“Role of Financial Institutions in Economic Development of India”

A project submitted to
University of Mumbai for partial completion of the degree of
Bachelor of commerce (Accounting and Finance) Under the
faculty of commerce

By

Sahil Sunil Mhatre

Under the Guidance of

Dr Nilesh Eknath Koli

CHANGU KANA THAKUR ARTS, COMMERCE AND SCIENCE COLLEGE,

NEW PANVEL

Plot No 01, Sector 11, Khanda Colony New Panvel (w)

Dist – Raigad, Maharashtra, Pin 4102016

March 2022

1
 CERTIFICATE

This is to certify that Sahil Sunil Mhatre has worked and duly completed his project work for the degree
of B.Com. (Accounting and Finance) under the faculty of Commerce in Changu Kana Thakur Arts,
Commerce and Science college, New Panvel. In the subject of project work and his project is entitled. “Role
of Financial Institutions in Economic Development of India” under my supervision. I further certify that
the learner under my guidance has done the entire work and no part of it has been submitted previously for
any degree or diploma of any university.
It is his own work and facts reported by his personal findings and investigations.

Seal of
the Dr Nilesh Eknath koli
College
Name and signature of guiding teacher
cc
Date of submission:

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 DECLARATION BY LEARNER
I the under signed Sahil Sunil Mhatre hereby, declare that the work embodied in this project world titled
“Role of Financial Institutions in Economic Development of India” forms my own contribution
to research work carried out under guidance of Dr. Nilesh Eknath Koli is a result of my own research work
and has not been previously submitted to any other university for any other degree/diploma to this or any other
university.
Wherever reference has been made to previous works of others, it has been clearly indicated as such and
included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented in
accordance with academic rules and ethical conduct

Sahil Sunil Mhatre

Name and signature of the learner

Certified by

Dr Nilesh Eknath Koli

Name and signature of guiding teacher

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 ACKNOWLEDGEMENT
To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimension in completion of
this project.

I take this opportunity to thank University of Mumbai for giving me chance to this project.

I would like to thank my Principal Dr. S.K. PATIL, for providing the necessary facilities required for
completion of this project.

I take this opportunity to thank our coordinator and project guide Dr. Nilesh Eknath Koli, for his moral
support and guidance that made this project successful.

I would like to thank my college library, for having provided various reference books and magazines related
to project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion
of project especially my parents and peers who supported me throughout the project.

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 Table of Content
Index Particulars Page No
no:

Chapter Introduction 9-31

No.1:

1.1 Meaning of finance

1.2 Circular flow of money and income

1.3 Financial system

1.4 Banking system in India

1.5 Emergence of financial institutions in India

1.6 Classifications of financial institutions

1.7 Banking institutions

1.8 Non -banking financial institutions

1.9 Corporate purpose, mission and objectives of financial institutions in India

1.10 Functions of financial institutions in India

1.11 Economic development and financial system

1.12 Role of Financial institutions in economic development

1.13 Role of Financial institutions in economic growth

1.14 Determinants of Financial development

1.15 Financial planning in financial institutions

Chapter Research methodology 32-39

No. 2

2.1 Problem of the study

2.2 Period of study

2.3 Collection of data

2.4 Secondary Data

2.5 Sample design

2.6 Objectives of the study

2.7 Relevance of this study

2.8 Hypothesis of the study

2.9 Scope of the present study

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2.10 Tools & Techniques for analysis

2.11 Ratio Analysis

2.12 Some other analytical parameters

2.13 Limitations of the study

Chapter Review of literature 40-53

No.3

3.1 Role of banking financial companies

3.2 Indian studies

3.3 Role of non-banking financial companies

3.4 COVID-19 and Its impact on financial markets and the real economy

3.5 Financial markets

3.6 Macroeconomics models featuring pandemic

3.7 Financial market Disruptions

Chapter Data Analysis, Interpretation and Presentation 54-115

No.4

4.1 Ratio Analysis

4.2 Profitability analysis

4.3 Return on long term funds or capital employed

4.4 Comparative statement of return on long term funds

4.5 Comparative statement of return on net worth or return on equity

4.6 Earnings per share analysis

4.7 Debt equity ratio

4.8 Capital adequacy ratio

4.9 Book value analysis

4.10 At a glance

4.11 Economic outlook

4.12 Historical evolution of the financial institutions in India

4.13 Indian money market

4.14 Issues on capital adequacy and government ownership in banking sector

4.15 Reform in development financial institutions

4.16 Reform in non-banking financial companies’ sector

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4.17 Liberalization

4.18 IFCI venture Capital funds Limited (IVCF)

4.19 Branches offices

4.20 Working analysis of financial institutions

Chapter Conclusion and Suggestions 116-125

No.5

Chapter Bibliography 126-127

No 6:

List of Charts

SR.NO. Particulars pages

1.1 Circular flow of income for a barter 9
economy
1.2 Circular flow of income for a money 10
economy
1.3 Financial system - various parts and 11
types of classification
1.4 Classification of Financial institutions 19
in India
1.5 Inter-relation between financial system 23
and the economy
1.6 The role of financial institutions 24
1.7 Function of financial institutions 29
1.8 Financial planning in financial 30
institutions

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 List of Tables
SR.NO. Particulars Page
No.
1.1 Comparative statement of return on 56
long term funds
1.2 Comparative statement of return on net 57
worth or return on equity
1.3 Comparative statement of earnings per 58
share
1.4 Comparative statement of Debt equity 59
ratio
1.5 Comparative statement of capital 62
adequacy ratio
1.6 Comparative statement of book value 63
1.7 Narsimhan committee of banks 72
1.8 Financial assistance by IDBI 91
1.9 Financial assistance by ICICI 92
1.10 Financial assistance by IIBI 93
1.11 Financial assistance by SIDBI 95

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 Role of Financial Institutions in Economic Development of India

Chapter No. 1: INTRODUCTION

Blood flow of an economy is finance. Finance is a link which connects saving and investment.
Banking is a method, which collects money from savers and is put in hands of those who are willing to invest.

Meaning of Finance:
Finance is the integral part of modern economic life and occupies vital place in all economic activities.
Economic growth virtually rests to the considerable extent on availability of adequate and timely finance.
Finance brings together different segments of the confederation and transforms them to the integrated whole
so as to work smoothly in direction of achieving the goals of the organization. That is the reason why finance
is a backbone of business activities.

Circular Flow of money and Income: -

Before independence, our economy was running without any financial intermediation and there was no clear-
cut standard medium of exchange which we called “A barter system economy”.

Chart 1.1

Circular flow of income for a barter economy

Resource Inputs

Physical property, Labour

and Management
Production
Provider of
of Goods and
Resource
Service Production Output

Product & Service

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Income earned by the barter economy is paid in goods and services form. Income may be earned by the
recipient for any of these resources: - (a) physical property i.e., land, tools or other goods. (b) labour (c) by
providing services of an entrepreneurial nature.

Those who are willing to provide all the three inputs for production purposes are entitled to receive production
outputs i.e., income. Thus, for each round of resource provision, production output is generated. But after
independence money exists in our economy, resources inputs, products and services may now be money.

Chart 1.2
Circular flow of income for a money economy

Resource Inputs

Physical property, Labour

and Management
Production
Provider of
of Goods and
Resource
Service Production Output

Introduction of money in the circular flow means that ‘real’ transaction i.e., the direct exchange of resource
inputs for production output. The introduction of money permits certain change to occur. There was no need
of exchange of products which were assumed to be of same value but exact value was decided between the
seller and buyer. Generalized purchasing was abolished. No longer must the seller accept only goods and
services those the buyer can offer.

Financial system: An introduction

Financial sector can have many faces in the economy. It collectively includes legal arrangements, instruments,
financial intermediaries and markets. A financial system helps to mobilize the financial surpluses of the
economy and to transfer them to the areas of financial deficits. It is the key factor of any development strategy.

The financial system promotes savings by providing a broader variety of the financial assets to common
public. Savings rose from the household sectors pooled together and assigned to different sectors of economy

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to increase production levels. For the economy to grow it is necessary that credit should be allotted in equal
manner, with judicious allocation so that all sectors are equally justified. Structure of financial system

The meaning of “System” in financial system implies the set of nexus and closely linked institutions, agents,
practices, market, transactions, liabilities and claims in the economy. Financial system is based on money,
credit and finance. The three terms are closely related yet are different from one another. Money refers to the
means of payment. Credit or loan is the sum of capital to be returned with interest, it refers to the liability of
economic unit. Finance is a monetary resource comprising debt and ownership, funds of the state, company
or persons. Chart 1.3 Present the Typical structure of financial system in any economy.

Chart 1.3
Financial System – Various parts and types of classification

Financial system is classified into financial institutions, financial markets, financial services and financial
instruments.

According to one classification, financial institutions are among the principal means for making payments for
goods and services and their loans are the chief source of credit for all economic units in the society, business,
household and governments. Financial institutions are classified as intermediaries and no intermediaries. As
the term indicates intermediaries are connecting link between savers and investors, they provide loans as well
as keep savings in flow, but its main responsibility is towards the savers, while their profits are from the
investors and borrowers. Non-intermediary institutions do not directly collect money from savers. All banking
institutions are the intermediaries. Many of the nonbanking institutions act as non-banking financial
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intermediaries (NBFI). UTI, LIC, GIC etc., are some of NBFIs in India. Reason for the existence of non-
intermediary institutions like IFCI, NABARD and IDBI is because of government efforts to provide financial
aid for certain purposes, sectors and regions.

Financial markets are the places that provide facilities of buying and selling of the financial claims and
services. The corporations, financial institutions, individual and government trade in financial products via
organized exchanges, dealers and brokers. Financial markets are classified as organized and un-organized. In
organized market firm’s transactions take place inside the well-established exchanges.

Financial markets are further classified as primary and secondary market. Primary market serves in the new
financial claim and securities and therefore they are also called new issue market and secondary market deals
in securities already issued or existing. Further financial markets are classified as money market and capital
market although both perform by transferring the resources to the producers. The conventional difference is
that money market serves in short term claims with a time of maturity of 1 year or less while capital do so in
long term claims with a maturity period about one year.

Financial instruments are classified as primary and secondary securities. The securities which are primary,
issued by the utmost investors to the utmost savers as ordinary shares of debentures. Secondary securities are
issued through the financial intermediaries to the utmost savers as bank deposits units, and insurance policy
and so on.

Financial system deals in financial services, claims, financial assets or securities of financial instruments.
These services and claims are many and varied in character because of diversity of reason behind borrowing
and lending.

The Indian Financial Systems are broadly classified into two:

1. Organized Sector

2. Unorganized Sector

The organized financial system is further classified in users of the financial services and its
suppliers. Financial Institutions sells their services to among households, government and business
and to those who are using financial services. The suppliers of financial services are

1. Central bank of India (RBI)

2. Commercial Banks

3. Financial Institutions

4. Money and Capital Markets

5. Informal Financial Enterprises an organized financial system has the following sub-
systems:
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 1. The banking System

2. The Co-operative System

3. The Development Banking System

4. Public sector

5. Private Sector

a. Money Market

b. Financial Companies/Institutions

The unorganized financial system composed of money lenders. Indigenous bankers, Landlords, lending pawn
brokers, traders etc. there is also the host of the financial companies Chit funds, investment companies, etc. in
the unorganized sector. They are not synchronized by the government or the Central bank in the systematic
manner.

Banking System in India:

The performance of banking system affects the success of the economic expansion of country especially
Indian capital market. In this backdrop it is essential to know the financial background of Indian banks
which have been the major player in Indian money market The major banking companies are:

I. Public Sector Bank (PSBs)

i. State Bank of India (SBI): SBI is an Indian public sector bank, it is the government
owned bank with headquarter in Mumbai (Maharashtra). The bank is listed in “fortune global
500”as it acquired 217th rank in the list of world biggest companies in 2017.Largest bank in
India and acquires 23%market share in assets and one fourth of total market’s loan and
deposits. It has 18354 branches and 59291 ATMs in India. SBI is the biggest employer in the
country with 209567 employees. Founded in the year 1806 as Bank of Calcutta, was the first
ever banking that was established in India and in a course of time raised into State Bank of
India (SBI). SBI represents the exceptional legacy of more than 200 years.

ii. Punjab National Bank (PNB): Punjab National Bank, the India’s first bank to come
out of the Swadeshi movement, established on April 12, 1895 at Lahore, with a capital of only
Rs 2 lac and with Rs 20000 as working capital. The first bank completely managed by Indians
with the Indian capital and founded by Danyal Singh Mahathat headquarter is in New Delhi
with Mr. Sanjiv Gupta as MD and CEO. It has a revenue of 47424.35 crore and operating
income of 12216 crores, net income of 3974.39 crore and total asset of 667390.45 crore.
iii. Bank of Baroda (BOB): It was started 109 yrs. ago on 20th july1908, founded by the
Maharaja of Baroda, Maharaja Sayajirao Gaekwad III. It headquarters is in Vadodara Gujrat.

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 Till July 2017 it has 5481 branches all over India. Its chairman is Mr. Ravi Venkatesh and PS
Jayakumar as MD and CEO. Its main fields are consumer and corporate banking, finance and
insurance, investment banking, credit cards, private equity and wealth management. Its
operating income in 2017 was 10975.907 crore and net income of 1383.14 crore. It is owned
by GOI with a total of 52420 employee and capital ratio of 13.17%. The bank with 13 other
commercial Indian banks, were nationalized on 19 July 1969 and has been nominated as a
profit-making PSU.

iv. Bank of India (BOI): A group of businessmen established BOI on 7th September 1906.It
was under private ownership till 1969 after which it was taken over by the Government, and
later on merged with thirteen other banks. It started with a 50 lakhs capital and 50 employees
and it has taken a mighty shape with net income of 609913.93 crore and total 45603 employees,
it’s headquartered is in Mumbai with Mr. Dinbandhu Mohapatra as MD and CEO. It provides
retail banking, mortgages loan, corporate banking, asset management and other banking
services.

v. Canara Bank (CB): It is a public sector bank in India and was founded as Canara Bank
Hindu Permanent Fund in 1906 at Mangalore India. Later it was coined as Canara Bank ltd in
1910 and finally Canara bank in 1969.It has it’s headquartered at Bangalore, Karnataka. Shri
TN Machala is the chairman and Shri Rakesh Sharma is the MD and CEO of Canara bank. It
offers a broad range of banking services and product like investment banking, retail banking,
consumer banking, commercial banking, private banking, asset management, pensions,
mortgages loan and credit cards. It has 549413 employees as on October 2017 and is having a
capital ratio of 12.86%.
vi. Union Bank of India (UBI): It was set up in 1969 under banking companies act.
Headquarter is based in Kolkata. Mr. Rajkian Raoji is the MD and CEO. Bank provides
corporate banking, consumer banking, personal banking, wealth management, investment and
mortgages loan. It has a total asset of 404695.93 crore, about 35415 employees with a capital
ratio of 10.6%.
vii. Central Bank of India (CBI): Established in 1911, Central Bank of India was the 1st
Indian commercial bank that was completely owned and managed by the Indians.
Headquartered in Mumbai, Maharashtra the establishment was the utmost realization of the
aspiration of Sir Sorabji Pochkhanawala, the founder. Sir Pherozesha Mehta was the 1st
Chairman of a truly 'Swadeshi Bank'. At present Shri Rajiv Rishi is the managing director of
central bank of India with 37685employees. Its capital ratio is 10.41%.

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 viii. Syndicate Bank (SB): Syndicate Bank is among the crucial and oldest commercial banks
of India (BSE532276, NSE SYNDIBANK). It was founded by T M APai, Vaman Kudva and
Upendra Pai. At establishment time, the bank was known as Canara Industrial and Banking
Syndicate Limited. The bank with thirteen other crucial commercial banks of India was
nationalized on 19 July 1969, by Government. The Bank has it’s headquartered in Manipal,
India. Its annual revenue is about Rs.6913.09 crore with operating income of 1514 crore and
annual net income of 359 crore. Its total asset is worth Rs 299073.34 crore. It is governed by
GOI with about 34989 employee and capital ratio of 12.03%.
ix. Oriental Bank of Commerce (OBC): Sri. Rai Bahadur Lalaji and Sohanlalaji the 1st
Chairperson of the Bank established it in 1943 in Lahore. Within 4 years of its existence, it had
to face the partition. Today it’s headquartered is in Gurgaon (BSE500135, NSE
ORIENTBANK). Present CEO and MD is Shri Mukesh Kumar Jain. Along with banking and
financial services it takes care of retail and private banking, pensions, asset management and
credit cards. It has total revenue of Rs. 2005.71 crore its total asset in Indian market is Rs
23754.54 crore. Total no employees are approx. 21469 with capital market of 11.76%.

x. UCO Bank (UCO): Government of India Undertaking, the United Commercial Bank Ltd.,
established on 6thJanuary 1943 with its Registered Head Office in Kolkata. Today it is having
a worldwide expansion with Mr. Ravi Kishan Takkar as the active CEO and MD. Bank is
exhaling in various products in the market like consumer and corporate banking, mortgage
loans pension, insurance, private banking and wealth management. Its annual revenue is about
Rs 18560.97 with operating income of Rs 3603 crore and total asset in capital market around
Rs 244882.57. Total number of employees is about 24724 and capital ratio of 9.63%

Private Sector Banks:

i. ICICI Bank Ltd. (ICICI): Industrial Credit and Investment Corporation of
India: (ICICI Bank) is a multinational Indian bank which was initially promoted in 1994, its
principal aim was to develop a financial institution for supplying medium and long-term
project financing to the Indian businesses. It offers a broader range in banking services with
specialized area in investment banking, life insurance, non-life insurance, venture and assets
management. Trades on BSE532174, NSE-ICICI BANK. It had it headquarter in Mumbai and
branches spread worldwide. Working chairman is Mr. M.K. Sharma with Mrs. Chanda Kocher
as CEO and MD and Mr. Sandeep Bakshi as COO. Annual revenue generated by bank is
rs.73660.76 crore, with an operating income of Rs.58905.705 crore.Net income is Rs. 9801.08
crore and has a total market asset of Rs.737546. 29crore.Its branches are spread over to China,

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 UK, Canada, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar, Oman, Dubai and South
Africa.

ii. HDFC Bank (HDFC): HDFC Bank was incorporated in August 1994. It is an Indian
banking and financial services company having the headquarters at Mumbai, Maharashtra. It
is having about 76,286 employees with 12,680 females and a presence in Hong Kong, Bahrain
even Dubai. HDFC Bank is the 2nd largest private sector bank in India in terms of assets.

iii. Axis Bank Ltd. (AXIS): It is the 3rd largest private-sector banks of India that offers a
comprehensive package of financial products with HQ in Mumbai with registered office in
Gujarat’s Ahmadabad. Came into work from July 30, 2007, Axis bank was known as UTI bank
initially. It was founded in 1993 by UTI bank and now has headquartered in Mumbai. Shikha
Sharma is the present MD and CEO with Mr. Sanjay Mishra as chairman. The areas served in
the banking sector are wealth management, private banking and equity, investment, finance
and insurance. Total revenue generated by the bank as on July 2017 was Rs.414.9025 crore
with the net income of Rs.83.5759 crore.

iv. The Federal Bank Limited is an important private sector commercial bank having it’s
headquartered at Aluva, Kochi, Kerala. It has 1252 branches and about 1680 ATMs across
India till 31 March 2016. Current chairman is Mr. K.M. Chandrashekhar with Mr. Shyam
Srinivasan as CEO and MD. Its annual revenue is Rs.9759.20 crore and operating income of
Rs.1924.23 crore. Their markets total asset is Rs.114976.93 crore. It has a total of 11593
employees and a capital ratio of 12.39%.

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Emergence of financial institution in India
Before independence financial system mechanism linked between investments and saving for the safety,
liquidity and profitability of the savers and on the other hand to the various types of working requirements of
investors. In India the institution is generally grouped into two parts –

1. The money markets.

2. The capital markets.

The money market includes banks and also other financial institution giving loans for short-
and medium-term period where as capital market composed of institutions that grant long term loans
and also invest in securities. The Indian capital market and money market before independence was
not developed for providing the needs of long-term finance. This is one of the crucial constituents for
the development of our economy. After attainment of Independence Government of India took steps
to fill the gaps in the capital market and created notional and state level financial institutions. These
financial institutions were like development bank which served as development not only carrying or
lending operation but also development activities including promoting projects and helping the clients
in their problems and difficulties.

The needs of financial institution in India are largely forced by the industries in India. As capital is the
backbone of an industrial organization. Present era Industrial Enterprises need various types of capital
namely initial capital, working capital, fixed capital, operational capital, maintenance capital,
development capital, etc. Since modern industries have to use the latest scientific technology and
pursue a process or specialization to produce commodities on a larger scale to meet market demands,
they have to invest very heavy capital for buying sufficient infrastructure in advance for fulfilling the
capital needs.

Another reason that they came into existence for the emergence of financial institution in India was
poverty, national savings were very few, and there was no capital formation because of minimal
savings. The gap between the capital formation and capital utilization could be fulfilled with the
establishment of financial institutions.

Government taxation and interest policies are also accountable for the emergence of financial
institution in India. The interest to be paid on loans is a deductible expenditure for the company's
profits. The financial control policies of the government increased the dependence of industrial
concerns on debt capital provided by such institution.

For the significant and balanced economic development there is an emergence of Financial Institutions
of India. They helped in those projects which are basic for fulfilling population needs. They also assist
the projects stated by government for public interest, by providing long term finance, by assisting the

17
new companies in raising funds from the capital market, providing technical and managerial
consultancy services to the Industrial Enterprises.

Meaning of Financial Institution

Financial institution offers a variety of services and specializes in one or more of the following
functions

1- Providing a payment mechanism.

2- Providing a means of lending and borrowing.

3- Providing other services such as foreign exchange, insurance and so on.

Financial institution mediates between those who are having a financial surplus and those who have
deficit. Whatever their apparent purpose, they all share the characteristics that they offer many
different types of loans to borrowers and create a huge range of assets of lenders.

Classification of financial institution

Based on their main activity or specialization with relation to the savers or borrower with whom they
deal customarily, there is a need to divide financial institutions. In other words, functional, geographic,
structural, the type of ownership or the scope of activity are the criteria which were often used to
classify a large number of financial institutions that exist in economy.

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 Regulatory financial institutions are financial institutions, regulated and setup by Reserve Bank of
Classification of financial institution in India

Regulatory intermediaries Non Intermediaries others

Regulated by RBI or Indian

Companies ACT 2013

Banking Non-Banking

minus (
,SIDC etc. Companies

RBI LIC
Financial Institution
Chart 1.4

India (RBI) or set up under Indian Companies Act 1956. Furthermore, financial institutions are also divided
as intermediaries and non-intermediaries. Financial intermediaries, as name suggests, an intermediary between
investors and savers i.e.,” surplus” spenders among the people and the “Deficit” spenders who borrow funds
for investment purpose. Financial intermediaries are further divided into banking and non-banking institutions.
Banking Institutions

Banking institutions are those, which mobilize saving by accepting monetary deposits from the people,
participate in payment mechanism for the exchange of goods and services and extent credit while
lending money. The typical feature of the banking institution is that they not only supply credit but
also create credit. The Reserve Bank of India, commercial banks and co-operative banks are banking
institutions. The banking institutions act as bridge between the people mobilizing their savings as
monetary deposits, and the real sector production units, who borrow for investment.

Non-Banking Financial Institutions

Non-Banking financial institutions also mobilize financial resources indirectly or directly from the
people and lend to the extent of resources made available. These institutions lend funds but do not
create credit. The Life Insurance Company (LIC), General Insurance Company (GIC), Unit Trust of
India (UTI), Development Financial Institution (DFI’s), Organization of Pension Provident Fund (PF)
fall under this category.

Non-financial intermediaries in the real sense, their resource does not consist of funds drawn directly
from
19
“Surplus” spenders or the people but from other sources including subscription and borrowing from
the government Reserve Bank of India and other financial institution. The development financial
institutions as IFCI, ICICI, IDBI, NABARD etc., are non-intermediaries. The development financial
institutions are specialized institution.

In other financial institutions category covers the capital and consultancy market. Capital market is
defined as market which deals in long term claims with a maturity period above 1 year. Capital market,
not only to coextensive with the stock market, but it is also much wider than the stock market. While
on the other side, consultancy institutions have been concerned with the management of customer
securities, credit syndication, portfolio management, acceptance credit, counselling insurance etc.

Corporate Purpose, Mission and Objectives of Financial Institution in India

In Indian economy, financial institutions have a function of providing term finance to entrepreneurs
and mobilize their resources for their lending operations. They have to comfort the task of entrepreneur
by dispensing finance timely and by providing information on market and other related services.

The corporate purpose of financial institution is to pace up the level of economic growth and to find
out and provide total solution to the business organization for the gap caused by developing long term
relationship with credit worthy corporates and institutional clients.

Keeping in view, the above purpose and mission, financial institution in India has set the following
long-term objectives –

1. The first and foremost objective of financial institution in India is to accelerate the growth of Indian
economy.
2. To serve as an agent of development in various sector with industry, agriculture and international
trade.
3. To provide them lending facilities to the industrial concerns.
4. To subscribe to share and debentures.
5. To underwrite security issues of business enterprises.
6. To provide indirect financial support to business enterprises through guarantees, discounting bills
and other facilities.
7. To finance the project which in turn leads to rural and agricultural development and development
in backward areas.
8. To finance house and small-scale industries.
9. To garner resources directly from common public by floating share and debenture in the stock
market.
10. To furnish managerial, technical and administrative services to the Indian industry.

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Function of financial institution in India

The functions of Financial Institutions have been tuned to the needs of industry, small scale industry, including
traditional ones and agriculture. The principal functions are common to all financial institutions. These are –

1. Payment Mechanism: - Financial institution facilitates payments by enabling business government and
consumers to complete transaction without cash. Checks and credit cards are used for the bulk
purchase. Recently financial institution has developed many new payment services including money
market, telephone bill-paying services, information-encoded credit and debit cards and electronic
machines that accepts deposits and dispense cash.
2. Promoting Investment: - The Financial institution supplies credit to support purchases of goods and
services and to pronounce capital investment such as construction of buildings, purchase of machinery
and equipment. Investments increase the productivity of resources and make a healthy physical quality
of life possible for individuals and families.
3. Risk Diversification: - Because of their immense size financial institution are able to bulk purchase of
investments and reduce the negative effect of one investment returning much lower-than-expected rate.
The negative effects of one asset in a small portfolio which many investors have, is diluted by holdings
of hundreds of assets. Financial institutions pool, distribute, reduce and manage risk better through
greater diversification of the portfolio which is not possible for any single, particularly small savers.
4. Portfolio Management: - Financial institution also acts as advisers and portfolio managers of most of
the primary securities owned in India. Investments are protected from fraud borrowers by loan officer
and well-trained investment analyst who seek good investment opportunities and securities.
5. Maturity Transformation: - Financial institution offers savers the alternate forms of deposit in respect
to their liquidity, risk return preference and lend borrowers the loans of long-term maturities required
by them. The financial institutions borrow less and lend more and, in the process, they change the
length of debt in such a way that its sooths the liquidity performance of the ultimate fund’s users. In
so doing, they encourage the savers to pursue from unproductive investment to productive investments.
6. Income Taxes: - financial institution transfer tax deduction from one time period to another and from
low to high income taxpayers. For example, income invested in and earned through pension funds is
not taxable until retirement, when rates generally lower than before retirement. Also, income taxes are
not applied to some services provided by financial institutions. When services, are provided in lien of
interest, payments, customers are said to receive implied interest. These benefits are a form of implicit
interest and usually are exempt from income taxes, whereas explicit interest payments are generally
subject to income tax.

