FINANCIAL INSTITUTIONS IN INDIA

RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT OF THE

COURSE LAW OF BANKING AND FINANCE FOR OBTAINING THE
DEGREE B.B.A LL. B (Hons.) DURING THE ACADEMIC YEAR 2020-21.

SUBMITTED BY: - NIHARIKA BHATI

ROLL NO. – 1839
8th SEMESTER
SUBMITTED TO: - ABHISHEK KUMAR
(ASSISTANT PROFESSOR OF LAW)

APRIL, 2021
CHANAKYA NATIONAL LAW UNIVERSITY
NYAYANAGAR, MITHAPUR, PATNA
800001

1
 DECLARATION

I hereby declare that the work reported in the BB.A.LL.B. Project Report entitled
“Financial Institutions in India” submitted at Chanakya National Law University, Patna is
an authentic record of my work carried out under the supervision of Asst. Prof. Mr. Abhishek
Kumar. I have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my Project Report.

(Signature of the Candidate)

Niharika Bhati
Chanakya National Law University, Patna

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my guide Asst.
Prof. Mr. Abhishek Kumar for his exemplary guidance, monitoring and constant
encouragement throughout the course of this thesis. The blessing, help and guidance given by
him time to time shall carry me a long way in the journey of life on which I am about to
embark.
I am obliged to staff members of Chanakya National Law University, for the valuable
information provided by them in their respective fields. I am grateful for their cooperation
during the period of my assignment.
Lastly, I thank almighty, my parents, brother, sisters and friends for their constant
encouragement without which this assignment would not be possible.

Thank you!

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 RESEARCH METHODOLOGY

Method of Research:
For the purpose of research, the researcher has used the Doctrinal Method of Research. The
Research is entirely a Library-based Research, where the researcher has made use of books,
law journals, magazines, law reports, legislations, internet websites, etc., for the purpose of
research.

Aims and Objectives:

The Researcher aims to study in detail about the concept of Financial Institutions and to study
in detail the functioning of some of the Financial Institutions like RBI, SEBI, Commercial
Banks, etc.

Sources of Data:
The research is a blend of primary sources, like judgments of the case, and secondary sources
like books, articles, magazines and law journals.

Method of Writing:
The method of writing followed in the course of this research paper is primarily analytical.

Scope and Limitations of the Study:

Though the researcher will try her level best not to leave any stone unturned in doing this
project work to highlight various aspects relating to the topic, but the topic is so dynamic
field of law, the researcher will sight with some of unavoidable limitations. The limitations
encountered by the researcher were the paucity of time.

Research Questions:
The researcher seeks to answer the following answers in this project:
1. What do we mean by Financial Institutions?
2. What is their role in economic development?
3. What are the types of Financial Institutions?

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 LITERATURE REVIEW

 R.N. Chaudhary , Banking Law, Central Law Publications (4th ed., 2016)

It provided definition of Financial Institutions as a channel between savers and borrowers of

funds. It explains the types of Financial Institutions. The Author has also explained
commercial banks distinguishing it from a investment bank. Commercial banking can also
refer to a bank or a division of a bank that mostly deals with deposits and loans from
corporations or large businesses, as opposed to normal individual members of the public. It
further clarifies the importance of commercial banks stating It raises funds by collecting
deposits from businesses and consumers via checkable deposits, savings deposits, and time
deposits, i.e. It makes loans to businesses and consumers. It also buys corporate bonds and
government bonds. The Author further provides the role and functions of SEBI as a financial
institution.

 Dr. S.R. Myneni, Law of Banking, Asia Law House (2nd ed. 2014)

It provided incite on role of Financial Institutions in Economic Development. He stated that

the financial institutions play an important role in complementing the facilities offered by
thebanks in an economy. He also stated that the two main reasons for the existence of
financial institutions are Economic development and Financial stability. He claimed that they
encourage and improve the efficiency of investment and savings in the economy while
keepthe financial sector complete and enhance the overall growth of the economy.
 R.N. Chaudhary , Banking Law, Central Law Publications (4 th ed., 2016)

It provided objectives and importance of Financial Institutions and the two main reasons for
the existence of financial institutions which are economic development and financial stability.
The Author further explains the role and function of Reserve Bank of India. He specifically
explains the role of RBI as securing monetary stability in India and, operating the currency
and credit system of the country. Being the monetary authority of the economy, RBI is
responsible for implementing, formulating and monitoring the monetary policy of India.
Keeping this authority in mind the RBI is required to maintain price stability and ensure

5
adequate flow of credit to productive sectors, and for this it resorts to various widely accepted
Resorts or Methods.

