FINANCIAL INSTITUTIONS

Financial Institutions A financial institution is an institution that provides financial services for its clients or members. Act as financial intermediaries. OBJECTIVE OF FINANCIAL INSTITUTIONS To transform financial assets acquired through the market and constitute them into a different, and more widely preferable, type of asset-which becomes their liability. This is the function performed by financial intermediaries, the most important type of financial institution. To exchange financial assets on behalf of customers. To exchange of financial assets for their own accounts. To assist in the creation of financial assets for their customers, and then selling those financial assets to other market participants. To provide investment advice to other market participants. To manage the portfolios of other market participants. Examples of financial institutions Banks Stock Brokerage Firms Non Banking Financial Institutions Building Societies Asset Management Firms Credit Unions Insurance Companies

FUNCTIONS OF FINANCIAL INSTITUTIONS
Financial institutions offer various types of transformation services : Liability-Asset transformation - They issue claims to their customers that have characteristics different from those of their own assets. For example, banks accept deposits as liability and convert them into assets such as loans.

NBFIs. and provide borrowers with loans of requisite maturities. FINANCIAL INTERMEDIARIES Financial intermediaries are a special group of financial institutions that obtain funds by issuing claims to market participants and use these funds to purchase financial assets.Size. Non-intermediaries give loans but do not collect deposits or funds from savers. etc. By doing so. It is different from other . create and enforce regulations and rules for the market. financial intermediaries do one or more of the following: Provide maturity intermediation Provide risk reduction via diversification at lower cost Reduce the cost of contracting and information processing Provide a payments mechanism. UTI. players and modes of transactions.transformation They choose and manage portfolios whose risk and return they alter by applying resources to acquire better information and to reduce or overcome transaction costs. Intermediaries transform funds they acquire into assets that are more attractive to the public. Risk transformation . such as banks. Regulators design the market system. What is a Bank ? A bank as an institution which accepts deposits from the public and in turn advances loans by creating credit. Classification IMPORTANCE OF FINANCIAL INSTITUTIONS Financial intermediaries convert the money given by savers to investment by borrowers.They distribute risk through diversification and thereby reduce it for savers as in the case of mutual funds. Maturity transformation They offer savers alternate forms of deposits according to their liquidity preferences. Regulators watch the markets. They provide large volumes of finance on the basis of small deposits or unit capital.

differing on the basis of their inception and operations. the existing financial institutions may be classified as (a) All India institutions like Industrial Development Bank of India (lDBI).financial institutions in that they cannot create credit though they may be accepting deposits and making advances. letters of credit. credit and debit cards Dealing with bullion. OVERVIEW OF IMPORTANT FINANCIAL INSTITUTIONS There are various kinds of financial institutions performing their role in financial intermediation and infrastructural development. Industrial Finance Corporation of India (IFCI) etc.. Functions of Banks Primary Functions Acceptance of deposits Lending money Making investments Borrowing money Functions of Banks Agency Functions Collection and payment of cheques Collection and payment of bills Remittance of funds Collections of government taxes Undertaking administration of estates as executors and trustees Functions of Banks General Utility Functions Issues of guarantees. Broadly. foreign exchange. etc. merchant banking. safe custody of articles. cheques. (b) Regional/State level institutions like the State Financial Corporation (SFC) (c) Other Institutions like DICGC etc. Industrial Finance Corporation of India .

expansion. It is headquartered in Bombay. IFCI is diversifying into bill discounting. The sources of funds for IFCI are Paid-up capital. Future : In order to tap on the other financial services that offer greater scope for the corporation. BFCE (France). its services focus on project finance as it provides assistance to all viable industrial projects above Rs. Loans are provided after a detailed project appraisal. market borrowings. IFCI provides assistance industrial concerns for their new projects.The Industrial Finance Corporation of India (IFCI) .50m. diversification and modernization schemes. the first All-India term-lending institution was set up in 1948 with the primary objective of providing medium and long-term credit to industry. It is headquartered in New Delhi. loans from the Government of India. advances from the Industrial Development Bank of India and foreign lines of credit from KfW (West Germany). Loans are generally extended for a period of 5-7 years with a moratorium of 2-3 years. It provides assistance to units in the private sector. Primarily. It is owned and financed mainly by the private sector. ODA(UK) and others. trade bills important financing and working capital financing. reserves. Industrial Credit and Investment Corporation of India The Industrial and Investment Corporation of India (ICICI) was founded in 1955. particularly to meet their foreign exchange requirements. repayment of loans. Loans are extended both in rupee and foreign currency. IFCI -Functions Functions : The main functions of IFCI are To provide various kinds of financial services to the industries. .

USAID. Providing technical and administrative assistance for promotion.600 billion. chemicals products and machinery. market borrowings both within and outside the country. Co-coordinating the working of institutions engaged in such activities and assisting in their development. Industrial Development Bank of India (IDBI) is the largest financial institution in India. . reserves. KFW. promoting and developing industries to fill the gaps in the industrial sector. is also the 10th largest development bank in the world. It is headquartered in Bombay.The resources of ICICI consist of Paid-up capital. loans from the Government of India. UK government and others. with assets at the end of 1999 approximating to Rs. temporary credit from the Reserve Bank of India. fertilizers. This apex financial institution in India. market borrowings and foreign lines of credit from World Bank. foreign lines of credit from the World Bank. reserves. Undertaking market and investment research and techno-economic studies to contribute to the development of industry. IDBI also began a role in assisting the State Finance Corporations (SFCs) of various states. repayment of loans. repayment of loans. ADB and others. market borrowings. The assistance was mainly in the form of long-term loans or in the form of project lending. The resources of IDBI consist of Paid-up capital.Operations IDBI initially provided long-term assistance to industries such as textiles. IDBI . management or expansion of industry. In 1964. advances from the Industrial Development Bank of India. Role of IDBI Planning. Industrial Development Bank of India The Industrial Development Bank of India (IDBI) was established in 1964 as a subsidiary of the Reserve Bank of India.