21
 Financial Institutions and Economic Development

“Development is an unpremeditated and discontinuous change of stationary state that forever alerts and
displaces the equilibrium, state that previously exists; while growth is steady and gradual change in long
run would come about by the gradual rise in the rate of savings and population.”

- J.A. Schumpumpeter

The importance of financial institution in promoting economic development has been accepted. Financial
institutions help the development process by influencing both the saving and investment. These financial
institution acts as the bridge between the saving of the various sources to invest them and productive uses.

Financial
Saving Investment
institution
The major source of savings in the country like India is from the household sector, but here one limitation
is that these savings amount are so small individual wise, that it can hardly be invested by them directly
to the industrial or the other sectors of economy.

Economic Development and financial System

The financial system act as an efficient conduct for allocating resources among competing users, the role and
the importance of the system in process of the economic growth have evolved overtime along with the
changing of paradigms.

The financial system provides the services which are essential in the modern economy. The use of stable and
broadly accepted way of exchange decreases the cost of transactions. It facilitates trade and therefore,
specialization in the production. Financial assets with liquidity, attractive yield, and risk characteristics uplift
saving in the financial form and by evaluating the alternative investment and keeping the eye on the activities
of the borrowers, financial intermediaries raise the efficiency of resources use. Access to the variety of the
financial instruments enables the economic agents to pool, exchange risk and price. Trade and the efficient
use of the resources, saving money and risk takings are cornerstones of the burgeoning economy.

22
 Chart no. 1.5

In

the past government’s efforts to promote economic development by controlling interest rates, directing

credit to the priority sectors and securing funding that are inexpensive for their own actions have

undermined the financial development. In recent years, the financial systems have come under further

stress, as a result of the economic shocks of the 1980’s many borrowers were not able to service their

loans. In more than 25 developing countries, government assists troubled intermediaries. The

restructuring of insolvent intermediaries provides the governments with an opportunity to re-think and

re-shape their financial system.

23
Conditions that support of the development of a stronger and equitable financial structure would raise the
ability of the home financial system to contribute growth. By restoring the macroeconomic stability, in
building better legal accounting, and regulatory system, specifying rules for the fuller disclosure of data
and levying. taxes that do not fall immoderately on finance, government can lay the foundations for
functioning of the financial system smoothly

The Indian financial system composed of an impressive network of banks other financial and the
investment institutions offering broad range of products and services, which functions together in fairer
development of capital and money markets. As such, financial system has to occupy a crucial role in the
process of the economic development.

Chart 1.6

The role of Financial Institution

Role of the Financial Institutions in Economic Development

The main distinguishing feature between developed and a developing country lies between its focus to
strengthen and economic growth and uplift its economy in the right direction and rest all is, mystery.
Developed countries do have a stronger economic growth as compared to developing countries. In
developing countries, the major factor which create hurdle in the economic rise are over population,
illiteracy and political instability. Economic growth is dependent on the financial development of financial
institutions and investment banks, commercial banks, bonds and stock exchange. Smooth and effective
24
functioning of various activities in the society is dependent on the banking sector. Finance is the core of
socio-economic growth trajectory of the society.

During early independent period of India its main objective is to attain financial growth with social justice
and equity, to strengthen the banking system of India. Banking system collects money from them who
have spare money or those who are saving in their income and lending that money to them, who require.
This system is highly valuable and necessary for any community to survive. But the role of commercial
banks is not confined to lending money to the needy ones but to those also who are in a position to invest
in an enterprise and create a profitable credit. This is a more complex task in view of dynamic changes in
the economic uplift of a developing country. In this way the job of financial sector becomes very important
in mobilization and allocation of financial saving from savers to borrowers.

Structure of banking sector in any developing country depends on its performance efficiency and ability
to accumulate savings and channelize them into productive investment.
There are various opinions with regard to origin of the word ‘bank’ in the modern sense. According to few
authors, the word ‘bank’ was derived from a French word ‘bancus’ or ‘banque’ that means a ‘bench’. In
the beginning, the bankers and the Jews of Italy, transacted their work on benches of market place. If
banker failed, then his ‘banque, (bench) was used to be broken in pieces by the public, which signifies the
bankruptcy of an individual banker. Some authors say that the word ‘bank’ was originally obtained from
German word ‘Banck’ which means a joint stock fund that was Italianized into ‘banco’ when the Germans
were masters of Italy. ‘Banco’ means stack of money. The word’ bank’ is used in modern times, means
an organization accepting money in the form of deposits that are used to be lend. In India, the Banking
Regulation Act, 1949 defines bank as a banking company which transact for the purpose to lend or invest
the deposits of money from the common public, and repaid on demand or withdrawal through cheque,
draft, order etc.

In present day bankers have 3 ancestors: goldsmiths, money lenders and merchants. The goldsmiths used
to accept money and other important, valuable items of their customers to keep it safe and issued receipts
of them. These receipts were used as medium of exchange. The money lenders lent their surplus funds to
the needy and earned income by way of taking high interest. The merchants were primarily traders and
they had to oblige their customers by keeping their money in safe custody. Banking business was their
side occupation. Today, we can see all the features of all three types of functions in modern banks.

During period of Queen Elizabeth, goldsmiths of England possessed position for modern bank. Self-
employed persons, education, car and housing loans for weaker sections and consumption loans were also
included. Various innovative schemes such as village adoption, agricultural development branches and
equity funds for small units etc. were introduced for the potential disbursement of bank credit. For making
the banking sector a crucial of the planning process in the country, credit planning was introduced. Banks

25
prepared quarterly credit budgets to bring about more correlation between the demand for and supply of
credit.

In post-independence era despite rapid rise in deposits and credit granting, public sector banks suffered
from low profitability over years, main reasons being deceasing interest income, and increased operative
cost of banks. They had relatively low rate of interest to earn and had to keep high proportion of deposits
in RBI as CRR (cash reserve ratio) and SLR (Statutory Liquidity Requirements). moreover, they had to
loan money to weak sections of society at low concessional ate of interest of 4%only. public sector ban
was also enforced by government to lend in agriculture and other important sectors, nearly all of them
were dubious in nature regarding to pay their dues. Subsequently their loan become hard and doubtful to
recover and was commonly known as non-performing assets

Cost for operating bank was relatively costlier considering branch expansion, recruitments, various trade
union activities, low productivity, heavy salary bill. All of these factors lead to reduced profitability of
banks, with poor customer friendly atmosphere and outmoded work technology. These changes made
them uncompetitive to face the challenges. This needed urgent and major changes in reforms so that public
sector bank could come out of their weaknesses.

Government of India set up a big level committee with Mr. Narsimham the former governor of Reserve
Bank as chairman o bring reforms related to structure, organization, functions and financial system
procedures. On these recommendations of Mr. Narsimhanm committee, first phase of financial sector
improvement was to reform operational efficiency of banking sector were initiated in 1991 and second
was started in 1998.

The major reform measures are given below:

(i) Progressive reduction of Cash Reserve Ratio and Statutory Liquidity Ratio.
(ii) Phasing out concessional rate of interest to the priority sectors.
(iii) Deregulation of interest rates.
(iv) Introduction to prudential norms relating to capital adequacy, asset qualification, provisioning and
income recognition
(v) Setting new private sector banks in a view to inducing greater competition and for improving
operational efficiency of the banking system.
(vi) Permission to foreign banks to open offices in India either as branches or subsidiaries.
(vii) Setting of Lok Adalat’s, Debt Recovery Tribunals, ARC, Settlement Advisory Committee,
Corporate Debt
Reconstructing Mechanism etc. for quicker recovery / restructuring. Promulgation of
Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act and its subsequent changes to ensure creditor part.

26
(viii) Establishment of the Apex supervision as Board for Financial Supervision for non-banking
financial companies, commercial banks and financial institutions
(ix) CAMELS an introduction of supervisory rating system, strengthening of offsite surveillance by
control returns move towards supervision that are risk based, consolidated financial conglomerates
and its supervision.
(x) Recasting the statutory auditor’s role, increased internal control by strengthening internal audit.
(xi) Introduction of INFINET as a communication backbone to the financial sector, introduction of
NDS (Negotiated Dealing System) for trading that is screen-based in Real Time Gross Settlement
(RTGS) System and government securities etc.

Financial development is generally defined as the process that highlights the improvement in quantity,
trust, quality, and efficiency in financial intermediary services. The process involves the communication
of many activities, Institutions that are possibly associated with the economic growth. Financial
development has a crucial role in economy. There are 2 schools of thought focusing towards this study.
First is expressionist while the other is structuralism. These include currency, term deposit, demand
deposits, (each as portion of true GDP) and M2/real GDP.

The structuralism view of financial development impacts on investment growth directly asset competition
and it fortify that the relation between investment and the real interest remains negative. In other cases,
the financial sector might be under developed or over developed (Colin, 2000). If financial sector is
overdeveloped, then it might become a way of transmitting the saving from home economy to the world
capital market. Many studies show that countries like Japan, Taiwan and China carefully pay attention to
maintaining a balance between real and financial sector development (Badi, Demitriades and Siong, 2007).

Role of Financial Development in Economic Growth:

Financial institutes are big enough to pay large money for successful projects and can keep a good track
and identify the potentials of projects by collecting information. In addition, once the project has stated its
strict monitoring helps to the fruitful utilization of resources thereby increasing productivity. Financial
markets help to regenerate resources for large investment; secondly, they facilitate pooling and limiting
of financial risk in individual projects. Finally financial markets may also reduce security holders’ liquidity
risk by permitting them to sell the securities without influencing firm access to the funds originally
invested.
With the help of financial market large changes in size and development of financial sector in a short
period of time can be seen by increasing pool of funds, reducing risk and increasing the productivity of
funds transfer from saver to investment projects.
DETERMINANTS OF FINANCIAL DEVELOPMENT

Financial Development is closely related with economic growth and economic growth within a country is
indicator of development in the country. Economic growth is evaluated by various factors that also
determine the financial progress. There are numerous factors which determine financial development. Few
of them are below
27
1) Gross Domestic Product: - Gross domestic product is the basic tool to evaluate overall economic output
of a country and is usually correlated to physical quality and standard of living. it can be assessed by
product approach, income approach and expenditure approach. It is defined as market value with all
fuel goods and services that are produced in a domestic economy during the course of one year and
also the income earned by foreigners locally minus income earned abroad by nationals.
2) Gross amount of money (M2): - M2 is the gross amount of money in the economy in a particular period
of time; it represents money and its close allies. Economist uses M2 when he needs to explain and
quantify the sum of money in circulation there are various ways to define money, but primary measures
usually include the currency in circulation along with the demand deposits. The Money supply
information are recorded and also published generally by the government or else by central bank of
that country. Public and private-sector analysts have monitored for long time changes in money supply
as of its possible effects on price level, rate of inflation and overall business cycle.
3) Savings: - It is an important detrimental factor because when economy improves earning of people
increases which increases saving of people in various forms like bank saving, pension plan, personal
finance. Saving is the preservation of money. Saving may also include reducing of expenditures like
recurring costs. In regards with personal finance, saving enumerate low-risk conservation of money,
as in a saving deposit account in contrast to investment, where the risk is higher.
4) Advances to deposits ratio: - Advances and Deposits are the important terms of financial development.
Advances refer to the amount lend by banks or other financial institutions to the business personnel or
households whereas deposit is the amount presented into banks by public. The economy is directly
proportional to savings and incomes of people that also increase the deposits in banks. As the deposits
rise in the banks, the advance given by the banks also starts to raise resulting money circulation in the
economy (Paul &Vassili, 2001).
5) Exports/ Imports: - Export is any commodity transported from one nation to another in a legal fashion
typically for trade. Export goods are domestic producers and foreign consumers whereas import goods
are foreign producers and domestic consumers. Import is any good or commodity brought in one nation
from another nation in a legal fashion for trade. Import and export thus lead to formation of basis of
international trade which means expansion of business and ultimately expansion of economic and
financial development. For healthy financial development export market should always be greater than
import market.
6) The economic development depends inter alia of a country, on its financial structure, in the long run,
the higher the proportion of financial assets in real assets, the greater is the scope for economic
development. Investment is a precondition of economic growth.
7) This apart to sustain growth, continued investment in the growth process is essential. Since finance is
an important input in the growth process it has major role to played in the economy. The more well-
organized composition of real capital is obtained by the promotion of financial assets that provide
incentives (encouragement) to savers to hold a large part of their money/property in financial form.
The rising rate of savings is related with the rise in the proportion of savings held in the form of
financial assets relative to tangible assets.

28
 Chart 1.7
Function of financial institutions

The crucial function of financial organizations, weather short term or long term, is to provide maximum
financial benefit to the public. This may be done in 3 ways –

1. Promoting the overall savings of the economy by deepening and widening the financial structure.

2. Distributing the existing savings in a more logical manner so that those in greater need, from the social and
economic point of view get priority in allotment.

3. Creating credit and deposit money and facilitating the transaction of trade production and distribution in
furtherance of the economy.

29
 Chart 1.8
Financial Planning in Financial Institutions

Financial Planning in Financial Institutions

The financial goals are defined in terms of profits, dividend payments, financial conditions and financial
services to the community. Goals may establish after thorough discussion and written policy statements or
through informal discussion by executive owner, and regulatory authorities. However, determined goals of an
organization are important as they give rise to successful strategies. Like life insurance companies use one
strategy and banks employ an entirely different strategy. Within the overall strategy of the institution, policies
are set by management. The major policy areas of financial institution are - investment policy, operational
policy and personnel policy. Policies determined what actions are taken. The results of these actions are
measured quantitatively in the financial results. The various financial results are primarily, statement of
condition at present, financial institution’s balance sheet under which there is an itemized statement of assets,
liabilities and capital. The statement of income reports revenues, expenses and profits of the financial
institution for a time period. The financial condition and income statements are basic reports for beginning
analysis of past operations and for starting to plan for future. Cash budget is the estimation of flow of cash in
30
and out for institution for a specific time period. It helps the financial institution to access whether the
institution has enough cash to fulfil regular operations. It also allows to institution to determine what amount
of credit they can extend to the customers before it starts to have liquidity problems. Uses and Sources of
funds helps in analysing the financial position of financial institution from one accounting period to another
as it analyses all changes affecting in cash, in the categories of operations, investment and financing. Financial
ratios are the useful indicators of an institution’s performance and the financial situation. In financial ratios,
several standard ratios are involved that are used to analyse the overall financial position of financial
institution. Through the help of financial ratios one can understand the overall financial picture of any financial
institution.

31
 Chapter No 2: RESEARCH METHODOLOGY
In this chapter, we convey the grounds for present study, set down the research problems and objectives,
and confirm the research design, choice of the sector, location of study, sampling technique and methods of
data compilation and investigation. It is followed by sharing of ethical considerations and limitations in our
research effort.

PROBLEM OF THE STUDY

The title of the present study is “Role of Financial Institutions in the Economic Development of India: A
Case Study of HDFC” by this research work researcher proposes at estimating the productivity, financial
and non-financial performance of HDFC bank.

PERIOD OF STUDY:

The period of seven-year has been taken to measure the financial performance of HDFC, ICICI and IDFC
Banks. For the comparative analysis of performance of various other financial institutions with HDFC Bank
ICICI Bank and IDFC Bank, the period of years i.e., the researcher has taken from 2013-17, to 2019-20.

This study is observational in nature undertaken to examine the working pattern on finance and other non-
financial issues and their impact on the productivity of HDFC, ICICI and IDFC banks. This study is useful to
understand how the financial and non-financial issues are undertaken, how the management team of
HDFC,ICICI and IDFC works and its relevant decision in financial management to enhance the profitability
and productivity. In systematic research, contrariwise, the researcher also uses facts already available and
analyses these as a crucial evaluation of materials. Thus, the study is an analytical study because the study
was undertaken based on the adequate size of sampled bank discussed in sampling design. In this study, the
researcher selected the HDFC Bank, ICICI Bank and IDFC Bank as a model and makes a critical analysis and
evaluation of the working and management of HDFC, ICICI and IDFC Banks.

COLLECTION OF DATA:

In dealing with any research problem, it is usually found that there is insufficient data in hand, and hence, it
becomes required to collect data that are appropriate. There are numerous methods of collecting the
appropriate data. While collecting data the researcher has to consider various issues such as money cost,
time and other resources.

32
Secondary Data:

Secondary Data means the data that are already available i.e., people refer to the data that have already
been collected and explained by someone else and which have previously been passed through
mathematical process. When the researcher employs the secondary data, then he has to look at various
sources from which he can get them. Secondary data may either be issued data or manuscript data.
Normally, declared data are obtainable in: Various publications of central, state or regional governments.
Several publications of foreign authorities or international organizations and their subsidiary organizations.

• Technical and trade journals

• Books, magazines, and newspapers

• Reports and publications of the several associations related to business and enterprise, banks, stock
exchanges

• Reports prepared by the research scholars, universities, economists, etc. in different fields

• Public records and the statistics, historical documents and the other sources of published information.

There are many sources of unpublished data; they can be found in diaries, letters, unprinted biographies and
journals, and can also be available with learners and the research workers, trade associations, labour bureaus
and different public/ private individuals and corporations.

The secondary data for study collected from various journals, magazines, research reports, books,
newspapers, publications of the central and state government’s reports and yearly reports of various banks
under study and from various websites of respective banks.

The present study is focused on the secondary data taken from the year-end reports of the HDFC bank and
other banks under this study. To supplement the data RBI publication, IBA Bulletin, different publications,
Bank quest, various books, periodicals, journals and different website related banking industries etc. have
used for better reliability. Opinions expressed in Business standard, Newspapers, accounting literature,
Annual review and different publications also used in this study.

SAMPLE DESIGN:

The present study is devoted to analyse and evaluate the role of financial institution like IFCI, ICICI, SIDBI,
and specially HDFC in the economic development of India. HDFC is selected as a model for conducting the

33
present study. These financial institutions are engaged in providing financial assistance to various sectors
according to their needs. They also provide the rehabilitation and refinance facilities.

The main objective of conducting this research work is to evaluate the financial performance of various
financial institutions with special reference to HDFC in the economic development of India during the period
of study. ES

OBJECTIVES OF THE STUDY:

1. To explain the need and relevance of financial institutions for the economic growth of the country.

2. To assess the measures undertaken by government and Reserve Bank of India (RBI) to improve the
performance and functioning of Financial Institutions.

3. To explore the working and management of HDFC Bank, ICICI Bank and IDFC Bank.

4. To discuss and explain the objectives of HDFC bank, ICICI bank and IDFC bank and its contribution in
economic development of the country.

5. To study about the products and services of HDFC bank, ICICI bank, and IDFC bank.

6. To study the organizational structure of the HDFC, ICICI and IDFC Banks.

7. To study the association within financial institutions and economic development of the country.

Relevance of this study:

Government regulation, in most of the countries, shielded the banks from the forces of competition. India
is no exception for this. With the nationalization of the most of the major commercial banks in year of 1969,
constraints on entry and expansion of the private and foreign banks were steadily increased. The Reserve
Bank of India also started implementing the same interest rates, pricing and service charges between
nationalized banks.

This reason of lack of competition either among public banks or between the public and private banks and
gradually eroded the spirit of competition from the banking sector. Besides, the public sector labour policies
where employee salaries and publicity are not related to their job production has also headed to a uniform
decline in the efficiency, the quality of customer services and work experience in banks.

It added some areas of concern in the order of increasing non-performing assets, declining profitability and
efficiency, which were threatening the viability of commercial banks. In the light of this facets of banking,
the Ghosh committee in 1985, Vaghul group in 1987 and Narasimham Committee in the year of 1991 were
appointed to improve the productivity, profitability and efficiency of the financial sector in common and
baking sector in particular.

34
Commercial banks have played an important role in giving direction to economic development by meeting
the financial needs of the business and manufacturing in the country. By promoting economy among the
people, the commercial banks have closed the process of capital formation. Banks attract community savings
in the organized sector which can then be allocated according to the priorities set by planning authorities in
the country, from various economic activities. ‘The banks are not only the safe deposit vaults for these
savings, but taking banking system as a unity; and they also create deposits in the manner of their lending
operations. However, the important function of a banker is the provision of convenient machinery by which
people can pay each other without having to walk round each other’s house with bags of coins.

Financial institutes like banks also exercise influence on the level of economic activities through the creation
of manufacturing of money. Through their lending policies, they change economic activity to the needs of
the country. In view of this, the role of the commercial banks in the underdeveloped countries and planned
economies like India becomes particularly important. Though levels of income in India are much low, yet
these are pocket, where savings could accrue. But they do not find appropriate avenues for its employment,
of which the commercial banks are a significant organ, help in capital formation a necessary condition for
growth. As admitted by the lending bankers, ‘banking is the king of the economic process chariot’. As such
its role in expanding the economy of a country like ours can neither be under estimated nor overlooked. The
success of our giant five year plan is dependent, among other things on the smooth and satisfactory
performance of the role by banking industry of our country.’

Innovation is the most essential tool for economic progress of an economy. Innovation is the function of the
entrepreneur and it requires fund for implementation. The entrepreneur often cannot bring about 102 these
innovations for lack of available finance. In such a situation, banks may come forward and pay special
attention in financing business of innovation by providing cheap and adequate credit.

Since 1992-93, the formation of the Indian banking system or financial institutional has undergone several
changes in terms of scope, opportunities and operational buoyancy etc. The financial institutes have been
facing much competition in intermediation manner from course lending institutions, nonbanking
intermediaries, chit funds and the capital market. To compete with them efficiently, the commercial banks
are been permitted to undertake new activities like investment banking, securities trading, insurance
business etc, on a basis of particular at par with the competitors. Besides, new banking services like ATM
and internet banking has emerged due to the progress of computers and information technology.

In the success of the economic growth of a country mainly depends on the effective performance of financial
institutes. Indian capital market is highly dependent on the growth and prosperity of banking sectors and
non-banking sectors. Therefore, it is high time to assess the financial performance of Indian financial
institutes. In this backdrop, the present study seeks to examine the trends in the financial performances of
35
financial institutes with special reference of HDFC, major players in the Indian money market, during the
period 20011 to 2017. All the financial institutes have been selected based on their total income and balance
sheet size.

Hypothesis of the study

In order to make an effective study the following Hypothesis are taken for the study:

Ho :(1) Financial Institutions have contributed immensely in the overall economic development and progress
of India during the last few years.

Ho :(2) HDFC have contributed in the overall economic growth of India by improving in Indian industry,
service sector and accelerating the growth of real estate and housing sector.

SCOPE OF THE PRESENT STUDY

The scope of this study is very wide. Some parameters regarding productivity and profitability like employee
data, branch data, capital information and the profitability data of HDFC, ICICI and IDFC banks. To assess
productivity effectiveness, some cases developed. In our study, the researcher has tried to estimate the
productivity and profitability of the HDFC, ICICI & IDFC Banks for this, the researcher has used several ratios,
tables, graphs and charts. The problem and suggestions for the banks to increase productivity effectiveness
is also covered.

TOOLS & TECHNIQUES FOR ANALYSIS

The researcher uses different type of tools and techniques to suit requirement for this study. The collected
data are properly edited, sorted and interpreted using all kind of proper accounting ratios and statistical
techniques.

The researcher chooses the observation technique to suit the requirement and based on data available.
Ratio’s analysis has been used as technique; this is used for analysis of the financial statement of the selected
model i.e., HDFC Bank. and other selected financial institutions.

Ratio Analysis:

Accounting ratios are those relationships expressed in numerical terms between those figures, which are
connected to each other. Obviously, by comparing two sets of data, no purpose will be given that are not
connected each other. Apart from this, the full figures are also inappropriate for comparison.

Formula:

Productivity = Output/Input

36
 Profitability = Operating income/operating assets

The researcher raises the technique to suit the requirement and based on data available. Ratios analysis has
been used as accounting technique; this is used for the analysis of financial statement of the selected units.
Ratio analysis means the process of the computing, arranging and presenting link of items and group of the
items in financial appraisal. Ratio reveals the numerical correlation between two figures. Accounting ratios
are used to describe important relationship, which exist between the data shown in the profit and loss
account or a balance sheet, in a budgetary control system or in any other part of accounting system.

Some other analytical parameters:

Various parameters are used in identifying the strengths/weaknesses of banks and suggesting improvement
measures in its future working. In the present study, following data/ parameters are employed for the
analysis of Financial Performance.

I.Net profit

ii. Total Income

iii. Investment

iv. Advances

v. Deposits

NET PROFIT

Net profit, often known as net income, has been reduced from the total amount of money left by the
company after all the expenses including taxes. .Net profit is stated on the company income bill and is one
of the critical indicators of the progress or downfall of the company's business operation throughout a given
time period. The actual formula for the calculating net profit is:

Net Profit = Total Revenue - Total Expenses

TOTAL INCOME

The total income indicates the rupee value of the income earned during a period. It consists of: Interest on
advances, discount on bills and Income on investments, etc. Noninterest income of banks arises from 104
sources other than money lent. It comprises of Commission, exchange, brokerage, Profit on the sale of
investment, Profit on the sale of land, buildings and other assets and Profits on Foreign exchange transaction.
The higher value of total income represents the efficiency and good performance.

37
INVESTMENTS

An investment is an asset, which you put money into with the hope that it will increase or value into a more
significant sum of money. The idea is that you can later sell it at a higher price or earn money on it while you
own it. Investment as a window of deployment of the funds was given more emphasis than lending.
Investment defines as sacrifice of present consumption with expectation of return in future. Investment
takes place at present but return can be expected in future but return is uncertain too. “Investment is made
in assets. Assets in all are of two types- real assets (land, building etc.) and financial assets (stock, bond, etc.).
Highly developed financial institutions greatly facilitate the real investment.

ADVANCES

Advance is a ‘credit facility’ granted by the bank. Banks grant advances largely for short-term purposes, such
as the purchase of goods traded in and meeting other short-term trading liabilities. In other words, it is the
amount borrowed by a person from the Bank. It is also known as „Credit‟ invested where the money is
disbursed and recovery of which is made later on. Bank credit means loan (advances) made by the banks to
the customers. Credit deployment is the dominant force through which banks help in the change of savings
in the capital. It is considered the most important factor in the process of economic growth with the
expansion of bank deposits. There has been continued expansion of bank credit reflecting rapid expansion
of agricultural and industrial output.

DEPOSITS

Deposit is the amount taken from the savers in the figure of current deposits, savings deposits and fixed
deposits by the bank and interest is paid by the bank to them. In general terms money deposits in banks
are known as bank deposits. The deposits are given to the developing countries like India, where the
resources mobilization serves as the main motivator of the development process. Expansion of the Public
Sector Banks deposits has been an important feature in recent years. Planned the economic development,
deficit financing and the increase in currency issue have led to increase in Public Sector Banks deposits. At
the same time Public Sector Banks have contributed greatly to the development of banking habit among
the people.

The present study was an observational study, taken on HDFC bank from the private sector. The banks
have been selected on the basis of quantum of total income and balance sheet size. The selected relevant
parameters like mobilization of deposits, loans and the advances, investment, return on assets, earnings
and expenses, responsiveness of earnings to expenses, capital structure, interest cost of deposits, interest
cost of borrowings, business per employee, profit per employee, spread as a percentage of total assets,
interest yield on loans, interest yield on investment and bank balances, intermediation costs to total
38
assets, debt-equity ratio, advances to assets ratio, total investments to total assets, cash-deposit ratio,
credit-deposits ratio, 105 percentage growth in net profit, interest income to total income, non-interest
income to total income, priority sector advances will be considered to study the operational performance
whereas percentage, rank, ultimate rank, tables, charts, graphs have been used for their analysis for the
study period . The technique of ratio analysis, charts, tables and graphs are used for statistical analysis over
the period of study.

Limitations of the Study

1. Under this study the researcher selected only few banking and financial institutions.

2. In this study researcher selected HDFC< ICICI & IDFC banks as a model to analyse its role in the economic
development of India.