TABLE OF CONTENTS

DECLARATION........................................................................................................................2
ACKNOWLEDGEMENT.........................................................................................................3
RESEARCH METHODOLOGY...............................................................................................4
LITERATURE REVIEW...........................................................................................................5
1. INTRODUCTION..................................................................................................................7
MERITS OF FINANCIAL INSTITUTIONS:...................................................................8
LIMITATIONS OF FINANCIAL INSTITUTIONS:.........................................................8
2. RESERVE BANK OF INDIA................................................................................................9
3. SECURITIES AND EXCHANGE BOARD OF INDIA.....................................................12
FUNCTIONS OF SEBI:......................................................................................................12
1. Protective Functions:.............................................................................................12
2. Developmental Functions:.....................................................................................13
3. Regulatory Functions:............................................................................................14
4. COMMERCIAL BANKS....................................................................................................15
5. SPECIALISED FINANCIAL INSTITUTIONS................................................................17
1. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI).................................17
2. STATE FINANCIAL CORPORATIONS (SFC)..........................................................17
3. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)
..........................................................................................................................................18
4. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI).....................................19
5. INDUSTRIAL INVESTMENT BANK OF INDIA LTD............................................19
6. CONCLUSION....................................................................................................................21
BIBLIOGRAPHY....................................................................................................................22

6
 1. INTRODUCTION

The economic development of any country depends on the growth of the business sector.
The well-developed financial system helps the business to achieve growth by making
funds available to them. For which, the government has established financial institutions all
over the country to provide finance to businesses.
These institutions aim at promoting the industrial development of a country and are called
‘development banks’. The main role of a financial institution is to transfer financial
resources from those who save it to those who are in need of financial resources for
economic activity.1

Central and state governments set up Financial Institutions. They provide both owned
capital and loan capital for long and medium-term and supplement the traditional financial
agencies like commercial banks. Financial institutions give technical assistance and
managerial services to organizations. These institutions give large funds for a longer
duration.2

Role in Economic Development

Financial institutions perform plethora of activities through their provision of liquidity,

divisibility, informational efficiencies and risk pooling services which broaden the spectrum
of risks available to investors. In this way, they encourage and improve the efficiency of
investment and savings in the economy. Through the provision of a broader range of financial
instruments, they are able to foster a risk management culture by attracting customers who
are not as much able to bear risks. One way of minimizing financial fragility in the
developing economies is to encourage a diversity of financial institutions, where investors are
able to assume a variety of risks outside the banking system itself. Without this diversity,
1
Saibal Ghosh (2003), "Banks, Development Financial Institutions and Credit Markets in India: A Model of
Financial Intermediation", Indian Economic Review, Reserve Bank of India , Vol. 38, No. 1, New Delhi.
2
https://business.mapsofindia.com/finance-commission/institutions.

7
there is a tendency for all risks to be bundled within the balance sheet of the banking system,
which more likely may lead to severe financial crises.

MERITS OF FINANCIAL INSTITUTIONS:

The merits of raising funds from financial institutions are as follows:

 Here, finance is available even during periods of depression, when no other source of
finance is available in the market.
 Besides providing funds, many of these institutions provide financial, managerial
and technical advice and consultancy to business firms.
 For long-term business funds requirements, financial institutions are preferable as
they provide long-term finance, which is not provided by commercial banks.3

LIMITATIONS OF FINANCIAL INSTITUTIONS:

The limitations of raising funds from financial institutions are as follows:

 Restriction on dividend payment imposed on the powers of the borrowing company

by the financial institutions.
 As these institutions come under government criteria, they follow rigid rules for
granting loans. Too many formalities make the procedure time-consuming
 Financial institutions may have their nominees on the Board of Directors of the
borrowing company thereby restricting the powers of the company.4

3
Bhole, 'Financial Institutions And Markets: Structure, Growth And Innovation', at
http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-institutions-in-india/82282
4
Ibid.

