UNIT 2

FINANCIAL INSTITUTIONS
FUNCTIONS OF FINANCIAL INSTITUTION
The various functions of financial institutions are as follows:
1) Raising Finance for Clients: Financial Institutions help its clients to raise
finance through Issue of shares, debentures, bank loans, etc. It helps its clients
to raise finance from the domestic and international market. This finance is used
for starting a new business or project or for modernization or expansion of the
business.
2) Broker in Stock Exchange: Financial Institutions act as brokers in the stock
exchange. They buy and sell shares on behalf of their clients. They conduct
research on equity shares. They also advise their clients about which shares to
buy, when to buy, how much to buy and when to sell, Large brokers, Mutual
Funds, Venture capital companies and Investment Banks offer merchant
banking services.
3) Project Management: Financial Institutions help their clients in the many
ways. For example: advising about location of a project, preparing a project
report. conducting feasibility studies. making a plan for financing the project,
finding out sources of finance, advising about concessions and incentives from
the government.
4) Advice on Expansion and Modernization: Financial Institutions give
advice for expansion and modemization of the business units. They give expert
advice on mergers and amalgamations. acquisition and takeovers,
diversification of business, foreign collaborations and joint-ventures,
technology up gradation etc.
5) Managing Public Issue of Companies: Financial Institutions advice and
manage the public issue of companies. They provide following services
 Advise on the timing of the public issue
 Advise on the size and price of the issue
 Acting as manager to the issue, and helping in accepting applications and
allotment of securities
 Help in appointing underwriters and brokers the issue
 Listing of shares on the stock exchange, etc.
6) Handling Government Consent for Industrial Projects: A businessman
has to get government permission for starting of the project. Similarly, a
company requires permission for expansion or modernization activities. For
this, many formalities have to be completed. Financial fostinutions do all this
work for their clients
7) Special Assistance to Small Companies and Entrepreneurs: Financial
Institutions advise small companies about business opportunities, government
policies, incentives and concessions available. It also helps them to take
advantage of these opportunities. concessions, etc.
8) Services to Public Sector Units: Financial Institutions offer many services
to public sector units and public utilities. They help in raising long-term capital,
marketing of securities, foreign collaborations and arranging long-term finance
from term lending institutions
9) Revival of Sick Industrial Units: Financial Institutions help to revive (cure)
sick industrial units. It negotiates with different agencies like banks, term
lending institutions, and BIFR (Board for Industrial and Financial
Reconstruction). It also plans and executes the full revival package
10)Portfolio Management: A Financial Institutions manage the portfolios
(investments) of its clients. This makes investments safe, liquid and profitable
for the client. It offers expert guidance to its clients for taking investment
decisions
Role of Financial Institution
1)The financial institution provides varied kinds of financial services to the
customers.
2)The financial institution provides an attractive rate of return to the customers.
3)Promotes direct investment by the customers and makes them understand the
risk associated with that.
4)It helps form the stock’s liquidity in an emergency in the financial markets.

Features of Financial Institution

 It provides a high rate of return to the customers who have invested in the

financial institution.

 It reduces the cost of financial services provided.

 It is considered very important for the development of financial services

in the country.
  It also advises the customers on dealing with the equity and the other

securities bought and sold in the market.

 It helps to improvise decision-making because it follows a systematic

approach to calculate all the risks and rewards.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be classified into two categories:
A. Banking Institutions
B. Non - Banking Financial Institutions
A. BANKING INSTITUTIONS (Reserve Bank of India)
Indian banking industry is subject to the control of the Central Bank. The
RBI as the apex institution organises, runs, supervises, regulates and develops
the monetary system and the financial system of the country. The main
legislation governing commercial banks in India is the Banking Regulation Act,
1949.
The Indian banking institutions can be broadly classified into two categories:
1. Organised Sector
2. Unorganised Sector.
1. Organised Sector
The organised banking sector consists of commercial banks, cooperative
banks ,regional rural banks and foreign banks
A)Commercial Banks:
A commercial bank is a financial institution that provides services like
loans, certificates of deposits, savings bank accounts bank overdrafts, etc. to its
customers. These institutions make money by lending loans to individuals and
earning interest on loans.
As of September 2022, there were 34 private and public banks licensed in
India. Examples are Bank of Baroda, Bank of India, Bank of Maharashtra.
B)Co-operative banks:
 A co-operative bank is a small-sized, financial entity, where its members
are the owners and customers of the Bank. They are regulated by the Reserve
Bank of India (RBI) and are registered under the States Cooperative Societies
Act.
An important segment of the organized sector of Indian banking is the
co-operative banking. The segment is represented by a group of societies