3. One of the methodological limitations of the study is that of limited generalization. In quantitative studies,
statistical generalization is achieved by applying the results of one study to that specific population from
which the sample for the study in question was drawn. Case studies, on the other hand focus upon analytical
generalizations i.e., generalization is about theoretical propositions and not populations. This means that if
one has ‘detailed knowledge of the organization and especially the knowledge about the processes
underlying the behaviour and its context can help to specify the conditions under which the behaviour can
be expected to occur’. This research is also context specific; its results and analysis may be peculiar to
banking sector, particular types of organizations, their cultures, their employees, type and various other
attributes of acquisition. Any change in these basic elements and business environment may alter the
outcomes of study remarkably.

4. The present study is based on secondary data. We had not prepared any questionnaire and interview for
employee of the bank, to user of the bank, investors of the bank and to general public.

5. The secondary data, which is used for this study is grounded on annual reports of the bank, magazines,
journals and other published and unpublished data. The quality of this research depends on quality and
reliability of data published in annual reports of banks, magazines, newspapers, and journals.

6. There are different methods to measure output and profitably of the bank. View of different experts may
vary in this matter from one another.

7. We have compared the four financial institutions regarding their working performance for the year 2015-
17 while the detail analysis is made for 2013-17 for model bank i.e., HDFC, ICICI & IDFC.

39
 Chapter No.3: REVIEW OF LITERATURE

This is an attempt to review the available literature related to the research problem. In this context, the
researcher tries to review various research papers, books, journals and other available literature to
understand the issues related to the research problem.

Review of literature helps the researcher to undergo the work done on the particular topic before the
proposed work. A detailed and thorough literature review helps in making an inspirational base for the
substantial, meaningful research. It is necessary for the understanding and development of conceptual
content in which the problem fits.

During the research period the researcher visited various libraries and institutions in India to understand
the background history, present scenario, future prospects and depth of the subject related to the research
topic. This helps the researcher to identify gaps and to determine the various objectives of the study.

Some relevant abstracts from these studies are

discussed under two heads: -

1) Role of banking financial companies:

• Overseas reviews

• Indian studies

2) Role of non- banking financial companies

Role of Banking Financial Companies: - The banking and financial sector development plays a very
significant role in the economic growth of a country. The banking financial companies and institutions link
up the savings and investments that promote economic growth of the country. These financial institutions
help in mobilizing more savings that leads to productive investment, increase in employment, increase in
GDP (Gross Domestic Product) and national income which ultimately results in economic development of
the country

. Finance is a ‘blood life’ for any business. It plays an important role in the development of any economy.
Because the companies use invested funds and other funds for the production of goods and services. Finance
is necessary and plays a vital role for any part of economy. As government also needs to borrow to finance
its long-term and short-term shortcoming between revenues and expenditures. Money is also borrowed by
households from banking financial companies to finance their large purchases which exceed their existing
incomes.

40
In a country under development phase like India the financial sector plays an important role and it is more
often necessary because the citizens and the government hope that their economy will grow rapidly and it
leads to overall economic growth and development. This growth of economy will promote higher per capita
income, national income, employment, standards of conduct and physical quality of living of the citizens.

A well-structured financial system proves to be more efficient in resource allotment in the economy by
improving the mobilization process. Thus, financial sector plays a vital role; it mobilizes resources from
financial units with extra funds and facilitating transfer of those funds from the actual savers to the economic
units with an investment. It links up the saving and investment and creating a wealth in the economy. The
importance of this mobilization process of resources cannot be under estimated because only through this
process it becomes possible to utilize the resources of an economy in the best possible way to enhance the
economic growth of the country and hence this will lead to higher level of real income.

Thus, banking and financial sector were developed to work as an intermediary between the depositors and
investors. It acts as a bridge between savings and investments. The financial development in the country
leads to the economic growth development of the country as a whole.

Banking and financial sector plays a significant role by providing liquidity that banks guides savers to hold
bank deposits rather than pure assets. Also, by eliminating self-financed capital investment, banks prevent
the unnecessary liquidation of such investment by entrepreneurs who think that they need liquidity.

Overseas Reviews

Berger, Hunter and Timme, (1993) in their study explain, the issue of efficiency in financial institutions as
the important factor. Berger and others provide a survey of the research on the basis of economies; They
explain X-inefficiency in banking and the impact of bank mergers on their efficiency. The author’s told that
product of mix efficiencies is less than 5% of the cost and X-inefficiencies are 20 percent or more of the costs
in banking. They also observe that the measured 23 inefficiency varies on the selection of measurement
methods. Interestingly they found that input inefficiencies are less than output inefficiencies. In contrast to
excessive costs, deficient revenues cause more inefficiency. This suggests that focusing on the cost function
could understate bank inefficiency.

As regards the sources of X-inefficiency, the author highlights are a result of scale and scope of operations,
agency problem between manager and owner, legal structure, organizational structure and regulations.

Verbrugge, Owens and Megginson, (1999); in their study, suggest that there is scanty literature on
bank privatization. In one of such studies, investigated bank privatization that divestment mechanism on
public security offerings. Their study covered 65 banks from 12 high information and 13 emerging
economies, although pre- and post-privatization data was available for only 36 banks, of which 31 were
41
located in high-information economies and five in emerging economies. The authors found ‘limited
improvement’ after privatization in noninterest revenue, operating efficiency, leverage and bank
profitability. There were significant returns to IPOs (although there was no information to compare these
with market returns), which were consistent with those IPO found in literature other non-financial
privatization studies. As pricing data for upcoming economies was very limited, this conclusion applies on
high information economies. There was no significant under-pricing of seasonal issues. The authors found
that the government retained substantial ownership even after the IPO. At IPO stage only in seven cases
government ownership was permanently removed and in eight cases government ownership was removed
with a secondary offering. The authors concluded that there is relatively small improvement in performance
after privatization as compared to government control over bank.

La Porta, Lopez de-Silanes and Shleifer, (2000) studied and did a survey on the effect on financial and
economic growth by government ownership of banks. The author found that government ownership of
banks is still common in 92 countries all over the world which were surveyed under this study. In 1995,
among top ten banks 42% of the equity was owned by government even in average countries. The authors
also found that higher the government ownership, slower development of the financial system, lower
efficiency and lower economic growth in financial sector. Further, they find that government ownership of
banks is more common in developing countries. Whatever the author’s opinion may be, it would be too harsh
to say that government ownership of banks has not contributed to financial development in India. Indeed, as
highlighted earlier, the fact of reach of rural areas to the financial sector is the least contested propositions
about government ownership of banks in India. This would stand true even in respect to the measures that the
authors employ: growth of private credit/GDP, growth of stock market capitalization growth of commercial
bank/total bank asset, growth of liquid liabilities/GDP

Barth, Caprio and Levine (2001) also find that state ownership need can be good for growth. The World
Bank (2001) says about this study that it shows that ‘at higher per capita income levels, the negative effect
diminishes to insignificant levels. It explains that greater state ownership is associated with lower stock market
activity, lower level of private credit, less non-bank credit, higher interest rate. They also find that state
ownership raises the probability of crises, though this was not statistically significant. The World Bank
concludes on the topic of government ownership that there is a strong case for moving to sell government
banks, but, for clear reasons, that it has the recommendation with the comment that ‘the findings do not
demand elimination of all state ownership’. The World Bank study also studied bank privatization in several
countries and what they gain from ownership, it underlines, that for ‘other things equal’, such as the ‘quality
of financial infrastructure and the regulatory environment’. Giving examples of Chile and Mexico, which had
major banking crises after privatization, because of poor supervision and regulatory framework. The World
Bank concludes that there must be a ‘deliberate and credible’ phasing out of state ownership, along with a
42
strengthening of the financial environment. So, the author supports the state ownership of bank in some
manner in his study.

Indian Studies

Swami and Subrahmanyam, (1993) studied bank efficiency and profitability in the Indian context. In
Indian banks when profitability was the only objective till then not enough studies were there. There have
been made many attempts to compare profitability of various categories of banks. Many of the studies were
done to focus on profits within public sector banks and compare them with profits of private sector banks
and it was observed that Indian banks are more focused on the enhancement of financial services rather than
profitability.

Reddy, (1998) was conducted his study on 150 borrower farmers from small, medium and large group and
reported that
“Almost all sample farmers (93%) from all groups told that their low income was the main reason for non-
repayment of loan.” Thus, according to author India is an agricultural country and many banks provide loans
at lower interest rates to the farmers. But due to non-payment of loans the efficiency of the banks affected
adversely.

Siddiqi, Rao Thakkar (1999) surveyed on 17 commercial banks having top 800 NPAs and reported that
the diversion of funds like diversification, promoting sister branches, modernization and expansion etc. was
the main reason for the growth of NPAs in public sector banks and they concluded that “the higher NPAs in
priority sector advances have pushed up the overall proportion of NPAs of these banks by about 3% to 4%”.
Thus, according to the study NPA is the result of diversification and expansion.

Kumar (2000) conducted his study on NPAs in RRB (Regional Rural Bank) at all-India level by
classifying loan asset and size of NPA and concluded to found decline in NPA over the periods are
maximum of 28% at the end of March 1999. Thus, the author states in his study that there is a decline in the
NPA of RRB at all India level proving it enhances the efficiency of banks.

Nachane and Ghosh (2002), did a study on determinants of Off-Balance Sheet Activities of Public
Sector Banks in India. The study was conducted with the main objective, to identify the factors influencing
off-balance sheet (OBS) activities of public sector banks in India. For the purpose of the analysis, pooled
data models were used for the period 1995-96 to 19992000. The results indicate that (i) OBS activities
depend on the size and (ii) higher the capital and liquid assets, lower the incentive to engage in OBS
activities.

43
Bhattacharya and Das (2003) conducted an analytical study which analyses the changes in market
and Indian banking sector and their future prospects on pricing and output of banking. In the initial part of
study author measures the market concentration in banking sector from 1989-2001 covering both static and
dynamic measures of market concentration. There was strong evidence of change in market concentration
around 1990.This was not improved even after the merger of banks and their nationalization. The second
part analyses the Indian banking sector and their future prospects on pricing and output of banking it showed
that the real output of banking sector in national income was very poor. On this note that there is massive
inflation of banking services raised some doubt about the methods used in this study. But the author argues
at reduction in the prices of banking services was due to favourable market structure in India.

Ram Mohan and Ray (2004) conducted a comparative study on the performance of Indian
commercial banks including public, private, and foreign banks using physical qualities of input and outputs
and compared revenue maximization efficiency of banks. This period of study was 1992-2000.study
concluded that public sector bank showed a better performance than private sector bank but was head on
with foreign banks. Thus, the study concluded that in post reform era the public sector bank performed much
better than private sector banks.

Selvam, Vanith and Babu (2005) did a study on mergers in banking industry in India. The main
objective was to analyse and compare the financial performances of merged banks with regards to their
deposits and investment, revenue, profits, and growth of total assets before and after merger. Time frame
was taken by comparing the performance four years prior to merger and four year and after merger. Out of
the 20 banks which went for merger 7 banks were selected by a simple draw.
They were SBI, ICICI bank, ORIENTAL BANK OF COMMERCE, HDFC BANK, CENURIAN BANK,
UNION BANK
OF INDIA, BANK OF BARODA. To evaluate the performance statistical methods were used like standard
deviation and test. The growth rate of sample banks for all variables was analysed. The study concludes that
the growth rate of ICICI bank was the highest among all sample banks except for one variable which was
deposits. The study also explains that banks who want merger and acquisition need to be careful to avoid
mistakes which are commonly associated with merger and acquisition.

Maji and Dey (2006) It is an empirical study on profit and production ability of selected private and
public sector banks in India. The objectives of the study are (i) to evaluate the productive efficiency of banks
during the period of study (ii) to evaluate how fast the banks have improved their profitability to a level
above and (iii) to evaluate the factors affecting the profitability of the sample banks. In this study, on the
basis of highest deposit mobilization during the study period of 19962004, five large Indian banks from
44
public sector and private sector each were selected. A composite productivity index was used to evaluate the
productivity efficiency of sample Banks’s model was used to evaluate the efficiency of bank in achieving
higher level of profitability. To evaluate the factors affecting profitability, multiple regression Model was
used. The study says that with exception of a few cases, the productivity index of ‘more than 1’ was found
for all the sample banks, but without a definite pattern. The decreasing order of profitability by the banks,
SBI and PNB are the most successful, followed by HDFC Bank and ICICI Bank. The factors affecting the
profitability, a strong correlation of interest on profitability was seen in cases of SBI, PNB, HDFC Bank and
ICICI Bank.

Uppal and Kaur (2007) conducted study on the efficiency of banks in the post reform era i.e., 1999-
2005. It says that that the efficiency of banks groups increased in the post reform era but it was more helpful
and beneficial to new private and foreign banks which were established in the post reform era as compared
to public sector banks.

Hugar S.S. and Vaz N.H. (2008), studied the customer orientation in 5 public sector banks 3 new
private sector and 3 foreign banks. It was concluded that new private sector banks had more ATMs as
compared to SBI. Profits/employee and business/employee was more in foreign banks where SBI had more
complaints followed by ICICI. The study suggested the public sector bank to adopt a model of Customer
Relationship Manager (CRM) to stand the competitive atmosphere. The study concluded that customer
orientation in better in private sector banks as compared to public sector.

Rao N. and Tiwari S. (2009) studied on the basis of deposits in 2005 the efficiency of 5 public sector
banks. Study concludes that employee efficiency has very less impact on deposit, advances and assets. These
are positively affected by operating profits and operating efficiency. Thus, deposits are only influenced by
operating efficiency and operating profit per branch.

Sangmi and Nazir (2010) conducted an analytical study on the performance of PNB (biggest national
public sector bank) and J&K Bank (biggest private sector bank) using (CAMEL) model with study period of
2001-2005. The study concludes that the performance of both the banks were satisfactory on account of
liquidity, management capability, asset quality and capital adequacy.

Dhara Kothari (2011) says that retail banking has expanded growth opportunities but at the same time
has many challenges to face. Success depends on the positive equilibrium between opportunities and
challenges, with an upper hand over opportunities. Effective use of technology in various operations will
help in strengthening the success chart in retail banking.

45
Dinabandhu Bag (2012) observed that since 1996 here is an increase in personal credit, but this was not
a significant increase when compared to per capita income and per household income. Demand of retail credit
was increased with the increase in employment generation. Main households are not served with retail credit
as a result of which a gap is generated between income and retail credit, banks need to develop a culture of
credit by using better credit management tools and improve credit eligibility Paritosh and Kavita (2012) in
their research paper on “The impact of customer satisfaction on retail banking” revealed that customers are
more satisfied with ATM’s, internet banking, and branch offices. Even in case of financial crisis they do lose
the trust and relationship of customers.

Sujatha S. And Arumugam N. (2013) aimed on “Customer satisfaction in Indian banking sector” view
that before introducing various services to customers, banks should take care of their needs. To serve
customers with different occupations and educational backgrounds banks should adopt strategies. There is a
correlation between the satisfaction of the customer and the performance of the banks. So, it is important for
banks to consider satisfaction of the customer as a relationship marketing strategy.

Gokilamani, and Natarajan (2014) studied that customer of Indian commercial banks are positively
responding to retail banking. It is important for banks to focus on service quality for strengthening their
competitive edge and to allocate the limited resources to serve the personal banking division. They further
views that the success of a retail bank will depend on product innovation, technological developments and
strategies to retain the retail customers.

Role of Non-Banking Financial Companies (NBFCs)

These are bunch of small sized private owned financial intermediaries which provide services like equipment
leasing, chit fund, hire purchase, loans investments. These companies provide credit to smaller unorganized
sectors, small borrowers at local level. These are considered an integral part of financial system by expanding
the financial system and increasing competition, moreover it helps diluting the financial stress and acts as
complementary system to the banking system in India at a reasonable price .NBFCs have gained a reasonable
edge over the banks in providing funds due to its flexibility, simple procedure and timeliness in giving credit
and all h a reasonably low cost .it is for this reason studies and research are going all over the world to
understand and follow NBFCs and to bring about changes in banking system. Some of these studies are
mentioned below.

Poterba, (1984); OECD, (2005) A number of empirical studies establish that key determinants of
housing prices are property taxes, maintenance cost, number and size of household, demographic changes,
supply conditions, interest rates and income levels Thus housing market can directly impact the growth of
economy of any country and can serve as a collateral market in borrowings with consumers.

46
(Kiyotaki and Moore, 1997; Bernanke and Gilchrist, 1999). Housing sector can affect the economy due
to its wealth effect, generation of employment and demand in the property related sectors and the margins of
profit involved in it. So, the housing prices should be regulated and monitored as it has the potential to threaten
the economy of any country and its financial stability.

(Reinhart and Rogoff, 2008). There have been cases where sudden downfall has been seen in the
financial sector especially real estate prices and real economy. Further, the instability which followed impacted
balance sheets of many financial institutions as was predicted by Feldstein (2007). The financial crisis then
got carried forward to the real sector.

Allen and Carletti (2011). Says that housing sector is impacted by both, macro prudential norms,
financial policy and labor policy prevalent in the economy (Ingves, 2007) As compared to larger countries,
smaller countries have a good financial transmission from housing sector, but for this to happen a strong
financial system is the major requirement. Cross-country studies indicate that the growth in housing finance
depends upon a number of factors such as macroeconomic stability, ability of financial institution and credit
history of the borrower. (Warnock and Warnock, 2007).

IMF (2011) observed that shocks to disposable income, mortgage interest rates and prices play an
important role in short term consumption. In comparison to equity market and housing market disturbances,
housing market have a more lager impact over economy. Housing market boom creates noticeable risk.
Some reasons for this higher impact of housing market over equity market are: I)-higher wealth
consumption in housing market as compared to equity market. ii) - since banking system has a capacity and
willingness to lend thus rise in housing price has more impact on the economy than equity market. iii) - Link
between boom and bust is more powerful for housing prices, than for equity prices and (IV) Housing price
busts were associated with tighter monetary policy than equity price busts.

Following Bianco and Occhino (2011), IMF estimated that higher house prices could significantly
strengthen consumption

Peppercorn (2013) presents the following critical factors for development of housing finance markets: a)
Value for money, i.e., housing market has higher multiplier effect and maximum use of public resources and
involvement of private sector. b) Coordination, i.e., ensure the coordination between administrations and
public/private sectors, c) Public sector role, i.e., from provider to enabler of housing; and d) Inclusive
housing finance, i.e., include non-salaried borrowers.

Jafor Ali Akhan (2010) writes on “Non-Banking Financial Companies (NBFCs) in India” discusses the
financial system in India. It covers the financial intermediaries including NBFCs, cooperative banks, RRBs
and commercial banks. The book is good source in getting information on risk coverage, management of
risk, classification and businesses etc of the NBFCs in India.

47
Shailendra Bhushan Sharma and Lokesh Goel (2012) write on “Functioning and Reforms in
Non-Banking Financial Companies in India”. Nonbanking Financial Companies do offer all sorts of banking
services and provide credit to small borrowers and unorganized sectors at local levels; hire purchase finance
is the largest activity of NBFCs

Subina Syal and Menka Goswami (2012) writes on “Financial Evaluation of Non-Banking
Financial Institutions: An Insight” in ‘Indian Journal of Applied Research’. The Indian financial system
consists of the various financial institutions, financial instruments and the financial markets that facilitate
and ensure effective channelization of payment and credit of funds from the potential investors of the
economy. Non-banking financial institutions in India are one of the major parts on Indian financial system
covers a large and variable needs of the market, and has expanded considerably over the last few years. This
study helps to understand the basic difference in working of banking system and NBFCs and is a god tool
for investors to understand the unorganized financial market of India which is very helpful in making wise
investment decisions.

Sornaganesh and Maria Navis Soris (2013) “A Fundamental Analysis of NBFCs in India” in
‘Outreach’. The study was made to analyse the performance of five NBFCs in India. The annual reports of
these companies are evaluated so as to ascertain risk, return, growth, loans disbursed and investments. To
sum up, the study is concluded that the NBFCs are earning good margins on all the loans and their financial
efficiency is good.

Taxmann’s (2013) published “Statutory Guide for Non-Banking Financial Companies” is published by
Taxmann’s Publications, New Delhi. The book listed the laws relating to Non-Banking Financial
Companies. The rules and laws governing the kinds of businesses undertaken by different types of NBFCs
are also discussed.

Amit Kumar and Anshika Agarwal (2014) published a paper entitled “Latest Trends in Non-banking
Financial
Institutions” in ‘Academicia: An International Multidisciplinary Research Journal’. In Indian Economy,
there are two major Financial Institutions, one is banking and other is non-Banking. The NonBanking
Financial Institutions provide financial services on wide range, enhanced equity and risk-based products and
also provide short to long term finance to different sectors of the economy.

Dash Saroj K, et al (2014) writes on “Housing Loan Disbursement in India: Suggestive Metrics to
Prevent Bad Debts” in ‘International Journal of Management, IT and Engineering’. Non-Banking Financial
Corporation (NBFC) in each of the countries involved in the business of lending mortgage loans took stock
of their policies and terms & conditions while disbursement of loans. The parameters, which are discussed in

48
the credit scoring software, are primarily quantitative parameters and some qualitative features whose
measurements are also quantified.

Naresh Makhijani (2014) writes on “Non-Banking Finance Companies: Time to Introspect” in

‘Analytique’. Over the last few years, the Non-Banking Finance Companies (NBFC) sector has advantages
over the banking system in supplying credit under-served and unbanked areas. However, RBI has suggested
bringing in regulatory norms to supervise and regulate NBFCs to bring them at par with banks. But it might
bring down the profitability and growth of NBFC sector. Now NBFCs have to re strategize as they will face
the problem of rising cost of funds, scaring capital and direct competition with banks.

Ravi Puliani and Mahesh Puliani (2014) write a book entitled “Manual of Non-Banking Financial
Companies”. The book discussed the glossary of terms that are used in banking operations and non-banking
activities. The book covers the circulars and directions issued by Reserve Bank of India from time to time to
control, manage and regulate the business of NBFCs.

ShailShakya (2014) published a working paper entitled “Regulation of Nonbanking Financial

Companies in India: Some Visions & Revisions”. Non-Banking Financial Companies are pioneer in their
cash deployment, accessibility to the markets and in a capacity to take higher risk. Many services such as
factoring, venture capital finance, and financing road transport were pioneered by these institutions. NBFC
sector has more significantly seen a fair degree of consolidation, leading to the emergence of large
companies with diversified activities. Recent financial crisis has shown to regulate NBFCs to avoid
regulatory gaps. The regulatory regime is lighter and different as compared to banks. The steady increase in
bank credit to NBFCs over the recent years means that the possibility of risks being transferred from more
lightly regulated NBFC sector to the banking sector in India can’t be ruled out.

Thilakam and Saravanan (2014) wrote in his article on “CAMEL Analysis of NBFCs in Tamil
Nadu” in ‘International Journal of Business and Administration Research Review’. Financial intermediation
is a crucial function of Banks, NonBanking financial companies (NBFCs) and Development Financial
Institutions (DFIs). The post reform period in India is characterized by phenomenal growth of NBFCs
supporting the role of banks in mobilizing funds and making it available for investment purposes. During the
last decade NBFCs have undergone a major change as an industry and have been witnessing considerable
business raise because of market dynamics, public sentiments and regulatory environment. To evaluate the
soundness of NBFCs in Tamil Nadu over a decade, the authors made an attempt of CAMEL criteria for
analysis of selected Companies. Based on findings the suggestions were offered to overcome the difficulties
face by selected NBFCs in their development.

49
It is revealed from the above review of literature that although loads of studies have been done on financial
organizations, comparison between private and public sector banks and evaluative study on Indian banks
and their role in economic growth, but very few studies are done on HDFC and its specific role in Indian
economy. Very few studies are there to evaluate the parameters of HDFC which eventually affects its
working like business and profitability per employee, ratio of deposits and advances its profits, capital
information etc. This literature review greatly helped the researcher to find the shortcomings and gaps as
mentioned and provided guidance to formulate plan and path for present research work.

COVID-19 and Its Impact on Financial Markets and the Real Economy:

The COVID-19 pandemic severely disrupted financial markets and the real economy
worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing
the unusual nature of the shock, the academic community has produced an impressive amount of research
during the last year. Macro-finance models have been extended to analyse the impact of epidemics. Empirical
papers study the origins and consequences of the disruptions and the impact of policy interventions. New
research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This
special issue contains early contributions to this important and rapidly developing literature.

Ten years after the end of the Global Financial Crisis (GFC) and the Great Recession, the COVID-19 pandemic
caught the world by surprise. While the GFC can be, at least in hindsight, understood as the consequence of
developments in the housing, mortgage, and financial markets that had been building up over several years,
the COVID-19 crisis was truly unexpected.

Many scientists have warned about the potential risks of pandemics, as part of a long list of possible rare
disasters; however, governments, firms, and households appear to have been caught off guard by the
coronavirus. At its roots, the COVID-19 crisis is not a financial or economic crisis; it is a health crisis that has
adversely affected the lives of millions around the globe. However, through its effects on supply and demand
conditions, and likely also on productivity, the COVID-19 crisis quickly turned into a large-scale financial
and economic crisis.

Financial markets. The effects of the COVID-19 crisis on firms and households, and the associated
uncertainty, caused disruptions in many financial markets. Even the U.S. Treasury market showed signs of
stress in March 2020. Corporate bond markets and money market funds experienced acute stress as well.
Crucially, financial markets rebounded quickly. While the S&P 500 Index lost one-third of its value during
the COVID-19 crash of February and March 2020, it gained all of it back by August 2020, and it has been
rising ever since. Similarly, U.S. corporate bond yields (relative to 10-year Treasury yields) rose sharply
during February and March 2020, but have rebounded quickly and returned to precrisis averages within the

50
same year. The quick recovery of financial markets in the United States can be, at least in part, attributed to
the Federal Reserve, which took swift actions to avert a full-fledged financial crisis. Still, these patterns led
many to wonder about a possible disconnect between financial markets and the real economy and the relevance
of financial market indicators for economic recovery.

Is the COVID-19 crisis just “another” large-scale shock? We think not. Its origin as a health
shock, an unprecedented global pandemic, makes it fundamentally different from previous financial and
economic crises, including the GFC and the Great Recession. A deadly virus attacked not only the health of
individuals but also that of the entire economy, creating stress in financial markets not seen since the GFC.
While both Congress and the Federal Reserve stepped in right away to apply lessons learned from the GFC,
the U.S. economy has not fully recovered more than a year later. Hence, putting the origin of the shock aside,
the magnitude and scope of the intervention are surely unprecedented and will affect economics and finance
research for years to come.

The articles contained in this special issue offer unique insights into the various challenges faced by economic
agents during this historical crisis episode. Some of the articles focus on disruptions in financial markets,
while others explore how shocks to the real economy may cause financial markets stress, affecting risk
premiums and asset prices, and how policy intervention can help alleviate the stress. Some of the articles lay
the foundation for new theories aimed to integrate epidemiology and economics, while others provide new
data and empirical analyses to shed light on the implications for markets and the economy. Collectively, the
articles in this special issue allow us to better understand the impact of the COVID-19 crisis on financial
markets and the economy as a whole. In addition, as the GFC resulted in many changes to the regulatory
landscape, the COVID-19 crisis also provides a real-life stress test to study which regulations have been
successful and which parts of the financial sector will require (ongoing) attention.

This special issue includes 10 articles, described in more detail in Section 1. Some of the papers were
submitted via the regular submission process; others were solicited by the editors. All of them provide unique
insights into the nature of this pandemic shock, its effect on financial markets and the economy, and the
ensuing policy interventions. As developments of this pandemic and its aftermath are still ongoing, and new
insights and data about the past events continue to emerge, we expect more research to follow in the future.
We very much welcome key contributions to the literature on COVID-19 and its long-term consequences in
the Review of Financial Studies. With this in mind, we conclude in Section 2 with a discussion of potential
directions for future research.

