Financial Institutions

Meaning Of Financial Institution

In financial economics, a financial institution acts
as an agent that provides financial services for
its clients. Financial institutions generally fall
under financial regulation from a government
authority.

Types of Financial Institutions

Common types of financial institutions include
banks, Insurance Co, Leasing Co, Investment
Co, Mutual Funds

Banks
A bank is a commercial or state institution
that provides financial services, including
issuing money in various forms, receiving
deposits of money, lending money and
processing transactions and the creating of
credit.

1. Central Bank
A central bank, reserve bank or monetary
authority, is an entity responsible for the
monetary policy of its country or of a group of
member states, such as the European Central
Bank (ECB) in the European Union, the Federal
Reserve System in the United States of
America, State Bank in Pakistan.

1. Central Bank
Its primary responsibility is to maintain the
stability of the national currency and money
supply, but more active duties include
controlling subsidized-loan interest rates, and
acting as a lender of last resort to the
banking sector during times of financial crisis

2. Commercial Banks
A commercial bank accepts deposits from
customers and in turn makes loans, even in
excess of the deposits; a process known as
fractional-reserve banking. Some banks (called
Banks of issue) issue banknotes as legal
tender.

3. Investment Banks
Investment banks help companies and
governments and their agencies to raise
money by issuing and selling securities in the
primary market. They assist public and private
corporations in raising funds in the capital
markets (both equity and debt), as well as in
providing strategic advisory services for
mergers, acquisitions and other types of
financial transactions.

4. Saving Banks
A savings bank is a financial institution whose
primary purpose is accepting savings deposits.
It may also perform some other functions.

5. Micro Finance Banks

For the purpose of poverty reduction
program, such kind of banks are working in
the different countries with the contribution
of UNO or World Bank.
In Pakistan 7 Micro Finance Banks are
providing services under the SBP prudential
regulation.

6. Islamic Banks
Islamic banking refers to a system of banking
or banking activity that is consistent with
Islamic law (Sharia) principles and guided by
Islamic economics. In particular, Islamic law
prohibits usury, the collection and payment of
interest, also commonly called riba in Islamic
discourse.

7. Specialized Banks
1. ZTBL
The Zarai Taraqiati Bank Limited It is also
known as Agricultural Development Bank
of Pakistan (ADBP).
It is the premier financial institution
geared towards the development of the
agricultural sector through the provision
of financial services and technical knowhow.

7. Specialized Banks
2. IDBP
Industrial Development Bank of Pakistan is one
of Pakistan's oldest development financing
institution created with the primary objective
of extending term finance for investment in
the manufacturing sector and SME Sector of
the economy.

7. Specialized Banks
3. SME Bank
Promote the business.
Positive impact on Financial environment.
Financing of projects.
Tell revenue generation schemes to
entrepreneurs.

8. Non-banking financial company

Non-bank financial companies (NBFCs) also
known as a non-bank or a non-bank bank, 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.

8. Non-banking financial company

Operations are, regardless of this, still
exercised under bank regulation. However this
depends on the jurisdiction, as in some
jurisdictions, such as New Zealand, any
company can do the business of banking, and
there are no banking licenses issued.

8. Non-banking financial company

Non-bank institutions frequently acts as
suppliers of loans and credit facilities,
supporting investments in property, providing
services relating to events within peoples lives
such as funding private education, wealth
management and retirement planning

8. Non-banking financial company

however they are typically not allowed to take
deposits from the general public and have to
find other means of funding their operations
such as issuing debt instruments. In India,
most NBFCs raise capital through Chit Funds.

9. Investment company
Generally, an "investment company" is a
company (corporation, business trust,
partnership, or limited liability company) that
issues securities and is primarily engaged in
the business of investing in securities.

9. Investment company
An investment company invests the money it
receives from investors on a collective basis,
and each investor shares in the profits and
losses in proportion to the investors interest
in the investment company.

