FINANCIAL MARKETS AND SERVICES

UNIT-2 FINANCIAL INSTITUTIONS

Meaning of Financial Institutions

In its simple meaning a financial institution is an institution that provides

financial services. Financial services refer to the activity of transfer of financial
resources from the savers or investors to the users or borrowers. Thus,
essentially financial institutions are the intermediaries between the savers and
borrowers of the money. More specifically, the term “financial institutions”
refers to all kinds of organizations which intermediate and facilitate financial
transactions of both individual and corporate customers.

Functions of financial institutions

1. Financial institutions mobilize the savings of the public
2. They provide credit facility to the needy persons
3. They render various other financial services like transfer of funds from one
place to another, payment mechanism, etc.,

Benefits of Financial Institutions

1. Financial institutions enable transferring of funds from investors to corporate
customers and other business entrepreneurs
2. They facilitate the flow of money from one corner of the country to another
corner
3. They enable achievement of economy of large scale operations by providing
funds for large scale business activities
4. They reduce the cost of transaction by increasing the number of transactions
5. They reduce the risk of loss of capital through diversification of funds to
different industries

Classification of Financial Institutions / Types of Financial Institutions

Basically there are three types of financial institutions, viz.,
(a) Banking Institutions (b) Non-Banking Financial Institutions and (c) Mutual
Funds

Banking Institutions
According to the Banking Regulations Act, a banking institution is an institution
that does the business of banking. The term banking business is defined as the
accepting of deposits of money from the public for the purpose of lending or

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investment and repayable on demand. A banking institution mobilizes the
savings of the public through accepting of deposits of money and lends the same
to the individual and corporate customers to meet their short term, medium
term and long term financial requirements and invests the surplus amount in
various securities or financial instruments in the financial market.

Types of Banking Institutions

On the basis of the functions performed by the banking institutions, they are
classified into the following types:
a) Commercial Banks
b) Investment Banks / Industrial Banks
c) Exchange Banks
d) Co-operative Banks
e) Land Development Banks
f) Regional Rural Banks
g) Savings Banks
h) Central Bank

Commercial banks
The banks which engage in the activity of providing finance to various
commercial establishments for meeting their working capital requirements are
called as commercial banks. The term “working capital requirement” refers to
the funds required for meeting the day to day activities like buying of raw
materials, payment of salaries, etc. These banks raise the required funds in the
form various kinds of deposits from the public and lend short term and medium
term loans to traders and business persons mainly for meeting working capital
requirements. The commercial banks are classified into two types viz., scheduled
banks and non-scheduled banks.

Scheduled Banks - The banks which are registered in the second schedule of
the RBI are called as scheduled banks. In order to be registered under the
second schedule of the RBI, the following conditions should be fulfilled:
1. The bank must be carrying the business of banking in India
2. The bank must have a paid up capital and reserve of an aggregate value of not
less than Rs. 5 lakhs and
3. The bank must satisfy the RBI that its affairs are not being conducted in a
manner detrimental to the interests of the depositor.
Non-scheduled Banks – The banks which are not registered in the second
schedule of the RBI are called as non-scheduled banks.

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Benefits enjoyed by scheduled banks

The scheduled banks come under the direct purview of the credit control
measures of the RBI and are entitled to borrowings and rediscounting facilities.
Non-scheduled banks are not entitled to such benefits.

Industrial Banks / Investment Banks

The banks which engage in the activity of providing finance to industrialists for
meeting their fixed capital requirements are called as industrial banks. The term
“fixed capital requirement” refers to the funds required for purchasing fixed
assets like Land, Building, Plant, Machinery, Furniture, etc. These banks raise the
required funds in the form of issue of shares, debentures and bonds to the public
and various financial institutions and lend medium term and long term loans to
industrialists & big businessmen mainly for meeting their fixed capital
requirements.

Exchange Banks
The banks which engage in foreign exchange business are called as exchange
banks. The term “foreign exchange business” refers to the business of converting
domestic currency into foreign currency and viceversa.
These banks convert foreign currency into Indian currency and Indian currency
into foreign currency and play a significant role in import and export activities.

