Financial Institutions

Financial institutions, otherwise known as banking institutions, are corporations

that provide services as intermediaries to its clients, members and society.
Financial institutions are regulated to control the supply of money in the market
and protect consumers. An organization, which may be either for-profit or non-
profit, that takes money from clients and places it in any of a variety of investment
vehicles for the benefit of both the client and the organization.
Any institution that collects money and puts it into assets such as stocks, bonds,
bank deposits, or loans is considered a financial institution. Broadly speaking,
there are three major types of financial institutions:
1. Depository institutions – deposit-taking institutions that accept and manage
deposits and make loans, including banks, building societies, credit unions,
trust companies, and mortgage loan companies that pay you interest on your
deposits and use the deposits to make loans.;
2. Contractual institutions – insurance companies and pension funds
3. Investment institutions – investment banks, underwriters, brokerage firms.

Standard settlement instructions

Standard Settlement Instructions (SSIs) are the agreements between two financial
institutions which fix the receiving agents of each counter party in ordinary trades
of some type. These agreements allow traders to make faster trades since the time
used to settle the receiving agents is conserved. Limiting the trader to an SSI also
lowers the likelihood of a fraud. SSIs are used by financial institutions to facilitate
fast and accurate cross-border payments.

Roles/Functions of Financial Institutions

Financial institutions include banks, credit unions, asset management firms,

building societies, and stock brokerages. These institutions are responsible for
distributing financial resources in a planned way to the potential users.

These functions performed in the following ways:-

A. Accepting Deposits
B. Providing Agricultural Loans
C. Providing Commercial Loans
D. Providing Real Estate Loans
 E. Providing Mortgage Loans
F. Issuing Share Certificates
G. Liability-Asset transformation
H. Size- transformation
I. Risk- transformation
J. Maturity- transformation

Financial Institutions roles in economic development;

a.Development & Introduction of Niche strategies

Through the development and introduction of financial institutions we can see the
strategies for different sector specially for the niche sector of the country. The
institutions develop and spread knowledge about financial products to assist the
efficiency for the accomplishment of sustainable economic growth.

b. Motivating the Financial Sector

Generally Financial Institutions will only use their resources for the benefit of their
interest - i.e. help to make profits, either directly or indirectly. The considerations
are important because with the help of development of institutions there is rise in the
investment business in the country. With presence of more institutions there will be
motivation in the financial area to perform better and take steps for the
strengthening of country. This will lead towards the prosperity in the country by
removing the risk.

c. Financing the Small Scale Sector

Credit is the key input for sustained growth of small scale sector. The provision of
short term credit or working capital to small businesses for its day to day
requirement for purchasing raw material and other inputs like water, electricity, etc.
and for payment of salaries and wages; and long term credit for creation of fixed
assets like building, land, plant and machinery help the SSE sector to perform better.

d. Development and Support Services

With the existence of different organizations development and support services in

the form of grants and loans to different agencies working for the promotion and
development of industries like associations, chambers are available. Other support
was observed in rural development, technology up-gradation, human resource
development, and marketing & promotion in the country.

e. Micro Finance Credit

With the expansion of different institutions like KHUSHHALI Bank, micro Credit is
offered to the poorest sector of country. This active step to facilitate growth of the
micro finance sector in country is very commendable.

f. Introduction of more Institutions

The Financial Institutions and Banking system play an important role in the
economy. The recent economies in the world have developed mostly by making best
use of the credit availability in their systems. An efficient banking system must
accommodate to the needs of high end investors by making available high amounts
of capital for vast projects in the industrial, infrastructure & service sectors. At the
same time, the medium and small projects must also have credit available to them
for new investment and extension of the existing units. Rural sector in a country like
India, and Pakistan can grow only if inexpensive credit is available to the farmers
for their short and medium term needs. This expected potential help the investors for
the introduction of more Financial Institutions in the country.