11. Leasing Companies

A lease or tenancy is the right to use or occupy
personal property or real property given by a lessor
to another person (usually called the lessee or
tenant) for a fixed or indefinite period of time,
whereby the lessee obtains exclusive possession of
the property in return for paying the lessor a fixed or
determinable consideration (payment).

12. Insurances Companies

Insurance companies may be classified as
1. Life insurance companies, which sell life
insurance, annuities and pensions products.
2. Non-life or general insurance companies,
which sell other types of insurance.

Mutual Fund
An investment which is comprised of a pool of
funds collected from many investors for the
purpose of investing in securities such as
stocks, bonds, money market securities and
similar assets.

Mutual funds are operated by money mangers,

who invest the fund's capital and attempt to
produce capital gains and income for the
fund's investors. A mutual fund's portfolio is
structured and maintained to match the
investment objectives stated in its prospectus.

10. Brokerage Houses

Stock brokers assist people in investing, online
only companies are called 'discount
brokerages', companies with a branch
presence are called 'full service brokerages' or
'private client services.

Financial Institution Functions

Financial institutions provide a service as
intermediaries of the capital and debt
markets. They are responsible for transferring
funds from investors to companies, in need of
those funds. The presence of financial
institutions facilitate the flow of cash through
the economy.

Financial Institution Functions

To do so, savings accounts are pooled to
mitigate the risk brought by individual account
holders in order to provide funds for loans.
Such is the primary means for depository
institutions to develop revenue.

Financial Institution Functions

Should the yield curve become inverse, firms
in this arena will offer additional feegenerating services including securities
underwriting, sales & trading, and prime
brokerage.

Misleading financial analysis

Financial analysis of an organization is
misleading when it is used to misrepresent
the organisation, its situation or its prospects.

 This type of deceit is sometimes used to

obtain money by misdirecting people to invest
in a stock market bubble, profiting from the
increase in value, then removing funds before
the bubble collapses, for instance in a stock
market crash.

Role of
Specialized Indian Financial
Institutions

CONTENT
Introduction to Financial Institutions in India which provide
financial skims for project management.

1. Commercial bank

2. Industrial Finance Corporations of India (I.F.C.I.)

3. Industrial Development Bank of India (IDBI)

4. Industrial credit and Investment

corporation of India (ICICI)

5. Small Industries Development Bank of

India(SIDBI)

6. State Financial Corporations (SFCs)

7.Venture capital funding

8. Angle capitalist

1.Commercial bank.

Commercial Banks are banking institutions that accept

deposits and grant short-term loans and Advances to their
customers.

In addition to giving short-term loans, commercial banks

also give Medium-term and long-term loan to business
enterprises.

Now-a-days some of the commercial Banks are also

providing housing loan on a long-term basis to individuals.
There are also many Other functions of commercial banks.

 The Banking products/function of commercial banks

are of two types.
(A) Primary functions; and
(B) Secondary functions.
(A) Primary functions
The primary functions of a commercial bank include
a) Accepting deposits; and
b) Granting loans and advances.

Secondary functions
a. Issuing letters of credit, travelers cheque, etc.
b. Undertaking safe custody of valuables, important document
and securities by providing safe deposit vaults or lockers.
c. Providing customers with facilities of foreign exchange
dealings.
d. Transferring money from one account to another; and from
one branch to another branch of the bank through cheque, pay
order, demand draft.

Types of commercial bank

Public Sector Banks: These are banks
where majority stake is held by the
Government of India or Reserve Bank of
India. Examples of public sector banks are:
State Bank of India,
Nationalized banks
Name
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank

Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab & Sind Bank
Punjab National Bank
State Bank of India
State Bank of Mysore
State Bank of Patiala
State Bank of Travancore
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank

Private sectors Banks:

In case of private sector banks

majority of share capital of the Bank
is held by private individuals. These
banks are registered as companies
with limited Liability.