Macroeconomic models featuring pandemics

Eichenbaum, Rebelo, and Trabandt (2021) make a seminal contribution to the literature by embedding the
canonical SIR (susceptible, infected, and recovered) model Kermack and McKendrick 1927) into a
51
macroeconomic model. They do so to understand the interaction between economic decisions and epidemics.
In the model, people can become infected while shopping, working, or interacting with others in scenarios
unrelated to either consuming or working. Susceptible people understand they are less likely to become
infected if they consume and work less. While this cautionary behaviour mitigates the severity of the epidemic,
it amplifies the severity of the economic downturn via demand (reduced consumption) and supply (reduced
labour supply) effects. The model also allows for the possibility that the health care system becomes
overwhelmed, and, in that case, people more aggressively cut back on consumption and work.

Jones, Philippon, and Venkateswaran (2021) develop a related model to understand the inter-action between
epidemics and economic activity. As before, the risk of infection increases when shopping and working. To
mitigate the risk of becoming infected, people can work from home, except with lower productivity. A key
feature of the model is that it allows for learning-by-doing, and productivity losses decline as people become
more experienced in working from home. This aspect of the model enriches the dynamic implications and
allows for testable predictions across sectors.

Financial market Disruptions and the impact of policy interventions

With a shock to the real economy of a magnitude, such as the COVID-19 shock, one would expect financial
turmoil to follow. The evolution of the shock, and the areas of the financial system affected by the shock,
however, came as a surprise. The epicentre of the financial turmoil was to a large extent the corporate bond
market. Haddad, Moreira, and Muir (2021 study this market during the height of the COVID-19 crisis in
March and April of 2020. The stress exhibited in this market was manifested by an increase in spreads and a
decrease in liquidity. What is most unique about this episode is that the greatest stress was seen for assets on
the safer end of the spectrum. Also, the increase in spread of these corporate bonds was not accompanied by
a similar increase in spreads of credit default swaps (CDS), so a large part of it must have been driven by
sources other than an increase in credit risk that could have resulted from the real shock.

The authors explain these patterns as a result of liquidity shortages in the corporate bond market. Demand for
cash by various institutions, such as mutual funds, accompanied by the constraints faced by financial
intermediaries—which are both phenomena studied in other papers—contributed to extreme liquidity
pressure, pushing down the prices of assets well beyond what the increase in credit risk would imply. Hence,
the paper provides important evidence of the fault lines in the financial system exposed by this crisis. The
authors also analyse what led to the quick stabilization of, and recovery in, this market, and attribute it to a
large extent to the intervention by the Federal Reserve, and in particular the unprecedented announcement that
it would purchase corporate bonds.

Kargar et al. (2021) also focuses on the corporate bond market at the height of the COVID-19 crisis and its
aftermath. To gain a better understanding of the changes in liquidity in this market, they follow pre-COVID-
19-crisis literature and distinguish between risky-principal trades, where dealers offer immediacy by
52
purchasing the asset and holding it until finding a buyer, and agency trades, where the seller retains the asset
until the dealer finds a buyer. They show that the cost of risky-principal trades increased dramatically in the
height of the crisis, leading customers to switch to the less-preferred agency trade. Hence, the way liquidity
was compromised is reflected not only in larger costs but also in slower speed.

They then build a model featuring demand for the different types of liquidity by different investors and an
intermediary sector that provides the different liquidity services at some costs. Estimating the model based on
COVID-19-crisis data, they argue that the patterns seen in the market can be explained as a combination of
increased demand for immediacy and an increase in the cost that dealers have to bear to provide liquidity in
the risky-principal route. They estimate that the demand for immediacy rose sharply by about 200 bps per
dollar of transaction, but that it receded quickly and fully following the announced interventions by the Federal
Reserve. On the other hand, the increase in cost of providing liquidity reversed only partially, due to balance
sheet constraints that continued to be binding. Since regulations that were put in place after the 2008 crisis
increased constraints on dealers, they might have contributed to the fragility in the corporate bond market in
2020, a market that was not at the centre of attention during the GFC.

Another episode of stress in financial markets following COVID-19 developments materialized in prime
money market funds. Li et al. 2021 study this episode. In two weeks in March 2020, institutional prime money
market funds lost about 30% of their assets under management. This episode was particularly interesting,
because money market funds experienced runs in the crisis of 2008 and were since then at the centre of
regulatory attention with different reforms introduced to maintain their stability. A natural question is whether
these reforms were of any help, and why runs still occurred.

According to the paper, a key reform enacted following the 2008 crisis was actually a primary source for the
current episode of fragility. This reform allows money market funds to impose redemption gates and liquidity
fees on investors if a measure of liquidity, the weekly liquid assets (WLAs), falls below 30%. While the
intention of the reform was to curb runs as they start to intensify, it may actually have the opposite effect, as
the impending suspension of liquidity may cause investors to rush to redeem as long as they can. In a sense,
the expected intervention may amplify the strategic complementarities behind a run. Indeed, the authors show
that funds that approached the threshold in the COVID-19 crisis saw increased redemptions. Such sensitivity
of outflows to funds’ WLAs was not seen in normal times, or in times of stress before the reform, such as the
2008 financial crisis. Also, a similar sensitivity is not observed in the COVID-19 crisis with respect to another
key measure of liquidity, which is not used by the regulation to determine the eligibility for imposing gates.
Finally, like in the case of the corporate bond market, the paper finds that emergency intervention by the
Federal Reserve was instrumental for stopping the outflows eventually.

53
 Chapter No.4: Data Analysis, Interpretation and presentation

Ratio Analysis

It is an important tool which is widely adopted by the modern companies in the analysis of the financial
statements. It serves the purposes of various related and interested parties in the financial statements such as
investors, government, competitors, customers, general public etc. The objective ratio analysis is to help
management in analysing and interpreting the financial statements to gain the adequate information which is
useful for the performance of various function like planning, coordination, control, communication and
forecasting.

Ratio analysis is the process of comprising of one figure against another, which make a ratio and the appraisal
of the ratio to make proper analysis about the strength and weakness of the firm's operation.

The ratio analysis provides the various utility which are as under:

1. It is used as instrument of management control particularly in the areas of sales and cost

2. It measures efficiency.

3. It helps in investment decisions to make profitable investments

4. It facilitates the function of communications.

It can easily be conveyed through the ratios as what has happened during the two intervening periods. Ratio
analysis need arises, due to the facts like ratio analysis is a tool for the interpretation of financial statement
because ratio help the analyst to have deep peep into the data given in a statement figure in their absolute form
in financial statements are neither significant nor comparable. Ratio provides power to speak. It is now being
used as a device to diagnose the financial help of a business concern.

Ratio analysis is extremely helpful in providing insight into a company's financial picture. Hence in the present
study, various ratios are taken into consideration to analyse the working of financial institution in the following
manner.

1. Profitability analysis

a. Return on long term fund.

b. Return on net worth.

2. Earnings per Share (EPS)

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3. Debt equity ratio

4. Capital adequacy ratio

a. Book value.

Profitability Analysis: -

The purpose of study of profitability ratios are to help adequacy of profits earned by the company and to
discover whether the profitability is increasing or decreasing. Profitability ratio are measured with reference
to sales, capital employed, total asset employed, shareholder fund etc. It is an indication of the efficiency with
which the financial institution looks at the profitability ratio as an indicator, whether or not firms earn
substantially more than it pays interest for the borrowed funds and whether the repayment of their debts
appeared reasonably certain or not. For the purpose of analysing the financial position of financial institutions
on the basis of ratio analysis we have selected three financial institutions that are HDFC, ICICI and IFCI and
the period of study taken based on ratio analysis is 4 years i.e., from 2013-14 to 2016-17.

Return on Long Term Funds or Capital Employed

Return on long term funds is also called “Return on capital employed”. The formula to calculate return on
long-term funds is as under: -

Return on long term funds = income before interest and tax X 100 Total long

Term used

Here, long term funds include reserve and surplus etc. It measures the efficiency of an organization’s business
in generating satisfactory profit on capital invested. The ratio is expressed in percentage.

55
 Table 1.1

Comparative Statement of Return on Long Term Funds

Financial Institutions

(IN %)

Years HDFC ICICI IFSC

2013-14 81.47 56.92 9.83

2014-15 66.77 57.03 9.81

2015-16 70.54 50.29 10.01

2016-17 65.17 46.54 5.95

Source: Compiled from Annual Reports of HDFC, ICICI and IFSC.

From the above table it can be observed that Return on capital employed or long-term funds of HDF from
the year 2013-14 to 2016-17, it is continuously declining. As it was 81.47% in 2013-14 and decreased to 66-
77% in 2014-15. After that it was increased in 2015-16 i.e., 70.54% but it was declining again in 2016-17 i.e.,
65-17%. In comparison to ICICI and IFCI the Return of capital employs is more in all the successive periods
of study. The return on capital employed of ICICI was also declining. It was 56.92% in 2013-14, it was slightly
increased in 2014-15 i.e., 57.03%. But it was declined in 2015-16 i.e., 50.29%. In 2016-17 it was again
declined to 46.54%. IFCI has also a continuous fall in ROCE that it was 9.83% in 2013-14, 9-81% in 2014-
15. It was increased in 2015-16 i.e., 10.01%. But in 2016-17 it was declined to 5.95%. From the above table
it is clear that the ROCE of HDFC, ICICI and IFCI registered a significant decline. But the ROCE of HDFC
is highest in comparison to ICICI and IFCI during the period of study. HDFC has its highest ROCE in the
year 2013-14 i.e., 81-47% whereas ICICI has its highest ROCE in the 2014- 15 that is 57-03%. And IFCI had
its highest ROCE in the year 2015-16 that is 10.01%. By analysing, the above table it was found that the
ROCE of HDFC is highest among the three financial institutions though it has been kept on decreasing but
not up to that extent as it has gone to negative. A comparative statement of ROCS of various financial
institutions under study reveals that the performance of HDFC is best among the selected financial institution
i.e., HDFC, ICICI and IFCI.

56
 Return on Net Worth: - Return on net worth is also known as “return on equity”. This is considered to be
the most important of all profitability ratios from the point of view of investors or shareholders. This ratio is
calculated by the following formula.

Return on Net Worth (ROE)= Net Profit after tax

Common or shareholders’ equity

This ratio is useful for comparing the profitability of company to that of other firms in the same industry. The
higher the ROE, the more efficient the company’s operations. It means that the company utilizes its funds
more efficiently.

Table 1.2

Comparative Statement of Return on Net Worth or Return on Equity

Financial Institutions (IN%)

Years HDFC ICICI IFCI

2013-14 19.50 13.40 8.76

2014-15 16.47 13.89 8.69

2015-16 16.91 11.19 5.50

2016-17 16.26 10.11 (-)8.07

Source: Compiled from Annual Reports of HDFC, ICICI and IFCI

The comparative statement of return on equity or Net Worth of various financial institution like HDFC, ICICI
and IFCI shown in the above table, reveals that the ROE of HDFC shows a declining pattern during the period
of 2013-14 to 2016-17. In the year 2013-14 the ROE of HDFC was 19.50% whereas it was declined to 16.47%
in 2014-15. There was a slight increase in ROE in 2015-16 that was 16.91%. But again, in year 2016-17 there
was a slight decline in ROE i.e., 16.26%.

The ROE of ICICI also shows the declining pattern during the period of study. It was 13.40% in 2013- 14. It
was increased to 13.89% in 2014-15 but again there was a decline in ROE in both the years 2015- 16 and
2016-17. That was 11.19% in 2015-16 and 10.11% in 2016-17.

The return on equity of IFCI shows a decline pattern. It was 8.76 % in 2013-14. It was declined to 8.69% in
2014-15. In 2015-16 there was again a decline in ROE that was 5.50%. It is significant to note that the ROE
of IFCI in the year 2016-17 shows a negative figure that was (-)8.07% It shows that the role of IFCI declined
drastically 2016-17. This is not a good sign because it reveals that the profitability of IFCI is not satisfactory
or even it shows negative return.

57
By analysing the above table, it was found that the ROE of HDFC is the highest among the three financial
institutions though it has been keep on decreasing but not up to that extent as it has gone to 93 negative. A
comparative statement of ROE of various financial institutions reveals that the performance of HDFC is best
among the three financial institutions.

Earnings per Share Analysis: -

Earnings per share is an important measure of economic performance of a corporate entity hence the
performance of a corporation is better judged in terms of its Earning per share (EPS). A higher EPS mean
better capital productivity. Earnings per share is calculated by dividing the net profit after tax and preference
share dividend divided by number of equity shares.

Earnings per Share=Net profit after tax and preference share dividend

No of equity Shares

This ratio indicates the amount of Earning per share. This ratio reflects the Earning per share available to
common equity shareholders. A growth company is identified as one, the EPS of which increases year after
year.

Table 1.3

Comparative Statement of Earnings per Share

(IN RS.)

Financial Institutions

Years HDFC ICICI IFCI

2013-14 35.47 17.00 3.1

2014-15 42.15 19.32 3.1

2015-16 48.84 16.75 2.0

2016-17 57.18 16.84 2.8

Source: Compiled from Annual Reports of HDFC, ICICI and IFCI.

The above table reveals that the earning per share (EPS) of the financial institutions under study highlight
upon the overall profitability and helps in determining the market price of equity share as well as if reflects
upon the ability of the concern to pay dividend to its equity shareholders.

As in the table it is clear that the EPS of the HDFC is greater during the period of study than other financial
institutions. In 2013-14 it was Rs. 35.47 which has increased to Rs. 42.15% in 2014-15. The EPS of HDFC
58
shows an increasing pattern which is a good indicator of capital productivity and profitability. It has increased
in 2015-16 to Rs. 48.84. In 2016-17 it has further increased to Rs. 57.18. It is significant to note that HDFC is
highest in EPS among the other financial institutions.

The EPS of ICICI shows an irregular pattern during the period of study. It was Rs. 17.00 in 2013-14 which
has increased to 19.32 in 2014-15. In 2015-16 it has declined to Rs. 16.75 and in the year 2016- 17 there was
a slight increase in the EPS of ICICI i.e., Rs. 16.84.

Of the IFCI, it was Rs. 3.1 in 2013-14 which was content in the year 2014-15 i.e., 3.1. But in Year 2015- 16
it has gone down to Rs. 2.0. In 2016-17 again there was a little increase in EPS of IFCI i.e., Rs. 2.8. With the
various EPS ratio of the financial Institutions under study we can come to know the economic performance of
these financial Institutions, whose EPS is higher it means it has better capital productivity and it can be
observed that the EPS of HDFC is the highest among all so its economic performance is good. And the EPS
of HDFC shows and increasing pattern during the period of study which means that the HDFC is identified as
a growth company because the EPS of HDFC increases year after year.

Debt Equity Ratio: -

Fixed assets and core working capital are financed by long term capital comprising debt and equity. This ratio
measures the proportion of long-term debt to equity. The debt equity ratio is also called “External Internal
Equity Ratio”.

In case the ratio is i.e., outsiders fund is equal to shareholders funds. It is considered to be quite satisfactory.

This ratio indicates the relationship loan funds and net worth of the company which is known as ‘gearing’. If
the proportion of debt to equity is low, a company is said to be low geared and vice-versa.

A debt-equity ratio of 2.1 is norm accepted by financial institution for financing of projects. The comparative
statement of debt equity ratio of the financial institutions – HDFC, ICICI and IFCI are as under: -

Table 1.4

Years HDFC ICICI IFCI

2013-14 9.36 6.65 3.6

2014-15 8.00 6.64 4.3

2015-16 8.25 6.86 4.5

2016-17 8.02 6.58 4.0

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Source: Compiled from Annual Reports of HDFC, ICICI and IFCI.

The debt equity ratio of HDFC was 9.36 in the year 2013-14, which has gone down to 8.0 in 2014-15 and after
that it has increased to 8.25 in 2015-16. It has declined in 2016-17 to 8.02. It shows a declining pattern, which
is a good sign for any institution. In comparison to ICICI the debt equity ratio in 2013- 14, was 6.65, which
remains constant with a slight change during the period of study. In year 2014-15 for 6.64, in 2015-16, it was
6.86 and in 2016-17, it was 6.58.

The debt equity ratio of HDFC was 9.36 in the year 2013-14, which has gone down to 8.0 in 2014-15 and after
that it has increased to 8.25 in 2015-16. It has declined in 2016-17 to 8.02. It shows a declining pattern, which
is a good sign for any institution. In comparison to ICICI the debt equity ratio in 2013- 14, was 6.65, which
remains constant with a slight change during the period of study. In year 2014-15 for 6.64, in 2015-16, it was
6.86 and in 2016-17, it was 6.58.

IFCI debt equity ratio is the lowest, which is a very good indication for this institution. In the year 2013- 14 it
was 3.6 it has increased in the year 2014-15 i.e., 4.3 and in 2015-16 it was 4.5 and 4.0 in the year 2016-17.

The above table reveals that the debt equity ratio shows the declining trend over the years is usually taken as
positive sign reflecting on increasing cash accrual and debt repayment. HDFC, ICICI and IFCI shows a
declining trend which reflects their good financial condition.

Capital Adequacy Ratio: -

Capital Adequacy Ratio: - The term capital adequacy is used to describe the adequacy of capital resources of
a bank in relation to the risks associated with its operations. All Indian scheduled commercial bank (excluding
RRBs) as well as foreign banks operating in India have to maintain the capital adequacy ratio at a minimum
of 9%.

Capital Adequacy Ratio (CAR) = Capital funds X 100

Risk weighted assets and off-balance sheet items

Here the capital fund is calculated as capital fund = (paid up capital + statutory reserve + free reserve / share
premium and capital Reserve) - Equity investment in subsidiaries - intangible assets -amount and balancing
figures of losses + Undistributed Reserve + cumulative preference share + capital instrument + Revaluation
reserve + General profits and loss reserve + Hybrid debt + Debt subordinated. Risk adjusted assets divide the
whole. The Risk adjusted value of a category of assets is determined by multiplying the nominal value of the
category as per the balance sheet with the risk weight assigned there to.

A comparative statement of capital adequacy ratio of HDFC, ICICI, and IFCI are as under: -

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 Table 1.5

Comparative Statement of Capital Adequacy Ratio

(IN %)

Financial institutions

Years HDFC ICICI IFCI

2013-14 16.07 17.70 21.3

2014-15 16.79 17.02 18.8

2015-16 15.53 16.64 16.9

2016-17 14.55 1739 16.7

Source: Compiled from Annual Reports of HDFC, ICICI and IFCI.

The HDFC capital adequacy ratio is all the year satisfy the minimum adequacy norm i.e. it was 16.07% in the
year 2013-14 which has gone up to 16.79% in 2014-15. Its CAR in 2015-16 has gone down to 15.53% and in
2016-17 it has gone down to 14.55%. The capital adequacy of ICICI in the year 2013-14 was 17.70% which
has gone down to 17.02% in 2014-15. Its CAR in 2015-16 has gone down to 16.64% and in the year 2016-17
it has increased to 17.39%. This financial institution has also followed the basic norms to maintain capital
adequacy of 9%.

The capital adequacy ratio of IFCI in the year 2013-14 was 21.3% has gone down to 18.8% in 2014- 15. The
CAR of IFCI shows a declining trend. So, it has also gone down 2015-16 and 2016-17 i.e., 16.9% and 16.7%
respectively. This financial institution has also followed the basic norms to maintain capital adequacy of 9%.

Book Value Analysis: -

The book value comes under the market test ratio Marker test ratio. It is related the firm’s stock price to its
earnings and book value as per share. These ratios give management, an indication of what investors think of
the company’s part performance and future prospective. If firms’ profitability, solvency, turnover ratio or
good then the Marker test ratio will be high and its share price is expected to be high.
Out of these market test ratios like Dividend pay-out ratio of all these ratios the book value is of great
importance. The book value expresses the summation of Equity, capital and reserves while detecting the
losses. It can be expressed in the following manner: -
Book Value = Equity Capital + Reserve – Profits and loss debit balance Total
no. of Equity Shares

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This ratio indicated the net worth per equity share. The book value is a reflection of the part earnings and the
distribution policy of the company. A high book value indicates that a company has huge reserves and is the
potential bonus candidate. A low book value signifies the liberal distribution policy of bonus and dividends,
or alternatively a poor record of accomplishment or profitability.

A comparative statement of book value of the financial institutions HDFC, ICICI, and IFCI are as under –

Table 1.6

Comparative Statement of Book Value

. (IN RS.)
Years HDFC ICICI IFCI
2013-14 181.23 126.80 36.9
2014-15 247.39 138.74 36.1
2015-16 287.47 154.32 36.9
2016-17 349.12 171.61 34.2
Source: Compiled from Annual Reports of HDFC, ICICI and IFCI
The book value of HDFC was 181.23 in the year 2013-14 which has been increased Rs.247.39 in 2014- 15.
The book value of HDFC shows and increasing trend over the period of study, which is a good sign for the
institution. In 2015-16, it has increased to Rs. 287.47 and in 2016-17; it has gone up to Rs. 349.12.
The book value of ICICI has also shows an increasing trend, which reflects that net worth per equity share,
has increased. This means that the firm’s earnings and the distribution policy is good and satisfactory. The
book value of ICICI was Rs. 126.80 in 2013-14, which has increased to Rs. 138.74 in 2014-15. It has further
increased in the year 2015-16 and 2016-17 that are Rs. 154.32 and Rs. 171.61 respectively.
IFCI book value keeps a declining from several years, which does not leave a good impact of the institution.
The book value of IFCI in the year 2013-14 was Rs. 36.9, which has decreased to Rs. 36.1 in year 2014-15.
In 2015-16 there was an increase in the book value of IFCI i.e., Rs. 36.9 similar to year 2013-14. In the year
2016-17, it had further decline to Rs. 34.2, which is not a good sign for the institution.
Income and expenditure account is maintained by the organization to show the various sources by which the
income of Institution is generated and various expenditure that are the uses of funds by these institutions for
productive purposes.
With the help of income and expenditure account, the company reveals information about the income and
expenses during the particular period i.e., financial year.
Out many expenditures in the income and expenditure account, the payment of interest constitute a major part
and analysed in this study. The study revealed that the payment of interest had increased in all the financial
institution during the period 2015-16 to 2016-17 expect IFCI. This shows that IFCI is not in a better position.
HDFC and SIDBI registered a significant increase in the payment of interest during the period.
The income account discloses the major elements i.e., interest income and other income. HDFC interest
income is highest among all the other financial institution. It registered a growth rate of 15%. Thus, interest
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income constitutes a major part of total income of HDFC. The other income of HDFC, SIDBI and ICICI
registered a significant increase over a period of 2015-16 to 2016-17. But in the other income ICICI is highest
among the other financial institutions under study. It registered a growth rate of 27.2 percent in the other
income whereas HDFC and SIDBI registered a growth rate of 14.36% and 13.26% respectively.
By analysing balance sheet, it can be re revealed that the HDFC is earning higher profits than the other
financial institutions. IFCI balance sheet depicts that its financial position is not up to the mark. It has to
improve institutions so that it can raise its profits.
The performance of financial institution may be appraised by taking into consideration the various ratios. By
the help of ratios, it is easy to compare the present performance with the past as well as to depict the area in
which particular business is comparatively advantaged or disadvantaged. Return on capital employed and
return on net worth helps in knowing about the profitability of the Institutions. Among the various financial
institutions, the key financial ratio of 3 financial Institutions namely HDFC, ICICI
and IFCI are taken into account over the period of 4 years i.e., from 2013-14 to 2016-17 for the purpose of
analysis.
The study revealed that HDFC Return on long-term funds (ROCE) is higher in comparison to ICICI and IFCI.
HDFC registered its highest ROCE in the year 2013-14 that was 81.47% where is ROCE of IFCI is lowest
among the three Institutions, this shows that IFCI is facing a lot of problem.
Earnings per share (EPS) is an important measure of economic performance of a corporate entity. The EPS of
HDFC is the highest and again that of IFCI is lowest. The higher EPS means that its capital productivity is
also high.
Debt equity ratio is measured for getting the long-term solvency of any institution in the proportion of debt to
equity is low, it means company is said to be low geared. HDFC, ICICI, and IFCI have shown a declining
ratio, which is positive sign for it. IFCI Debt-equity ratio is lowest among all the three financial institutions.
It is a good indicator for this institution.
All the institution has to maintain the capital adequacy at a minimum of 9% as discussed earlier. All the three
financial institutions fulfil the adequacy norms and their CAR (capital adequacy ratio) is above 9% over the
period of study.

AT A GLANCE

Since the 2000s, India has made remarkable progress in reducing absolute poverty. Between 2011 and 2015,
more than 90 million people were lifted out of extreme poverty.

However, the COVID-19 pandemic led India’s economy into a contraction of 7.3 percent in FY21, despite
well-crafted fiscal and monetary policy support. Following the deadly ‘second wave,’ growth in FY22 is
expected to be nearer to the lower bound of the range of 7.5 to 12.5 percent – still putting India among the
fastest growing economies in the world. The pace of vaccination, which is increasing, will determine economic
prospects this year and beyond. Successful implementation of agriculture and labour reforms would boost
medium-term growth, while weakened household and corporate balance sheets may constrain it. The
economic slowdown triggered by the outbreak is believed to have had a significant impact especially on poor

63
and vulnerable households. Recent projections of GDP per capita growth, taking into account the impact of
the pandemic, suggest that poverty rates in 2020 have likely reverted to estimated levels in 2016.

The informal sector, where the vast majority of India’s labour force is employed, has been particularly
affected. As in most countries, the pandemic has exacerbated vulnerabilities for traditionally excluded groups,
such as youth, women, and migrants. Labour market indicators suggest that urban households are now more
vulnerable to fall into poverty than they were before the onset of the pandemic.

The response of the government to the COVID-19 outbreak has been swift and comprehensive. A national
lockdown to contain the health emergency was complemented by a comprehensive policy package to mitigate
the impact on the poorest households (through various social protection measures) as well as on small and
medium enterprises (through enhanced liquidity and financial support).

To build back better, it will be essential for India to stay focused on reducing inequality, even as it implements
growth-oriented reforms to get the economy back on track. The World Bank is partnering with the government
in this effort by helping strengthen policies, institutions, and investments to create a better future for the
country and the people through green, resilient an inclusive development.

Economic Outlook

After growing at very high rates for years, India’s economy had already begun to slow down before the onset
of the COVID-19 pandemic. Between FY17 and FY20, growth decelerated from 8.3 percent to 4.0 percent,
with weaknesses in the financial sector compounded by a decline in the growth of private consumption. In
FY21, the economy contracted by 7.3 percent.

In response to the COVID-19 shock, the government and the Reserve Bank of India took several monetary
and fiscal policy measures to support vulnerable firms and households, expand service delivery (with
increased spending on health and social protection) and cushion the impact of the crisis on the economy.
Thanks in part to these proactive measures, the economy is expected to rebound - with a strong base effect
materializing in FY22 - and growth is expected to stabilize at around 7 percent thereafter.

HISTORICAL EVOLUTION OF THE FINANCIAL INSTITUTION IN INDIA:

Institutions which collect money from savers and lenders and use that money to grant long term loans and
invest in securities in different firms, for different purposes to create revenue are known as financial institution.
They directly do not increase the real capital but are the important links between the savers and investors in
an economy.

Financial institutions mainly mobilize the stagnant savings to credit or finance markets. They use the money
in various financial schemes for the upliftment of community.

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Financial institution are different from non-financial commercial and industrial institution in manner that
financial institutions deals in assets like deposits, loan and securities, whereas non-financial institution are
mainly focused on assets like machinery equipment’s, stocks of good etc.

Any economy is dependent on financial system which constitutes of managerial services financial instruments,
financial markets and financial institutions. All of them work are interrelated activities which ultimately help
in generating saving, investment, capital formation and the growth of economy. These are basically managed
by financial managers, who actively participate in raising the industry resources.