regi
stered under the Acts of the states relating to cooperative societies. In
fact, co-operative societies may be credit societies or non-credit societies.
Different types of co-operative credit societies are operating in Indian economy.
These institutions can be classified into two broad categories:
(a) Rural credit societies which are primary agriculture, (b) Urban credit
societies which are primarily non-agriculture.
For the purpose of agriculture credit there are different co-operative credit
institutions to meet different kinds of needs.
C) Regional Rural Banks (RRBs): Regional Rural Banks were set by the state
government and sponsoring commercial banks with the objective of developing
the rural economy. Regional rural banks provide banking services and credit to
small farmers, small entrepreneurs in the rural areas. The regional rural banks
were set up with a view to provide credit facilities to weaker sections. They
constitute an important part of the rural financial architecture in India.
D) Foreign Banks: Foreign banks have been in India from British days.
Foreign banks as banks that have branches in the other countries and main
Head Quarter in the Home Country. With the deregulation (Elimination of
Government Authority) in 1993, a number of foreign banks are entering India.
Foreign Banks are: Citi Bank. Bank of Ceylon.
2. Unorganised Sector.
In the unorganised banking sector are the Indigenous Bankers, Money Lenders.
A. Indigenous Bankers

Indigenous banking system is the system of banking that involves private

firms or individuals who act as banks by providing financial services such
as loans and accepting deposits. Indigenous banking system is made up of
indigenous bankers who do not fall under the purview of the government.
Example :- Punjab National Bank
B) Money Lenders:
A moneylender is a person or group who typically offers small personal
loans at high rates of interest. The high interest rates charged by them is
justified in many cases by the risk involved. Money Lenders may be
professional or non-professional. They include large number of farmer,
merchants, traders.
Non – Banking Financial Institutions
A Non-Bank Financial Institution (NBFI) is a financial institution that does
not have a full banking license or is not supervised by a national or
international banking regulatory agency. NBFIs facilitates bank related financial
services, such as investment, risk pooling, contractual savings and market
brokering. Examples of these include insurance firms, pawn shops, cashier's
check issuers, payday lending
A)Non-Banking Finance Companies: Non Banking Financial Companies
(NBFCs) are financial institutions that provide banking services without
meeting the legal definition of a bank, i.e. one that does not hold a banking
license. These institutions are not allowed to take deposits from the public.
Nonetheless, all operations of these institutions are still exercised under bank
B)Development Financial Institutions: Development Finance Institution (DFI)
is generic term used to refer to a range of alternative financial institutions
including micro finance institutions, community development financial
institution and revolving loan funds. These institutions provide a crucial role in
providing credit in the form of higher risk loans, equity positions and risk
guarantee instruments to private sector investments in developing countries.
DFIs are backed by states with developed economies.
INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