1. Bank of Punjab Ltd. (since merged with

Centurian Bank)
2. Centurian Bank of Punjab (since
merged with HDFC Bank)
3. Development Credit Bank Ltd.
4. HDFC Bank Ltd.
5. ICICI Bank Ltd.
6. IndusInd Bank Ltd.
7. Kotak Mahindra Bank Ltd.
8. Axis Bank (earlier UTI Bank)
9. Yes Bank Ltd.

Industrial Finance
Corporations of India (I.F.C.I.)
IFCI was established as a statutory corporation on 1st July
1948 by special Act of Parliament, IFCI Act, 1948.
It was converted into a public limited company on July 1,
1993.
Its main object is to provide medium and long term credit to
eligible industrial concerns in corporate sectors of the
economy, particularly to those industries to which banking
facilities are not available.

Objectives
(a) To provide long and medium-term credit to industrial concerns engaged
in manufacturing, mining, shipping and electricity generation and
distribution.

(b) The period of credit can be as long as 25 years and

should not exceed that period;
(c) To grant credit to a single concern up to a maximum
amount of rupees one crore. This limit can be exceeded
with the permission of the government under certain
circumstances;

 (d) underwrite and directly subscribe to shares and

debentures issued by companies;
(e) assist in setting up new projects as well as in
modernization of existing industrial concerns in
medium and large scale sector;

Functions
The main functions of I.F.C.I. are as under: i) Granting loans and advances for the establishment, expansion,
diversification and modernization of industries in corporate and
co-operative sectors.
ii) Guaranteeing loans raised by industrial concerns in the capital
market, both in rupees and foreign currencies.
iii) Subscribing or underwriting the issue of shares and
debentures by industries. Such investment can be held up to 7
years.

 iv) Guaranteeing credit purchase of capital goods, imported as

well as purchased within the country.
v) Providing assistance, under the soft loans scheme, to
selected industries such as cement, cotton textiles, jute,
engineering goods,etc.
vi) Providing technical, legal, marketing and administrative
assistance to any industrial concern for the promotion,
management and expansion of the industrial concern.

 vii) Providing equipment to the existing industrial concerns on

lease under its equipment leasing scheme.
viii) Procuring and reselling equipment to eligible existing
industrial concerns in corporate or co-operative sectors.
ix) Rendering merchant banking services to industrial concerns.

 In 1995-96, 67% of the total financial assistance distributed

by IFCI was in the form of rupee term loans, while foreign
currency loans accounted for approximately 17% of total
financial assistance. Thus the two types of assistance
accounted for a total of 84% of the total financial assistance
by IFCI. The remaining 16% of financial assistance, was in
the form of underwriting, direct subscription, guarantees and
equipment leasing.

Industrial Development Bank of India

(IDBI)
The Industrial Development Bank of India was set up in July
1964 as a wholly owned subsidiary of the Reserve Bank of
India.
The purpose was to enable the new institution to benefit from
the financial support and experience of RBI.

After a decade of its working, it was delinked from RBI in

1976, when its ownership was transferred to the Government of
India.

 assisting the development of such institutions and providing

credit and other facilities for the development of industry. Thus
the role of IDBI may be stated as under:
As an apex financial institution, it coordinates the working of
other financial institutions.
(2) It assists in the development of other financial institutions.
(3) It provides credit to large industrial concerns directly.

(4) It undertakes other activities for the development of industry.

Objectives
The main objectives of IDBI is to serve as the apex institution
for term finance for industry in India. Its objectives include
(1) Co-ordination, 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

diversifications of industrial growth.

Function
The IDBI has been established to perform the following
functions (1) To grant loans and advances to IFCI, SFCs or any other
financial institution by way of refinancing of loans granted
by such institutions which are repayable within 25 year.
(2) To grant loans and advances to scheduled banks or state
co-operative banks by way of refinancing of loans granted
by such institutions which are repayable in 15 years.

(3) To grant loans and advances to IFCI, SFCs, other institutions,

scheduled banks, state co-operative banks by way of refinancing
of loans granted by such institution to industrial concerns for
exports
(4) To discount or rediscount bills of industrial concerns.
(5) To underwrite or to subscribe to shares or debentures of
industrial concerns.
(6) To subscribe to or purchase stock, shares, bonds and
debentures of other financial institutions.