Co-operative Banks
The banks which are formed on the principle of mutual co-operation to meet the
needs of its members are called as co-operative banks. They are formed by small
group of individuals belonging to same or similar kind of activities like farming,
retailing, small scale industry, etc. These banks raise the required funds in the
form of various kinds of deposits from the members and the public. They lend
short term and medium term loans to members and other traders, business
persons and agriculturists mainly for meeting working capital requirements at
generally low rate of interest and play a significant role in financing agricultural
and allied activities in India.

Land Development Banks

The banks which are formed by the agriculturists on the principle of mutual co-
operation to meet the long term needs of agriculturists are called as land
development banks. These banks raise the required funds by the issue of shares
and debentures, bonds, etc., mainly to the specific group of persons and other

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financial institutions. They provide short term and medium term loans to
members and other agriculturists mainly for procuring tools and equipments
needed and also to make permanent improvement of the land and for allied
activities like cattle farming, etc., at generally low rate of interest and play a
significant role in financing agricultural and allied activities in India. These
banks are now-days called as Agriculture and Rural Development Banks.

Regional Rural Banks

The banks which are formed to mobilize the savings of the rural people and fulfil
the credit needs of the relatively less served or not served sections of the
societies in rural areas are called as Regional Rural
Banks (RRBs). They are the banks that were set up as government sponsored
regional based rural banking institutions under the Regional Rural Banks Act,
1976. The shareholding pattern of these banks is 50 : 35 : 15 among central
government, sponsoring bank and state government respectively. They were
configured as hybrid micro banking institutions, combining the local orientation
and small scale lending culture of the cooperatives and the business culture of
commercial banks. Small farmers, agricultural labourers and socio-economically
weaker sections of the society are the main customers of these banks.

Savings Banks
The banks which are formed to mobilize savings of the poor and middle income
people of the society are called as savings banks. The primary objective of these
banks is to promote the habit of thrift and savings among the people with small
incomes. The money saved in these banks is permitted to be withdrawn by the
depositors in time of need. However, there are certain restrictions on the
number and the amount of withdrawal to be made in a particular period. In
India, the central government runs savings bank through the postal department.
Almost all of the commercial banks also do the function of savings bank and
encourage people to open savings account with them. Generally, these banks do
not engage in the activity of lending money to the public.

Central Bank
The bank formed for supervising, controlling and regulating the activities of
both banking and other non banking financial institutions is called as central
bank. Generally, every country will have only one central bank. In India, Reserve
Bank of India is the central bank. The central bank acts as a leader of the money
market, enforces monetary discipline in the economy of the country, manages
the issue and circulation of the currency, controls the creation of bank deposits

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and safe guards the financial stability of the country. It also keeps a close touch
with the government and assists in the implementation of its economic policies.
It serves as banker, agent and advisor to the government. Thus, it functions as
the apex bank of the country and contributes to the better maintenance of the
monetary and economic stability of the country. It accepts deposits from the
government, banks and other financial institutions and lends the same to the
government, banks and other financial institutions to enable them balance their
funds position. Following list shows the main functions of central bank.

Main functions of central bank

The functions of central bank are classified into three viz., Traditional functions,
Promotional functions and Supervisory functions.

Traditional functions
a) Monopoly of note issue
b) Banker to government
c) Agent and advisor to government
d) Banker to banks
e) Act as national clearing house
f) Lender of last resort
g) Controller of credit
h) Foreign exchange management
i) Exchange control
j) Publication of information

Promotional functions
a) Promotion of banking habits
b) Provide refinance for export promotion
c) Provide facilities for agricultural activities
d) Provide facilities for small scale industries
e) Provide help to co-operative sector

Supervisory functions
a) Granting of license to banks
b) Supervising and inspecting the activities of financial institutions
c) Implementing of deposit insurance scheme
d) Controlling of financial institutions
Non-Banking Financial Institution / Non-Banking Financial Corporation
(NBFCs)

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A Non-Banking Financial Institution popularly called as Non-Banking Financial
Company (NBFC) refers to a specialized financial institution other than a
banking institution that mobilizes the savings of a certain segment of the public
and lends the same to the individual and corporate customers to meet their
specialized needs. It is registered under the Companies Act, and is engaged in
the business of lending to specialized purposes and investing in shares,
debentures, bonds, etc. As per section 45(1)(f) of the Reserve Bank of India Act,
a non-banking financial company is a non-banking institution which is a
company and which has its principal business the receiving of deposits under
any scheme or lending in any manner. It is compulsory for a NBFC to get itself
registered with RBI as a deposit accepting company. A company intending to do
the business as a NBFC must have a minimum of Rs. 25 lakhs as owned fund. It
should have more than 50% of assets in the form of financial assets and more
than 50% of income as income from financial assets.