Through the late 80s and the early 90s IDBI played a significant role in the development of financial markets . till the time Export. Subsequently. Short-term loans 10. Arranging Foreign Collaboration 7. Issue Management 2. IDBI entered into rediscounting of -machinery bills to promote the sale of indigenous machinery on deferred payment basis. House Finance 5.Import (Exim) Bank of India was formed in 1982. Portfolio Management 3. Hire Purchase 2. Advising on acquisitions &mergers 8. Venture Capital 4. Inter-Corporate Loans Life Insurance Corporation of India . Bill discounting 3. Advising on Capital restructuring 9. Activities of NBFCs Fund-Based Activities Fee-Based Activities 1. IDBI created a Small Industries Development Fund (SIDF) to provide a special focus to the needs of the small scale sector. In 1986.it played a major role in setting up of the Stock Holding Corporation of India Limited (SHCIL) Non Banking Financial Institutions [NBFC] NBFCs help to bridge the credit gaps in several sectors which traditional institution are unable to fulfill. Factoring 6. NBFCs are more flexible in their operations and quick in decisionmaking. Equity Participant 7. Equipment leasing 1. Project Counseling 6.By 1965. IDBI entered into finanancing exports on a different payment basis. This fund is intended to provide financial inputs catered to the specific needs of the small scale sector. Loan and Investment 5. Corporate Counseling 4.

in its investment activity. It works in close liaison with the other all-india financial institutions in providing finance directly and in helping industrial concerns by its underwriting support. GIC provides substantial assistance to industrial projects by way of term loans. In addition to investing in socially-oriented sectors. LIC is one of the two largest institutional investors in the country. UTI raises its resources primarily through the sale small denomination units. By law it is required to invest 25 percent of its funds in government securities and a further 25 percent in approved securities . subscription to equity capital and debentures. but it has gradually developed into an important all-india financial institution which provides substantial support to industry. The primary activity of LIC is to carry on life insurance business. Unit Trust of India The Unit Trust of India (UTI) was set up in 1964 with the principal objective of mobilizing public savings and channeling them into productive corporate investments. and underwriting of securities. UTI subscribes to industrial securities and also purchases outstanding securities in the secondary market. Thanks to its massive resources. . It is headquartered in Bombay.The Life Insurance Corporation of India (LIC) came into being in 1955 after the nationalization and merger of about 250 independent life insurance societies. where the bulk of its inevitable resources are required to be Invested. General Insurance Corporation The General Insurance Corporation (GIC) was founded when the management of general insurances business in india was taken over by the government in 1971 and subsequently nationalized in 1973. It is headquartered in Bombay.

Presently almost every state has an SIDC which is fully owned by the respective state government. refinance from IDBI and borrowings from the Reserve Bank of India and the Government of India. State Industrial and Development Corporations The state Industrial and Development Corporations (SIDCs). market borrowings. State Financial Corporations The State Financial Corporation (SFC). In addition. In addition to providing term finance to industry. their role in sponsoring joint sector projects with the participation of private entrepreneurs need to be emphasized.UTI is naturally governed by considerations of yield and security as it has an obligation to earn a responsible rate of return for its unit holders in its various schemes. The financial resources of SFCs consist of Paid-up capital. UTI has emerged as one of the two largest institutional investors in India. The major resources of the SIDCs are Paid-up capital reserves Market borrowings Loans from the government. 1951. insurance companies. without exposing them to undue risks. SIDCs get funds from IDBI under its refinancing scheme. Their shareholders are the respective state governments. render assistance to medium and small scale industries to their respective states. IDBI. were set up by the state Governments during the 1960s to serve as catalytic agents in the industrialization process of their respective states. reserves. and private shareholders. credit cooperatives. In particular. SIDCs perform a variety of other functions. Direct Financial Assistance Financial institutions provide direct financial assistance in the following ways: Rupee term loans Foreign Currency term loans Subscription to equity shares . set up under the State Financial Corporations Act.

Also called as seed money or seed financing. Banks are set up to mobilize savings of many small depositors. in case of default in payment there of by the buyer. Investment strategy The nature of their liabilities determines the investment strategy pursued by all financial institutions. in agreed installments with stipulated interest in the respective due dates. Guarantee for foreign currency loans Underwriting Advantages of financial institutions Reduction of information and transaction costs Grant long-term loans Provide liquid claims and pool risks. The liabilities of all financial institution will generally fall into one of the four types shown in the adjacent Table : .for proof of concept or market research or product development. Financial intermediaries economize costs of borrowers and lenders. Indirect Financial Assistance Besides providing direct financial assistance. which are insured. financial institutions extend help to industrial units in obtaining finance/credit through the following ways: Deferred Payment guarantee .Seed capital Money used for the initial investment in a project or start-up company.A deferred payment guarantee is a contract under which a bank promises to pay the supplier the price of machinery supplied by him on deferred terms.

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