FINANCIAL INSTITUTIONS

T.Naga Rani
Department of Commerce
S.D.M.S.M.Kalasala.
Definition:
Institutions which collects funds from the public and places them in financial
assets, such as deposits, loans, and bonds, rather than tangible property.
In financial economics, a financial institution an institution that provides
financial services for its clients or members. Probably the most important financial
service provided by financial institutions is acting as financial intermediaries. Most
financial institutions are highly regulated by government.
1. Deposit-taking institutions that accept and manage deposits and make loans,
including banks, building societies, credit unions, trust companies, and
mortgage loan companies
. Insurance companies and pension funds! and
". #rokers, underwriters and investment funds.
T!pes of Financial Instit"tions:
$he financial institutions are generally regulated by the financial laws of
government authority. $he various financial institutions generally act as the
intermediaries between the capital market and debt market. #ut the service provided
by financial institution depends on its type. $he financial institutions are also
responsible to transfer funds from investors to the companies. $ypically, these are the
key entities that control the flow of money in the economy.
$he credit union is co-operative financial institution, which is usually
controlled by the members of the union. $he ma%or difference between the credit
unions and banks is that the credit unions are owned by the members having accounts
in it.
$he stock brokerage firms are the other types of financial institutions that help
both the corporations and individuals to invest in the stock market.
&nother type of financial institution is the asset management firms. $he prime
functionality of these firms is to manage various securities and assets to meet the
financial goals of the investors. $he firms also offer fund management advice and
decisions to the corporations and individuals. 'arious types of financial institutions
are as follows.
1. (ommercial #anks.
. (redit )nions.
". *tock #rokerage +irms.
,. &sset Management +irms.
-. Insurance (ompanies.
.. +inance (ompanies.
/. #uilding *ocieties.
0. 1etailers
#$ Commercial %an&s:
#ank that offers a broad range of deposit accounts, including checking, savings
and time deposits and e2tends loans to individuals and business. (ommercial banks
can be contrasted with investment banking firms, such as brokerage firms, which
generally are involved in arranging for the sale of corporate or municipal securities
'$ Cre(it Unions
$he credit unions are the co-operative financial institutions that are owned by
the members of the union. $he ma%or difference between the credit unions and banks
is that the credit unions are owned by the members unlike banks.
$he credit unions are generally non-profit organi3ations. $he credit union can
also be termed as profit enterprise dedicated to earn profit for its members. $he profits
earned by the union are received by the members in the forms of dividends. $he
dividends are paid on savings that are ta2ed as ordinary income. It has been seen that
in the )*&, the dividend rates on shares offered by the credit unions are higher. $he
credit unions also charge lower interest rates than banks in the )*&. )sually credit
unions have a lower cost of funds than the commercial banks.
$he credit unions also offer several financial services like banks, but the
terminology used here are different from the banks. $he credit unions offer the
services of share accounts, share draft accounts, share term certificates, credit cards
and online banking services.
)$ Stoc& %ro&erage Firms
$he stock brokerage firms are those entities that are responsible for helping the
investors put their money in the stock market. 4owever, the stock brokerage firms are
also useful in many other ways, especially for the investors.
$he stock brokerage firms help their clients, the investors, by providing them
with accurate information regarding the workings of a stock market. $he stock
brokerage firms are useful as they can help the investors get the ma2imum return from
their investments in the stock market.
T!pes of Stoc& %ro&erage Firms
$here are primarily two types of stock brokerage firms, based on their mode of
operations. $hey are
a5 6nline *tock #rokerage +irms
b5 6ff line *tock #rokerage +irms
a$ Online Stoc& %ro&erage Firms:
$he online stock brokerage firms are those, who offer their services through the
Internet. $he online stock brokerage firms are regarded as being e2tremely popular
with the investors, by virtue of, the 7uality of the services, provided by them. $he
services of the online stock brokerage firms save the investor a lot of money and time,
which may be invested in other purposes. It is always easy for the investors to gather
information on the online stock brokerage firms and their services, as information on
them are always found on the Internet.
*$ Offline stoc& %ro&erage Firms:
$he off line stock brokerage firms are the traditional stock brokerage firms.