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT

Financial system is only found to helpful when it is converting wealth with more productive forms/outcomes.
It involves the conversion currencies to assets like bonds, equity and securities. It leads to increase in volume
of investment too, which promotes investment activity. This investment activity evaluates the resource
allocation efficiency so that money can be easily channelized into various investment channels.

Relationship between the Financial System and the Economic Development

Finance means funds needed by government, businessman individuals etc., to meet their necessary
requirements like daily needs, wages and salaries, raw material and finance for government schemes. This is
what is referred to financial system of India - borrowing and lending /supply of funds as per demands. Indian
financial system Of India is classified broadly into two sectors —

A. Organized sector

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B. Un-organized sector

are basically financial system works on users of financial service and suppliers of financial services? Users
are individuals, businessmen, and government whereas suppliers are financial institutions. Some of the main
suppliers of financial services in India are –

1. RBI

2. Banks

3. Financial institution

4. Money and capital markets

5. Informal financial enterprises

As mentioned above organized sector of financial system comprise of –

1. The Banking system

2. The Corporate system

3. Development banking system:

A. Public sector

B. Private sector

C. Money market

D. Financial companies

The unorganized sector of financial system composed of –

1. Money lenders
2. Indigenous bankers
3. Landing pawnbrokers
4. Landlords
5. Traders
6. Chit funds

These are not regulated by RBI and are also well known as NBFC non-banking financial companies.

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INDIAN BANKING SYSTEM

Banking starts from the Vedic era even before Manu, who saved money from his works and laid down rules
relating to rate of interest. Then during Mughal invasion there was start of markets and financing foreign trade
and commerce. This was followed by entry of East India company which laid the pavestone of banking in
India. The General Bank of India (GBI) was the 1st joint stock bank established in 1786. It was followed by
Bank of Hindustan and the Bengal bank. Two of them failed to survive in India but Bank of Hindustan
continued in existence till 1906.

In 19th century East India Company established three banks, in 1809 bank of Bengal, bank of Bombay in
1840, and Bank of Madras in 1843. These three banks worked independently and were called Presidency
banks. These three banks were merged together in 1920, and a new entity was born on 27th January 1921
which was known as Imperial Bank of India. Imperial Bank maintained its existence till 1955 when State
Bank of India was formed and it was merged in newly constituted SBI. RBI Act was passed in 1934 and RBI
or the Central bank was formed in 1935.

By that time India was in the wave of Swadeshi movement which led to the formation of Indian banks with
Indian management. This was the time when Indian banks came into existence like Punjab National Bank
Limited, Bank of India Limited, Canara Bank Limited, India bank limited, the Bank of Baroda Limited and
Central Bank Limited.

Later on, July 19, 1969, 14 important banks of India were nationalized and further on 15th April 1980, 6 more
commercial Private sector banks had been taken over by Indian government.

The organized banking of India mainly divided into three segments –

1. Reserve Bank of India

2. Commercial Banks

3. Co-operative Banks

Common classification is given by RBI for Indian Bank is –

RBI is the supreme authority in Indian banking system and has the responsibility of controlling and monitoring
the banking system in India. It keeps the reserve of the entire scheduled bank and hence called a “Reserve
Bank”.

Scheduled banks are the banks which were introduced in IInd schedule of RBI act 1934. These banks are the
one having a minimum capital and reserve of aggregate not less than 5 lakh and also satisfying RBI guidelines
that they work in no harm of interest to the depositors. All commercial banks, Indian and foreign, RRB, State
cooperative banks are scheduled banks.

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Non-scheduled banks are the one which are not included in IInd schedule of RBI act 1934, which are not more
than 3 in country.

Scheduled commercial banks deals in profits and the scheduled co-operative banks are based on Co-operative
Principles. Scheduled commercial banks provide financial services to customer and in return expect profit
from them in term of interest, discounts etc. Their main focus is on profit. They are also well known as money
multiplier banks.

They are further classified into private and public sector banks.

Public sector banks include SBI and associates and other 20 nationalized banks. Private sector banks comprise
of small number of non-nationalized scheduled banks and foreign banks which are operating in India known
as foreign exchange banks.

Regional rural banks are basically small banks made for artisans, farmers, labourers, and small entrepreneurs.
It gives financial assistance for agricultural, trade, commerce and industry in rural areas. These banks came
into existence in mid of 1970.

INDIAN MONEY MARKET

Money market is the mechanism where short term funds/amounts are loaned and borrowed and by that money,
financial transactions are cleared for a particular economy. It includes financial business of all kinds. A few
examples of money market are RBI, non-banking agencies like LIC, commercial banks, Bonds, merchant
banks, foreign banks, discount houses and co-operative banks. Peculiarities of the Indian money market.

A. Existence of 3 Sectors: -

1) Organized Sector

2) Un-organized Sector

3) Co-operative Sector

RBI is a banker’s bank, it controls regulate, monitors and make continuous

efforts to bring banks under its direct influence. Un-organized sector comprises of Mahajan’s, pawnbrokers,
property owner and traders who do not differentiate between finance purpose and duration of finance.

B. Varied rate of interest: -

Variation in rate of interest depends on the type amount, duration of loans. It varies from purpose to purpose
like saving Account, housing loan, retail loan, personal loan, credit card loan etc. These are more seen in
organized sector of Indian market.

C. Seasonal stringency of funds: -

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India is an agriculturally based economy. Economical variations are noticed as per seasonal requirements of
the agriculture-based industry. During the month when requirement to bring agriculture products from village
to the cities mostly 36 from November to June, banks give loan at a high rate of interest but on the other side
rate of interest is lower in non-agricultural months i.e., July to October.

RBI again plays a crucial role to smoothen these fluctuations by pumping money in busy season and
withdrawing money from the market in off-season.

D. Lack of Integration: -

The various segments of money market are more or less working independently in their respective own fields
and are loosely connected to each other. They are very limited to a particular class of business. For any country
to make a monetary policy it is very important to have a well-organized market with a good institutional
framework, environment and well moulded to the requirements of economic world in which it is going to
implement. The money market is expected to follow the following main functions –

1. To provide equilibrium mechanism to even out demand and supplying of short-term funds.

2. Provide access to the suppliers and users of funds to fulfil their requirements efficiently as and when.

Call Money Market: -

Loans made in this particular market are of short term, maturing between a day to fortnight. The rate of
borrowing and lending is called as call money rate.

They have two sub types:

a) Call market

b) short notice market.

Call money rate is market determined depending on demand and supply of funds. Public sector banks cover
about 80% of the demand and remaining 20% of the demand is by private sector banks. NBFC constitutes
80% of the supply to these market and rest 20% supply comes from banking system.

Bill Market: -

In this market short term bills up to 90 days are bought and sold. However, this market is not the prevalent in
India but more common in UK (United Kingdom) and other international markets. 90 days’ bill is mostly used
by government to raise funds for short period. They are an important instrument of borrowing for government.

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Certificate of Deposit (CDs): -

They are issued by banks in the multiple of rupees 25 lacs to expand investors base. Presently, they are reduced
to minimum of Rs 1 lacs. Maturity period varies from three months to 1 year and these are easily transferable
after 45 days of date of issue. The volume of Certificate of Deposits, issued by banks and rate of interest on
them is good enough to explain the liquidity in money market.

Commercial papers (CP): -

These are issued by the companies with the net worth of 10 crores., later this amount was reduced to 5 crores.
These are issued in the multiple of rupees 25 lacs with the minimum amount of 1 crore. Maturity of CP is
within 3 to 6 months. Banks are principal holder of CP and are substitute for direct bank credit to companies.

Capital Market: -

These are long term funds and equity finance to government and corporate sectors. These have noticed a
drastic change pertaining to industrial policy, licensing policy, financial industry, increasing competition. The
demand for capital market arises from the private sector manufacturing industries, agriculture and largely from
government for economic development purposes. Capital market directly affects: -

1. Mobilization of national savings for the economic development.

2. Mobilization and import of foreign capital and foreign investment to fulfil the deficit and maintain the
economic growth rate.

3. Productive utilization of resources.

4. To direct the flow of funds and stabilize the diversified industrialization.

INDIAN CAPITAL MARKET

Before Independence

In this period, the Indian capital market was not well developed owing to the
hampered industrial growth and security trading. Before independence there was lack of investors, financial
institutions were under restriction by governments and no intermediaries were there to mobilize and channelize
the savings of public into investment. Those problems were resolved only after independence.

INDIAN CAPITAL MARKET SINCE THE INDEPENDENCE

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After 1951, Indian capital market broadened as the volume of savings and investments had shown
improvements. Steps were taken to protect the interest of investors. There was growth of the joint stock
companies and corporate enterprises, which was good indicator of capital market. Other good indicator was
the growth of public borrowing for investment.

Post-independence, the function of capital market was expanded and its volume was increased but still it was
small in respect to the size of economy and there was lack of institutional infrastructure.

For this purpose, Government of India set up a series of financial institutions for supporting the private sector
industries. These were IFCI (1948), SFCs, ICICI (1955), IDBI (1964), and UTI (1964). LIC was established
in 1956 to convert savings into capital market.

NARSIMHAM COMMITTEE (1991) ON BANKING SYSTEM IN INDIA

After nationalization of banks until 1969, there was a vast geographical spread of banking and financial
services, as a result, there were certain distraction, which affected the efficiency, productivity, quality, and
profitability of the system. Some financial institution was getting week because of poor customer satisfaction
and outdated mode of working.

To tackle these shortcomings a high-level committee was formed under the guidance of former RBI Governor
Mr.N. Narsimham, who was elected as the chairperson. He gave his recommendation in 1991 in primary
interest to develop and improve the wealth, public sector bank and make them efficient to meet the demands
of real economy.

In 1991 its recommendations were – 1. Ensuring degree of operational flexibility.

2. Internal autonomy of public sector banks in making decisions.

3. Increase the level of professionalism in banking.

II phase of committee and banking reforms gave their recommendation in 1998 after authorization from
finance ministry. This time the target of the committee to review the progress in banking sector reforms and
design a program necessary to strengthen the financial system and make it competent internationally.

In 1998, the Narsimham Committee gave the following recommendations: -

1. Need of concrete banking system in context to capital account convertibility (CAC) which would
involve large inflows and outflows of capital. For this it was recommended to merge the stronger banks
to have a multiplier effect.

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 2. In context to rehabilitation of weak public sector banks, which have accumulated high percentage of
NPA, they were advised to adapt a concept of narrow banking i.e. to place the funds in short, term in
risk free assets.
3. . Narsimham committee favoured the local banks saying that leaving behind 2-3 banks of international
orientation and 8 - 10 nationalized banks, India still needs a large number of local banks and small
banks confined to states or a well-defined area in order to meet out the financial demand of local trade
market, small industry and agriculture.
4. For capital adequacy ratio Narsimham committee recommended setting an Asset Reconstruction Fund
(ARF) to take over the bad debt of banks.

Table 1.7

1991 1998

Banks to reduce number More strong banks

Free bank from government interference Free bank from government interference

More 3 tier structure More 3 tier structure

Financial Capital Adequacy @ 8% Revise Capital Adequacy norms

The institutional building reforms

Post-independence up to 1968:

By independence India had a good number of commercial banks. The

overwhelming majority was confined to major town and cities. Saving in banks was about only 1% of the
national income and forming around 12% of estimated saving of household sector.

In 1935 RBI was established by the government with its major shareholder as Bank of England. It was in
January 1st 1949, when it became state owned institution with its main aim to integrate its own policies to the
Government of India. It was at this time Banking Regulation Act was in force to keep an eye on the commercial
banking activity. Despite the widespread of banking system in India, there was a lack of depth in the market.
In rural India organized financial institution were negligible.

Post-independence, it was the countries need to mobilize saving into proper channels to utilize it in identified
sectors of economy which was mainly agriculture and industry. This objective was targeted more efficient in
1950, when five-year plans were launched.

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Initially the Indian economy operated at a very low level of saving and investment to counteract this challenge
it was decided in first 5-year plan to raise the amount of investment. It was planned to use the concept of
mixed economy where both public sector as well as private sector were used for mobilization of resources and
step-up investment.

The 1st 5-year plan stated “Central Banking in a planned economy can hardly be confined to the regulation of
overall supply of credit or to a somewhat negative regulation of the flow of bank credit.”

Thus, after independence, it was clear that India needs to ensure organized system to fulfil the need of credit
to agriculture and industry. It was the important responsibility of RBI to develop institutional infrastructure in
financial system. Commercial banking use to take care of general banking, needs of accepting deposits.

Development Finance institution were the major ownership of RBI. RBI used to finance these institutions at
concessional rate, for the same purpose state Finance Corporation (SFCs) were also setup to create the long-
term needs of industry.

With all these efforts and action there was acceleration in pace of public investment and industrialization
during late 1950’s and early 1960’s.

The UTI (Unit Trust of India) came with existence in 1964 sponsored by RBI to provide a channel to retail
investor for participation in capital market. In all these developments, export market did not receive the
attention of government. So, for this purpose in July 1957 Export Risk Insurance Corporation was set up which
was later converted into Export Credit and Guarantee Corporation in January 1964.

Summary: -

In this period, it was experienced and shown that financial institution boosted up the Indian economy. RBI
took over the responsibility to develop a financial infrastructure. However still it was that these institutions
work efficiently. Still number of customers per branch were reduced to 1,32,700 in 1950 to 64,000 in 1969,
there was an increase in share of credit in industry from 34 % in 1950 to 67.5% in 1968. Agricultural sector
was a little up by 2% of total bank credit.

1969-1990 (The Pre-Reform years) & Bank Nationalization

Even after the elaboration of banking system in India, due to vast geographical coverage, still some rural and
the semi-urban areas were left behind by banks. As a result, large industries and big establishments enjoyed
the facilities of banking system.

Thus, to bring about a state of diffusion of the banking system, government of India, initiated some
organizational and legislative changes. So, in July 1969, 14 large commercial banks were nationalized in order
to deliver the credit flow to genuine areas and work according to the plans designed. These lead to two main
aspects of nationalization i.e., rapid expansion of branches and channelling of the credit according to plan
priorities. Thus, banking was made available to uncovered areas and enable them utilise the banking facilities.
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These reduced the credit gap in agriculture and the small scale industry increasing the economic activities in
organized banking system.

By the middle of 1970’s it was felt the commercial banks cannot understand and fulfil the credit requirements
of agriculture unless they have the specialized knowledge of rural settings. Keeping this in mind regional rural
bank was established in 1975. Now in this way three institutional arrangements were made of rural areas co-
operative banks, commercial bank, RRB’s. This was multi-agency approach to cater need of credit in rural
areas. It was this background in mind, that led to the establishment of NABARD(National Bank of Agriculture
and Rural Development) in 1982. In the history of co-operative credit NABARD was given regulatory control
over rural credit co-operatives and its main objective was to create institutional arrangements at country level
to finance, coordinate, guide and control cooperative credit system.

After 1980 to give a specialized attention to all segments of industry, several specialized financial institutions
were started, which ultimately help in the growth of DFI’s. These were (EXIM) Export Import Bank of India,
SIDBI (Small Industries Development Bank of India), National Housing Bank (NHB).

It was during this period a new instrument came into existence to increase the resources in primary market. It
was Insurance of capital through equity routes, debentures and public sector bonds. Secondary market also
noticed an increase in stock exchange listing of companies and market capitalization. Several specialized
credit rating agencies emerged during this period. These were CRISIL, CARE and ICRA, custodial service
providers like Stock Holding Corporation of India (SHCI), establishment of over-the-counter Exchange of
India (OTCEI) most important was establishment of SEBI (securities and exchange Board of India) in 1988.

Till 1980’s there was dominance of public sector and state ownership Balance sheet of financial institution
were controlled both on the liability side and asset side. Authorities were satisfied with these institutions. But
in true sense market did not exist, capital market was controlled so the transaction cost was high. In the most
part of 1980 inter-bank call money market interest rate was controlled which led to the restriction of money
market. Whereas security market was just a capital market for raising debt for the Government, such control
leads to several inefficiency entering into the banking system. Repression was assumed in the form of-

High end interest rate structure with large built in cross subsidization in form of the minimum lending rates
of commercial sector.

In form of Cash Reserve Ratio (CRR) and SLR (Statutory Liquidity Ratio).

On the eve of reform in 1991 CRR and SLR was together as much as 63.5% of bank’s deployable resources,
quantitative restrictions such as Branch Licensing and the restriction on new lines of the business, inflexibility
management structure severely constrained the operation, Independence and functional anatomy of banks.

As quality of assets portfolio of the banks rapidly deteriorated, profitability of banking system was severely
compromised. Condition was moreover worsened by the widespread market segmentation. The market of

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short-term fund was reserved for banks and market for longer term funds were exclusive domain for
Development Financial institutions. Direct assess of corporate borrowers to lenders was controlled strictly and
NBFC were permitted to collect funds only for corporate.

External Sector Problems in early 1990’s - The Initiation of Reform process and
Macroeconomics stance

The above-mentioned adverse effects joined with balance of the payment crisis during the Gulf War held in
1990 led to the erosion of public savings and inability of public sector to generate resources for investment
rapidly.

So, the reforms were introduced in 1991 to improve the balance of the payment crisis. This was not a prolonged
crisis but just emerged at end of period of healthy growth in 1980. The annual average of Indian economy was
5.5% GDP, which was modest as per international standards and was better than the previous average of 3.5%.

By the beginning of 1980’s it was understood that the present system of control and its dependence on public
sector market India could not gain rapid growth. It was the requirement of the hour when compared with
international competition. In this context, several initiatives were taken like - direct taxes were reduced,
licensing control on trade and foreign investment were liberalized, role of private sector expanded. However,
these initiatives brought only marginal changes. Changes that are more fundamental were required in the same
direction.

Along with liberalization program some structural adjustments were also undertaken, macroeconomics
stability was made continuous effort, fiscal and external sector policy were made in coordination with
monetary policy in maintaining overall balance. The exchange rate was made flexible, foreign investment was
permitted and current account was made fully convertible. Transparency and accountability were ensured in
banking system to develop credibility. Inter-linkage between the real and the financial sectors were recognized
and reforms were taken that the intermediation between them kept pace with the underlying economic activity.

1991 and After: The Reform Years Major policy stance of Reform:

Reform in financial system was made to reform the Indian economy. Investors were ready to spread to
international markets and to start new practices and standards. Since 1991 Indian financial system has
undergone a radical transformation. There was a complete change in the operation of banks, pattern, ownership
and organization structure of DFI’s and NBFC’s. The important thrust of the reforms was, creation of efficient
non-banking sector focusing on creating a deregulating environment strengthening the prudential norms, also
the supervisory system, changing ownership, and increasing competition.

The policy was to enable greater flexibility in utilization of resources by banks. Interest rates were deregulated
which gave banks the freedom to price their deposits and loans and reserve bank stepped aside in managing
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the banks on the both assets and liabilities. Now Reserve Bank was more focused on prudential norms, capital
adequacy ratio, asset recognition norms, exposure norms, improved the level of transparency and the
disclosure standards. Since the market was open it was very much necessary to monitor and supervise it which
was done systematically. Several “onsite inspection and offsite surveillance” was done to evaluate bank safety,
improved quality of board and management compliance of banking laws, improve bank assets, analyze
financial factors to determine bank solvency and to take corrective actions to improve its performance. For
the same purpose in 1994 a powered BFS (board of financial supervision) was constituted.

Role of Competition: -

- It is a general assumption that competition increases efficiency this was incorporated in the financial system
by licensing new private bank since 1993. Foreign banks were also grown entry to the market. Therefore, by
the end of March 2002, new private sector bank constituted 11% assets and 6.4 % of net profit of scheduled
commercial banks. Respectively for foreign banks, it was 7.0% and 7.3%. In February 2002, RBI allowed
foreign direct investment of 49% in banking sector. The same was allowed by union budget 2002-03 in
authorised foreign bank to accurate as branches of the parent branch either overseas or as a subsidiary in India.
Involvement of these banks in financial system that leads to its improved efficiency via improved technology
and improved risk management strategy.

Issues on capital adequacy and government ownership in banking sector

In the word of globalization, there is a ranking system for bank based on their ability to raise debt or equity
should be present. Internationally Banks follow the norms of capital adequacy. Indian Bank were also expected
to maintain capital adequacy, but due to past bad lending it was difficult for them to do so. Between 1985-86
and 1992-93 government tried to pay capital to banks to tune of Rs. 40 billion.

But in the view of increase demands it was difficult for the government to sustain that for long. Keeping this
in mind the government proposed in union budget for financial year 2001 to lessen its holding to nationalized
banks to 33% minimum while maintaining the public sector character of the banks.

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Role of information technology in financial sector

In the era of globalisation, it is mandatory to keep a higher level of technological development to survive the
race. In this regard, RBI has established an institute for the development and research in banking technology
(IDBRT) in 1996 for the utilisation of technology by the banks.

IDBRT under its functioning started the financial communication backbone called INFINET (Indian financial
network) which covered a wide area using satellite (VSATS) and terrestrial lines. This network is working
since 1999 with a closed user group of exclusive banks and the Financial Institutions. With the use of INFINET
many products were launched which include NDS (Negotiated Dealing System) which is screen-based trading
of government securities and other one is Real Time Gross Settlement system (RTGS) which provide one to
one settlement of fund flows as a continuous or real time basis. Since payments and settlement is lifeline of
Indian economy. It is extremely important to have a strict monitoring system as the reforms progress. In this
regard, an integrated state of the art robust payments and settlement system was laid down under the guidance
of national payment council (NPC) in May 1999.

Although there are common objectives of various financial intermediaries in financial sector. It is extremely
important to develop, transform, and modify each segment to the state of art where it can match the
international standards. These reforms were first developed for commercial bank and letter extended to all
segments and financial intermediaries such as DFI’s, NBFC’s, cooperative banks, and Insurance sector.

Reform in Development Financial Institutions

DFI’s also faced a change in the regulatory framework along with change in the operating environment of
banks. There was a withdrawal of low-cost funds from DFI’s whereas on demand draft they have to compete
with the banks for long term lending. DFI’s raised their funds at competitive rates from markets through the
public issues and increased it also from private placements, which lead to increase in their cost of funds.
Seasonal DFI’s also lost their assets especially when their industries have also been affected by down turn or
by undergoing transformation/ merger/ sizable exposures. DFI’s responded to these situations by diversifying
into the para banking activities like merchant banking, advisory services etc. This resulted in decline of their
term lending operation while an increase in short term lending and non-fund-based operations.

Divestment of RBI ownership in Financial Institutions

RBI currently holds share in National Housing Banks (NHB), Infrastructure Development Finance Company
(IDFC), Deposit Insurance and Credit Guarantee Corporation (DICGC), NABARD and currency printing
press. RBI regulates the financial institution and moreover started to transfer the ownership of NHB and
NABARD to government of India. In respect to DICGC government accepted the proposal of RBI for framing

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the new Act to make it survive with the financial sector liberalization. It was asked to convert DICGC to Bank
deposits insurance conformation (BDIC) to deal with depositors’ risk and the distressed banks.

Reform in Non-Banking Finance Companies (NBFC) Sector

RBI has limited power to regulate the assets balance sheet of NBFC’s. The legislative focus was primary
aimed at moderating their deposit mobilization activity by linking quantum of the deposit acceptance to their
net owned fund. For this regulatory framework RBI proposed an Amendment Act in 1997. Its main feature
was raised in entry point norms, compulsory registration with RBI, to the revised entry point norms
compulsory registration with RBI, maintenance of certain percentage of liquid assets in the form of approved
securities, creation of the reserve policy and transferring certain proportion (not < 20%) of profit every year.
The thrust of regulation since 1998 was essentially focused on NBFC accepting public deposits. The nature
and the extent of supervision of regulatory measures were three-fold criteria of:

• Size of NBFC (defined in the terms of assets/income)

• Type of activity perform i.e., loaning, purchase, investment, equipment leasing.

• The acceptance of public deposits.

A three-tier supervising mechanism comprising of onsite inspection, offsite surveillance and external auditing
was aligned in order to operate on healthy lines and protect depositor’s interest.

Reform in capital market

In 1992 Indian market was opened for (FII) Foreign Institutional Investors to meet
the international standards. The market infrastructure needed a policy to encourage foreign investment in
Indian financial structure. Foreign investors tend to seek transparent trading mechanism and safe payment
settlement system apart from being supervised and regulated.

Capital users act 1947 was repealed in 1992 for market forces to play their roles in determining price issues
and allocation of resources for competition uses. National Stock Exchange (NSE) was incorporated in 1992

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to provide transparency, lower transaction cost and to provide the access to investors from all over the country
on equal footing. In 1995 Bombay Stock Exchange (BSE) too shifted to a limit order book market. In order to
ensure free and speedy transferability of securities, the Depositories Act 1996 was enacted. Dematerialisation
of securities was started in the depository more. It also started the maintenance of ownership, records and
transfer of securities electronically by book entry without any physical transfer from one to other. Another
important development was initiation of the mutual funds in private sector in 1992 which ended the monopoly
of UTI.

These steps promoted market integrity. Indian corporate sector entered into international market through
Global Depository Receipt (GDR’s), foreign currency convertible bonds (FCCB’s) and external commercial
borrowing (ECB’s). Indian corporates faced higher disclosure norms in foreign market. Entrance of foreign
investment in Indian market led to change in corporate governance and practice to follow Internationally
Accepted Accounting Standards. India also allowed NRI’s and the overseas corporate bodies OCBs to invest
in India and generate foreign deposits.

Impact of Financial Institution: Building process in India

Now there are evidences that economy building process necessarily depends on the development of financial
institutions. Impact of deregulation in financial sector gave positive result like reduced cost of intermediation,
increased profit, reduced operating expenditure of banks. There was a significant change in the product
consumption, technology use and risk management of the practices of financial institutions. But as it was
expected in reform process all financial entities could not meet the standards of globalization.

Macroeconomics Performance:

During first 3 decades after the independence, the growth rate was in lower
range of 2.5- 3.5%. After liberalization in 1980, it was increased to 5.8%. After opening up of economy in
1990 is it, accelerated the growth to 6.0%. This growth process was in a broader base without any coalitions
with government as its pioneer.

The decades of 1990 were divided into two phases based on inflation. High Ist phase of inflation in first half
of decade with inflation rate of 10% and lower phase in second half with the inflation rate of 6.8%. This
ablated further down to 4.1% during initial years of twenty century.

The movement of per capita income decides the growth rate of open economy. The average growth rate was
1.5% during first two decades after independence. Then it plunged to 0.5% in 1970 followed by a large upsurge
over 3.0% during 1980’s. A particular significant growth rate of 4.5% during second half in 1990’s.

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Another important factor, which suggests positive influence over economy, was the improvement in India's
external account of balance of payment. Inflow of foreign investment has also increased significantly clearly
indicating India as favourite investment destination.

Scheduled Commercial Banks

The visible impact of Institution building is evidenced both in terms of widening as well as deepening of
information process. Banking system has acquired a wide reach, judge in terms of expansion of branches and
the growth of credit and deposits.

Co-operative Banks:

Asset quality of co-operative banks in a few years does not show any improvement, but there is an increase in
NPA, which unlikely is commercial banks. Mostly bigger co-operative banks have shown a bad performance,
which has deteriorated their position in cooperative banking segment. With phased deregulation of the interest
rates offered by these banks there has been a marked fall in their spread. This however was not witnessed in
other segments of cooperatives.

Developed Finance Institutions

With changing environment there was a change in the profit of DFI’s

which started giving importance to non-fund-based business. DFI’s foreign currency business was affected by
the corporate access to international capital market. In second half of 1990’s the asset quality of DFI’s was
eroded due to several factors like downturn of concessional funds in industrial sector and restructuring and
softening of interest rates. Some DFI’s were able to face the competitions while several were not. Since banks
entered in long term finance, competition in the assets side of DFI’s was increased manifold. Profitability, of
DFI’s was significantly compromised.