Types of Non-Banking Financial Companies (NBFCs)

NBFCs are classified in two ways (1) Classification as per RBI and
(2) Classification on the basis of activities performed or General Classification

Classification as per RBI

According to RBI, the NBFCs are classified into three categories viz.,
(1)Asset Financing Companies, (2)Investment Companies and (3)Loan
Companies.

Asset Financing Companies

These are the companies whose business is to provide finance for purchase of
physical assets like automobiles, tractors, earth moving and material handling
equipment’s, etc. (Example - Bajaj Auto Finance Corporation, Fullerton India).

Investment Companies
These are the companies whose business is to acquire and trade in industrial as
well as government securities like shares, stocks, bonds, debentures etc., mainly
in the capital market. (Example – Stock Broking Companies, Gilt Firms)

Loan Companies

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These are the companies whose business is to give loans to activities other than
their own. They give different kinds of loans like housing loans, gold loans, etc.
(Example – Mannappuram Gold Finance, Muthoot Finance, Attica Gold Finance,
HDFC, etc.)

Classification on the basis of activity performed or General classification

On the basis of activities performed or according to general classification, the

NBFCs are classified into four categories viz., (1) Development Institutions,
(2) Specialized Institutions (3) Investment Institutions and (4) Other
Institutions

Development Institutions

They are the institutions that provide long term finance for agriculture and
industrial development purposes. These are multipurpose institutions that
provide not only credit facility but also assist in discovering investment projects,
preparing project reports, arranging technical advice, managing industrial units,
underwriting, promotional activities, etc. Basically they are intended to develop
backward regions as well as small and new entrepreneurs. They provide
medium and long term finance to business units mainly for acquisition /
development of basic facilities like land and buildings, plant and machinery, etc.
These institutions generally do not accept deposits from the public. IDBI, ICICI,
IFCI, SIDBI, SFCs & SIDC fall under this category. The main features of
development institutions are:
• They are specialized financial institutions
• They provide medium and long term finance
• Generally they do not accept deposits from the public
• They provide multipurpose financial assistance
• Their primary objective is to promote the economic development of the
country
• They encourage small and new entrepreneurs and work in the general interest
of the country

Specialized Institutions

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They are the institutions that provide assistance to special sectors like housing,
infrastructure, agriculture, etc. These institutions generally do not accept
deposits from the public. NABARD, NHB, NHAI & EXIM
Bank fall under this category
Investment Institutions
They are the institutions that acquire and trade in securities mainly in the
capital market. They mobilize savings of public in various forms other than in
the form of demand deposits and utilize the same for investment activities
mainly in the capital market. LIC, GIC & UTI fall under this category
Other Institutions
They are the institutions that carry a particular activity like Core Investment,
Micro Financing,
Equipment Leasing, Hire Purchasing Finance, Housing Finance, Mutual Benefit
(Nidhi) Company, Chit Fund Company, etc.

Factors contributing to the growth of NBFCs

1. The banking companies were controlled through a comprehensive and
detailed regulation over their activities. However, there were no such
comprehensive and detailed regulations over the non-banking financial
institutions in the past. This has become the main reason for the growth of non-
banking financial institutions.
2. Non-banking financial institutions were more easily accessible by the
customers than the banking institutions in the past. This is another reason for
the growth of NBFCs.
3. Non-banking institutions followed much less formalities during the pre and
post sanction requirements. Their services were less complicated, fast and tailor
made. This also has led to the growth of NBFCs
4. The monetary policy and credit policy announced by the RBI sometimes keeps
away some borrowers from approaching the banking institutions. NBFCs cater
to the needs of such borrowers who remain outside the purview of commercial
banks. This also has led to the growth of NBFCs.
5. Generally, the rate of interest offered on the deposits by the NBFCs is higher
when compared to the banking institutions. This also has led to the growth of
NBFCs.

