BANK DEBT

Sources of funds for firms can be classified as internal and external. Internal sources include re- invested earnings while external
sources include: (i) equity capital and equity premium, (ii) bonds, and (iii) borrowings (from banks and financial institutions).

The pioneering study by Singh and Hamid (1992) in the developing country context found that (a) companies in the seven
developing countries (including India) that constituted their sample, use much more external finance than companies in developed
countries

Studies on the capital structure of Indian firms have mostly concentrated on the issue of leverage.Bank Debt is Unique debt.
The potential benefits of bank financing to firms include lower transaction cost, flexibility, embedded options in favour of
borrowers, ability to restructure debt in times of dif- ficulty, proceeds.

According to them, a relationship with an intermediary prior to offering stock reduces investors' uncertainty about the market
value of the firm and therefore can increase IPO proceeds. Datta et al (2000) also reached a similar conclusion that "banks are
'different' from other debt investors and that banking relation- ships add value in part by conveying good news to other parti-
cipants about the prospects of the borrowing firm

Umakrishnan and Subramanian (2002) brought out the unique- ness of bank debt in the Indian context as follows: (i) The loan
schemes offered by Indian banks traditionally have lot of flexibilities in the form of borrower's ability to have a line of credit
sanctioned which may or may not be utilised. Generally no commitment charge is levied for keeping the limit unutilised or
underutilised. These result in a situation where the large borrowers keep the bank loan as a last resort to borrow when the
opportunities of market borrowing dry up. This is more pronounced in the case of borrowers with good credit rating. Such
flexibility is not available for other forms of

2. Bank debt allows and has provision for the scope for tailor- made structuring of debt

3. iii) In the event of default or near default of the borrower, banks offer to restructure the loan which is difficult in case of market
debt.

India. Given the fact that despite the reforms to deepen the financial markets, Indian firms continue rather increase their
dependence on banks for funding

Equity dominance in case of FDI firms and their preference for internal financing as compared to their domestic counterpar

The greater dependence of domestic firms on bank finance and secured loans as compared to FDI firms.

The FDI firms have a much higher internal to external funds ratio of 1.67 as against the figure of 0.75 for domestic firms, as a
result of which the former has a higher interest coverage ratio of 20.13 as against 4.63 for the latter

rest. Textile industry seems to be the most dependent on bank finance while machinery industry is the least dependent on bank

The comparison of means across firm size based on sales turnover indicates that large firms tend to depend more on internal
finances compared to the small and middle sized firms. surprising given the greater ability of large corporates to mobilise
resources internally in comparison to the smaller entities

finance. Bolton and Freixas (2000) through their theoretical work show that riskier firms prefer bank loans, the safer ones tap the
bond markets and the one in between prefer to issue both equity and bond. bonds. Bond financing is predominant in mature firms
whereas bank finance is the main source of funding for start-up firms

His conclusions are that while firms with high credit ratings chose to go to market directly, the borrowers with ratings towards the
middle of the spectrum rely on bank loans. The lowest rated firms also approach banks but may be turned down for credit on
screening.\

The study by Umakrishnan and Subramanian (2002) attempted to identify variables to differentiate between bank-dependent and
non-dependent firms using two variable discriminant analysis. The study identified size of the firm, FDI in the firm, export
intensity, gross profit, tangibility, variability in sales turnover and average interest cover as the factors discriminating between the
two groups of firms. The factors which were not found significant in this regard are age of the firm, the nature of industry,
leverage ratio, and asset utilisation