Non-Banking Finance Companies (NBFC’s)

There is a vast variety in NBFC’s when seen in composition, structure and function. In 1970’s, there was a
reasonable increase in NBFC’s with reported companies around 2242 in 1969 to 11010 in 1993. In recent
years and NBFC’s have seen a decline in their numbers. The decline in numbers of deposit is due to conversion
of deposit taking companies into no deposit taking companies.

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Insurance Companies

Performances of insurance companies depend on two indicators

1. Penetrating rates

2.Insurance diversity.

These indications shows that India's relative international position for life insurance industry is stronger than
non-life insurance industry. Most of the private sector companies in Indian insurance sector have joined hands
with foreign partner with 26% holding partnership of the total paid up equity capital. Insurance companies
from public sector continue to dominate the Indian insurance company.

Capital Markets

Indian equity market has shown an exponential growth in 1990, mostly in term of resource mobilization,
number of stock exchange, trading volume customer, number of listed stock investor and market
capitalization. Market has seen a fundamental institutional change resulting in reduction in transaction cost,
improvement in efficiency, transparency and safety reading has greatly improved the framework and
efficiency of trading and settlement. As result Indian capital market is qualitatively comparable to many
developed and emerging markets.

Still the magnitude of activities is negligible to those seen in international market. The reform measures have
attracted foreign investors leading to increase in FII’s. Being an emerging market in early 1990 India has
attached larger volume of international equity share than any other emerging market.

Evaluation of financial Institution in India:

At the time of independence, Indian capital market was undeveloped. Although there was demand for new
capital market, but there was no financial body present who could enter into long term industries finance. In
these circumstances, government of India started developing financial institutions in India.

This concept was initiated strongly after IInd World War. The importance of financial institution was felt
strongly to fill the gap in capital market. Various merchant banks and industry firm, which were forecast at
that time, were not convinced to invest in industrial development owing to the risks existing in the capital
market. Need of such institution stated way back in 1918 when ideas of such agencies were contemplated
when industrial commission recommended the establishment of Institution analogous to Industrial Bank of
Japan.

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Thus, for industrial development in the country it was necessary to develop financial institutions. Their main
roles are: -.

a) Role as Financial Intermediary: - Financial Intermediary plays a main role of mobilizer of

communities saving and a channelized of these savings into productive outlets for the economic
development of the country. Financial institution allocates funds to those industries, which have a
better future for industrialization.
b) Role as Catalytic Agent: - - Financial intermediary catalyse a social change which is important for
overall growth of economy and provides assistance to weaker and helpless sections of the society.
c) Role as a Creator of Money: - By accepting deposits from the public and gives loan for needy
business and funds transactions which further creates deposit.
d) Role as a Promoter: -Financial intermediaries make frequent surveys of industrial structure in various
parts of the country, analyses trend in the demand and supply position of various projects.
e) Role as a Counsellor: -By advising corporate enterprises when to enter a business and how to manage.

To carry out the mentioned role in fulfilling the economic growth. It has set the following long-term
objectives:

1. It strikes to promote economic growth.

2. It provides lending facility to the needy sectors of the society
3. It provides lease financing and venture capital.
4. It provides refinance activity.
5. It subscribe to share and debenture.
6. It provides banking and non-banking financial facilities.
7. It arranges for packages of incentive to entrepreneurs.
8. To furnish, manage, technical and administrative services to the Indian industry.

With these objectives, government established Indian Finance Corporation of India in 1948 by Act of
parliament for making medium and long-term capital money lending available to industrial concern.
Later it was realized that single institution cannot satisfy the needs of capital of all. It was advised to
start State financial Corporation to cater the needs of small industries in different states. They had a
smaller amount of share of Rs. 50 lakh - 5 crore and provided financial help to small enterprises.

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These institutions work with only lending activity and were kept away from market risk associated
activities. Later need arise for new entrepreneurs who experienced problem in acquiring capital from
merchant and their poor financial position. For such group of entrepreneurs Government of India
joined hands with World Bank sponsored a privately own institution in 1955 named as ICICI
(Industrial Credit and Investment Corporation of India).
After the formation and nationalization of Life insurance business in 1906 another development in
capital market was the formation of LIC (Life Insurance Corporation).
It collects a large amount of fund from customers on account of insurance cover and gave long term
loans to corporate sectors to acquire industrial securities from market.
In 1958, Re-Finance Corporation of India Limited (RCIL) was established with prime objective to re-
finance to commercial banks and give medium term loans. This was later merged with IDBI in 1964
with the role of refinancer.
Later in February 1964, Union Trust of India was setup to pool the savings of middle- and lower-
income group and enable them to share the benefits of industrialization thereby acting as a connecting
link between saving and investment. Government of India also focused to look after the sick units of
financial institution. To take care of these units and provide assistance to them for speedy recovery,
reconstruction and rehabilitation an individual financial institution in capital market was set up in 1971
and was known as Industrial Reconstruction Corporation of India (IRCI). Later with the setting up of
Board of Industrial and Financial Reconstruction (BIFR), Industrial Investment Bank of India Limited
(IIBI) under Companies Act 1956 in 1997, these sick units were given adequate operational flexibility
and financial autonomy.

In 1973 GIC came along with its four subsidiaries - National Insurance Limited, New India Assurance
Company, Oriented fire and India Insurance Company. GIC (General Insurance Company) provided
assistance to industrial sector in form of loan, underwriting, equity shares, debentures and bonds. In
December 1986 ICICI promoted SICK for ensuring, assisting development investing in shipping,
fishing and related industries.

For promoting finance and development of small-scale industry a separate financial institution was
formed in 1990 – (SIDBI) Small Industrial Development Bank of India and which later on took over
the function of IDBI.

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Apart from all these financial institutions were also set up to promote Export Import, Agriculture, land &
housing sector in India. Some of them are NABARD (National Bank for Agriculture and Rural Development)
set in 1982 was the apex Bank to promote agriculture and rural development in India.

EXIM Bank (Export Import bank) established in 1982 to promote finance and facilitates Indian foreign trade.

IFCI Industrial Finance Corporation of India:

It was established in July 1948 with its main objective to arrange medium- and long-term credit for various
Industrial Enterprises of the country. Initially the authorized capital of the corporation was Rs. 10 crore which
was divided into equity is of Rs. 5000 each, later this capital was increased up to Rs 20 crore.

IFCI Act was first amended in 1960 to widen its spread to those industries which were involved in preservation
of goods. Second amendment was done in 1986 to provide help to inter alias for Medical Health and other
allied services. In 1992-93 government permitted IFCI to finance the industrial concern of development,
maintenance and construction of roads.

Shareholders of IFCI and IDBI, co-operative banks, Scheduled banks, Insurance companies, Corporation
issued bonds and debentures. In the open market it was authorized to borrow currency for the World Bank and
other organizations, accept deposits from public and borrowing from Reserve Bank of India.

Liberalization - Conversion into company in 1993

This arrangement continued till early 1990’s by then

it was realized that flexibility is needed to run with the changing financial systems. It was felt that IFCI should
directly access the market for its fund’s needs. With this objective it was decided to convert IFCI from a
statutory corporation to company under Indian Companies Act 1956. So, it was renamed as IFCI Limited with
effect from 1999, October.

Some sectors, which were directly benefited from IFCI’s disbursal, include

• Consumer goods industry (Textile and Paper)

• Infrastructure (Power generation, telecom services)

• Service industry (United hospitals)

• Industry (electronic synthetic fibre, plastic, chemical etc.)

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• Basic industry (Iron, steel, fertilizer, cement)

• Capital and intermediate Goods.

The assistance provided to these industries were in the form of loans, foreign currency loans, underwriting of
and direct subscription to share and debentures, deferred payment guarantees and foreign loan guarantees.

Corporate Advisory: -

Corporate advisory by IFCI began as part of merchant banking and allied business department in 1986. Over
the years it continued to provide services to medium and large-scale enterprises, till 1997. In 1997 IFCI
promoted a wholly owned subsidiary IFCI Financial Services Limited I-FIN. I-FIN has grown over the years
and emerged as a niche player in brokerage and portfolio management services. IFCI aims to be a provider of
total financial structure for any aspiring or existing business entity.

Ancillary services: -

• Corporation finance and investment banking

• Catalyst in channelizing FDI

• Project advisory and Finance

• Restructuring advisory services

Advisory Services to Regulatory Agencies: - For different infrastructure sector namely electricity, telecom,
oil and gas, education etc. IFCI facilitates by giving consultancy services.

Industry Research and information services: - IFCI has a dedicated research team looking both at macro
level issues as well as sector specific industry research.

Legal Advisory Services: - This unit comprises of investigation and preparation of title reports and advisory
services for matter under dispute where independent consultancy is required.

Corporate financial and investment banking: - IFCI offers a range of services to its corporate clients like
placement of debt and equity, preparation of information memorandum, identifying potential investors, merger
and amalgamation strategy, identification of takeover targets, assets valuation, obtaining credit from overseas,
arranging foreign line of credit, providing information on foreign market condition.
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Catalyst in channelling FDI: - IFCI provides a gamut of service to foreign investors: -

o Necessary office infrastructure for start-up operations

o Facilitating approvals / clearance for government departments

o Inputs to business decision concerning market, material and manpower availability

o Inputs on debt and equity syndication to obtain needed capital

o Advisory services as per needs namely research, information on products, services, tax incentives, tariffs.

Infrastructure Advisory: -

IFCI provides total solution catering in the specific need of clients starting from stage of investment
identification to financial closure. Services provided under infrastructure sector includes facilitation of credit
documentation, due diligence agreement and documents review, project conceptualization and feasibility
studies, risk allocation, assessment and reasonableness of cost. Advise on financial option, sources, cost and
risk, financial analysis and modelling, credit syndication, domestic and overseas, arranging differed payment
guarantee, ECB placement of debt and equity, capital market advisory summary.

Project advisory and Finance: - IFCI has set up a project Finance Group to focus on traditional project
advisory services. Ranges of services offered are: -

o Project conceptualization and related services

o Preparation of feasibility studies

o DPR

o Capital structuring

o Techno economic feasibility

o financial engineering

o Project management designs

o Syndication of domestic and foreign loan

o Post sanction follow up and and legal documentation

Restructuring Advisory Services: - IFCI gives advisory services to private and public sector companies on
financial restructuring, operational restructuring, cost structure studies. It also includes:

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 A) Buy / sell Advisory: -
which looks after purchase, sale, transfer of assets, operating and technological
rights, brands, business operation, separation, liquidation, disposal on nonstrategic ventures assets or
liabilities.
B) Merger/Joint ventures and Alliances: -
It takes care of drafting information memoranda for potential buyer/
seller, locating suitable counterparties, determining share exchange ratio, structuring and
negotiation of terms and condition for new entity.
C) Privatization: -
It conducts SWOT analysis to prepare an appropriate package, assessment and
valuation of assets, valuation of companies, suggesting measures to enhance sell value, financial
restructuring, bid process management.

IFCI Venture Capital Funds Limited (IVCF)

It was originally setup by IFCI as a society by the name of risk capital foundation (RCF) in 1975 to provide
support to first generation professionals and technocrats who are setting up their own ventures in medium
scale sector under risk capital scheme. In 1988 it was converted into a company named Risk Capital and
Technology Finance Corporation Limited (RCTC), when it also introduced the technology finance and
development scheme for financing development and commercialization of technology. It was letter name as
IVCF in February 2000. IFCI performs the three important functions:

• It guarantees loan raised by industrial concern in the capital market.

• It grants loans and advances loans to industrial concern and subscribes to the debentures floated by them.

• It underwrites the issues of stock, share, and debenture, which are disposed by the corporation within a period
of 7 years from acquisition of it.

Financial Assistance by IFCI (Rs. Crore)

Assistance 2013-14 2015-16 2016-17 2018-19 2019-20

Loans Sanctioned 210 2430 1860 130 -

Disbursements 110 1570 2120 180 40

Source: RBI Bulletin November 2020.

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It is cleared that the loans sanction and disbursement in 1990 had increased. It was resources by IFCI and also
due to rapid development of Industries during this period. Finance Ministry converted IFC into a public limited
company in 1993 so, as to give it freedom of operation, to improve its loans sanction and disbursements.

IFCI has been badly affected and burdened with heavy non-paying assets – essentially loans given to industrial
units who have defaulted.

The Government of India has given over Rs. 2,096 crores in 2002-03, and 2003-04 as loans to IFCI to meet
its outstanding liabilities. The IFCI has proposed to the government to convert these loans to grants, IFCI has
also received consent from PSB and financial Institutions for financial restructuring of their investment in
IFCI.

State Financial Corporation (SFC)

IFCI scope was limited to large scale industries but market contains medium and small-scale industries also,
which require financial assistance. For this sole purpose State financial corporation was developed. The
government passed the SFC Act in 1951 and made it applicable to all the states, there authorized capital was
sold to minimum of Rs. 50 lakhs to a maximum of Rs. 5 crore and was divided into shares of equal value
which are taken by State Government, RBI, Co-operative banks and other financial institution.

The scope of activities by State Corporation wider than IFCI. SFC takes care of issues of stocks, shares,
bonds and debentures of industrial concerns. It grants loans and advances which have to repay by the period
of less than 20 years. At present there are 18 SFCs and in almost every state.

Financial Assistance by SFC (Rs. Crores)

Assistance 2013-14 2015-16 2016-17 2018-19

Loans Sanctioned 370 1860 2800 2080

Disbursements 250 1270 2000 1760

Source: RBI Bulletin November 2020.

During 2015-16 SFCs had sanctioned loans aggregating Rs. 2080 crores and disbursed Rs. 1760 crores they
were much larger in the previous year’s Rs. 2800 crores and Rs. 2000 crores. Over 70% of the total assistance
sanctioned and issued by all SFCs is provided to small-scale industries.

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State Industrial Development Corporation (SIDC)

There are 28 SIDCs in respective state, which promote industrial development and financial assistance to
small entrepreneurs and help backward regions.

Financial Assistance by SIDCs (Rs. Crores)

Assistance 2013-14 2015-16 2016-17 2018-19

Loans Sanctioned 19 216 2080 1590

Disbursements 11 125 1660 1720

Source: RBI Bulletin November 2020.

As Shown in the table 4.4 the assistance sanctioned by SIDC in 2015-16 was Rs. 1590 crores and assistance
disbursed Rs. 1720 Crores whereas in the previous year i.e., 2000-01 the loan sanctioned were Rs. 2080 crores
and its disbursement Rs. 1660 crores the above table revels that the amount of loan sanctioned by SIDC was
highest in 2015-16 i.e., Rs. 2080 crores and the amount of loans disbursement was highest in 2015-16 i.e., Rs.
1720 crores.

Industrial Development Bank of India (IDBI)

Established under Industrial Development Bank of India Act 1964 and is the principal financial
institution for providing credit and other facilities for developing industries. In 1976 it was separated from
RBI and came under the ownership of Government of India.

Functions of IDBI: -

• To provide financial assistance to Industrial Enterprises.

• To promote institution engaged in industrial development.

IDBI provides direct assistance by granting project loans, soft loans, technological refunds loans and
equipment finance loans. The loans and advances given by IDBI are converted to share and equity at a later
date. Indirect lending IDBI follows the concept of IFCI and ICICI. Indirect loans to industrial concern are
taken from open market from scheduled banks, cooperatives, IFCI and notified financial institutions.

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These loans have to be repaid between 3 to 25 years in case of IFCI and SFC. IDBI can refinance the term
loan and they are repayable between 3 to 10 years in case of scheduled banks and State Cooperative Banks.

To increase in financial resources IDBI can subscribe to stocks bonds, shares and debentures of IFCI, SFC
and other notified Financial Institutions so that it is able to provide large assistance to the industry.

The IDBI act 1964 has made special provision for those industrial concerns who have very low rate of return.
IDBI has launched a special fund known as development assistance fund to secure finance to search industrial
sectors.

IDBI also gathers money from foreign financial Institution and international money market and make it
available to Indian industrial units, thereby becoming the most important institution in industrial unit.

Restructuring of IDBI was required when government analyze that IDBI does not have enough pace to
accelerate the industrial development. One of the main reasons for it was: -

• RBI and IDBI both are closely related and have same board of directors

• IDBI was a slave of procedures due to regulations of RBI

• The Governor and Deputy Governor were unable to bear the weight of responsibility.

With this background IDBI was delinked from RBI and was made an autonomous Corporation in February
1976, after which it has given an impressive performance so far.

Narsimham Committee 1991 on IDBI

IDBI stated playing a dominant after its freedom from RBI in 1976. IDBI’s sanctioned and disbursed loan
were 36% and 40% respectively. It reformed into direct financing like any other FI and indirect financing like
refinance system.

Narsimhan committee in 1991 recommended that there should be a sense of competition among banks and
DFI’s. Lending Institutions should compete for funds in market thereby providing more lending facilities to
corporate borrowers.

Narsimhan committee recommended that IDBI should stop giving direct financing functions first like IFCI,
SFC’s and SIDBI. Direct financing function should be given to some other finance company. IDBI would
continue its refinancing role and act as an apex in promotional and refinancing system. But government of
India rejected its recommendation and amended IDBI Act 1964 and empowered IDBI to raise equity from
capital market.

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 Table 1.8

Financial Assistance by IDBI (Rs. Crores)

Assistance 2013-14 2015-16 2016-17 2018-19

Loans Sanctioned 1280 6250 26830 6310

Disbursements 1010 4460 17480 2090

Source: RBI Bulletin November 2020.

IDBI’s loans sanctioned has increased from Rs. 1280 crores in 1980-81 to Rs. 26830 in 2015- 16 and for the
same period the disbursement had increased by 1010 crores to Rs. 17840 crores. It reflects the growth of the
business and industry of the country also increased the mobilization of resources by the development of
financial institutions.

Taking in consideration the other term lending institution IDBI registered steep decline in loans sanctioned
and disbursed since 2015-16, thus the financial assistance by IDBI declined from Rs. 26830 crores in 2000-
01. To Rs. 6310 crores in 2016-17. The amount of loan disbursement was also decline from Rs. 17480 crores.
It was due to economic slowdown and decline in investment.

Above table clearly indicates the growth of business and industry and increased mobilization of resources by
development of financial institutions.

In early 1990’s Government of India decided to transform IDBI into commercial bank without hampering its
traditional development finance obligations in 2016 and which into effect in 2015. IDBI was transformed into
IDBI Ltd. on October 1, 2004.

ICICI (Industrial Credit and Investment Corporation of India)

ICICI was established in 1955 with private ownership. It was sponsored by World Bank, India and other
developing countries.

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It was established as public limited company under Indian Company Act for developing medium and small
industries of private sector. Initially public sector institutions like banks, LIC, GIC, and its associate
companies owned its equity capital. It performs following functions: -

• Long term and medium-term loan both Indian and foreign currency

• Guaranteed loan for all private investments

• Participated in equity capital and debentures

ICICI assisted manufacturing industry in all sectors i.e., private sector, joint sector, public sector, corporate
sector but major advantage was gained by private sector.

Table 1.9

Financial Assistance by ICICI (Rs. Crores)

Assistance 2013-14 2015-16 2016-17 2018-19

Loans Sanctioned 310 3740 55820 36230

Disbursements 180 1970 31660 25830

Source: RBI Bulletin November 2020

In a matter of 20 years, loans between 2013 and 2014 sanctioned by ICICI had increased from Rs. 310 crores
to over Rs. 55820 crores and loan disbursed increased from Rs. 180 crores to Rs. 31660 crores.

Another event was merger of ICICI and ICICI Bank in 2017, which lead to the formation of first universal
Bank of India. With this merger ICICI does not exist as development financial institutions.

Industrial Investment Bank of India (IIBI)

IRCI (Industrial Reconstruction Corporation of India) was established in March 20, 1985. The basic aim was
to revive sick and closed industrial units and give primary loan for reconstruction.

It provides assistance by modernization, diversification, expansion and coordination to sick industry.

It accepts stocks, shares, bonds and debentures. In 1997, it was renamed as IIBI and it was registered as a
company under Companies Act 1956. IIBI is fully owned by government of India.

IIBI had diversified activities into ancillary lines such as consultancy, equipment leasing and merchant
banking.

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 Table 1.10

Financial Assistance by IIBI (Rs. Crores)

Assistance 2013-14 2015-16 2016-17 2018-19

Loans Sanctioned 19 235 2100 1390

Disbursements 17 154 1710 1220

Source: RBI Bulletin November 2020.

The IRCI loans sanctioned were 19 crores in 1980-81 which was raised to Rs. 235 crores in 1990-91. Similarly,
the disbursement had also gone up in this period i.e., Rs. 17 crores to Rs. 154 crores. But after it converted
into IIBI in 1995 its sanction and disbursement had remarkably increased in 2000-01. The loan sanction was
Rs. 2100 crores and loans disbursements were Rs. 1710 crores. But amount of loan sanctioned and disbursed
was decreased to Rs. 1390 crores and Rs. 1220 crores respectively in 2018-19.

The financial assistance rendered by IRCI later ranged as IRBI and finally renamed as IIBI since 1997.

SIDBI (Small Industries Development Bank of India)

Established in 1992, 2nd April as a subsidiary of IDBI by Small Industries Development Bank of India Act
1989. It was the principal financial institution for promotion, financing and development of industry in a small
sector and co-ordinate the functions of institution engaged in the promotion and financing of developing
industry in small scale sector. Small scale industry contributes to the economy in terms of production,
employment and exports. Small scale industries with industrial units of not more than 10 million, SIDBI
assisted flow to transport wealth care and tourism sector and to professionals setting up small sized
professional ventures.

Objectives of SIDBI: - Four basic objectives of SIDBI financing promotion, development and
coordination.

Functions of SIDBI: -

• It refinances loans and advances extended by primary lending institutions.

• It discounts the rediscounts bills from scale of machinery or to manufacture by industrial units.

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• It grants direct assistance as well as refinance loans extended by lending institutions.

• Co-ordination and understanding by using the network of banks and state level financing institution which
have retail outlets. SIDBI entered into MOU with many banks, government agencies, international agencies
to facilitate and coordinate issues pertaining to development of small-scale industries.

Table 1.11

Financial Assistance by SIDBI (Rs. Crores)

Assistance 2013-14 2015-16 2016-17

Loans Sanctioned 2410 10820 2990

Disbursements 1840 6440 1360

Source: RBI Bulletin November 2020.

SIDBI has introduced equipment financing for assistance to existing well-run small-scale units for technology
up-gradation during the year 2015-16

SIDBI has set up a venture capital fund to assist entrepreneurs. With the table 4.8 it is clear that during 2000-
01 financial assistance sanctioned and disbursed by SIDBI amounted to Rs. 10820 crores and Rs. 6,440 crores
respectively. But the amount of loan sanctioned and disbursed both were declined in 2018-19 i.e., Rs. 2990
crores and Rs. 1360 crores respectively. It provides both direct and indirect assistance.

SIDBI widened its scope by liberalizing in terms of assistance. SIDBI provided refinance under ARS.
(Automate Refinance Shares). Under ARS term loan was fixed up to Rs. 10 lacs, which was later raised to 50
lacs and extend of refinance was raised from 75% to 90%.

SIDBI Code of Commitment

SIDBI commitment to micro, small and medium enterprises customers is that it provides easy, transparent,
speedy assistance to banking services to fulfil the day to day needs and requirements during financial crisis.

These code does not overpower the regulatory authorities and comply their guidelines from time to time.

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Objectives of Code of Commitment

• To give positive push to MSME’s by giving early access to the banking services.

• Promote good and fair banking

• Insurance transparency

• Effective communication to improve understanding

• Promote competition in market, so that MSME’s get better operating standards

• To fulfil the requirements in time, which build a confident relationship

Products covered by SIDBI under their commitment include fixed deposits, refinance facility, loan and
advances, issue of letter of credit, micro-finance, pre and post shipment credit.

SIDBI helps its customers to use the service by providing appropriate updates, by keeping them informed
about the change of interest rates, charges, term and conditions, keeping complaint and suggestion boxes at
appropriate places and provide complaint section in branches and on SIDBI’s home page to help customers
communicate with higher officials.

Customers personal and business information details will be kept private and confidential, SIDBI does not
differentiate on the basis age, sex, cast, religion, community or disability of the customers.

HDFC (Housing Development and Finance Corporation)

Housing Development and Finance Corporation (HDFC) is a pioneered housing finance company, which was
incorporated in 1977, by the founder chairman Hasmukh Thakorads Parekh. It is a model private housing
finance company for developing countries with nascent housing finance markets. Its head office is in Mumbai.
HDFC is India's premier housing finance company and enjoy an impeccable track record in India as well as
international market. Since its inception in 1977, the corporation has maintained a consistent and healthy
growth in its operation to remain the market leader in mortgage. Its outstanding loan portfolio covers well
over a million dwelling units; HDFC has developed significant expertise in retail mortgage loans to market
segments and has a large corporate client base for its housing related credit facilities. With its experience in

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financial markets, strong market reputation, large shareholder base and unique consumer franchise, HDFC
was ideally positioned to promote a bank in the Indian environment.

Objectives of HDFC:

1. Primary objective of HDFC is to enhance the residential stock in the country through the provision of
housing finance in systematic and professional manner and to promote home ownership.
2. Its main aim is to increase the flow of resource to the housing finance sector by integrating with the
overall domestic financial markets.
HDFC has extensive distribution network of 453 interconnected offices (including 140 offices of
HDFC sales) with outreach programs to several towns and cities all over India.
It has 3 representative offices in Dubai, London and Singapore offering home loan products to Non-
Resident Indians and persons of Indian origin. It has enhanced distribution through HDFC sales, HDFC
bank and third-party Direct Selling Association. HDFC diversified its financial services in banking,
insurance (life and general), asset management, real estate venture capital and education loans among
others. HDFC and its group companies consistently maintain leadership position in their respective
sectors.

HDFC (Housing Development Finance Corporation) Bank Ltd.

The Housing Development Finance Corporation Limited (HDFC) was established in 1994 with its registered
office in 1994 with its registered office in Mumbai, India. Unlike IDBI, IFCI and SFCs which are set up as
government owned Institutions. The HDFC was organized as a wholly owned private institution. The HDFC
was amongst the first to receive an “in principle” approval from the Reserve Bank of India (RBI) to set up a
bank in private sector, as a part of RBI’s liberalization of the Indian banking industry in 1994. HDFC Bank
commenced operation as scheduled commercial bank in January 1995.

Objectives of HDFC Bank Limited

HDFC Bank’s mission is to be world class Indian Bank. The objective is to build sound customer franchises
across distinct business so as to be the preferred provider of banking services for target and wholesale customer
segments and to achieve healthy growth in profitability, consistent with the bank’s risk appetite. The bank is
committed to maintain the highest level of the ethical standards, professional integrity, corporate governance
and regulatory compliance. HDFC Bank business philosophy is based on five core values are: -

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• Operational excellence.

• Customer focus.

• Product leadership.

• People.

• Sustainability.

The Indian financial system is broad-based in the year to come there is no doubt that the Indian financial
system will grow in size. All along with the introduction of liberalization policy in 1990’s the financial sector
needs to be restructured and supervision improved so that financial institutions play a catalytic role in
accelerating the process of development.

The financial sector reforms based mainly on the recommendations of the Narsimhan committee have changed
considerably the operating environment for both the banks and development financial institutions.

Thus, the financial institution in India have emerged as most dynamic and matured species of Indian financial
system and possess the tremendous potentiality to face any challenge to them.