g. Mopping up Savings

The banks and financial institutions also accommodate to another important need of
the society that is mopping up small savings at sensible rates with several options.
The common man has the choice to park his savings under a few alternatives,
together with the small savings schemes introduced by the government from time to
time and in bank deposits in the form of recurring deposits, savings accounts, and
time deposits. Another choice is to invest in the mutual funds or stocks.

h. Availability of Financial services to households & individuals

Individuals have a key impact on the environment through their doings and
consumption of goods and services. Financial institutions can have a major effect on
the activities of individuals by the provision of appropriate financial arrangements -
for example, car ownership has been critically increased by the accessibility of car
loans and hire purchase. In the absence of suitable financing arrangements, products
may struggle to achieve sales, mainly if they have high capital costs.

i.Capital mobilization

Capital mobilization is commonly one of the most necessary conditions for

economic development. The role played by Financial Institutions in the process of
financial integration in developing countries is very important. With the help of this
channel advantage of integration materialized. With the help of capital mobilization
capacity building, good governance and economic reforms can easily be achieved.

j. Managing Risk in Financial Institutions

Risk factor is very critical factors while dealing with finance. The assistance of
issuance of new securities e.g., the sale of new Treasury securities or new corporate
stock or facilitation of trading of existing securities e.g., the sale of existing stock
etc. involve factor of risk. We are not self-assured either the securities traded in
secondary markets are liquid or not. Focusing on risk management in the financial
institution is very essential.

Merits

Merits of raising funds through financial institutions are as follows:

1. Financial institutions provide long term finance, which are not provided by
commercial banks;
2. The funds are made available even during periods of depression, when other
sources of finance are not available;
3. Obtaining loan from financial institutions increases the goodwill of the
borrowing in the capital market. Consequently, such a company can raise
funds easily from other sources as well;
4. Besides providing funds, many of these institutions provide financial,
managerial and technical advice and consultancy to business firms;
5. As repayment of loan can be made in easy installments, it does not prove to
be much of burden on the business.

Opportunities
 - Healthy & Stable Sector
- Cost Effective
- E-Business Solutions
- Niche Banking Services
- Call for Custodians
- Access to new segments
- Expansion

Challenges

- Lack of financial performance information

- Risk management
- Promoting growth and profitability
- Competition in technology/Going digital
- Consumer Expectation
- Regulatory pressure
- Data security and privacy
- Expenses for staff expansion

NABARD
NABARD stands for National Bank for Agriculture and Rural Development.
NABARD is a leading development bank in India. Its headquarters are based in
Mumbai (Maharashtra). The branches of NABARD are spread all over the country.
NABARD was established on Shiva raman Committee’s recommendations on July
12th, 1982 to execute the National Bank for Agriculture & Rural Development Act
1981. It is the apex banking institution to provide finance for Agriculture and rural
development with the paid up capital of Rs. 100 cr. by 50: 50 contribution of
government of India and Reserve bank of India.
It is an apex institution in rural credit structure for providing credit for promotion
of agriculture, small scale industries, cottage and village industries, handicrafts etc.
The mission of NABARD is to endorse sustainable and fair agriculture & rural
affluence through effectual credit support, institution development, associated
services and pioneering initiatives.

The functions of NABARD are:

1. To serve as a peak financing agency for institutions offering investment &

production credit for upholding diverse developmental activities in rural areas.
2. To take measures towards institution building for succeeding absorptive
capability of credit delivery system, together with monitoring, restructuring of
credit institutions, formulation of rehabilitation schemes & training of personnel.

3. To coordinate the rural financing activities of institutions affianced in

developmental work at the field level & link with the Indian Government, State
Governments, RBI & other national level institutions concerned with policy
formulation.

4. To embark on evaluation & monitoring of projects refinanced by it.

5. NABARD also gives guidelines for promotion of group activities under its
programs and provides 100% refinance support for them.

6. It refinances to the complete extent for those projects which are operated under
the ‘National Watershed Development Programme‘and the ‘National Mission of
Wasteland Development‘.