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 2. RESERVE BANK OF INDIA

The Reserve Bank of India is the nerve center of the monetary system of the country.
The bank acts as the regulatory authority with regard to the functioning of the various
commercial bank and the other financial institutions in India. It is the Central Bank of
the country and it started operating since April 1, 1935 subsequent to the RBI Act in
1934 under private shareholders’ institutions. The Central Government is now empowered
to appoint Directors, Deputy Governors and Governors of the bank. The position of the bank
is that it is a State-owned institution. This transfer to public ownership from private
shareholders’ institution came with the RBI Act in 1948.5

The Reserve Bank of India is empowered to control, regulate, guide and supervise the
financial system of the country through its monetary and credit policies. This authority
was derived from the various acts. These are RBI in 1934, Banking Regulations Act 1949,
Companies Act 1956, Banking Laws Act 1965 (applicable to co-operative societies), and
Banking Laws Act 1963.6

The Reserve Bank of India has several functions to perform. Some of its major functions are:

 It is the bankers’ bank, and banker to State and Central Governments. It is also
a banker to the commercial banks, State co-operative banks and financial
institutions of the country. It is the only bank engaged in the issue of legal tender
currency.
 RBI also performs development functions and controls the monetary policy of
the country. Amongst the development or promotional roles it has improved the
banking business by integrating the organized and unorganized sector of the money
market.7
 It has acted as a leader in implementing the ‘Lead Bank’ scheme. It also tried to
bring appropriate geographical diversification of bank branches. To give
5
Samia Rekh, “Reserve Bank of India’, at http://www.economicsdiscussion.net/reserve-bank/functions-reserve-
bank/rbi-functions-7-main-functions-of-the-rbi/20890.
6
V.Avadhani, Indian capital market, First Edition, Himalaya publishing Home.
7
Kolekar, Yogesh Prasad (6 August 2015). "Central Bank – A Vital Organization of an Economy". at:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2640638

9
 adequate security to banks and their customers, it created the Deposit Insurance
Corporation in 1962.8
 The RBI has also played a role in the country’s agricultural sector. It conducted an
All-India Rural Credit Survey in 1954 and Rural Credit Review in 1968 to study the
problems of rural credit. It provides agricultural credit through State Co-operative
Banks to Co-operative Banks for short-term purposes for marketing of crops.

 In the institutional financial structure, the RBI played an important development role.
The IDBI was started as a wholly-owned subsidiary of the Reserve Bank of India in
1964. The Unit Trust of India was also originally an associate institution of the RBI.
All the other financial institutions and development banks have been provided
technical consultancy, financial help and guarantees at the times of formation and
growth.9
 Since 1992, the RBI has carried out many reforms and promotional measures to
strengthen the banking and financing system in India. It has focused on efficiency
and profitability of banks and has streamlined measures to bring about the
discipline in protection of depositors. The RBI has issued guidelines on asset
classification, income recognition and capital adequacy of commercial banks.10

The RBI has under its command the entire economic situation in the country. To fulfill this
role, it regulates the monetary policy of the country, it uses three kinds of techniques:

 the bank rate technique,

 modified as the ‘quota-cum- slab’ system and

 ‘net liquidity ratio’ system.

By using these systems, the RBI charges differential interest rates from different banks to
raise the cost of refinance on the basis of the level of liquid assets maintained by different
banks without changing the level of bank rate to maintain stability in the government

8
M L,Tannan “Banking Law & Practice in India” , ( 2005), p. 65 21st Edn. Vol.I, Wadhwa & co. Nagpur.
9
http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-institutions-in-india/82282.
10
https://cleartax.in/s/rbi-reserve-bank-of-india.

10
securities market. RBI also operates a Credit Authorization Scheme since 1965 to
regulate the volume and distribution of bank credit.11

The RBI also uses selective credit controls on sensitive commodities like food grains,
cotton and oilseeds and since 1970 it has resorted to a reserve ratio technique for controlling
the monetary policy which is the cash ratio maintained by banks. Finally, the RBI resorts to
the ‘moral suasion’ technique most actively and effectively for regulating the economy.