MANAGEMENT AND WORKING ANALYSIS OF FINANCIAL INSTITUTIONS

(A) MANAGEMENT OF FINANCIAL INSTITUTIONS:

Organization pattern, operational process as well as the staff expertise is some of the main factors on
which the success of financial institutions depends. The Management of financial Institution, its shape and
structure, age and constitutions of staff and its expertise, the depth and width of experience gained by it,
operational philosophy and Institutional environment are all determined by the owner.

Organizational Structure of IFCI

IFCI was established on July 1, 1948, as the first Development Financial Institution in the country to cater to
the long-term finance needs of the industrial sector.

Management Organisation

The organisation structure of IFCI as its exists at present is given in chart 5.1. It shows that there are various
levels of management in the central organisations of corporation. The power of general supervisor, directions,
and management of the corporation are vested in the board of Director. The Board of Director with the
assistance of the executive committee, an Audit Committee, NPA Committee, Investors Grievances
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Committee. Engagement of Stressed Asset Management Special committee, Remuneration Committee and a
managing director exercises all the powers and discharge all the functions of the corporations.

The chairperson and managing director of IFCI head the day-to-day operations with the support of the
executive director and experienced professionals.

IFCI has hired private consultant to examine strategic options and draw up its business plan. Based on their
recommendations, IFCI has recognised into operational departments covering management of large assets,
credit co-ordination, asset recovery, corporate advisory services, and treasury. Foreign exchange and
resources. These new groups are supported in turn by services departments such as corporate accounts, legal
services, information technology, economic research, and human resources (as shown in structure of IFCI).

IFCI recruitment is based on work force assessment. For specialized discipline such as infrastructure, risk
management, economies, foreign exchange, information technology and legal affairs, recruitment is done
laterally. Government directives reportedly govern staff salaries, which are not market oriented. IFCI has good
relationship with its employees and their union.

At top level is the Board of Directors and after board of directors are Chairman and Managing Director. In
between these, two lies the executive committee, Audit committee, NPA Review committee, Investor's
Grievance committee. Engagement of Stressed Asset Management special committee, Remuneration
committee. After the managing director come in line of organisation the Executive Directors after it are the
Chief General Manager who give direction to the General Managers. Then comes the Deputy General Manager
they supervisor those particular departments to which they have been appointed. After its various departments
are there who work like AR Cell NPL Group, AR Cell Small NPL group, Legal Department and the General
Manager gives Asset Recovery Group, Large asset management cell, in this cell the direction. Next comes
Credit and Risk Management Department comprising credit Audit Cell and Internal Rating and Portfolio Risk
management cell, credit co-ordination division, planning and research department comprising industry
Research Division. Compliance division and Library and subsidiaries, information technology department and
Budget and MIS division, Human Resources including, Estates Division and security, Services division,
Business development corporate communication, Department of Hindi cell, Vigilance department. Inspection
and Audit department, corporate Advisory services including fee-based activities, corporate advisory services
for overseas ventures and infrastructure advisory, central account including pension cell, other regional office,
debt servicing, treasury operations. Disinvestment division, secretary's department are there under IFCI.

Organisational Structure of SFCs and SIDCs

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State Financial Corporations, being first state level development banks, were mostly established during 1950s,
under the State Financial Corporation Act, 1951 enacted by government of India. At present, there are 18 state
financial corporations (SFCs) in the country.

With the growing emphasis on balanced regional development, the need for establishing an effective
institutional framework for promotion of industries was well recognised. In additions to SFCs. during 1960s
the state governments set up State Industrial Development Corporation (SIDCs) to act as catalyst agents in the
industrialisation of States. The first SIDC was set up in Bihar in November, 1960. Since then, almost all the
states and union territory have established the SIDCs in their respective states.

Organization Structure UPFC - Uttar Pradesh Financial Corporation

The organisational set up of UPFC is shown in the chart-5.2 It shows that there are various levels of
management in the central organisation of the corporation. Under section of the SFC Act, 1951, the power of
general supervision, direction, and management of the corporation are invested in the Board of Directors.

Board of Directors:

In this corporation there are 12 directors including managing director and they are
appointed in the following manner as per provision of SFCs Act, 1951.

• 4 Directors nominated by the State Government.

• 1 Directors nominated by Reserve Bank of India.

• 2 Directors nominated by Industrial Development Bank of India

• 1 Elected Director to represent scheduled Banks

• 1 Elected Director to represent cooperative Banks.

• 1 Elected Director represents Insurance Companies, Investment Trust and other financial institutions.

• 1 Elected Director to represent shareholders other than the institutions referred in clauses (1) to (6) of SFCs
Act.

• 1 Managing Director, appointed by the State Government in consultation with IDBI.

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The UPFC Chairman and Managing Director both are IAS officers. Besides two directors out of three
nominated by State government are also IAS. The usual practice among the various SFCs had been to have an
industrialist or a non-official as the chairman and a civil servant or a banker as the Managing Director.

The Board of Directors is primarily concerned with internal policy formulation and overall management
and control of the corporation.

The government nominated directors is generally IAS having no professional experience. Non-officials should
also be nominated as Directors. This needs to draw in the Board, the persons having wide experience in the
field of development banking and financial matters.

Chairman:

According to the SFC Act, 1951 the chairman of the corporation shall be appointed by the Board from
amongst its directors with the concurrence of the State government. The practice is that the Principal Secretary
to U.P. Government, department of industries and export promotion uses to be the ex-officio chairman of
UPFC and thus, the chairman is not a whole-time officer of the corporation.

Managing Director:

The SFCs Act, 1951 provides for appointment of the Managing Director by the State government in
consultation with IDIAI and the Board of Directors of the Corporation. The Managing Director is a whole-
time officer of the corporation and holds office during the pleasure of the State government. As a matter of
principle, the Managing Director performs such duties as the Board of Directors may. by regulations, entrust
or delegate to him. He is an ex-officio chairman of the Executive Committee, Internal committee and recovery
review committee. As a matter of fact the managing director looks into the day-to-day working of the
corporation and his duties and responsibilities are very wide.

Executive Committee:

UPFC has an executive committee to assist the Board of Directors in various matters. The executive committee
deals with the matters which are within the competence of the Board of Directors, subject to such general or
special directions as the board may, from time to time. Thus, the role of Executive committee in management
of the corporation is quite important and infect, the various policy decisions are taken in the recommendations
of this body. Managing Director of the corporation is the ex-officio chairman of the Executive Committee. In
addition to him, there are 5 other members chosen from board in the following manner: -

1) Two members chosen from among directors nominate by State government.

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2) Two members chosen from among the directors nominated by RBI and IDBI and

3) One member chosen from among elected directors.

Internal Committee:

Under the provisions of SFC Act one or more advisory committee or committees may be appointed by the
corporation for the purpose of assisting the top management in the efficient discharge of the functions. It is
surprising that UPFC had not been appointing any such committee in the past. It was only in 1974-75 that one
standing advisory committee known as 'Internal Committee' was constituted for the first time with Managing
Director as chairman and three other officers of the corporation as members.

Recovery Review Committee:

UPFC constituted second advisory committees, viz., Recovery Review committees in the year 1979-80. This
committees is constituted by the board to review the chronic default cases and suggest measures for improving
the recovery position.

Internal Organisation:

At the Head Office of the corporation there are two General Managers, 3 deputy general managers, one deputy
general manager-cum-secretary to assist the Board and managing director in the execution of the policies of
the corporation. In addition to this, there are other subordinate officers as well, who supervise and control the
working of different departments.

The entire work at Head office has been divided broadly in fifteen departments. These are: Development,
Appraisal, Disbursement, Refinance. law, Resources Management and Accounts, Management Services.
Rehabilitation, Internal Audit, Administration, Special Schemes, Recovery, Planning and Monitoring, Small
Loans and Corporation Secretaries. The corporation secretariat department has been further divided in
reception, stationery and insurance sections. Apart from these managing director, general managers, deputy
general managers and secretary have their own cells. These consist of Personal assistant, stenographers and
assistants.

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Regional and Branch Organisation:

The Regional committee was constituted in the year 1978-79 for each region to
assist the regional manager in the discharge of his duties. The composition of the Regional Committee as for
each region is as follows –

1. Regional Manager - Chairman

2. Senior Manager - Member Dy. Senior Manager (Finance)

3. Senior Manager/ - Member Dy. Senior Manager (Tech.)

4. Senior Manager/ - Member Dy. Senior Manager (Law)

Branch Offices:

Two branch offices of the corporation are located at Almora and Srinagar (Garhwal). They are managed by
Branch Manager, a few Assistants and Typist etc. The branch offices have no authority for appraisal, sanction,
documentation and disbursement of the loans. The work of these offices is to provide information about the
financing facilities to the prospective borrowers and send their loans applications to the concerned regional
offices. Besides this, these offices undertake the work of recovery of loans.

UPSIDC (U.P. State Industrial Development Corporation)

A. Management Organisation

The organisation design of UPSIDC is given in chart 5.3 It shows that there is
multi-tier system of management in the central organisation. Since UPSIDC is incorporated as a state
government owned private limited company under Indian Companies Act, 1959 It has a Board of Directors
at the top of its managerial hierarchy. The Board of Directors being in supreme command occupies a strategic
and private importance in its organisation as in the case of all private limited companies.

Board of Directors:

In UPSIDC, there are around 14 directors including chairperson and managing director. The State
government nominates six of its directors. Eight are elected in the general meeting of the corporation.
Chairman's from amongst nominated directors Managing director is appointed by State Government. Except

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 managing director all other directors have the tenure for one year but they are generally nominated or re-
elected.

Composition of Board of Directors of UPSIDC is as follows

6 Directors nominated by State Government

8 Directors elected by General Body.

Of the six directors nominated by the State government, all are from IAS cadre, out of which one is appointed
as Chairman and one as Managing Director. Of eight elected directors six are industrialists, one is chartered
accountant and remaining one is an officer of Northern Railway. In UPSIDC, chairman and managing director
both are IAS officers.

Besides four more director nominated by State government are IAS. The chairman of both the
corporations - UPFC and UPSIDC is the same person i.e. Principal Secretary, Industries Department of U.P.
Government. The Board of Directors is primarily concerned with Policy formulations and overall management
and control of the corporation. The Board is allotment authority of industrial sites of more than 5 acres. The
sanctioning power for equity participation, promotion of industrial units in joint/assisted sector, underwriting
and bridging are vested in the Board.

It is guided by the State government in planning its operations. As the corporation provides infra-structural
facilities, incentives and technical assistance, in addition to financial assistance, it is responsible for rapid and
balanced industrial growth of the state.

Chairperson:

As per Article of Association of UPSIDC, the Board of Directors shall appoint the chairperson of the
corporation with the concurrence of State Government. The person to be appointed as the Chairman must be
a director of the Corporation. The practice has been that the principal secretary to U.P. Government,
department of industries becomes the ex-office chairman of the corporation and thus the chairman is not the
whole-time officer of the corporations.

Managing Director:

According to the Articles of Associations of UPSIDC, the Board of Directors shall, with the concurrence of
Government of U.P. appoint any one of the directors as managing director of the corporations. In practice itis
the State government who appoints managing director. Managing director always has been a man of 1AS
cadre.

The managing director is a whole-time officer of the corporation and holds office during the pleasure of State
government. The managing director looks into day-to-day working of the corporation and his duties and
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responsibilities are very wide. The managing director performs all such duties as the Board of Directors may
entrust or delegates to him. He is the ex-officio chairman follow up committee. He is empowered to determine
the quantum of assistance under equity participation scheme within the maximum limits.

General Manager:

After managing director come general managers in the hierarchy of the management of the corporations. The
general manager assists the managing director in the performance of his duties. General Manager is
responsible for ensuing co-ordination among various departments of the corporations. He is responsible for
supervision of the work of field offices also. He is chief executive officer of the corporation to deal with day-
to-day functioning of the organisation.

B. Internal Organisation
At the Head office of UPSIDC, there are Deputy General Manager, senior managers, chief managers,
legal advisor, administrative officer and secretary and other subordinate staff to assist the Board and
Managing Director in the discharge of their duties. The entire work at the head office level was been
divided into 8 departments.
1. Secretarial Section
Secretarial activities relate to the matters connected with Board meetings and general meetings and
routine correspondence from the UPSDIC. To keep records of various activities of the corporation and
publicity is also the responsibility of this section: This section is headed by Secretary, who has under
him deputy secretary and assistant manager, besides helping staff to assist him in the execution of his
secretarial activities.
2. Administrative Section
The section is under the control of administrative officer who is at present a person from PCS cadre.
Administrative officer has under him, an assistant manager to look after matters relating to
appointment, promotion, training, transfers and postings of employees of the corporations.

3. Legal Section

The section is responsible for seeing that in performing various activities all the legal formalities related to
appraisal, documentation, follow-up and recovery are performed properly to safeguard the interest of the
corporation. This section frames the various regulations and advises the management on various legal matters.
This section is headed by legal advisor, under him additional legal advisor and an assistant manager.

4. Project Section

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The function of this section is to do survey work, pre-sanction inspection of assisted and joint sector units
and to do entire work related to technical economic and financial appraisal of applications for various kinds
of assistance. The section is under the control of the deputy general manager (project) and is assisted by Chief
Manager (project), two senior managers, two managers, two deputy managers. One manager and one deputy
manager are engineers in this section.

5. Finance Section

This section is responsible for all work relating to underwriting of securities, equity participation and
sanctioning of bridging loan. This section is also responsible for the disbursal of assistance and recovery of
various dues of the corporation. The raising of order and resources is also the job of this department. This
section is headed by the Deputy General Manager (finance) who is assisted by senior manager, a manager and
a deputy manager. The function of this section is very important as this section must have experts in the field
of finance and business management.

6.Industrial Area Section

The function of this department is to develop industrial areas in various parts
of the State of U.P. To select the new site for developing industrial area is the most important duty of
this department. This section receives and processes the applications of entrepreneurs applying for
industrial plots/shed. The whole state of U.P. is their area of work.

7.Accounts Section

This section maintains accounts relating to financial assistance and other receipts
payments relating to the corporation. This section is responsible for completion and analysis of data
relating to operations of the corporation audit and taxation etc. This section is under the control ofchief
manager (accounts) who is assisted by a number of manager, deputy manager and assistant managers.

8.Architecture and Town Planning Section

The development of industrial areas is the most important function of the corporation there is full-
fledged section of Architecture. The activities of this section include the preparation of map and layout
of various industrial areas, plot and shades.

Organizational Structure of IDBI

IDBI was established in 1964 under the Act of Parliament for
providing credit and other facilities for the development of industry. It also acts as the principal

105
financial institutions for co-ordinating the activities of institutions engaged in the financing, promotion
or developing of industry.

Management:
The general superintendence director and management of the affairs and business of the
Development Bank shall vest in a Board of Directors which may exercise all powers and do all such
acts and things as may be exercised or done by the Development Bank and are not by this Act expressly
directed or required to be done by the Development Bank in general meeting.
A Board of Directors governs IDBI and its operations are carried out under the supervision of the
chairperson and managing director who are appointed by the central government. The same person
may be appointed to function both as chair and as managing director. One whole-time director
appointed by the Central government on the recommendation of the Board; two directors who shall be
official of the Central government nominated by the Central government. Three directors from
amongst persons having special knowledge of, and professional experience in science, technology,
economics, industry, banking industrial co-operatives law, industrial finance, investment,
accountancy, marketing or any other matter, the special knowledge of and professional experience in
which would in the opinion of the Central government be useful to the development bank, nominated
by the Central government and such number of directors elected in the prescribed manner, by
shareholders. Other than the Central government whose names are entered in the register of
shareholders of the Development bank 90 days before the date of the meeting in which such elections
take place on the following basis like –

• Where the total amount of equity share capital issued to such shareholders is ten percent or less
of the total issued equity capital two directors where the total amount of equity share capital issued to
such shareholders is more than 10% but less than 25% of the total issued equity capital, three directors
and
• Where the total equity share capital issued to such shareholders is 25% or more of the total
issued equity capital, four directors.

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Organizational Structure of IDBI:
A meeting of the Board shall be held at least once every three months and
at least four meetings s hall be held every year and the meeting may be hold at such places as may be
prescribed.
Notice of every meeting of the Board shall be given in writing to every director for the time being in
India, and at his usual address in India to every other director subject to the provision, the Board may
meet at such times and places and shall serve such rule of procedure in regard to transaction of its
business including the manner of adopting of resolutions.
Chairperson and the managing director being nominated by the chairperson in his behalf and in the
absence of such nomination any director elected by the directors present from among themselves, shall
preside at the meeting.
All question which come up before any meeting of the Board shall be decided by a majority of votes
of the directors present and voting and in the event of an equality of votes, the chairman or in his
absence of both the chairman and the managing director, the person presiding shall have a second vote.

Executive committee and other committee:

The Board shall constitute an executive committee consisting of the chairman, the managing director,
the whole-time director and such other directors as it may deem fit.
The executive committee shall discharge such further as may be delegated to it by the Board. The
Board may constitute such other committee whether consisting wholly of directors or wholly of other
persons or party of directors and party of other persons for such purposes as it may think fit.
The director and the member of committee shall be paid such fees and allowances as may be prescribed
for attending the meeting of the Board.
No fees shall be payable to the chairman if he is appointed whole time. or to the managing director or
to the whole-time director or to every other director who is an official of the government.

Disqualification of director:
A person is not eligible for director in this Institution if he has been formed to be of unsound mind, is
an undischarged insolvent etc.

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 The IDBI Institutional Structure

Project Appraisal Department

PAD appraises all the industrial project proposals PAD projects constitute the
majority of projects sanctioned by IDBI in terms of value. Besides a number of smaller projects are
funded at the branch level.

Corporate Finance Departments

The three (CEOs) Corporate finance department follow up on the projects that have
already been sanctioned, in order to ensure their timely implementation and proper utilization of funds.
Relationship’s manager was instituted with in the CEOS. These managers will be dedicated to manage
IDBI's interactions with a major industrial (ownership) group.

Forex Service and treasury department

The treasury and funding division contracts decides on utilization and monitors all lines of credit from
multi-lateral institutions like World Bank (WB) and the Asian Development Bank (ADB). Its head
office is in Mumbai. IDBI has 3 additional officers throughout India. As on November 1998, IDBI
was structured into 33 departments which are organised into five groups to facilitate proper distribution
of responsibility.

Organisational Structure of IIBI

IRCI (Industrial Reconstruction Corporation of India) was set up in 1971 for rehabilitation of sick
industrial units, was reconstituted as IRBI (Industrial Reconstruction Bank of India in 1985). With a view to
convert it into a full-fledged DFI, IRBI was incorporated in March 1997 as IIBI (Industrial Investment Bank
of India) under companies Act, 1956.

The Board of Directors and the governing body manage most of the public enterprises. It is experienced that
whether the institution is conducted by Board of directors or by Governing board. The basic managerial
structures are of three tier system. At the upper level comes the top management constituent of Managing
director, directors, shareholders, board of director etc. Next comes the middle management like managers etc.

At last, comes the lower manager like foreman and workers due to lack of proper information regarding the
organisational structure of IIBI so it become difficult to know its functioning but IIBI render both the financial
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and non-financial services that reason it may be having different departments, committee which may follow
its different works which provide help in the Development of industrial growth of our country.

Organisational Structure of SIDBI

SIDBI has been established in April 2, 1990 by the Government of India with its
headquarter in Lucknow, Uttar Pradesh as the Principal financial institution for promotion, financing and
development of industries in the small scale sector and to co-ordinate functions of the institutions in the small
scale sector.

The general superintendence, direction and management of affairs and business of the small industries bank
shall vest in a Board of Directors which may exercise all power. The Board of the SIDBI consists of chairman
and managing director appointed by the central government; two whole-time directors appointed by the central
government; two directors who shall be officials of the Central government nominated by the Central
government; three directors to be nominated on the prescribed manner by the Development bank, the public
sector banks, the General Insurance corporation, the life insurance corporation and other institutions owned
or controlled by the Central government; three director including on director from the officials of SFC,
nominated by the Central government.

Meeting:

A meeting of the Board shall be held at least once in every three months and at lest found meetings shall be
held every year. The chairman and managing director, if for any reason is unable to attend a meeting of the
Board, any other director nominated by the chairman and managing director in his behalf and in the absence
of such nomination, any director elected by the directors present among themselves, shall preside at the
meeting.

All question which come up before any meeting of the board shall be divided by a majority of votes of the
directors present and voting and in the event of an equality of votes, the chairman and managing director or
in his absence, the person presiding shall have a second or casting vote.

Executive committee and other committees

The board shall constitute an Executive committee consisting of the chairman and managing director, the
whole-time directors and such other directors as it may deem fit. The Board may constitute such other
committee whether consisting wholly of directors or wholly of other persons or partly of directors and partly
of other persons for such purpose as it may deem fit.
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The directors and the members of committee shall be paid such fees and allowances as many as prescribed for
attending the meetings of the Board or of any committee constituted in pursuance of this Act and for attending
to any other work of the Small Industries Bank.

No fees shall be payable to the Chairman and managing director or to the whole-time director or to any other
director who is an official of the government.

Disqualification of Directors A person shall not be eligible for being elected as director if he is an undischarged
insolvent, has been found to be unsound mind by a court of competent jurisdiction and the finding is in force,
is an undischarged insolvent and has applied to be adjudicated as an insolvent and his application is pending,
are some of the reason which disqualify a person in becoming director.

Organisational Structure of ICICI:

The Industrial Credit and Investment Corporation of India (ICICI) Ltd. was set up in 1955 and it provides
long and medium-term assistance in the form of loans or equity participation of the creation, expansion and
modernisation of individual enterprises.

The Industrial Credit and Investment Corporation of India also serves to encourage and promote the
participation of private capital, both internal and external, in ownership of industrial investment and the
expansion of investment markets in particular by : providing finance in the form of medium term loans or
equity participation; guaranteeing loans from other private investment sources; sponsoring and underwriting
new issues of securities; making funds available for reinvestment; and furnishing managerial, technical and
administrative advice and assisting in obtaining managerial, technical and administrative services to Indian
industry.

It renders retail banking and internet banking services it supply venture capital provide asset credit, provide
lease financing facility, provide treasury and custodial services to promote sector industrial enterprises.

Management of ICICI:

ICICI is a professionally managed organization. Its board of directors consists of professionals, fulltime
directors and a government nominee. The managing director and chief executive officer manage day to day

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operations with the support of the joint managing directors, 7 executive directors and a pool of competent
professionals from various disciplines. Its head office is in Mumbai.

After transforming into a visual banking, ICICI's organizational structure was revamped only in its five groups
is retail banking, wholesale banking a corporate centre, international banking, project finance and special asset
management. Training is important for ICICI to meet challenges in the financial sector-particularly important
is overall competency development of executive and staff.

ICICI has built strong capabilities in training and development, with training and leadership programs and a
dedicated training faculty. ICICI bank uses the best available training programs and personnel both Indian and
Foreign to build skills and capabilities on a global standard.

ICICI bank undertakes campus and lateral recruitment. ICICI bank encourages employees to work in different
departments enriching their knowledge and experience, giving them a broader view of the organization and
ensuring that the bank finds the best uses for them. Salaries are at market trends, helping attract talented
professionals, ICICI bank has a good relationship with its employees. Now it may be concluded that for
improving organisation effectiveness in the financial institutions like IFCI, ICICI, IDBI, SFC (UPFC,
UPSIDC), IIBI and SIDBI it is necessary to have expertise-oriented board and scientifically designed internal
organisation.

IDBI the apex development internal organisation provides refinance facility to UPFC, UPSIDC. Hence it is
imperative that IDBI should look into the organisational matters of these corporations and give its direction
from time to time. IDBI's organisation structure is driven by its business objectives of offering the best services
to the major industrial groups. The organisational structure is geared to provide the best products and services
to meet its developmental role. SIDBI as an apex institution, provide assistance for the development of small-
scale units had lot of members in its board of directors.

Their contribution cannot be under estimated as they have played an important role in making SIDBI an
important financial institution. There are various committees in all the financial institution which help them a
lot in performing there work effectively and efficiently.

(B) WORKING ANALYSIS OF FINANCIAL INSTITUTIONS:

The success or failure of any organization to a great extent depends on

its working pattern. In order to analyze and evaluate the financial working of different financial institutions
we have done financial statement analysis and ratio analysis.

Financial Statement Analysis:

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It includes the detailed analysis of items of income and expenditure statement and balance sheet of any
organization. It gives a clear picture of the financial position of any organization during a particular period.
Thus, financial statement analysis provides us a base for comparative analysis. This analysis helps to various
users of financial statements such as customers, investors, government, shareholders, competitors etc. and
assist them in their decision-making.

Income and Expenditure Account

Expenditure – It means the total amount of money that an organization spends. There are two types of
expenditure i.e., Capital and revenue expenditure. Capital expenditure are that expenditure which are done by
an organization with a view to acquire or improve a long-term asset such as equipment’s or buildings. Whereas
revenue expenditure includes the operating expenses of any organization. The expenditure of financial
institutions under study (HDFC, ICICI, IFCI, and SIDBI) broadly includes payment of interest, depreciation,
provisions for NPAs and other expenditure. Out of total expenditures incurred by these financial institutions,
it is observed that the payment of interest contributes almost 80 – 90% of the total expenditure. So, a detailed
analysis of the interest payment during the year 2015-16 and 2016-17 is done to understand the trend of this
aspect of expenditure of these financial institutions.

It is noted that interest expenditure of HDFC increased by 10.8% i.e., from Rs. 326299.33 million in 2015-16
to Rs. 361667.3 million during 2016-17. Interest expenditure increased by 2.8% from Rs. 315153.95 million
in 2015-16 to Rs. 324189.59 million in 21016-17 of ICICI. Interest expenditure of IFCI has declined
marginally by 0.9% during 2016-17 which was Rs. 25167.2 million in 2015-16 and gone down to Rs. 22893.20
million in 2016-17. Whereas the interest expenditure of SIDBI during 2016-17 has increased by 15.5% i.e.,
from Rs. 35020.78 million to Rs. 40463.62 million.

he studies reveals that HDFC, ICICI & SIDBI interest payment have increased successively in 2015- 16 &
2016-17 out of which HDFC and SIDBI registered a growth rate of 10.8% and 15.5% respectively. Whereas
the position of IFCI is not much satisfactory. There has been a fall in the payment of interest. In IFCI it went
down by 0.9% during 2016-17. From the above analysis it is observed that HDFC & SIDBI’s performance is
better than the other financial institutions under study. Their interest expenditure is high which means their
deposits are also increasing from 2015-16 to 2016-17.

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Income:

The income statement of this financial institution discloses two measure elements i.e., interest income and
other income, which almost constitute 90-95% of the total income these institutions. Which is being further
analysed as under:

a) Interest income – Interest is a important source of income to all these financial institutions.

It is noted that in the year 2015-16 the interest income of HDFC was Rs. 602214.45 million while it was
increased up to Rs. 693059.58 million in the year 2016-17, which was increased by 15%. The interest income
of SIDBI is also increased by 9.5% during the year 2016-17 which was Rs. 55418.24 million in 2015-16 to
Rs. 60708.37 million in 2016-17. Whereas the interest income of IFCI was declined by 26.9% which was Rs.
34398.30 million in 2015-16 to Rs. 25135.40 in 2016-17. ICICI interests’ income in the year 2015-16 was Rs.
527394.35 million while it was increased up to Rs. 541562.80 in the year 2016-17, which was increased by
2.6%. The study reveals that HDFC, SIDBI and ICICI interest income have increased successively in 2015-
16 and 2016-17 out of which HDFC and SIDBI a growth rate of 15% and 9.5% respectively. Whereas the
position of IFCI is not very much satisfactory. The growth rate of interest income of HDFC is highest as
compared in two successive years i.e. 2015-16 and 2016-17 by 15% and the lowest is of ICICI i.e. by 21.6%.
It means HDFC, ICICI and SIDBI are receiving a great income from the interest.

