State the merits and demerits of non institutional credit.
Answers
Answer:
ADVANTAGES:
i) Both risk as well as loan capital are available. Public financial institutions provide underwriting facilities also.
(ii) New companies which may find it difficult to raise finance from the public can get it from these institutions. Assistance is available when recourse to normal sources is impracticable or unprofitable. Modernization and expansion plans can be financed without much strain on the financial structure of the company.
(iii) As these institutions carry out a thorough investigation before granting assistance to a concern, relationship with them helps to increase the credit-worthiness of a company.
(iv) Loans and guarantees in foreign currency and deferred payment facilities are available for the import of required machinery and equipment.
(v) The rate of interest and repayment procedures are convenient and economical. Facilities for repayment in easy installments are made available to the deserving concerns.
(vi) Along with finance, a company can obtain expert advice and guidance for the successful planning and administration of projects.
LIMITATIONS
(i) The concern requiring finance from public financial institutions has to submit itself to a thorough investigation that involves a number of formalities and documents.
(ii) Many deserving concerns may fail to get assistance for want of security and other conditions laid down by these institutions.
(iii) Sometimes, these institutions place restrictions on the autonomy of management. They lay down a convertibility clause in loan agreements. In some cases, they insist on the appointment of their nominees to the Board of Directors of the borrowing company.