FINANCIAL INSTITUTIONS

By- Shalu Malik

NSB, NIILM School of Business

New- Delhi

INTRODUCTION
Financial institutions are government-regulated or private entities that
offer financial services to their customers. These institutions control
the flow of cash from an investor to a company and vice versa within
and outside a country. Financial institutions cater to clients ranging
from individuals to big organizations, depending on their size and the
services offered. Broadly speaking, financial institutions deal in the
sectors pertaining to mortgage, automobile, homeowner, personal
business and corporate finance.

The Financial Institutions in India mainly comprises of the Central

Bank which is better known as the Reserve Bank of India, the
commercial banks, the credit rating agencies, the securities and
exchange board of India, insurance companies and the specialized
financial institutions in India. 

Reserve Bank of India:

The Reserve Bank of India was established in the year 1935 with a
view to organize the financial frame work and facilitate fiscal stability
in India. The bank acts as the regulatory authority with regard to the
functioning of the various commercial bank and the other financial
institutions in India. The bank formulates different rates and policies
for the overall improvement of the banking sector. It issue currency
notes and offers aids to the central and institutions governments.

Commercial Banks in India:

The commercial banks in India are categorized into foreign banks,

private banks and the public sector banks. The commercial banks
indulge in varied activities such as acceptance of deposits, acting as
trustees, offering loans for the different purposes and are even allowed
to collect taxes on behalf of the institutions and central government. 

Credit Rating Agencies in India: 

The credit rating agencies in India were mainly formed to assess the
condition of the financial sector and to find out avenues for more
improvement. The credit rating agencies offer various services as:

 Operation Up gradation
 Training to Employees
 Scrutinize New Projects and find out the weak sections in it
 Rate different sectors

The two most important credit rating agencies in India are:

 CRISIL
 ICRA

Securities and Exchange Board of India:

The securities and exchange board of India, also referred to as SEBI

was founded in the year 1992 in order to protect the interests of the
investors and to facilitate the functioning of the market
intermediaries. They supervise market conditions, register institutions
and indulge in risk management.

Specialized Financial Institutions in India :

The specialized financial institutions in India are government

undertakings that were set up to provide assistance to the different
sectors and thereby cause overall development of the Indian economy.
The significant institutions falling under this category includes:

 Board for Industrial & Financial Reconstruction

 Export-Import Bank Of India
 Small Industries Development Bank of India
 National Housing Bank

WHAT FACTORS ARE IMPORTANT IN BUILDING A

STABLE FINANCIAL SYSTEM
I shall now say a few words about the factors that are important in
building a stable financial system. Most generally, a stable financial
system can be described as a financial system that is able to
withstand shocks without giving way to cumulative processes which
could impair the allocation of savings to investments and the
processing of payments in the economy. How do we get there?

1. First, financial system architecture should be carefully planned.

Different stages of financial development require adequate
institutional processes to be in place. Here, one can refer to the
sequencing laid out by IMF in recent years and to the European
experience with opening and gradually liberalizing the financial
sector during the 1980s and 1990s.
2. Second, a solid micro supervision of the financial sector and
individual institutions should be in place.

3. Third, close co-operation and exchange of information between

the central bank and supervisory authorities is warranted at all
times and especially in periods of financial stress. I will refer to
this more extensively in a moment.

4. Fourth, there are several, complementary public policies that are

typically needed to sustain or build up confidence in financial
institutions.

 Fiscal policy. If fiscal authorities, as in the euro area, are

restricted in their ability to run deficits or accumulate large
debts, an important source of financial market stress and
financial instability is removed.

 Monetary policy. As is now widely accepted, monetary

authorities should in the first place try to guarantee price
stability, being the best possible contribution it can make to
growth in the medium to long-term. Indirectly, this should also be
conducive to supporting financial stability, as the economy will
have less macro uncertainties to deal with, when allocating
resources. However, it goes without saying that the central bank
should take an active interest in monitoring financial sector
developments, given the importance of the sector, also from a
monetary policy (transmission) perspective, and given its
importance in the economic system (intermediation between
lenders and borrowers). In some cases, when financial stability is
threatened, monetary policy may be used as a tool to support the
financial sector. This support may come not only through interest
rate policy, but also and most powerfully through the central
bank's role as a lender of last resort, that is, in providing final
liquidity when solvent commercial banks suffer liquidity strains.
Financial Institutions: Types

Financial institutions can be categorized into the following types,

based on the services offered by them:

 Commercial banks: These institutions offer services such

as insurance, mortgages, loans and credit banks.

 Credit banks: They are cooperative financial institutions,

generally controlled by members who have accounts in the firm. These
unions offer direct debits, direct deductions from payroll, cheaper
insurance facilities and standing order facilities.

 Savings and loan association: These associations offer loans,

mortgages, insurance, credit cards and interest to their clients.

 Stock brokerage firms: These firms help individuals and

corporate invest in stock market. Stock brokerage firms also offer
insurance, mortgages, credit cards, securities, loans, check writing
and money market services to clients.

 Insurance companies: Insurance companies provide a cash

cover in lieu of premium to policyholders. Services such as insurance,
securities, mortgages, loans, credit cards and check writing are
offered by these firms.

 Retailers: They offer services such as insurance, securities,

mortgages, loans, credit cards and cash management.

National Level Institutions

A wide variety of financial institutions have been set up at the national
level. They cater to the diverse financial requirements of the
entrepreneurs. They include all India development banks like IDBI,
SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI
Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI;
etc.

1. All-India Development Banks (AIDBs):- Includes those

development banks which provide institutional credit to not only
large and medium enterprises but also help in promotion and
development of small scale industrial units. 