Initially established in 1948, the Industrial Finance Corporation of India was

converted into a public company on July 1993 and is now known as Industrial
Finance Corporation of India Ltd. The main aim of setting up this development
bank was to provide assistance to the industrial sector to meet their medium and
long-term financial needs.
ORGANISATION AND MANAGEMENT OF IFCI
The Head Office of the IFCI is in New Delhi. It has also established its
Regional offices in Bombay, Chennai, Kolkata, Chandigarh, Hyderabad,
Kanpur and Guwahati. The branch office of IFCI is located in Bhopal, Pune,
Jaipur, Cochin, Bhubaneswar, Patna, Ahmedabad and Bangalore.
The IFCI is managed by a Board of Directors, headed by a Chairman, who is
appointed by the Government of India, in consultation with RBI. The chairman
holds his position for a period of 3 years, subject to extension. Of the 12
directors, 4 are nominated by the IDBI, three of whom are experts in the fields
of industry, labour and economics and the fourth is the General Manager of the
IDBI. The remaining 8 directors are nominated.
OBJECTIVES OF IFCI
(1) The corporation grants loans and advances to industrial concerns.
(2) Granting of loans both in rupees and foreign currencies.
(3) The corporation underwrites the issue of stocks, bonds, shares etc.
(4) The corporation can grant loans only to public limited companies and co-
operatives but not to private limited companies or partnership firms.
FUNCTIONS OF IFCI
1)Loans and advances factors: The main function of the IFCI is to provide
medium and long term loans and advances to industrial and manufacturing
concerns. It looks into a few factors before granting any loans. Such as national
economy, the overall cost of the project and finally the quality of the product
and the management of the company.
2)Subscribe of debentures: The Industrial Finance Corporation of India can
subscribe to the debentures that these companies issue in the market
3)Guarantees of loans: The IFCI provides guarantees to the loans taken by
such industrial companies.
4)Underwriting of securities: When a company is issuing shares of debentures
the Finance Corporation of India can choose to underwrite such securities.
5) Deferred payments system: it guarantees deferred payments in case of loans
taken from foreign banks in foreign currency.
6)Merchant banking and allied services department: Its look after matters
such as capital restructuring, mergers, amalgamations, loan syndication, etc.
ACTIVITIES OF THE IFCI
The promotional activities of IFCI are explained below
1)Soft Loan Assistance: soft loan is a loan with no interest or a below market
rate of interest. This scheme provides soft loan assistance to existing industries
in small and medium sector for developing technology through in-house
research and development.
2)Entrepreneur Development: IFCI provides financial support to Entrepreneur
Development Programmes conducted by several agencies all-over India. In co-
operation with Entrepreneurship Development Institute of India.
3) Industrial Development in Backward Areas: IFCI also take measures to
promote industrial development in backward areas through a scheme of
concessional finance.
4) Subsidised Consultancy: The IFCI gives subsidised consultancy for,
(i) Small Entrepreneurs for Meeting the Cost of Project.
(ii) Promoting Ancillary Industries
(iii) To do the Market Research.
(iv) Reviving Sick Units.
(v) Implementing Modernisation.
(vi) Controlling Pollution in Factories.
5) Management Development: To improve the professional management the
IFCI sponsored the Management Development Institute in 1973. It established
the Development Banking Centre to develop managerial, manpower in
industrial concern, commercial and development banks.

Industrial Development Bank of India (IDBI)

Industrial Development Bank of India (IDBI) established under Industrial

Development Bank of India Act, 1964, is the principal financial institution for
providing credit and other facilities for developing industries and assisting
development institutions.

Till 1976, IDBI was a subsidiary bank of RBI. In 1976 it was separated from
RBI and the ownership was transferred to Government of India. IDBI is the
tenth largest bank in the world in terms of development. The National Stock
Exchange (NSE), the National Securities Depository Services Ltd. (NSDL),
Stock Holding Corporation of India (SHCIL) are some of the Institutions which
has been built by IDBI.

Organisation and Management:

IDBI consist of a Board of Directors, consisting of a chairman and Managing
Director appointed by the Government of India, a Deputy Governor of the RBI
nominated by that bank and 20 other Directors are nominated by the Central
Government.

The board had constituted an Executive Committee consisting of 10 Directors,

including the Chairman and Managing Director. The executive committee is
empowered to sanction financial assistance.

The Head office of IDBI is located in Mumbai. The bank has five regional
offices, one each in Kolkata, Guwahati, New Delhi, Chennai and Mumbai.
Besides the bank have 21 branch offices.

Functions of IDBI:
The main functions of IDBI are discussed below:
(i) To provide financial assistance to industrial enterprises.

(ii) To promote institutions engaged in industrial development.

(iii) To provide technical and administrative assistance for promotion

management or expansion of industry.

(iv) To undertake market and investment research and surveys in connection

with development of industry.

IDBI Assistance:
The IDBI provides financial assistance either directly or through some
specified financial institutions:
(i) Direct Assistance:
The IDBI grants loans and advances to industrial concerns. There is no
restriction on the upper or lower limits for assistance to any concern itself. The
bank guarantees loans raised by industrial concerns in the open market from the
State Co-operative Banks, the Scheduled Banks, the Industrial Finance
Corporation of India (IFCI) and other ‘notified’ financial institutions.
(ii) Indirect Assistance:
The IDBI can refinance term loans to industrial concerns repayable within 3 to
25 years given by the IFCI, the State Financial Corporation and some other
financial institutions and to SIDCs (State Industrial Development Corporations),
Commercial banks and Cooperative banks which extend term loans not
exceeding 10 years to industrial concerns. IDBI subscribes to the shares and
bonds of the financial institutions and thereby provide supplementary resources.