The RBI has announced the entry of new private sector banks since Jan. 1993 to provide
efficiency profitable and protection to investors it has issued guidelines for the scope of
banking of private sector banks. It has also allowed the entry of foreign banks and joint
sector banks.

The RBI has also in pursuance of Narsimhan Committee report gradually reduced the
cash reserve ratio and statutory liquidity ratio of banks. It has tried to reduce control and
allowed financial institutions and banks to mobilize their resources according to capital
market related arrangements. It has deregulated the interest rates as a measure of
liberalization since 1991.12

Thus, RBI acts as the regulatory authority with regard to the functioning of the various
commercial bank and the other financial institutions in India.

11
Samia Rekh, “Reserve Bank of India’, at http://www.economicsdiscussion.net/reserve-bank/functions-reserve-
bank/rbi-functions-7-main-functions-of-the-rbi/20890.
12
Ruddar Datt & K.P.M.Sundharam, Indian Economy, Fortieth Revised Edition, S.Chand & Co.Ltd.,

11
 3. SECURITIES AND EXCHANGE BOARD OF INDIA

Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market
but initially SEBI was not able to exercise complete control over the stock market
transactions. It was left as a watch dog to observe the activities but was found ineffective in
regulating and controlling them. As a result, in May 1992, SEBI was granted legal status.
SEBI is a body corporate having a separate legal existence and perpetual succession.13

With the growth in the dealings of stock markets, lot of malpractices also started in
stock markets such as price rigging, ‘unofficial premium on new issue, and delay in
delivery of shares, violation of rules and regulations of stock exchange and listing
requirements. Due to these malpractices the customers started losing confidence and
faith in the stock exchange. So, government of India decided to set up an agency or
regulatory body known as Securities Exchange Board of India (SEBI).14

FUNCTIONS OF SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three
important functions. These are15:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.

1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide
safety of investment. As protective functions SEBI performs following functions16:

13
V.Avadhani, Indian capital market, First Edition, Himalaya publishing Home.
14
Diva Rai, “Facts you must know about SEBI”, at: https://blog.ipleaders.in/features-of-sebi.
15
Priyali Sharma, “ Role and Function of SEBI”, at: http://www.yourarticlelibrary.com/accounting/right-shares-
accounting/right-shares-function-and-sebis-role/70830.
16
Ibid.

12
 i. Checks Price Rigging: Price rigging refers to manipulating the prices of securities
with the main objective of inflating or depressing the market price of securities. SEBI
prohibits such practice because this can defraud and cheat the investors.

ii. Prohibits Insider trading: Insider is any person connected with the company such as
directors, promoters etc. These insiders have sensitive information which affects the
prices of the securities. This information is not available to people at large but the
insiders get this privileged information by working inside the company and if they use
this information to make profit, then it is known as insider trading, e.g., the directors
of a company may know that company will issue Bonus shares to its shareholders at
the end of year and they purchase shares from market to make profit with bonus
issue.17 This is known as insider trading. SEBI keeps a strict check when insiders are
buying securities of the company and takes strict action on insider trading.

iii. SEBI Prohibits Fraudulent and Unfair Trade Practices: SEBI does not allow the
companies to make misleading statements which are likely to induce the sale or
purchase of securities by any other person.

iv. Undertakes Steps to Educate Investors so that they are able to evaluate the
securities of various companies and select the most profitable securities.18

v. Promotes Fair Practices and Code of Conduct in security market by taking

following steps:

a) SEBI has issued guidelines to protect the interest of debenture-holders wherein

companies cannot change terms in midterm.

b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff
fine and imprisonment.

c) SEBI has stopped the practice of making preferential allotment of shares unrelated to
market prices.

17
https://www.elearnmarkets.com/blog/sebi-purpose-objective-functions-sebi
18
Supra Note 15.

13
 2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI19:

i. SEBI promotes training of intermediaries of the securities market.

ii. SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:

a) SEBI has permitted internet trading through registered stock brokers.

b) SEBI has made underwriting optional to reduce the cost of issue.

c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To
regulate the activities of stock exchange following functions are performed:

i. SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.

ii. These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
iii. SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer
agents, trustees, merchant bankers and all those who are associated with stock
exchange in any manner.20
iv. SEBI registers and regulates the working of mutual funds etc.21

v. SEBI regulates takeover of the companies.

vi. SEBI conducts inquiries and audit of stock exchanges.

