Debt Finance in the Small Corporate Sector in India: A Strategical Need

Abstract

Debt finance in the small corporate sector in India is a strategical need, as the small-scale manufacturing industries play the most crucial role in the development of the economies of the country. Similarly, debt finance is also important for the survival, growth and development of the small-scale industries. The small-scale industries play an even greater role in the development of rural economies of the country. In India, it is the second largest employer, after agriculture, and accounts for nearly 6% of the country's Gross Domestic Product (GDP). Debt fi nance plays a vital role in this sector as the owner's fund is limited and there are fewer takers for their equity. Debt fi nance is required by all the industries, whether they are in promotional, operational or expansion stages. Small corporate firms generally use debt funds extensively, as the owner's fund does not suffice to meet their needs. For growth, modernisation, expansion and diversification purposes, small companies borrow funds from external sources. Debt has played an important role in the Indian corporate sector, more specifically in the small manufacturing industries in the private sector. From both financial and non-financial point of view, debt is advantageous to business concerns. Debt is financially better, because it is cheaper and non-financially it does not disturb controlling power and provide flexibility. Corporations generally raise debt funds in the forms of debentures, public deposits, finance from commercial banks and financial institutions and as trade credit and accruals. Long-term sources of debt funds include debentures, public deposits and institutional finances and short-term sources include short-term loans from commercial banks, accrued expenses, accounts receivables and miscellaneous sources.