Functions of NBFCs
The NBFCs mainly perform the functions of receiving of deposits, lending of
money and investment of money.

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 Receiving deposits – NBFCs receive mainly two types of deposits. They
are:
a) Regulated Deposits – The deposits on which there is a ceiling limit or certain
other restrictions prescribed by the RBI are called regulated deposits. For
example, hire purchase companies and equipment leasing companies can
receive deposits only upto ten times of their net-owned funds.
b) Exempted Deposits – The deposits on which there are no ceiling limits or
other restrictions by any controlling authority are called exempted deposits.
These deposits include borrowing from other banks and financial institutions,
money received from Government, intercompany borrowings, security deposits,
money received from local authorities, directors, etc.
 Lending of money – NBFCs lend money in various forms like hire
purchase finance, leasing finance, consumption finance, finance for social
activities, housing finance, development finance, etc.
 Investment of money – NBFCs invest their surplus funds in various forms
of securities like shares, stock, debentures, bonds, etc.

Services rendered by NBFCs

The important services rendered by NBFCs are:

1. Mobilization of savings by offering attractive schemes and attractive rates of
interest
2. Timely provision of adequate credit facility in a easy and simple way
3. Act as financial supermarket where credit facility is available for diversified
activities.
4. Channelize funds for productive purposes by financing the capital intensive
industries
5. Encourage thrift and develop savings habit among general public by receiving
deposits in various attractive forms.
6. Enable asset creation by providing housing finance
7. Increase standard of living of people by providing installment facilities to buy
consumer durables
8. Render expert advice on investment of funds
9. Promote economic development by providing wider choice to both borrowers
and investors

Regulations of NBFCs

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As already discussed, in the earlier days, there were no comprehensive and
detailed regulations over the functioning of NBFCs. However, in 1960 the RBI
made an attempt to regulate NBFCs through issuing directions in respect of the
following:
1. Maximum amount of deposits that can be accepted by a NBFC
2. The period of deposits
3. The rate of interest
4. Maintenance of certain percentage of funds in the forms of liquid assets
5. Creation of reserve funds
6. Transfer of certain percentage of profits to reserve fund every year, etc.

The amendment made to the RBI Act in the year 1997 gave comprehensive
powers to the RBI to regulate the functioning of NBFCs. Accordingly the NBFCs
are controlled by RBI.

Important regulations in respect of NBFCs are:

1. It is mandatory for every NBFC to obtain a certificate of registration and have
minimum net owned funds.
2. Ceilings are prescribed for acceptance of deposits, capital adequacy, credit
rating and net-owned funds.
3. RBI is entrusted with the development of a comprehensive system to
supervise NBFCs.
4. Statutory auditors are required to report all kinds of non-compliance of
specific rules and regulations.

Overall contributions of NBFCs to the Indian Economy

1. Development of infrastructure facility
2. Generation of employment opportunity
3. Creation of wealth
4. Meet the requirements of economically weaker sections of the society
5. Balanced growth of different regions and industries

CONSTITUTION, OBJECTIVES & FUNCTIONS OF IDBI

Constitution of IDBI

The IDBI was constituted as a wholly owned subsidiary of the RBI in July 1964
under the IDBI Act, 1964 as a Development Financial Institution. Later on, in the
year 1975 it was taken over by the Central Government under the Public
Financial Institutions Law (Amendment) Act, 1975. The Central Government de-

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invested around 28% of its holding in the year 1995 by selling the shares to the
public.
Presently about 72% of the share capital of the IDBI is held by the Government.
IDBI served as a Development Financial Institution (DFI) for 40 years and in the
year 2004, the IDBI was transformed into a Bank through forming a new
company called Industrial Development Bank of India Limited (IDBI Ltd.,) as a
wholly owned subsidiary of IDBI under the Companies Act, 1956. The company
was incorporated on September 27, 2004 and the undertaking of IDBI was
transferred and vested in IDBI Ltd., with effect from October 1, 2004. IDBI took
over the business of United Western Bank Ltd., in the year 2006 and the merger
came into effect from October 3, 2006. Effective from May 7, 2008 the name of
IDBI Ltd., was changed to IDBI Bank Ltd., and presently the bank is functioning
in the same name.