Developmental Activities of IDBI:

(1) Promotional Activities:
In fulfillment of its developmental role, the bank continues to perform a wide
range of promotional activities relating to developmental programmes for new
entrepreneurs, consultancy services for small and medium enterprises and
programmes designed for accredited voluntary agencies for the economic
upliftment of the underprivileged.

These include entrepreneurship development, self-employment and wage

employment in the industrial sector for the weaker sections of society through
voluntary agencies, support to Science and Technology Entrepreneurs’ Parks,
Energy Conservation, Common Quality Testing Centers for small industries.

(2) Technical Consultancy Organisations:

With a view to making available at a reasonable cost, consultancy and advisory
services to entrepreneurs, particularly to new and small entrepreneurs, IDBI, in
collaboration with other All-India Financial Institutions, has set up a network of
Technical Consultancy Organisations (TCOs) covering the entire country.
TCOs offer diversified services to small and medium enterprises in the
selection, formulation and appraisal of projects, their implementation and
review.
(3) Entrepreneurship Development Institute:
Realising that entrepreneurship development is the key to industrial
development; IDBI played a prime role in setting up of the Entrepreneurship
Development Institute of India for fostering entrepreneurship in the country. It
has also established similar institutes in Bihar, Orissa, Madhya Pradesh and
Uttar Pradesh. IDBI also extends financial support to various organisations in
conducting studies or surveys of relevance to industrial development.

STATE FINANCIAL CORPORATIONS

The State Financial Corporations (SFCs) are established under the State
Financial Corporation Act, 1951 with a view to providing medium and long-
term finance to medium and small industries. There are 18 SFCs operating in
different states.
Objectives
1)To establish uniformity in regional industries
2)To provide incentives to new industries
3)To bring efficiency in regional industrial units
4) To provide finance to small, medium and cottage industries in the state.
5)To develop regional financial resources
Share Capital
The SFC can have share capital rouging from 50 lakhs to 5 crore. It can be
increased up to 10 crore with the prior sanction of the central government. The
shares are subscribed by the State Government, RBI, banks Co-operative banks.
Types of Assistance
(1) Granting of loans or advances and subscribing to the debentures of industrial
concerns, repayable within a period of not exceeding twenty years.
(2) Guaranteeing loans raised by industrial concerns in the capital market or
from schedule banks or state cooperative banks.
(3) Guaranteeing deferred payments due from any industrial concern in
connection with its purchase of capital goods within India,
(4) Underwriting the issues of stocks, shares, bonds or debentures by industrial
concerns,
(5) Subscribing to the stocks, bonds or debentures of an industrial concern out
of the fund representing the special class of share capital subscribed by the State
Government and the IDBI in accordance with the provisions of Section 4A of
the SFCs Act, 1951.
The maximum amount of loan for a single concern is 60 lakh. Loans and
advances are granted primarily for the establishment of new industries or for
expansion and development of existing industrial concerns.
As per the Amendment Act, 1962, the SFCs are authorized to render financial
assistance to hotel and transport industries.
Financial Resources
The financial resources of SFCs consists of
(i) Share capital,
(ii) Issue of bonds,
(iii) Refinance from IDBI,
(iv) Borrowing from RBI, and
(v) Loans from State Government.
Industrial Credit and Investment Corporation of India (ICICI)
 Industrial Credit and Investment Corporation of India (ICICI) was
established in 1955 as public limited company under Indian Company Act, for
developing medium and small industries of private sector. Initially its equity
capital was owned by companies, institutions and individuals but at present its
equity capital has been owned by public sector institutions like—Banks, LIC
and its associate companies. In March 2002, the ICICI was merger with the
ICICI Bank and created a first universal bank in India. With this merger, ICICI
does not exist any more as a development financial institution.

Objectives:
The important objectives of the ICICI are as follows:
(i) To provide loans to industrial projects in private sector.
(ii) To stimulate the promotion of new industries.
(iii) To assist the expansion and modernization of existing industries.
(iv) To provide Technical and managerial aid to increase production.

Functions of the ICICI

(i) It provides long-term and medium-term loans in rupees and foreign
currencies. (ii) It participates in the equity capital of the industrial concerns.
(iii)It underwrites new issues of shares and debentures.
(iv) It guarantees loans raised by private concerns from other sources.