19
R.K Bangia., “Banking Law & Negotiable Instruments Act” , (2002), p.l 1,1st Edn.,, Allahabad Law Agency
20
Dr. S.R. Myneni, Law of Banking, Asia Law House (2nd ed. 2014)
21
https://blog.finlaw.in/sebi-the-purpose-objective-and-functions-of-sebi.

14
 4. COMMERCIAL BANKS

The Commercial Banks are the oldest institutions in the financial market in India. There
are many kinds of banks. These are categorized under scheduled and non-scheduled.
Commercial banks can be both scheduled and non-scheduled and in the public and
private sector. Further, they can be Indian or foreign banks. The commercial banks
indulge in varied activities such as acceptance of deposits, acting as trustees, offering
loans for the different purposes and are even allowed to collect taxes on behalf of the
institutions and central government.22
Bank credit in India has often been used for holding excessive inventories for earning
speculative profits which have been responsible for inflationary pressures in the country.
Banks in India have been traditional in providing credit to industry. They have given short-
term credit for financing working capital requirements. They have provided finance through
loans, cash credits, and overdrafts, demand loans, purchasing and discounting commercial
bills, installment and hire purchase credit.23

Banks in India have also given credit for long-term purposes since 1951. They provide
demand loans for short-term and term loans for long-term. In 1974, the Tandon Committee
bifurcated the demand loans into demand credits and variable credits. The demand credit is to
have a minimum level of borrowing which the borrower is expected to use throughout the
year. This is called the ‘core’ portion of credit. The borrower is supposed to pay interest on
the entire amount of demand loan and on the utilized part alone only on the Variable Cash
Credit. The Tandon Committee suggested that the rate of interest on demand loan should be
lower by one per cent than the rate on variable cash credit.

22
Dr. S.R. Myneni, Law of Banking, Asia Law House (2nd ed. 2014)
23
http://www.economicsdiscussion.net/banks/commercial-bank-definition-function-credit-creation-and-
significances/607.

15
There are certain merits of raising loans from Commercial Banks such as:
 Banks are flexible sources of finance as the amount to be received is decided by the

borrowing party and can be increased and decreased according to business needs.
Loans can be repaid in advance when funds are not required.
 Banks keep the borrower’s information confidential and secure.
 Banks provide assistance in time of need to businesses by providing funds.24

However certain limitations also occur while raising funds from commercial banks. The
limitations of raising funds from commercial banks are as follows:

 Banks are notorious for making a detailed investigation of the company’s background
and affairs, financial structure, plan etc., and also to ask for the security of assets and
personal sureties. This makes the procedure of getting funds difficult;
 Funds are generally available for short periods and renewal is uncertain and
difficult;
 Banks put forth difficult terms and conditions before providing a loan.25

24
Bhole, 'Financial Institutions And Markets: Structure, Growth And Innovation', at
http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-institutions-in-india/82282
25
https://corporatefinanceinstitute.com/resources/knowledge/finance/commercial-bank/

16
 5. SPECIALISED FINANCIAL INSTITUTIONS

The specialized financial institutions in India are government undertakings that were
set up to provide assistance to the different sectors and thereby cause overall
development of the Indian economy.
1. INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

IFCI was set up as a statutory organization under the Industrial Finance Corporation
Act 1948. Its main objectives were to provide help towards supporting the local
advancement and urging new business visionaries to go into the urgent and needful
sectors of the economy. It offers assistance to those concerns that are engaged in the
manufacturing, processing or preservation of goods or in mining, shipping and hotel keeping
or in generation and distribution of electricity or other forms of powers, transport services
and certain other specified activities.

Functions:

i. Granting of loans for a period not exceeding 25 years at a time;

ii. Subscribing Shares and Bonds;

iii. Underwriting of the issue of Shares and Bonds;

iv. Guaranteeing foreign currency loans, taken from foreign Financial Institutions;
v. Guaranteeing deferred payment arrangements in respect of the purchase of both
indigenous and imported Plant and Machinery.26

vi. Guaranteeing loans raised from scheduled banks or Co-operative banks.