7. It also supports “Vikas Vahini” volunteer programs which offer credit and
development activities to poor farmers.

8. It also inspects and supervises the cooperative banks and RRBs to periodically
ensure the development of the rural financing and farmers’ welfare.

9. NABARAD also recommends about licensing for RRBs and Cooperative banks
to RBI.

10. NABARD gives assistance for the training and development of the staff of
various other credit institutions which are engaged in credit distributions.

11. It also runs programs for agriculture and rural development in the whole
country.

Role of NABARD:

1. It is an apex institution which has power to deal with all matters concerning
policy, planning as well as operations in giving credit for agriculture and other
economic activities in the rural areas.
2. It is a refinancing agency for those institutions that provide investment and
production credit for promoting the several developmental programs for rural
development.

3. It is improving the absorptive capacity of the credit delivery system in India,

including monitoring, formulation of rehabilitation schemes, restructuring of credit
institutions, and training of personnel.

4. It co-ordinates the rural credit financing activities of all sorts of institutions

engaged in developmental work at the field level while maintaining liaison with
Government of India, and State Governments, and also RBI and other national
level institutions that are concerned with policy formulation.

5. It prepares rural credit plans, annually, for all districts in the country.

6. It also promotes research in rural banking, and the field of agriculture and rural
development.
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IFCI
Industrial Finance Corporation of India (IFCI) is actually the first financial institute
the government established after independence. The main aim of the incorporation of
IFCI was to provide long-term finance to the manufacturing and industrial sector of
the country. In July 1, 1948 the Industrial Finance Corporation of India (IFCI) was
established by the Government under a special Act.

The prime object of IFCI is to provide medium term and long-term finance to
public limited companies and co-operative organisations. The IDBI, scheduled
banks, insurance sector, co-op banks are some of the major stakeholders of the
IFCI. The authorized capital of the IFCI is 250 crores and the Central Government
can increase this as and when they wish to do so.

Later, by an amendment to the IFCI Act, private limited companies have become
eligible to get financial assistance from IFCI. After the establishment of Industrial
Development Bank of India (IDBI) in 1964, the IFCI became a subsidiary to the
IDBI. Again on 24th March, 1993 the Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Bill 1993 was passed in the Parliament in order to
privatize the I.F.C.I.

Now I.F.C.I. would be free to raise resources from the open market and face
competition. Moreover, with effect from 1st July, 1993, the IFCI has been
converted into a public limited company and it is renamed as Industrial Finance
Corporation of India Ltd.

Functions of Industrial Finance Corporation of India (IFCI):

The Corporation is authorised to perform the following functions:

(i) Granting loans and advances to industrial concerns and subscribing to the shares
and debentures floated by them; it provides medium and long-term loans and
advances to industrial and manufacturing concerns. It looks into a few factors
before granting any loans. They study the importance of the industry in our national
economy, the overall cost of the project, and finally the quality of the product and
the management of the company. If the above factors have satisfactory results the
IFCI will grant the loan.

(ii) Underwriting the issue of stocks, shares, debentures and bonds of industrial
concerns provided these stocks, shares etc., are disposed of by the Corporation
within seven years;

(iii) The IFCI also provides guarantees to the loans taken by such industrial
companies.

(iv) Granting loans in foreign currencies to specified industries; It also guarantees

deferred payments in case of loans taken from foreign banks in foreign currency.

(v) When a company is issuing shares or debentures the Industrial Finance

Corporation of India can choose to underwrite such securities.

IFCI as a Business Facilitator

In the last few decades, the Industrial Finance Corporation of India has made a
significant contribution to the development of our economy. Also, it is responsible
for the growth, expansion, and modernization of our industrial sector.

The Industrial Finance Corporation of India has also been beneficial for the import
and export industry, the cause of pollution control, energy conservation, import
substitution, and many such initiatives and industries. Some sectors, in particular,
have seen a lot of benefits. Some of these are
 Agricultural Based Industries like paper, sugar, rubber, etc.
 Service Industries like restaurants, hospitals, hotels, etc.
 Basic industries in any economy like steel, cement. Chemicals etc.
 Capital and goods industries like electronics, fibers, telecom services, etc.