(7)

To grant line of credit or loans and advances to other

financial institutions such as IFCI, SFCs, etc.
(8) To grant loans to any industrial concern.
(9) To guarantee deferred payment due from any industrial
concern.
(10) To guarantee loans raised by industrial concerns in the
market or from institutions

(11) To provide consultancy and merchant banking services in

or outside India.
(12) To provide technical, legal, marketing and administrative
assistance to any industrial concern or person for promotion,
management or expansion of any industry.
(13) Planning, promoting and developing industries to fill up
gaps in the industrial structure in India.
(14) To act as trustee for the holders of debentures or other
securities

Subsidiaries
The following are the subsidiaries of IDBI.

(1) Small Industries Development Bank of India

(SIDBI)
(2) IDBI Bank Ltd.
(3) IDBI Capital Market Services Ltd.
(4) IDBI Investment Management Company

Capital Structure and Operations

As on September 30,1996,
The authorized Capital of IDBI was Rs.2000 crores.
Issued, subscribed and paid up share capital was Rs.828.76 crores.
Reserves were Rs.6309 crores. Loan funds were Rs.35450 crores.
The total outstanding loans, investments and guarantee of IDBI
stood at Rs.39,221 crore as on 31st March 1996.

Industrial Credit and Investment

Corporation of India (ICICI)
Industrial Credit and Investment Corporation of India was
established as a joint stock company in the private sector in 1955.
Its share capital was contributed by banks, insurance companies
and foreign institutions including the World Bank.
Its major shareholders now are Unit Trust of India, Life
Insurance Corporation of India and General Insurance Corporation
and its subsidiaries.

Objectives
The ICICI has been established to achieve the following objectives:
(I) To assist in the formation, expansion and modernization of
industrial units in the private sector;

(ii) To stimulate and promote the participation of private capital (both

Indian and foreign) in such industrial units;
(iii) To furnish technical and managerial aid so as to increase production
and expand employment opportunities;

Functions
The primary function of ICICI is to act as a channel for
providing development finance to industry. In pursuit of its
objectives of promoting industrial development, ICICI
performs the following functions:(i) It provides medium and long-term loans in Indian and
foreign currency for importing capital equipment and technical
services. Loans sanctioned generally go towards purchase of
fixed assets like land, building and machinery

(ii) It subscribes to new issues of shares, generally by

underwriting them;
(iii) It guarantees loans raised from private sources including
deferred payment;
(iv) It directly subscribes to shares and debentures;

(v) It provides technical and managerial assistance to industrial

units;

(vi) It provides assets on lease to industrial concerns. In

other words, assets are owned by ICICI but allowed to be
used by industrial concerns for a consideration called lease
rent.
(vii) It provides project consultancy services to industrial
units for new
projects.

(viii) It provides merchant banking services

Subsidiaries
1.ICICI Securities and Finance Co. Ltd.
2. ICICI Assets Management Co. Ltd.

3. ICICI Investors Services Ltd.

4. ICICI Banking Corporations Ltd.
5. Credit Rating Information Services of India Ltd. (CRISIL)

6. Technology Development and Information Company of

India Ltd.(TDICI)
7. Programmers for the Advancement of Commercial
Technology.
8. `Programmer for Acceleration of Commercial Energy
Research (PACER)

Financial assistance granted and disbursed by ICICI over the

years have grown steadily. ICICI has disbursed a total
financial assistance of Rs.4225 crores during the three months
period from Ist April 1998 to 30th June 1998. The total
amount sanctioned during this period is Rs.9135 crore.

State Financial Corporations (SFCs)

To meet the financial needs of small and medium enterprises,
the government of India passed the State Financial Corporation
Act in 1951, empowering the State governments to establish
development banks for their respective regions.
Under the Act, SFCs have been established by State
governments to meet the financial requirements of medium and
small sized enterprises.