Role of IDBI

1. The primary role of IDBI is to act as the principal financial institution for
coordinating the activities of various financial institutions that are engaged in
the financing, promoting and developing of various industries.
2. It plans, promotes and develops industries keeping in mind the national
priorities.
3. It also provides technical and administrative assistance for promotion,
management, expansion activities of the industry.
4. It undertakes market and investment research and surveys and techno-
economic studies to contribute to the development of the industry and attempts
to bring a balanced growth of the industries in all corners of the country.

Objectives of IDBI

1. Coordination, regulation and supervision of the working of other financial

institutions such as IFCI, ICICI, UTI, LIC, Commercial Banks and SFCs.
2. Supplementing the resources of other financial institutions and thereby
widening the scope of their assistance.
3. Planning, promotion and development of key industries and diversification of
industrial growth.
4. Developing and enforcing a system of industrial growth that conforms to
national priorities.

Functions of IDBI

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1. IDBI provides direct as well as indirect financial assistance to industrial

enterprises like IFCI, SFCs or any other financial institution by way of
refinancing. 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. It also
refinances the 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

2. It promotes institutions engaged in industrial development. In fulfillment of

its developmental role, the bank performs a wide range of promotional activities
relating to developmental programs for new entrepreneurs, consultancy
services for small and medium enterprises and programs 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 Centres for small industries.

3. It provides technical and administrative assistance for promotion,

management or expansion of industry. 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
Organizations (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. Realizing 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.

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4. It undertakes market and investment research and surveys in connection with
development of industry. IDBI also extends financial support to various
organizations in conducting studies or surveys of relevance to industrial
development.

5. It also performs other functions like, discounting or rediscount bills of

industrial concerns, underwriting or subscribing to shares or debentures of
industrial concerns, subscribing to or purchasing stock, shares, bonds and
debentures of other financial institutions, granting a line of credit or loans and
advances to other financial institutions such as IFCI, SFCs, etc., guaranteeing
deferred payment due from any industrial concern, guaranteeing loans raised by
industrial concerns in the market or from institutions, providing consultancy
and merchant banking services in or outside India, debenture trusteeship, forex
services, depository participant service, establishment of subsidiaries, etc.

CONSTITUTION, OBJECTIVES & FUNCTIONS OF SFCS

Constitution of SFCs
In order to meet the financial requirements of small scale and medium-sized
industries, there was a need of special financial institutions. With this view, the
Central Government passed the State Financial Corporation Act of 28th
September, 1951 which empowered the state government to establish financial
corporation to operate within the state. State Financial Corporations are
constituted under the State Financial Corporation Act, 1951 through a
notification in the Official Gazette. A minimum of 75% of the share capital of
these corporations shall be held by the State Government, RBI, Scheduled Banks,
Insurance Companies, Investment Trusts, Co-operative banks and other financial
institutions. Remaining 25% of the share capital may be issued to the general
public.

Objectives of SFCs
1. To establish uniformity in regional industries
2. To provide incentive to new industries
3. To bring efficiency in regional industrial units
4. To provide finance to small-scale, medium sized and cottage industries in the
state
5. To develop regional financial resources.

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Functions of SFCs
1. The SFCs grant loans for a period not exceeding 20 years to industrial units
mainly for acquisition of fixed assets like land, building, plant and machinery,
etc.,
2. The SFCs provide financial assistance to industrial units whose paid-up capital
and reserves do not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crore as
may be specified by the central government)
3. The SFCs underwrite new stocks, shares, debentures etc., of industrial
concerns for a period not exceeding 20 years
4. The SFCs provide guarantee loans raised in the capital market by scheduled
banks, industrial concerns, and state co-operative banks to be repayable within
20 years.
5. SFCs also perform various other functions like appraisal of investment
projects, credit syndication, project documentation, placement of debt, industry
research, legal advisory services, etc., to small and medium sized industries.

CONSTITUTION, OBJECTIVES & FUNCTIONS OF SIDCS

Constitution of SIDCs
State Industrial Development Corporations are constituted by the respective
States as a wholly owned Government Company under the Companies Act, 1956.