The IFCI is authorised to advance long and medium term finance only to those
companies which are engaged in manufacturing, mining, shipping and generation
and distribution of electricity. Now the Corporation’s capacity to advance loan or
to assist a single concern is limited to Rs 1 crore and the period of loans should not
exceed 25 years.

The corporation is charging rate of interest on loan at the rate of 11.25 per cent on
rupee loan and 11.50 per cent on foreign loan.

The corporation is giving more preference in advancing finance to:

(i) New entrepreneurs,

(ii) Projects aimed at exploring new areas of technology,

(iii) Prospect of the projects in earning foreign exchange,

(iv) Projects involved for producing inputs for raising agricultural production,

(v) Projects involved in the production of essential consumer goods, and

(vi) Projects located in notified list.

Financial Resources of Industrial Finance Corporation of India (IFCI):

The main three components of financial resources of IFCI include:

(i) Share capital

(ii) Bonds and debentures and

(iii) Other borrowings.

Initially, the paid up capital of the IFCI was Rs 5 crore. Later on, the amount was
increased several times and as on 31st March, 2013, the amount of paid up capital
stood at Rs 1,926 crore. The share capital of IFCI is mostly subscribed by IDBI,
commercial banks and the cooperative banks. IFCI has also accumulated sizeable
reserves.

Besides paid up capital and reserves, the other major sources of financial resources
of IFCI are issue of bonds and debentures, borrowings, from the IDBI, the
government and foreign loans. Again such bonds and debentures issued by IFCI
are guaranteed by the Government of India for its repayment of principal and
payment of interest.

SIDBI
SIDBI was established as a wholly owned subsidiary of Industrial Development
Bank of India (IDBI) under a special Act of the Parliament 1988 and started its
operations on April 2, 1990. It took over the responsibility which were earlier
administered by IDBI. It is the Principal Financial Institution for the Promotion,
Financing and Development of the Micro, Small and Medium Enterprise (MSME)
sector and for Co-ordination of the functions of the institutions engaged in similar
activities. It is managed by a team of 10 Board of Directors. The authorised capital
of the Bank is Rs. 1000 crore and the Paid up capital is Rs. 450 crore.

SIDBI makes use of the current banking network to extend credit facilities to the
small business and micro industries sector. It provides direct financial assistance to
such banks and institutes which are passed over to the MSME sector. It also
provides indirect financial assistance via line of credit, refinancing facilities, bills
discounting, etc.

SIDBI Subsidiaries
 SIDBI VENTURE CAPITAL LIMITED (SVCL)
 SIDBI TRUSTEE COMPANY LIMITED (STCL)

SIDBI provides direct, indirect and micro finance facilities.

- Direct Finance: In the form of Term Loan Assistance, Working Capital
Assistance, Support against Receivables, Foreign Currency Loan, Scheme of
Energy Saving for MSME sector, equity support etc.
- Indirect Finance: The Indirect assistance in the form of Refinance is
provided to Primary Lending Institutions (PLIs), comprising banks, State
 Level Financial Institutions, etc. having a wide network of branches all
over the country. The main objective of Refinance Scheme is to increase the
resource position of PLIs which would ultimately facilitate the flow of credit
to MSME sector.
- Micro Finance: SIDBI provides micro finance i.e. credit to small
entrepreneurs and businessmen for establish their business.

Functions of SIDBI

1. When a private bank or institution provides loans or advances to small units for
business purposes, the SIDBI will refinance such loans and also provides resources
support to them.
2. SIDBI discounts and rediscounts bills arising from sale of machinery to or
manufactured by industrial units in the small scale sector.
3.To expand the channels for marketing the products of Small Scale Industries
(SSI) sector in domestic and international markets.
4. It provides services like leasing, factoring etc. to industrial concerns in the small
scale sector.
5. To promote employment oriented industries especially in semi-urban areas to
create more employment opportunities.

