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The long-term financial market of an economy is known as the ‘capital market’. This market makes it possible to raise long-term money (capital), i.e., for a period of minimum 365 days and above. Ceation of productive assets is not possible without a string capital market—the market gained more importance once most of the economies in the world started industrialising. Across the world, banks emerged as the first and the foremost segment of the capital market. In coming times many other segments got added to it, viz., insurance industry, mutual funds, and finally the most attractive and vibrant, the security/stock market. Organised development of capital market together with putting in place the right regulatory framework for it, has always been a tough task for the economies. It is believed today that for strong growth prospects in an economy presence of a strong and vibrant capital market is essential.
Though the capital market of India is far stronger and better today in comparision to the periods just after Independence, the process of emergnece
has not been easy and smooth. Once India opted ‘industry’ as its prime moving force, the first challenge was to raise long-term funds for industral establishments and their expansion. As banks in India were weak, small and geographically unevenly distributed they were not in a position to play the pivotal role they played in case of the industrialising Western economies. This is why the government decided to set up ‘financial institutions’ which could play the role of banks (till banks gain strength and presence) and carry on the responsibilities of ‘project financing’.
After Independence, India went for intensive industrialisation to achieve rapid growth and development. To this end, the main responsibility was given to the Public Sector Undertakings (PSUs). For industrialisation we require capital, technology and labour, all being typically difficult to manage in the case of India. For capital requirement, the government decided to depend upon internal and external sources and the government decided to set up financial institutions (FIs). Though India was having banks, but due to low saving rate and lower deposits with them, the upcoming industries could not be financed through them. The main borrowers for industrial development were the PSUs. To support the capital requirement of the ‘projects’ of the public sector industries, the government came up with different types of financial institutions in the coming years. The industrial financing supported by these financial institutions was known as ‘project financing’ in India. Over the time, Indian capital market started to have the following segments:
The requirement of project financing made India to go for a number of FIs from time to time, which are generally classified into four categories:14