Objectives of SIDCs
1. To act as catalyst for promoting industrial growth in the State, especially in
the medium and large sector by identifying industrial opportunities, providing
guidance and advice to prospective entrepreneurs, providing necessary financial
assistance and other related services to realize these opportunities.
2. To act as the designated agency of the Government to plan and formulate
proposals for industrial infrastructure development projects after assessing the
need in different sectors/areas; and monitor the specified mega projects during
implementation as the nodal agency.

Functions of SIDCs

1. SIDCs provide term loans like normal term loan, equipment finance, lease
finance, corporate loan, bill discounting, subscription to non-convertible
debentures, bridge loans, rehabilitation loans, deferred payment guarantees,
etc., to small, medium and large scale sectors, including sectors like health care ,
hospitals, hotels, tourism, etc.,

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2. They render various financial services like pubic issue management, rights
issue management, bought out deals, project consultancy, project appraisal,
credit syndication, underwriting of shares, management advisory services, etc.,
3. They perform industrial promotional activities like project identification,
identification and selection of suitable entrepreneurs, assistance in securing
statutory and government approvals and clearances, direct participation in
equity, promotion of joint sector projects, providing of escort services, acting as
a nodal agency of the respective state government for specified major/mega
projects, attracting industrial investment including direct foreign investment
and NRI investment, arranging meetings of the industrialists and other related
bodies, conducting industrial promotion campaigns within and outside the
respective state, organizing visits of delegation of industrialists to overseas
countries, inviting delegations and trade bodies from overseas countries, etc.,
4. They perform various developmental activities like development of industrial
parks, industrial townships, industrial growth centres, international standard
airports, minor sea ports, etc.,

CONSTITUTION, OBJECTIVES & FUNCTIONS OF LIC

Constitution of LIC
The Life Insurance Corporation of India popularly known as “LIC of India” was
incorporated on September 1, 1956 by nationalizing 245 Indian as well as
foreign companies. It was established with a view to provide an insurance cover
against various risks in life.

Objectives of LIC

1. To spread the insurance products all over India particularly in rural areas and
economically background classes and to provide financial insurance covers
against death at low premium.
2. To mobilize the people’s savings through insurance linked savings schemes
3. To invest the funds, bearing in mind the national priorities and obligations of
attractive return to the insured.
4. To conduct the business with utmost economy
5. To act as trustees of the insured public
6. To meet the various life insurance needs of the community that would arise in
the changing social and economic environment
7. To involve the employees of the organization to the best of their capacity in
furthering the interests of the insured public

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8. To promote amongst all the employees and agents of the corporation a sense
of participation, pride and job satisfaction.

Functions of LIC

1. LIC offers a variety of insurance products to its customers such as insurance

plans, pension plans, unit-linked plans, special plans and group schemes
2. It carries on the business of capital redemption, annuity and reinsurance
3. It advances or lends money to the public for construction of house property
4. It advances or lends money to the government for developmental activities
5. It invests money in various other financial and non-financial corporations

CONSTITUTION, OBJECTIVES & FUNCTIONS OF EXIM BANK

Constitution of EXIM Bank

Export Import Bank of India (EXIM Bank) is the premier export finance
institution in India, established in 1982 under the Export Import Bank of India
Act, 1981. The EXIM Bank has a 17 member Board of Directors, with Chairman
and Managing Director as the chief executive and full-time director. The Board of
Directors consists of the representative of the Government of India, RBI, IDBI,
ECGC, commercial banks and the exporting community. The authorized capital
of EXIM Bank is Rs. 200 crores, of which Rs.75 crores is paid up. The bank has
secured a long-term loan of Rs. 20 crores from the Government of India. It can
also borrow from the RBI. It is also empowered to raise resources in the
domestic and international markets.

Role of EXIM Bank

EXIM Bank is primarily established to act as a catalyst and a key player in the
promotion of cross border trade and investment. Its primary role is to enable
Indian industries, particularly the Small and Medium Enterprises (SMEs) to
enter global market by offering a wide range of products and services at all
stages of the business cycle starting from import of technology to export of
products. It helps SMEs in areas like import of technology, product development
for export purpose, export marketing, pre shipment, post shipment and overseas
investment.