 Industrial Development Bank of India (IDBI): was

established in July 1964 as an apex financial institution for
industrial development in the country. It caters to the
diversified needs of medium and large scale industries in
the form of financial assistance, both direct and indirect.
Direct assistance is provided by way of project loans,
underwriting of and direct subscription to industrial
securities, soft loans, technical refund loans, etc. While,
indirect assistance is in the form of refinance facilities to
industrial concerns.

 Industrial development Bank of India (IDBI): was the

first development finance institution set up in 1948 under
the IFCI Act in order to pioneer long-term institutional
credit to medium and large industries. It aims to provide
financial assistance to industry by way of rupee and foreign
currency loans, underwrites/subscribes the issue of stocks,
shares, bonds and debentures of industrial concerns, etc. It
has also diversified its activities in the field of merchant
banking, syndication of loans, formulation of rehabilitation
 programmes, assignments relating to amalgamations and
mergers, etc.

 Small Industries Development Bank of India

(SIDBI): was set up by the Government of India in April
1990, as a wholly owned subsidiary of IDBI. It is the
principal financial institution for promotion, financing and
development of small scale industries in the economy. It
aims to empower the Micro, Small and Medium Enterprises
(MSME) sector with a view to contributing to the process of
economic growth, employment generation and balanced
regional development.

 Industrial Bank of India corporation ltd: was set up in

1985 under the Industrial reconstruction Bank of India Act,
1984, as the principal credit and reconstruction agency for
sick industrial units. It was converted into IIBI on March 17,
1997, as a full-fledged development financial institution. It
assists industry mainly in medium and large sector through
wide ranging products and services. Besides project
finance, IIBI also provides short duration non-project asset-
backed financing in the form of underwriting/direct
subscription, deferred payment guarantees and working
capital/other short-term loans to companies to meet their
fund requirements.

2. Specialized Financial Institutions (SFIs):- are the

institutions which have been set up to serve the increasing
financial needs of commerce and trade in the area of venture
capital, credit rating and leasing, etc. 
 IFCI Venture Capital Funds Limited (IVCF): formerly
known as Risk Capital & Technology Finance Corporation
Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with
the objective of broadening entrepreneurial base in the
country by facilitating funding to ventures involving
innovative product/process/technology. Initially, it started
providing financial assistance by way of soft loans to
promoters under its 'Risk capital scheme’. Since 1988, it
also started providing finance under 'Technology finance
and Development scheme' to projects for commercialization
of indigenous technology for new processes, products,
market or services. Over the years, it has acquired great
deal of experience in investing in technology-oriented
projects.

 ICICI Venture Funds Ltd: formerly known as Technology

Development & Information Company of India Limited
(TDICI), was founded in 1988 as a joint venture with the
Unit Trust of India. Subsequently, it became a fully owned
subsidiary of ICICI. It is a technology venture finance
company, set up to sanction project finance for new
technology ventures. The industrial units assisted by it are
in the fields of computer, chemicals/polymers, drugs,
diagnostics and vaccines, biotechnology, environmental
engineering, etc.

 Tourism Finance Corporation of India Ltd. (TFCI):- is

a specialized financial institution set up by the Government
of India for promotion and growth of tourist industry in the
country. Apart from conventional tourism projects, it
 provides financial assistance for non-conventional tourism
projects like amusement parks, ropeways, car rental
services, ferries for inland water transport, etc. 

3. Investment Institutions:- are the most popular form of

financial intermediaries, which particularly catering to the needs
of small savers and investors. They deploy their assets largely in
marketable securities. 

 Life Insurance Corporation of India (LIC): was

established in 1956 as a wholly-owned corporation of the
Government of India. It was formed by the Life insurance
corporation act, 1956, with the objective of spreading life
insurance much more widely and in particular to the rural
area. It also extends assistance for development of
infrastructure facilities like housing, rural electrification,
water supply, sewerage, etc. In addition, it extends
resource support to other financial institutions through
subscription to their shares and bonds, etc. The Life
Insurance Corporation of India also transacts business
abroad and has offices in Fiji, Mauritius and United
Kingdom. Besides the branch operations, the Corporation
has established overseas subsidiaries jointly with reputed
local partners in Bahrain, Nepal and Sri Lanka.

 Unit Trust of India (UTI): was set up as a body

corporate under the UTI act, 1963, with a view to
encourage savings and investment. It mobilizes savings of
small investors through sale of units and channelizes them
into corporate investments mainly by way of secondary
capital market operations. Thus, its primary objective is to
stimulate and pool the savings of the middle and low
income groups and enable them to share the benefits of the
rapidly growing industrialization in the country. In
 December 2002, the UTI Act, 1963 was repealed with the
passage of UTI Act, 2002, paving the way for the bifurcation
of UTI into 2 entities, UTI-I and UTI-II with effect from 1st
February 2003.

 General Insurance Corporation of India (GIC): was

formed in pursuance of the General insurance business act,
2002 for the purpose of superintending, controlling and
carrying on the business of general insurance or non-life
insurance. Initially, GIC had four subsidiary branches.

State Level Institutions

Several financial institutions have been set up at the State level which
supplements the financial assistance provided by the all India
institutions. They act as a catalyst for promotion of investment and
industrial development in the respective States. They broadly consist
of 'State financial corporations' and 'State industrial development
corporations'.

 State Financial Corporation’s (SFCs) :- are the State-level

financial institutions which play a crucial role in the development
of small and medium enterprises in the concerned States. They
provide financial assistance in the form of term loans, direct
subscription to equity/debentures, guarantees, discounting of
bills of exchange and seed/ special capital, etc.

By- Shalu malik

NSB, NIILM School of Business

New- Delhi
 References:

www.ecb.int.com

www.economywatch.com

www.business.gov.in

www.business.mapofindia.com