(v) It provides technical,managerial and administrative assistance to industrial

concerns.

Financial Assistance of ICICI:

To achieve its objectives, ICICI provides financial assistance in various forms
such as:
(i) Long term and medium term loans both in terms of rupee and foreign
currency.
(ii) Participating in equity capital and in debentures.

(iii) Underwriting new issues of shares and debentures.

(iv) Guarantee to suppliers of equipment and foreign loaners.

Activities of ICICI:
The activities of ICICI are discussed below:
1. Project Finance:
The project finance is provided to industries for the cost of establishment,
modernization or expansion of manufacturing and processing activities in the
form of rupee and foreign loans, underwriting, subscription to shares and
debentures and guarantees to supply of equipment and foreign donors.
The rupee loan is given for the purchase of equipment and machinery,
construction and preliminary expenses. The foreign currency loans are provided
for the purchase of imported capital equipment.

2. Leasing:
The leasing operations of the ICICI commenced in 1983. Leasing assistance is
given for computerization, modernization/replacement, equipment of energy
conservation, export orientation, pollution control etc.

3. Project Advisory Services:

The Project advisory services are provided to the Central and State
Governments and public sector and private sector companies. Advice to the
governments is provided on policy reforms and on value chain analysis and to
private sector companies on strategic management.

4. Facilities for Non-resident Indians:

The information regarding on facilities and incentives given by the Government
of India to the non-resident Indians for judicious investing in India are offered.
5. Provision of Foreign Currency Loans:
The ICICI has a provision of foreign currency loans and advances to enable
Indian Industrial concerns to secure essential capital goods from foreign
countries.

EXPORT IMPORT BANK OF INDIA (EXIM BANK)

Export Import Bank of India was set up in 1982 by an Act of Parliament for
the purpose of financing, facilitating and promoting India's foreign trade.
It is the principal financial institution in the country for coordinating the
working of institutions engaged in financing exports and imports.
EXIM Bank is fully owned by the Government of India and the Bank's
authorized and paid up capital are 10,000 crore and 2,300 crore respectively.
EXIM Bank helps Indian companies in their globalization efforts through a
wide range of products and services offered at all stages of the business cycle,
starting from import of technology and export product development to export
production, export marketing, pre-shipment and post shipment and overseas
investment.
EXIM Bank supplements its financing programmes with a wide range of
value-added information, advisory and support services, which enable exporters
to evaluate international risks, exploit export opportunities and improve
competitiveness, thereby helping them in their globalization efforts. The
improve competitiveness, thereby helping them in their globalization efforts.
Capital of Export Import Bank
The authorized capital of the EXIM Bank is 200 crore and paid up capital is
100 crore, wholly subscribed by the Central Government. The bank can raise
additional resources through:
1) Loans/grants from Central Government and Reserve Bank of India.
2) Lines of credit from institutions abroad.
3)Funds rose from Euro currency market
4)Bonds issued in India

Objectives of Export Import Bank of India

1)To translate national foreign trade policies into concrete action plans.
2)To provide alternate financing solutions to the Indian exporter, aiding them in
there efforts to internationally compete
3)To develop mutually beneficial relationships with the international financial
community
4)To initiate and participate in debates on issues central to India's international
trade.
5)To have close working relationships with other export development and
financing agencie multilateral funding agencies and national trade and
investment promotion agencies.
6) To anticipate and absorb new developments in banking export financing and
information technology
7) To be responsive to the problems of Indian exporters and pursue policy
resolutions.
8) To ensure the provision of financial, technical and administrative assistance
in the export import sectors.
9) To make the planning, promotion, development and financing of export
oriented concerns
10) To ensure the undertaking and financing research, surveys and techno-
economic studies connection with the promotion and development of foreign
trade.

Functions of Export Import Bank of India

The main functions of the EXIM Bank are as follows:
1)Financing of exports and imports of goods and services, not only of India but
also of the third world countries.
2) Financing of exports and imports of machinery and equipment on lease basis.
3) Financing of joint ventures in foreign countries.
4) Providing loans to Indian parties to enable them to contribute in the share
capital of joint ventures in foreign countries.
5) It helps to undertake limited merchant banking functions such as
underwriting of stocks shares, bonds or debentures of Indian companies
engaged in export or import.
6) It ensures to provide technical,administrative and financial assistance to
parties in connection with export and import.