
• Financial institutions provide such debts to business organisations.

(viii) Rate of Interest:

• The corporations charge a uniform rate of interest, irrespective of the amount of loan in relation to the total cost.
• This also has become the reason for heavy borrowing from such institutions.