Objectives
(1) Provide financial assistance to small and medium industrial
concerns. These may be from corporate or co-operative sectors as
in case of IFCI or may be partnership, individual or joint Hindu
family business. Under SFCs Act, industrial concern means any
concern engaged not only in the manufacture, preservation or
processing of goods, but also mining, hotel industry, transport
maintenance of machinery, setting up or development of an
industrial area or industrial estate, etc.

(2) Provide long and medium-term loan repayable ordinarily

within a period not exceeding 20 years.

(3) Grant financial assistance to any single industrial

concern under corporate or co-operative sector with an
aggregate upper limit of rupees Sixty lakhs. In any other
case (partnership, sole proprietorship or joint Hindu family)
the upper limit is rupees Thirty lakhs.

(4) Provide Financial assistance generally to those

industrial concerns whose paid up share capital and free
reserves do not exceed Rs.3 crore.
(5) To lay special emphasis on the development of
backward areas and small scale industries.

Functions of State Financial

Corporation (SFCs)
(1) Grant of loans and advances to or subscribe to debentures of
industrial concerns repayable within a period not exceeding 20 years,
with option of conversion into shares or stock of the industrial
concern.
(2) Guaranteeing loans raised by industrial concerns which are
repayable within a period not exceeding 20 years.
(3) Guaranteeing deferred payments due from an industrial concern
for purchase of capital goods in India.

(4) Underwriting of the issue of stock, shares, bonds or debentures

by industrial concerns.
(5) Subscribing to, or purchasing of, the stock, shares, bonds or
debentures of an industrial concern subject to a maximum of 30
percent of the subscribed capital, or 30 percent of paid up share
capital and free reserve, whichever is less.
(6) Act as agent of the Central government, State government,
IDBI,IFCI or any other financial institution in the matter of grant
of loan or business of IDBI, IFCI or financial institution.

(7) Providing technical and administrative assistance to any

industrial concern or any person for the promotion,
management or expansion of any industry.
(8) Planning and assisting in the promotion and
development of industries.

Venture capital funding

Venture capital is a means of equity financing for rapidlygrowing private companies.
Finance may be required for the start-up,
development/expansion or purchase of a company.
Venture Capital firms invest funds on a professional basis, often
focusing on a limited sector of specialization (eg. IT,
infrastructure, health/life sciences, clean technology, etc.).

The goal of venture capital is to build companies so that

the shares become liquid (through IPO or acquisition) and
provide a rate of return to the investors (in the form of
cash or shares) that is consistent with the level of risk
taken.

INDIAN PRIVATE EQUITY AND VENTURE

CAPITAL ASSOCIATION (IVCA) Indian Private
Equity and Venture Capital Association (IVCA) is a
member based national organization that represents venture
capital and private equity firms, promotes the industry
within India and throughout the world and encourages
investment in high growth companies.

Name of the Venture Capital Fund in

India.
Aavishkaar India Micro Venture Capital Fund
Aditya Birla Private Equity Trust
Axis Venture Capital Trust
BTS India Private Equity Fund
Canbank Venture Capital Fund
Green India Venture Fund

Angle capitalist

An angel investor or angel (also known as a business

angel or informal investor) is an affluent individual
who provides capital for a business start-up, usually in
exchange for convertible debt or ownership equity.
A small but increasing number of angel investors
organize themselves into angel groups or angel
networks to share research and pool their investment
capital.

Today "angels" typically offer expertise, experience

and contacts in addition to money. Less is known
about angel investing than venture capital because of
the individuality and privacy of the investments, but
the Small Business Administration estimates that there
are at least 250,000 angels active in the country,
funding about 30,000 small companies a year .

Angel Funding vs. Venture Capital

The Amount Raised
Professional vs. nonprofessional
Other People's Money vs. Own Money

Board Seats

Angels Investing Network in India

1.Chennai Fund
2.Indian Angels Network
3. Mumbai Angels
4. Tie Entrepreneurship Acceleration Program