+$ Asset Management Firms:
&sset management companies provide investors with more diversification and
investing options than they would have by themselves 8 attain their investment goals
by proper management of assets. $here are a large number of asset management firms
operating all over the world.
,$ Ins"rance Companies:
Insurance companies are today provide a multitude of services, many e2tending
beyond the normal realm of 9insurance.9 $he largest companies often provide the
following services to their clients:
;ife Insurance
;ong $erm (are Insurance
Disability Income Insurance
<mployee #enefits
*pecial =eeds
-$ Finance Companies:
+inance plays a very important role in the present market driven world. *tarting
from the process of production to distribution, the entrepreneur as well as the
company needs finance. $he business enterprises as well as firms need finance to meet
all of their short term, medium term and long term needs.
$he long-term financial need is generally to make investment on the fi2ed
assets such as plants, machines and buildings.
$he short term financial needs is generally for working capital management
$he medium term financial needs generally for a period of 1 year to - years.
.$ %"il(ing Societies:
& cooperative whose members pool their resources in order to offer financial
and lending services such as mortgages. It is similar to a bank or credit union building
societies emerged in the ).> during the 1?
th
century and are similar to savings and
loans institutions in the )nited *tates.
Financial Instit"tions in In(ia:
$he banking institutions of India play a ma%or role in the economy of the
country. $he banking institutions are the providers of depository and transaction
services. $hese activities are the ma%or sources of creating money. $he banking
institutions are the ma%or sources of providing loans and other credit facilities to the
clients.
$he (ommission of +inance and India@s Development are interring woven for
the success of the Ministry of +inance, Aovernment of India. $he Indian +inance
(ommission was established as per the drafted provisions of the &cts and 1ules in the
year 1?-1. $he +inance commissioner and the four other members of the +inance
(ommission of India, forms the main operating body of the commission. $he +inance
(ommission of India is being vested with responsibility of working closely with the
Ministry of +inance, Aovernment of India and work towards the financial goal of
India. +urther, the commission also assesses and recommends financial assistance to
different states of India according to their re7uirements and contribution made by
them towar-ds the gross domestic products BADP5 of India. $hus, the +inance and
India@s Development are very much dependent on the successful operation of the
+inance (ommission of India.
Mo(ifications in t/e financial sector:
In order to incorporate changes in the financial system, modifications in three
significant aspects of the financial sector was necessary which comprises of the
e2change rate policy, interest rate policy, capital transactions etc. $he banking sector
in any country serves as the most significant institution in the financial sector,
e2perienced a sea of changes. Ma%or development in the banking sector was witnessed
in the year 1?.?, when most of the Indian banks were nationali3ed. $hus, the banking
industry came under the public sector. $he nationali3ation of the banks changed the
entire scenario of banking activities throughout India, new policies were formulated
and the hitherto challenged sectors were offered financial and advisory assistance to
bring in simultaneous development in those sectors too. $he agricultural sector was
immensely facilitated by the nationali3ation of the banking sector. Plans were chalked
out to improve the standards of the backward sections of the society by arranging for
credit to start off new businesses and improve the e2isting ones. $herefore, the =ew
1ole of +inance in India was witnessed through the rapidly changing banking
framework.
Concl"sion:
$he nationali3ation of the banking system made the system more organi3ed
as well as strong and thus aided the banking sector in fighting successfully with the
financial crisis that had affected a large fragment of the &sian population. $he system
had certain deficiencies. $he Indian baking system did not maintain a planned cost
structure and was also unable to match its steps with the changing market needs and
the rising competition. $he other drawback e2isting within the Indian banking system
was the rigidity that lay within the decision making procedure. $hus, the role of
finance as an accepted norm is to reflect the 9real economy9. $he other significant
cause behind the high cost of banking is that the percentage of the average cost of
operation of banking activities out of the assets is much high compared to the
development economies in the world. $he changing market demands have again
brought India at the face of a challenge and the new role of finance in India would be
to accept this challenge and incorporate new policies again to meet the changing
market demands. &s a first step towards this goal, the banking system should be up
graded to bring in reductions in the cost of operation.