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Objectives of EXIM Bank

1. To provide financial assistance to exporters and importers

2. To function as the principal financial institution for coordinating the working
of institutions engaged in the financing of export and import of goods and
services
3. To provide refinance facilities to commercial banks and financial institutions
against their export import financing activities
4. To promote the country’s international trade
5. To ensure an integrated and coordinated approach in solving the allied
problems encountered by exporters in India.
6. To pay specific attention to the exports of capital goods
7. To help in the field of export projection
8. To facilitate and encourage joint ventures and export of technical services and
international and merchant banking
9. To extend buyers’ credit and lines of credit
10. To tap domestic and foreign markets for resources for undertaking
development and financial activities in the export sector.

Functions of EXIM Bank

1. Planning, promoting and developing exports and imports

2. Providing technical, administrative and managerial assistance for promotion,
management and expansion of exports sector
3. Undertaking market and investment surveys and techno-economic studies
related to development of exports of goods and services.

MUTUAL FUNDS

Meaning of mutual funds

Mutual Fund can be thought of as an investment company that brings together a
group of people and invests their savings in stocks, bonds and other securities
generally in the capital market. It may even invest its resources in money-
market instruments, gold, gold related instruments and real estate assets.
The combined holding of stocks, bonds or other assets is known as portfolio of
mutual funds. Each person who contributes his savings into mutual fund
becomes a part owner of the fund. Mutual funds are also called regulated
investment company where a company or a trust uses its capital and invests in

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other companies. Mutual funds earn income through dividend on shares,
interest on securities and also capital gains. A mutual fund is formed by the
coming together of number of investors who transfer their surplus funds to a
professionally qualified organization to manage the portfolio of investments.
The profit or loss is shared by the investors in proportion to their investments.
The mutual funds normally come out with a number of schemes with different
investment objectives which are launched from time to time. To pool the savings
of small investors, the mutual funds adopt a very simple technique of dividing
each fund into a small fraction called ‘units’ of equal value. Each investor is
allocated units in proportion to the size of respective investment.

Definition of mutual funds

According to Securities and Exchange Board of India (Mutual Funds) Regulation

Act, 1996, “mutual fund is a fund established in the form of a trust to raise
monies through the sale of units to the public or a section of the public under
one or more schemes for investing in securities, including money market
instruments or gold or gold related instruments or real estate assets”

Features of mutual funds

1. Mutual funds are the companies that mobilize the savings of individuals in the
form of units.
2. Each person who contributes his savings into mutual funds is allocated units
of mutual fund
3. These savings are invested in the securities, bonds, money market
instruments and other assets.
4. The portfolio of investments is planned and managed by financial experts
5. The income earned in the form of dividend on shares, interest on securities
and capital gain that arise on account of trading of securities by the mutual fund
companies is distributed to the unit holders

Advantages of mutual funds

1. channelizing the savings for investment – Mutual funds channelize the savings
of small investors by offering various schemes suitable to the various classes of
investors. These savings are directed towards capital formation and thus
enables the development of the economy as a whole.

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2. Benefit of wide portfolio of investment – Mutual funds offer the benefit of wide
portfolio of investment through diversification of investment. This is in
accordance with the maxim ‘not to keep all eggs in one basket’. Diversification of
investment refers to investing in a number of different stocks of many different
industries so as to minimize the impact of loss in one asset. Investing in
hundreds of different stocks in many different industries would not be possible
for a small investor. Mutual funds can invest in a large number of stocks of
different industries so that the risk spreads over a large number of assets. This
minimizes the impact of loss in one asset through gains in other assets.

3. Economies of scale – As a mutual fund buys and sells large number of

securities at a time, the per unit transaction costs become lower than what a
small investor would incur for such transactions. Thus, mutual funds reap the
benefit of economies of large scale business.

4. Professional management at low cost – The primary advantage of mutual funds

is that the money of small investors is professionally managed. Generally the
small investors do not possess the necessary expertise and also time to analyse
the suitable security to invest in. A mutual fund provides an inexpensive way for
them to get a full time expert manager to plan and monitor their investments.

5. Better yields – Mutual funds command large funds at their disposal and are
able to strike any deal at lower rates of brokerage. They also enjoy the
economies of large scale transactions and professional management at low cost.
This results in better yield to the unit holders.