Other income:

Other income comprises interest of staff advances, profit on sale of fixed assets, rental income, divided, profit
on sell of shares or debentures, business service fees etc. Other income constitutes a great part of the total
income of the financial institutions.

The study reveals that the other income of HDFC has increased from Rs. 107517.23 million in 2015- 16 to
Rs. 122964.99 in 2016-17 i.e., 14.36%. The other income of ICICI has also increased in 2016-17 from Rs.
153230 million in 2015-16 to Rs. 195044 million i.e., by 27.2%. This is a good sign for the financial position
of ICICI bank.

The other income of IFCI in the year 2015-16 was Rs. 5668.1 million which shows that there was a declined
i.e., Rs. 3607 million in 2016-17. Which shows that there is decline of 36.36% in other income of IFCI during
the period. Whereas the other income of SIDBIs shows an increase which was Rs. 2427.8 million in 2015-16
to Rs. 2749.6 million in 2016-17 which have increased by 13.26% during the period.

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Of the above analysis it is observe that the other income of ICICI is the highest out of other financial
institutions. From the study, it is clear that the other income of HDFC, ICICI and SIDBI shows an increase
that is a good indicator of their financial position.

Book Value Analysis: -

The book value comes under the market test ratio Marker test ratio. It is related the firm’s
stock price to its earnings and book value as per share. These ratios give management, an indication of what
investors think of the company’s part performance and future prospective. If firms’ profitability, solvency,
turnover ratio or good then the Marker test ratio will be high and its share price is expected to be high. Out of
these market test ratios like Dividend pay-out ratio of all these ratios the book value is of great importance.
The book value expresses the summation of Equity, capital and reserves while detecting the losses.

It can be expressed in the following manner: -

Book Value = Equity Capital + Reserve – Profits and loss debit balance Total

no. of Equity Shares

This ratio indicated the net worth per equity share. The book value is a reflection of the part earnings and the
distribution policy of the company. A high book value indicates that a company has huge reserves and is the
potential bonus candidate. A low book value signifies the liberal distribution policy of bonus and dividends,
or alternatively a poor record of accomplishment or profitability.

A comparative statement of book value of the financial institutions HDFC, ICICI, and IFCI are as under –

The book value of HDFC was 181.23 in the year 2013-14 which has been increased Rs.247.39 in 2014- 15.
The book value of HDFC shows and increasing trend over the period of study, which is a good sign for the
institution. In 2015-16, it has increased to Rs. 287.47 and in 2016-17; it has gone up to Rs. 349.12.

The book value of ICICI has also shows an increasing trend, which reflects that net worth per equity share,
has increased. This means that the firm’s earnings and the distribution policy is good and satisfactory. The
book value of ICICI was Rs. 126.80 in 2013-14, which has increased to Rs. 138.74 in 2014-15. It has further
increased in the year 2015-16 and 2016-17 that are Rs. 154.32 and Rs. 171.61 respectively. IFCI book value
keeps a declining from several years, which does not leave a good impact of the institution.

The book value of IFCI in the year 2013-14 was Rs. 36.9, which has decreased to Rs. 36.1 in year 2014-15.
In 2015-16 there was an increase in the book value of IFCI i.e., Rs. 36.9 similar to year 2013-14. In the year
2016-17, it had further decline to Rs. 34.2, which is not a good sign for the institution. Income and expenditure

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account is maintained by the organization to show the various sources by which the income of Institution is
generated and various expenditure that are the uses of funds by these institutions for productive purposes.

With the help of income and expenditure account, the company reveals information about the income and
expenses during the particular period i.e. financial year. Out many expenditures in the income and expenditure
account, the payment of interest constitute a major part and analysed in this study. The study revealed that the
payment of interest had increased in all the financial institution during the period 2015-16 to 2016-17 expect
IFCI. This shows that IFCI is not in a better position. HDFC and SIDBI registered a significant increase in the
payment of interest during the period.

The income account discloses the major elements i.e., interest income and other income. HDFC
interest income is highest among all the other financial institution. It registered a growth rate of 15%. Thus,
interest income constitutes a major part of total income of HDFC. The other income of HDFC, SIDBI and
ICICI registered a significant increase over a period of 2015-16 to 2016-17. But in the other income ICICI is
highest among the other financial institutions under study. It registered a growth rate of 27.2 percent in the
other income whereas HDFC and SIDBI registered a growth rate of 14.36% and 13.26% respectively. By
analysing balance sheet, it can be re revealed that the HDFC is earning higher profits than the other financial
institutions.

IFCI balance sheet depicts that its financial position is not up to the mark. It has to improve institutions so that
it can raise its profits. The performance of financial institution may be appraised by taking into consideration
the various ratios. By the help of ratios, it is easy to compare the present performance with the past as well as
to depict the area in which particular business is comparatively advantaged or disadvantaged.

Return on capital employed and return on net worth helps in knowing about the profitability of the Institutions.
Among the various financial institutions, the key financial ratio of 3 financial Institutions namely HDFC,
ICICI and IFCI are taken into account over the period of 4 years i.e., from 2013-14 to 2016-17 for the purpose
of analysis.

The study revealed that HDFC Return on long-term funds (ROCE) is higher in comparison to ICICI and IFCI.
HDFC registered its highest ROCE in the year 2013-14 that was 81.47% where is ROCE of IFCI is lowest
among the three Institutions, this shows that IFCI is facing a lot of problem. Earnings per share (EPS) is an
important measure of economic performance of a corporate entity.

The EPS of HDFC is the highest and again that of IFCI is lowest. The higher EPS means that its capital
productivity is also high. Debt equity ratio is measured for getting the long-term solvency of any institution
in the proportion of debt to equity is low, it means company is said to be low geared. HDFC, ICICI, and IFCI
have shown a declining ratio, which is positive sign for it. IFCI Debt-equity ratio is lowest among all the three
financial institutions.

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 Chapter No.5: CONCLUSION FINDING AND SUGGESTIONS
After going through my whole research work, facts and summaries, I have come to the conclusion that the
role played by the financial institution in promoting the economic development of the country is very vital
since inception. This can be judged by comparing the performance of different sectors before and after the
establishment of these institutions. They have helped in improving the overall economic situation since the
date of their inception. In the industrial sector, IDBI is an example, which has assumed the responsibility of
delivering the growth of different sector of the economy. It has provided financial assistance and other
financial services to the various sectors of economy according to their requirements.
It has diversified its activities and provided funds to various areas and people who needed such boost. Due to
initiative taken by these institutions, the latest technology, machineries, equipment and technical know-how
have been quite accessible by various sectors of economy. Our country has gained the advantages of
industrialization only after the establishment of these institutions. Earlier, our economy has faced a huge
financial crunch in this sector. In other words, we can say that these financial institutions have always assumed
the responsibility of diversifying the available resources of the economy to various areas and sectors, so that
we can obtain a balanced economic development of each and every region. It results in the equal development
of all its sectors and areas. These financial institution acts as a bridge between the savings and investments in
the country, which provides a boost to the production capacity of the economy, which results in the
improvement of production opportunities, generation of employment and an increase in the Gross Domestic
Product GDP and also an increase in the National income. Only, because of these financial institutions we
have now become self-sustainable and self-dependent due to the improvement in the economic situation of
the country.
With the development of economy, the financial needs and requirements of all sectors like agriculture,
industry, services and infrastructure also increases rapidly.

Thus, financial institutions in India have emerged as most dynamic and matured species of the Indian
Financial System and possess tremendous resilience and potentiality to face any challenge to them. Financial
Institutions not only perform as an engine but also act as an intermediary which leads to growth factor in
desirable objectives. Financial institutions are not only act as lending agencies but they played a major role in
exploiting the strength of finance and all the other resources provide maximum benefits to the country.

As we can see the main instrument of working of all these institutions is finance. Thus, finance has played a
crucial role through these financial institutions in the growth of economy. These institutions have played a
vital role, to raise and disburse scarce resources in such a manner that they can serve the socio-economic
objectives of the nation.

In our country India, a developing country, there is the necessity of the growth of these financial institutions
for the overall growth of the country. India, to become a developed country needed not only the expansion of
the existing financial institutions but also the opening of new ones.
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The living standard of a person has become very high. More needs, more demands and more production
process are there. Thus, in a state of significant strides in economic activity and managed efforts for the
increased production and the holding of the price-line, the role, that banking systems are called simultaneous
to play, must essentially be significant. In the year 1990, reforms in financial and banking sector in India
started. The chief purpose behind the introduction of betterment was deteriorating the financial health and the
sub-standard performance of Public Sector Banks that until then nearly liked a monopoly position. These
banks were not only troubled with rising Non-Performing Assets but also the scored low regarding customer
service and immediately after the liberalization of Indian economy, the use of information technology while
banking operations started, the bank started entering the scope of financial services. In the early 1990s, there
were structural adjustments of first magnitude in global banking system. Large-scale incorporations,
amalgamations, and purchases between the banks and financial institutions supported them in their extension
due to their size and financial powers of the merged institutions. Thus, in recent times, the newly developed
financial groups can maximize scale and scope economies by expanding all the financial services under one
umbrella. Private and foreign banks have joined large scale in India and offered the element of competition
handling on wave of technology and in the customer service. With the creation of cutting-edge technology,
these banks have reduced the number of physical branches and the related overhead costs, thereby increasing
the amount of trade and profits.

Due to liberalization, privatization and globalization during the post-reform period, there are some problems
and challenges facing the Indian banking sector. Major problems and challenges, which Indian commercial
banks are facing today, are as below

➢ Under profitability
➢ Less productivity
➢ High NPAs
➢ High operating costs
➢ High provisioning
➢ Problem of Rumours
➢ The problem of customer comfort
➢ Complex and non-responsive organizational structure
➢ Common asset management
➢ Low work culture
➢ Low credit-deposit ratio
➢ Disaster time of global and its impact on Indian banks
➢ Insufficient automation

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There are number of studies have been published on financial performance and its evaluation of the banks in
India, performance comparison between public and private sectors banks and other financial organizations but
analysis in case of HDFC

Bank still remain unexplored on certain parameters. The researcher tries to fill this issue with the evidence by
extending the specific context of the banks. Therefore, the primary purpose of the present study is to compare
and assess the financial performance of HDFC Bank by examining different parameters, ratios and measures,
impact of the deposits and advances on profitability, business per employee and profitability per employee of
HDFC Bank for last ten years’ production reports in order to improve their banking services.

The establishment of these institutions helped in the improvement of not only the industrial sector but of other
sectors also like agricultural sector. The agricultural sector has experienced a great productivity because these
institutions provide funds and other financial services to this sector and protect them, earlier before the
establishment of these financial institutions, there was a huge financial crunch in this sector, which was
preventing the sustainable growth of this sector. “Green Revolution” has been considered as a golden period
of the Indian agriculture sector, which was a result of financial assistance and financial services provided by
the financial institutions. Due to these institutions the irrigation facilities were also improved and ultimately
results in the improved productivity of the agricultural sector.

Thus, these financial institutions have played a major role in the improvement of all the sectors of economy,
which in turn improves the Gross Domestic Product, standard of living of the people, the per capita income
and employment generation in the economy. The credit of all these improvements and overall economic
development of the country goes to these financial institutions only.

At present time, although these institutions are facing a great competition from various domestic and
international level institutes but they will resume their responsibility as in their past and will always ready to
help the nation in developing a viable nation economy.

The Indian financial system is broad based in the year to come, undoubtedly the Indian financial system will
grow in size. After the introduction and announcement of new economic policy 1990, the financial institutions
have been well-structured and played a major role as a catalyst in accelerating the growth of the economy.

Due to LPG policy in 1990, the financial sectors of the country have experienced huge changes in the money
and capital markets and this leads to promote the economic development of a country. These policies have
introduced reforms efforts in terms of in strengthening production norms, enhancing transparency standards
and positioning best management practices.

The operating environment for both the banks and DFIs have been changed with the financial sector reforms
mainly based on Narsimham committee.

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IDBI has provided financial assistance to various sectors of economy and has formulated their strategies and
operational policies for the sustainable growth of the country.

IFCI has also formulated suitable policies and delivers its responsibility to various sectors of economy by
fulfilling their diverse needs of genuine industrial and economic growth. It has rendered assistance to various
projects belonging to different states of the country.

ICICI has come to be more reorganized and vibrant financial institution which offers a wide range of financial
products and services to various sectors of economy, which in turn results in the overall economic
development of the country.

The IIBI provide short term loans to companies to meet their fund requirements. They also offer bank
financing in the form of working capital and other short-term loans.

SIDBI has emerged and established as an apex financial institution to render services to the small-scale
institution as well as medium scale industries. Thus, it played a major role in the development and growth of
India's small and medium scale industrial sector.

Over the years HDFC has involved as “World Class Bank of India” providing total financial solution under
one roof. It has played a major role in the development of economy by providing housing finance, credit
rating, venture capital and various types of financial products and services to different sectors of economy.
HDFC is one of the largest private sector banks having unique standing among the other financial institutions.
HDFC has set an example over the last few years by providing sustainable value to customers, corporate
clients and investors. It offers a wide range of products, services and distribution capability under an umbrella
brand. Thus, it has remarkable contribution in the overall growth of the economy.

Income and expenditure account is maintained by the organization to show the various sources by which the
income of Institution is generated and various expenditure that are the uses of funds by these institutions for
productive purposes.

With the help of income and expenditure account the company reveals information about the income and
expenses during the particular period i.e., financial year.

Out of many expenditures in the income and expenditure account, the payment of interest constitutes a major
part and analysed in this study. The study revealed that the payment of interest had increased in all the financial
institution during the period 2015-16 to 2016-17 except IFCI. This shows that IFCI is not in a better position.
HDFC and SIDBI registered a significant increase in the payment of interest during the period.

The income account discloses the major elements i.e., interest income and other income. HDFC interest
income is highest among all the other financial institution. It registered a growth rate of 15%. Thus, interest
income constitutes a major part of total income of HDFC. The other income of HDFC, SIDBI and ICICI
registered a significant increase over a period of 2015-16 to 2016-17. But in the other income ICICI is highest

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among the other financial institutions under study. It registered a growth rate of 27.2 percent in the other
income whereas HDFC and SIDBI registered a growth rate of 14.36% and 13.26% respectively.

By analysing balance sheet, it can be revealed that the HDFC is earning higher profits than the other financial
institutions. IFCI balance sheet depicts that its financial position is not up to the mark. It has to improve
institutions so that it can raise its profits.

The performance of financial institution may be appraised by taking into consideration the various ratios. By
the help of ratios, it is easy to compare the present performance with the past as well as to depict the area in
which particular business is comparatively advantaged or disadvantaged. Return on capital employed and
return on net worth helps in knowing about the profitability of the Institutions. Among the various financial
institutions, the key financial ratio of 3 financial Institutions namely HDFC, ICICI and IFCI are taken into
account over the period of 4 years i.e., from 2015-16 to 2019-20 for the purpose of analysis.

The study revealed that HDFC Return on long term funds (ROCE) is higher in comparison to ICICI and IFCI.
HDFC registered its highest ROCE in the year 2015-16 that was 81.47% where is ROCE of IFCI is lowest
among the three Institutions, this shows that IFCI is facing a lot of problem.

Earnings per share (EPS) is an important measure of economic performance of a corporate entity. The EPS of
HDFC is the highest and again that of IFCI is lowest. The higher EPS means that its capital productivity is
also high.

Debt equity ratio is measured for getting the long-term solvency of any institution in the proportion of debt to
equity is low, it means company is said to be low geared. HDFC, ICICI and IFCI have shown a declining ratio
which is positive sign for it. IFCI Debt-equity ratio is lowest among all the three financial institutions. It is a
good indicator for this institution.

All the institution has to maintain the capital adequacy at a minimum of 9% as discussed earlier. All the three
financial institutions fulfil the adequacy norms and their CAR (capital adequacy ratio) is above 9% over the
period of study.

Findings
The present trend indicates a positive outlook for economic development due to improved capacity utilization,
improve industrial climate, expanding external and domestic demand and ease in availability of credit.

Since the recent uptrend has persisted for long, ever longer than earlier one (preceding 1965), the growth rate
of industrial output may be said to have moved on to a higher path. It is expected that new policies of
promoting market, private sector and foreign direct investments, the industrial output would not only pickup
its earlier high growth but may remain much above it in future.

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These have been an accelerated growth of the long-term capital market in India in the recent years. The healthy
growth of the capital market rest on broad based development of the banking system, both are supplementary
and complimentary.

In comparing the various financial institutions organization structure with that of state level financial
institutions like UPFC and UPSIDC, in the UPFC there is need for well thought long range policy of branch
expansion in the same way UPSIDC can play a significant role in rapid industrialization of state of U.P., if
organized on the scientific lines. These SFCs have to concentrate on the publicity of its various activities and
also attract the entrepreneur of the state of U.P.

In comparison of ICICI, HDFC, IDBI, IIBI the SFCs has to change a lot in their policies of giving assistance
and also in their organization structure by appointing more skilled and experienced people.

With the progressive blurring of functions between banks and financial institutions, the all-India financial
institutions are fast losing ground and adopting the business model of bank to remain visible in the long run.
The merger of ICICI with ICICI bank on 30th March, 2002, was the beginning of conversions of financial
institutions into universal banking.

Taking into account the changing operating environment following the initiation of economic reforms in the
early 1990, the government decided to transform IDBI into a commercial bank. The IDBI (transfer of
undertaking and repeal) Act 2003 was enacted in December 2003 and came into effect from July 2, 2004.
IDBI was transformed into IDBI Ltd. on October 1, 2004 a company under the companies act 1956 with the
reverse merger of ICICI with ICICI bank in 2002 and conversion of IDBI into a bank. The importance of
AIFIs in the provision project finance has come down considerably.

IFCI has also been incorporated as a company under the companies act 1956 from first July 1, 1993.

There is a great challenge before the SIDBI emanates from the upsurge of universal banking concept. The
exiting all India financial institutions are preferring to connect themselves to universal banking. SIDBI finds
itself not there, where it has to perform the various functions conferred to it.

HDFC was the first to receive an “in principle” approval from RBI (Reserve Bank of India) to set up a bank
in private sector as a part of RBIs liberalization of the Indian banking industry in 1994, HDFC bank
commenced its operations as scheduled commercial bank in January, 1995.

In analysing the economic performance of HDFC, ICICI and IFCI the profit after tax of HDFC is the highest.
Its earning per share is also highest. Its capital adequacy ratio is also within the norms of the government.
HDFC’s profitability is very high. It is now customer oriented. It has been setup to provide a wide range of
financial solutions to its customers under one roof. HDFC has extended a lot in every sphere of economy.
Thus, HDFC has a great contribution in the economic development of India.

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ICICI’s performance is also very remarkable. It has also improved its profit during the various successive
years. It has also performed the norms in maintaining the capital adequacy ratio hence its performance is also
good. HDFC bank is the India’s largest private sector bank and lender by assets. It has extensive network of
branches that provide many different financial services and are principally engaged in commercial banking,
investment banking, securities and even insurance.

HDFC offers innovative services to customers and believes in technological upgradation in distribution of its
services.

HDFC improves its practices by way of offering better products, enhanced technology, service levels,
management of risks, audit and compliance. It improves its services to retail and wholesale customers.

HDFC bank focuses on its ‘people ‘and believes that they are a significant competitive strength for it. The
study finds out the overall working and management of HDFC is good, effective and efficient.

Problems and Suggestions: -

There are various problems faced by our financial institutions in the present era. Some of them are as follows
–

1.Reduced access to cheap funds: - In order to fulfil the financial requirements of various sector as well as
its borrowers, financial institutions require a huge amount of fund. Because these institutions lend their funds
mainly for development activities, it is necessary for them to access the fund at the cheaper rates.

As the primary objective of these institutions is mainly the development of economy not only making the
profit, thus it is essential for these institutions to access the money at most reduced rates. Because they are not
the profit-making institution but they are involved in the development activities, so it is difficult to them to
manage funds at higher rates. At present era lenders are more aware about the marketing condition and
prevailing interest rates. Earning for more returns they always try to lend their funds at the higher rates and
not ready to lend at the lower rates to these institutions. Thus, at present time it is one of the biggest problems
for these institutions that they are not getting funds at most reduced rates.

Suggestion: - In order to solve this problem, the government should play a significant role. The government
should provide sources from which they can get funds at much cheaper rates. There should be provisions of
refinance or reimbursement with these institutions. The government should take necessary action of providing
refinance, sources of funds and reimbursement facilities to these institutions at least, until the economy
becomes self-sufficient.

2. Increasing Reliance on Market Borrowing: - Now a day’s government does not provide
sufficient refinance facilities to such institutions, they are compelled to borrow funds from market to deliver
their financial services.

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These market borrowing can be more expensive as a result they finance it only to the projects, which are more
profitable. It leads to interruption in the progress of those development works which require huge amount of
funds. Ultimately, it results in the hampering of the development process of the country.

Suggestion: - The solution to this problem is that the government should provide support to these institutions
until the development process of the country achieve a satisfactory target.

3. Rapid Disintermediation: - Earlier these financial institutions act as an intermediary for financing various
projects. They perform the activity of financing through various commercial banks, co-operative banks etc.
Now days these banks have started providing direct assistance to the various projects and the profitability
aspects are more considerable by these banking institutions. Therefore, all the burden of providing finance to
the development activities has come on the shoulders of financial institutions.

Suggestion: - The solution of this problem is that the management and organization of the various financial
institutions should be more organized and well structured. There should be a proper channel for all the
activities undertaken by these institutions. All the sources and uses of funds should be properly disclosed and
recorded in the books of accounts and investments should be properly analysed. This is necessary because the
resources are scarce and borrowers are plenty. So, for the proper and optimal utilization of these scarce
resources is necessary for fulfilling the primary objective of development activities.

4.Growing complexities of the financial sector: - As the time moves the financial sector become more
complex due to increase in number of borrowers and lenders. This leads to increase in the volume of
competition. The government imposed various policies of tax structure etc., and makes it more complicated.
Because of all this now a days it is not easy to take loan, it involved a lot of formalities to be dealt with.

Suggestion: - The government to support the financial system by making it simpler and should reduce the
unnecessary imposition of restrictions. The government should also take necessary steps towards simplifying
the tax structure and other policies so it can be dealt with relative ease.

5.Mismatch of Assets and Liabilities: - The assets and liabilities of these financial institutions experienced
a gap over time. This leads to increase in the cost of funds and ultimately resulted in substantial decline in the
profitability of these institutions.

Suggestion: - This can be investigated by doing a thorough research in this area. We must study the
possibilities, which can make this situation better. SWOT analysis can help in overcoming this situation.
Competitor’s strong points should be focused for reducing their weaker points.

6.Increase in Cost of funds: - Earlier, the government played a major role of financing for these institutions.
Thus, these financial institutions were acted as the representative of the government. But now, the government
has withdrawn its support by discountenance of disbursement of funds. Thus, these financial institutions have
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faced a severe problem of acquiring funds from other resources which are quite costly. This leads to the
increment in cost of funds.

Suggestion: - The solution lies within them, as these financial institutions cannot remain dependent on the
government anymore. They need to explore new areas and options from where they can collect funds at
affordable rates. One of such examples is coming up with various mutual funds. These mutual funds are great
sources of accumulating a pool of funds and then disbursing them for overall economic development of the
economy.

7. Increasing commercialization: - This is serious problem with the reduction in financial support from
government, these financial institutions have to manage everything with their own. Due to this, these
institutions need to focus their profitability status along with development activities of the countries. This
leads to commercialization of these institutions to a greater extent. Another reason for this is severe
competition that prevails in the industry.

Suggestion: - The solution is that these institutions should take only those projects which can serve both the
objectives i.e., development process of the economy as well as keeping an eye on the profitability criteria.

8.Liberalization of the Financial Market: - Though, the liberalization of financial market has been one of
the greatest and beneficial invention in the financial sector but it has some drawbacks also. Whenever the
liberalization process of financial market is accompanied by liberalisation of capital flow and trade in country.
The country by the virtue of its domestic financial market is unaware of having any prior information regarding
this aspect. This ends up giving a significant advantage to the international institutions.

Suggestion: - The solution to this problem is that while announcing such policies of liberalization it must be
ensured that, overseas institution do not take any undue advantages away from the domestic ones. The
government should make policies to regulate this trend.

9. Lesser Diversification: - Earlier most of the financial institutions used to take help from
intermediaries to disburse their funds. For example, NABARD used to take help of Regional Rural Bank
(RRBs) and commercial bank. But now a days, these intermediaries have started providing funds directly to
the borrower from their own sources, since there is ample opportunity for them to acquire funds in present
scenario. This leads to lesser the diversification of activities and funds of these financial institutions. They are
remaining untouched from several areas as they do not have the many branches.

Suggestion: - The solution is that the government should support such financial institutions by providing them
financial assistance to diversify their activities and for opening more branches. These financial institutions
should amalgamate themselves with other institutes to make them more diversified.

For example, recently IDBI was amalgamated with Western Union Bank. More mergers and acquisition like
this should take place to bring in more diversification.

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10. Lack of Proper Management and Policy Makers: - As we are seeing in the recent past that many of
failures are due to wrong decisions and policies that are being taken by the management. One of the reasons
for this the management always thought about the profitability aspect rather than development aspect. As a
result of this thought in mind the decisions would never proves to be fruitful. Therefore, there is a need for
better management which acts in more responsible manner and is accountable for its every decision.

Suggestion: - While deciding the various positions of management and the Board, the government should
monitor and help to maintain a rational percentage of shares in the institutes and to influence those making
decisions which will serve our nation in the best possible manner.

Further scope of the study:

• The present study is focused on HDFC’s working and management, same study can be conducted on the
other financial institutions.

• The present study is based on secondary data, the same study can be conducted on primary data.

• A study can be conducted on the HDFC Bank’s customer satisfaction, measuring customer and employee’s
satisfaction both.

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Chapter No.6: BIBLIOGRAPHY

Government Publications

• Annual Economic Surveys

• Handbook of Statistics

• Indian Economic Statistics

• Economic Survey – 2011-12

• Five Year Plan, Government of India

Journal and Periodicals

• Journal of Banking and Finance

• Indian Economic Journal

• Indian Journal of Economic

• Reserve Bank of India, Monthly Bulletins

• Journal of Government Financial Management

• Financial Planning Journal

• Journal of Institutes and Bankers

• The Indian Journal of Commerce

• Journal of Emerging Market Finance

• Economic and Political Weekly • National Bank News Review

• Journal of Business Perspective

• Journal of Indian Institute of Banking

Details

• The Economic Times

• The Pioneer

• The Time of India

• The Hindu

• Hindustan Times

• Financial Express

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Reports

• Annual Reports of HDFC

• Annual Reports of ICICI

• Annual Reports of SIDBI

• Annual Reports of IFCI

• RBI Bulletin, November 2012

Websites
• www.bankingindiaupdate.com
• www.banknetindia.com
• www.business.gov.in
• www.capitalmarket.com
• www.censusindia.com
• www.economicdevelopment.net
• www.economywatch.com
• www.icici.com
• www.ifciltd.com
• www.idbi.com
• www.hdfc.com
• www.iibi.com
• www.sidbi.com
• www.indiabudget.nic.in
• www.indiaonestop.com

Books

• Agarwal, Banerjee and Nair: Business Environment, Pragati Prakash an, 2011.
• Agarwal, R.M.: Capital Markets Development Corporate Financing Pattern and Economic Growth in
India, 2010.
• Banerjee, Babakotos: Capital Structure in Public Enterprises: The Role of Banking and Financial
Institutions, An Analysis Journal of Accounting and Finance, Vol. III, No. 1, 1989.
• Base, A.K.: Fundamental of Banking Theory and Practices, 1962.
• Bhasin, Nitti: Banking and Financial Markets in India – 1947 to 2007, New Century Publication,
2007.
• Bhatia, V.V.: Structure of Financial Institution, Vora and Co., Bombay, 1972.

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