6. To initiate steps for technological up-gradation and modernization of existing

units. It helps the small-scale industries for higher efficiency and better products.

7. SIDBI facilitates timely flow of credit for both term loans and working capital to
SSI in collaboration with commercial banks to make sure these small scale
industries always have adequate working capital.
8. SIDBI Co-Promotes state level venture funds in association with respective state
government.

9. It grants direct assistance and refinance loans extended by primary lending

institutions for financing exports of products manufactured by small scale units.
10. SIDBI has arrangements with banks, government bodies other international
agencies, etc. to enable a holistic approach for the development of the MSME
sector.
11.SIDBI offers small-scale units with additional services like leasing, factoring,
etc.
12. Besides providing credit, SIDBI also provides these small scale industries with
support for development and promotion activities. They educate about
entrepreneurial development, responsible financing, environment protection,
energy efficiency. This we call as the Credit Plus Approach.

Importance of SIDBI

Firstly the entire institution is designed in a way to especially help the MSME sector,
who have their own unique credit needs. And so SIDBI ensures that these businesses
get the right funding. These loans are customized to suit the size of the organization
and its business environment.

Also, because of the various tie-ups, the bank has with other institutions and
government backing it can provide credit and loans at concessional rates. The interest
rates are never predatory.

And not only credit facilities SIDBI provides many other kinds of assistance. This
has allowed the MSME sector to grow and develop tremendously in the last few
decades. And now it is one of the most highly effective sectors of the Indian
economy and contributes significantly to our GDP.

National Housing Bank(NHB)

The National Housing Bank (NHB) is an apex level financial institution catering to
the housing sector in the country. It was established on July 9, 1988. It works as a
facilitator in promoting housing finance institutions or providing assistance to
other institutions of such type. It is headquartered in Delhi and has offices in all the
major cities of India. NHB has 9 departments which are NHB Residex Cell,
Regulation and Supervision, Refinancing operations, Direct finance operations,
Enabling processes, Information Technology, Resource mobilization and
management, Development and risk management, Board and CMD secretariat.

Objectives of NHB are as follows:

- To promote a sound, healthy, viable and cost effective housing finance system to
cater to all segments of the population and to integrate the housing finance system
with the overall financial system.
- To promote a network of dedicated housing finance institutions to adequately
serve various regions and different income groups.
- To augment resources for the sector and channelize them for housing.
- To make housing credit more affordable.
- To regulate the activities of housing finance companies based on regulatory and
supervisory authority derived under the Act.
• To encourage augmentation of supply of buildable land and also building
materials for housing and to upgrade the housing stock in the country.
• To encourage public agencies to emerge as facilitators and suppliers of serviced
land, for housing.

The 3 Main function of NHB in the housing finance business in the country are as
follows

1. Promotion and Development Function

The institution had been set up when regional and local level housing finance
institution were nearly absent and the banking sector was not willing to do housing
finance on any significant level. There was a need to set up local and regional level
financial institutions for supply of housing credit. NHB is of the opinion that
intervention through institutional credit can be made more effective by adoption of
different approaches to cater to the needs of different income groups. NHB is
encouraging the financial institutions to lend to this segment through its refinance
programmes. There has been a sustained effort at creating and supporting new set
of specialised institutions to serve as dedicated centres for housing credit.

2. Regulatory Function

The second most important function of NHB is the regulatory role assigned to it.
This role assumes more importance as the housing finance system in India enters a
secondary phase of development in terms of integration with the debt and capital
markets. The housing finance system as such is still developing in the country and
thus there needs to be a great amount of stability in terms of resource development,
policy development and institution building. NHB has come up with guidelines for
its financial assistance with guidelines. Besides it has also issued guidelines for
prudential norms for income recognition, asset classification etc.