26
https://www.investopedia.com/ask/answers/061615/what-are-major-categories-financial-institutions-and-
what-are-their-primary-roles.asp.

17
 2. STATE FINANCIAL CORPORATIONS (SFC)

The State Financial Corporations Act, 1951 made the State Governments build up State
Financial Corporations in their particular areas for giving medium and short-term funds to
businesses which are outside the extent of the IFCI.

Functions:

The SFCs perform the following functions:

i. Granting loans to small and medium industries for a period not exceeding 20 years at
a time;

ii. Granting loans raised by the eligible concerns for a period not exceeding 20 years at a
time;

iii. Underwriting the issue of shares and bonds of small and medium industrial concerns;

iv. Guaranteeing the loans raised by the small and medium industrial concerns.

However, the loan granted to any single firm cannot exceed 10% of the paid-up capital of the
corporations or Rs. 10 lakhs, whichever is less, and loans should always be secured by pledge
or mortgage or hypothecation.27

3. INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA (ICICI)

It was set up in January 1955, with an authorized capital of Rs. 25 corers in order to assist
industries in the private sector. This foundation formed in 1955 as a public organization
under the Companies Act. ICICI helps the creation, development and modernization of
industrial endeavors solely in the private sector.28

Functions:
Its main functions are:

i. To encourage investment in private industries;

27
Deeksha Bhargav, Financial Institutions in India, Available at: http://www.yourarticlelibrary.com/india-
2/financial-institution/list-of-financial-institutions-in-india/82282
28
Saibal Ghosh (2003), "Banks, Financial Institutions and Credit Markets in India: A Model of Financial
Intermediation" , Indian Economic Review, Reserve Bank of India , Vol. 38, No. 1, New Delhi.

18
 ii. To provide technical and managerial advice and skill to private industries;

iii. To grant loans in rupees repayable within a period of 15 years;

iv. To underwrite the issue of Shares and Bonds;29

v. To buy Shares and Bonds of private industries;

vi. To give direct loans in both rupee and foreign currencies on medium and long-term basis.

4. INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

In 1964, it was set up under the Industrial Development Bank of India Act, 1964 with a target
to facilitate the working of other financial institutions including commercial banks.

Functions:

The important objects and functions of IDBI may be sub-divided into three groups, viz.:

i. Direct assistance to industrial concerns such as Granting loans, underwriting Shares

and Debentures, Guaranteeing loans and deferred payments, rediscounting of bills of
specified kinds, granting credit also for exports, refinance of export credit, etc.

ii. Indirect assistance to industrial concerns. It includes Re-lending facilities to the IFC,
SFCs, Commercial Banks, State Co-operative Banks, etc., guaranteeing their obliga-
tions and subscribing the shares and bonds of term-lending institutions.
iii. Promotional functions: It includes Surveying of industrial potential of the different
states for balanced industrial development and accelerated industrial growth.
However, the present rate of interest on rupee and foreign currency loans is 14% p.a.
and for re-financing scheme is 10% p.a.30

5. INDUSTRIAL INVESTMENT BANK OF INDIA LTD.

It was set up as an essential institution for the restoration of sick units and was known as
Industrial Reconstruction Corporation of India. It was reconstituted and renamed as the
Industrial Reconstruction Bank of India in 1985 and again in 1997, its name was changed to
Industrial Investment Bank of India.31
29
https://archive.india.gov.in/business/business_financing/financial_institutions.php
30
https://business.mapsofindia.com/finance-commission/institutions.
31
Supra Note 27

19
Functions:

i. To finance industries essential to planned development.

ii. To give priority to the manufacturer of capital goods.

iii. To act as an agency for grant of special loans for rehabilitation and modernization of
Cotton-Textiles and Jute Industries and for expansion of machine tool units.

It renders assistance to any type of industrial undertaking, whether in the public or private
sector, statutory bodies, companies, firms or individuals and it can provide assistance in any
form, viz., credit, capital machinery or equipment.32

32
Supra Note 28.

20
 6. CONCLUSION

A financial institution is an institution that provides financial services for its clients or
members. Any institution that collects money and puts it into assets such as stocks, bonds,
bank deposits, or loans is considered a financial institution.