6. Benefit of research work – Mutual funds command large funds at their disposal
and are capable of making an in-depth study and research work on the
corporate securities and other investment opportunities. The investment can be
made purely on the basis of such research work. Research involves a lot of time,
efforts and expenditure and it is not feasible for a small investor to undertake
research work before investing. By investing in a mutual fund, a small investor
can reap the benefits of research work done by them.

7. Liquidity – The units of mutual fund can be converted into cash at any time.
This ensures liquidity to the small investor.

8. Simplicity – Many banks and non-banking institutions have their own line of
mutual funds and buying a unit of mutual fund is very easy. Most institutions

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have systematic investment plans (SIPs) that enable one to invest as little as Rs.
1,000 on a monthly basis and purchase the desired units of mutual funds.
9. Tax Benefits – Many mutual funds offer units that provide tax benefits under
different sections of Income Tax Act, 1961. The income earned by mutual funds
is also free from taxes and hence, a lot of tax benefits accrue to the small
investors.

10. Flexible investment schedules – Mutual funds offer units under different
schemes that enable the small investors to shift from one scheme to another
easily.

11. Supporting capital market – Mutual funds provide a sustainable domestic

source of demand for capital market instruments and support capital market to
be active all the time.

12. Promoting industrial development – Mutual funds supply a large amount of

funds for the industries to meet their capital requirements and promote their
development.

13. Assured benefit of IPOs – Many a times it may not be possible for a small
investor to subscribe to the IPOs of companies. Mutual funds get a guaranteed
allotment of such IPOs and thus a small investor who invests in mutual funds get
the benefit of IPOs in an indirect way.

14. Reduction of marketing costs of new issues – Since the mutual funds subscribe
to a large size of new issues, the marketing cost of new issues is substantially
reduced.

15. Supporting money market – Generally money market instruments are not
accessible to the small investors as the minimum amount of investment in such
instruments is more. Mutual funds support the money market by investing the
funds in money market instruments and thus keep the money market active.

Disadvantages of mutual funds

1. Professional management – Many small investors are of the opinion that the so
called professionals are no better than individual investors in picking up stocks.
Moreover, the professionals have no direct impact of loss or gain on the
investments. Even if the fund loses money, the managers are still paid their
salary.

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2. Costs – Running a mutual fund is a costly affair. Creating, maintaining and
distributing units of mutual fund involve a lot of expenses. These expenses are
actually passed on to the small investors.
3. Dilution – As the mutual funds have small holdings in a number of stocks of
different companies, high returns from a few investments are diluted due to the
small returns from other investments.
4. Compulsion – Successful mutual fund attracts large savings from the small
investors and makes the mutual funds compelled to find new avenues for
investment. This may affect the overall profitability of the funds.
5. Taxes – When a security is sold, it may attract capital gains tax. Investors who
are concerned about the impact of taxes need to keep these things in mind while
investing in mutual funds.

Types of Mutual Funds

Money Market Funds

The funds that invest in short term fixed income securities like government
bonds, treasury bills, bankers’ acceptances, commercial papers, certificate of
deposits, etc., are called as Money Market Funds. They are generally safer
investments but the yield potential is lower when compared to other types of
mutual funds.
Fixed Income Funds
The funds that invest in fixed & regular interest yielding investments like
government bonds, debentures, etc., are called as Fixed Income Funds. The
government bonds are safer but the rate of interest is lower. The corporate
bonds, i.e., debentures are riskier but the rate of interest is generally higher.
Equity Funds
The funds that invest in equity shares and stocks of joint stock companies are
called as Equity Funds. These funds aim to grow faster than money market or
fixed income funds. They provide the benefit of capital appreciation besides
regular dividend. Generally they are riskier when compared to other funds.
Balanced Funds
The funds that invest in a mix of equities and fixed income securities are called
as Balanced Funds. They try to balance the aim of achieving higher return and
safety of funds.
Index Funds
The funds that invest in investments in accordance with the specific index such
as S&P are called as Index Funds. The value of such investments will go up or
down as the index goes up or down. In case of investment in index funds, the

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portfolio manager is relieved of doing much research on his investment
decisions.
Specialty Funds
The funds that invest in specialized areas like real estate, commodities,
environment protection companies, etc., are called as Specialty Funds.
Fund of Funds
The funds that invest in other mutual funds are called as Fund of Funds. They
aim to reap the benefit of research and analysis done by other funds.

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