3. Financial Function

The third important role of NHB is to provide financial assistance to the various
banks and housing finance institutions. As an apex refinance institution, the
principal focus is to generate large scale involvement of primary lending
institutions falling in various categories to serve as dedicated outlets for assistance
to the housing sector. It supports housing finance sector by extending refinance to
different lenders It also supports by lending directly in respect of projects
undertaken by public housing agencies for housing construction and development
of housing related infrastructure. It helps by guaranteeing the repayment of
principal and payment of interest on bonds issued by housing finance companies.
Real Estate and Stock market fluctuations also are monitored. So the major
things under the financial role that NHB plays are refinance operations, project
finance, guarantee and securitisation.

Reserve Bank of India

The Reserve Bank of India was established in 1935 under the provisions of the
Reserve Bank of India Act, 1934 in Calcutta, eventually moved permanently to
Mumbai. Though originally privately owned, was nationalized in 1949.

Organisation and Management:

The Reserve Bank”s affairs are governed by a central board of directors. The
board is appointed by the Government of India for a period of four years, under
the Reserve Bank of India Act.

Main Role and Functions of RBI

 Monetary Authority: Formulates, implements and monitors the monetary

policy for

a)  maintaining price stability, keeping inflation in check;

b) ensuring adequate flow of credit to productive sectors.

 Regulator and supervisor of the financial system: lays out parameters of

banking operations within which the country”s banking and financial system
functions for-

a) maintaining public confidence in the system,

b) protecting depositors’ interest;

c) providing cost-effective banking services to the general public.

 Regulator and supervisor of the payment systems:

 a) Authorises setting up of payment systems;

b) Lays down standards for working of the payment system;

c)lays down policies for encouraging the movement from paper-based

payment systems to electronic modes of payments.

d) Setting up of the regulatory framework of newer payment methods.

e) Enhancement of customer convenience in payment systems.

f) Improving security and efficiency in modes of payment.

 Manager of Foreign Exchange: RBI manages forex under the FEMA-

Foreign Exchange Management Act, 1999.  in order to

a) facilitate external trade and payment

b) promote the development of foreign exchange market in India.

 Issuer of currency: RBI issues and exchanges currency as well as destroys

currency & coins not fit for circulation to ensure that the public has an
adequate quantity of supplies of currency notes and in good quality.
 Developmental role : RBI performs a wide range of promotional functions
to support national objectives. Under this it setup institutions like NABARD,
IDBI, SIDBI, NHB, etc.
 Banker to the Government: performs merchant banking function for the
central and the state governments; also acts as their banker.
 Banker to banks: An important role and function of RBI is to maintain the
banking accounts of all scheduled banks and acts as the banker of last resort.
 An agent of Government of India in the IMF.

Offices and Training Centres:

1. RBI has 20 regional offices, most of them in state capitals and 11 Sub-
offices. So, the RBI has its offices at 31 locations.
2. Has five training establishments – Two, College of Agricultural Banking and
Reserve Bank of India Staff College are part of the Reserve Bank. Other
three are autonomous, National Institute for Bank Management;  Indira
Gandhi Institute for Development Research (IGIDR);  Institute for
Development and Research in Banking Technology (IDRBT).
Instruments of Monetary Policy of RBI :

As discussed earlier, RBI executes Monetary Policy for Indian Economy. The RBI
formulates, implements and monitors the monetary policy. The Monetary Policy
Committee (MPC) is entrusted with the task of fixing the benchmark policy
interest rate (repo rate) for inflation targeting.

The main objectives of monitoring monetary policy are:

 Maintaining price stability while keeping in mind the objective of growth

 Inflation control (containing inflation at 4%, with a standard deviation of
2%)
 Control on bank credit
 Interest rate control

The monetary policy (credit policy) of RBI involves the two instruments given in
the flow chart below:

Quantitative Measures

Quantitative measures refer to those measures that affect the variables, which in
turn affect the overall money supply in the economy.
Instruments of quantitative measures:

Bank rate

The rate at which central bank provides loan to commercial banks is called bank
rate. This instrument is a key at the hands of RBI to control the money supply in
long term lending. At present it is 6.25%. 