Financial sector plays an indispensable role in the overall development of a country. The
most important constituent of this sector is the financial institutions. The financial institutions
have traditionally been the major source of long-term funds for the economy. These
institutions provide a variety of financial products and services to fulfill the varied needs of
the commercial sector. Besides, they provide assistance to new enterprises, small and
medium firms as well as to the industries established in backward areas. Financial institutions
are the key players in the development of the capital market in any economy.

The Financial Institutions in India mainly comprises of the Central Bank which is better
known as the Reserve Bank of India, the commercial banks, the credit rating agencies, the
securities and exchange board of India, insurance companies and the specialized financial
institutions in India. There has been a lack of financial institutions to supply long-term
finance to industry, as traditionally commercial banks provided only short-term finance.
Thus, some Special Financial Institutions (SFIs) were established to ensure that industry got
sufficient long-term funds in the desired sectors. And that too in accordance with the
priorities determined.

The financial institutions play an important role in complementing the facilities offered by
the banks in an economy. In fact, the existence of Banking Financial Institutions (BFIs) and
Non-banking Financial Institutions (NBFIs) supported by efficient money and capital
markets, keep the financial sector complete and enhance the overall growth of the economy.
Thus, it can be said that the gap between the demand for and supply of finance in general and
industrial finance more specifically, is sought to be filled through term loans being offered by
various financial institutions. And this makes itself as the most important need for financial
institutions.

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 BIBLIOGRAPHY

STATUTE & REGULATION

 Banking Regulation, 1949
 Reserve Bank of India Act, 1934

BOOKS AND JOURNALS

 R.K Bangia., Banking Law & Negotiable Instruments Act , (2002), ,1st Ed.,
Allahabad Law Agency
 Dr. S.R. Myneni, Law of Banking, Asia Law House (2nd ed. 2014)

 Tannan, Mandira Mitra, Banking Law, Lexis Nexis (1st ed., 2014)

 Ruddar Datt & K.P.M.Sundharam, Indian Economy, Fortieth Revised Edition,

S.Chand & Co.Ltd.,

 Saibal Ghosh (2003), "Banks, Development Financial Institutions and Credit Markets
in India: A Model of Financial Intermediation", Indian Economic Review, Reserve
Bank of India , Vol. 38, No. 1, New Delhi.

ARTICLES AND BLOGS

 Bhole, “Financial Institutions And Markets: Structure, Growth And Innovation”, at

http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-
institutions-in-india/82282
 Deeksha Bhargav, “Financial Institutions in India”, Available at:
http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-
institutions-in-india/82282
 Diva Rai, “Facts you must know about SEBI”, at: https://blog.ipleaders.in/features-of-
sebi.

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  Priyali Sharma, “ Role and Function of SEBI”, at:
http://www.yourarticlelibrary.com/accounting/right-shares-accounting/right-shares-
function-and-sebis-role/70830.
 Saibal Ghosh (2003), "Banks, Financial Institutions and Credit Markets in India: A
Model of Financial Intermediation" , Indian Economic Review, Reserve Bank of India
, Vol. 38, No. 1, New Delhi.
 Samia Rekh, “Reserve Bank of India’, at
http://www.economicsdiscussion.net/reserve-bank/functions-reserve-bank/rbi-
functions-7-main-functions-of-the-rbi/20890.

WEBSITES

 http://www.economicsdiscussion.net/banks/commercial-bank-definition-function-
credit-creation-and-significances/607.
 http://www.yourarticlelibrary.com/india-2/financial-institution/list-of-financial-
institutions-in-india/82282.
 https://archive.india.gov.in/business/business_financing/financial_institutions.php
 https://blog.finlaw.in/sebi-the-purpose-objective-and-functions-of-sebi.
 https://business.mapsofindia.com/finance-commission/institutions.
 https://cleartax.in/s/rbi-reserve-bank-of-india.
 https://corporatefinanceinstitute.com/resources/knowledge/finance/commercial-bank/
 https://www.elearnmarkets.com/blog/sebi-purpose-objective-functions-sebi
 https://www.investopedia.com/ask/answers/061615/what-are-major-categories-
financial-institutions-and-what-are-their-primary-roles.asp.

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