Investment Financing An Empirical Study Of Indian Manufacturing Sector PDF Download

Unorganised manufacturing sector of India is operating under increasing returns to scale despite the industries being predominantly traditional in nature. Scarcity of capital compels this sector to operate at a sub-optimal level. Scheduled commercial banks plagued with NPAs under directed lending primarily due information asymmetry and monitoring problems, not only restrict supply of loans to this sector but also fail to ensure productive use of the capital advanced to this sector. Informal sources of financing is highly important to this sector and these financers having full information about borrowers are in a position to monitor the functioning of the latter often bundling of financing with other relations and at times through equity participation. Thus, informal financing ensures most productive use of scarce resource, which is reflected in terms of increasing returns to scale. Significantly positive regression coefficient of the value added per enterprise on the proportion of non-institutional finances in total outstanding loan and a negative coefficient of the regression on the share of institutional finances are again manifestation of the differences in the utilization of the finances and the quality of financial services provided by the two sources. It is argued that in order to provide adequate finances to these industries banks may operate through these informal institutions that would not only ensure proper screening, timely delivery and effective monitoring but also ensure proper use of the fund and thus safe repayment for the bank. It would thus provide a good opportunity to banks to do business with a vast sector of the economy.