 Increase in the bank rate will make the loans more expensive for the
commercial banks; thereby, pressurizing the banks to increase the rate of
lending. The public capacity to take credit at increased rates will be lower,
leading to a fall in the volume of credit demanded.
 The reverse happens in case of a decrease in the bank rate. This increases the
lending capacity of banks as well as increases public demand for credit and
 hence will automatically lead to a rise in the volume of credit flowing in the
economy.

Liquidity Adjustment Facility-

Reserve Bank of India’s  LAF helps banks to adjust their daily liquidity
mismatches. LAF has two components – repo (repurchase agreement) and reverse
repo.

(i) Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends short-
term money to the banks against securities. When the repo rate increases
borrowing from RBI becomes more expensive.Repo rate is always higher than the
reverse repo rate. At present it is 6.00%

(ii) Reverse Repo Rate:  It is the exact opposite of repo. In a reverse repo
transaction, banks purchase government securities form RBI and lend money to the
banking regulator, thus earning interest. Reverse repo rate is the rate at which RBI
borrows money from banks.The banks use this tool when they feel that they are
stuck with excess funds and are not able to invest anywhere for reasonable
returns. At present it is 5.75%

(iii)Marginal Standing Facility (MSF):  was introduced by the Reserve Bank of

India (RBI) in its Monetary Policy (2011-12). The MSF would be a penal rate for
banks and the banks can borrow funds by pledging government securities within
the limits of the statutory liquidity ratio SLR.

The scheme has been introduced by RBI for reducing volatility in the overnight
lending rates in the inter-bank market and to enable smooth monetary transmission
in the financial system. Currently, it is 6.25%

Varying reserve ratios –

 The reserve ratio determines the reserve requirements that banks are liable to
maintain with the central bank. These tools are:

(i)Cash Reserve Ratio (CRR)

It refers to the minimum amount of funds in cash( decided by the RBI) that a
commercial bank has to maintain with the Reserve Bank of India, in the form of
deposits. An increase in this ratio will eventually lead to considerable decrease in
the money supply. On the contrary, a fall in CRR will lead to an increase in the
money supply. Currently, it is 4%.
(ii) Statuary Liquidity Ratio (SLR)
SLR is concerned with maintaining the minimum percentage( fixed by RBI) of
assets in the form of non-cash with itself. The flow of credit is reduced by
increasing this liquidity ratio and vice-versa. As SLR rises the banks will be
restricted to pump money in the economy, thereby contributing towards a decrease
in money supply. The reverse case happens if there is a fall in SLR, it increases the
money supply in the economy. Currently, SLR is 19.5%.

Mutual Funds
Mutual funds are a type of investment where
investors pool their resources together to invest
in diversified assets. A Mutual Fund is a trust
that pools the savings of a number of investors
who share a common financial goal. The
money thus collected is then invested in capital
market instruments such as shares, debentures
and other securities. However, it is important
to note that when you invest in a mutual fund,
you do not become an owner of the assets in the portfolio. Instead, you own a unit
of the actual fund.  There are many different types of mutual funds but the most
common ones include stocks, bonds and other money market assets. The flow chart
below describes broadly the working of a mutual fund:

Advantages
The advantages of investing in a Mutual Fund are:

 Professional Management
 Diversification
 Convenient Administration
 Return Potential
 Low Costs
 Liquidity
 Transparency
 Flexibility
 Choice of schemes
 Tax benefits
 Well regulated

Built-In Diversification- Investing in a diversified portfolio can be very

expensive. The nice thing about mutual funds is that they allow anyone to hold a
diversified portfolio. The reason why investors invest in a diversified portfolio is
because it increases the expected returns while minimizing the risk.  Therefore,
many see mutual funds as a cost effective way to achieve this.

Liquidity- Another nice advantage to mutual funds is that the assets are liquid. In
financial jargon, liquidity basically refers to converting your assets to cash with
relative ease. Mutual funds are considered liquid assets since there is high demand
for many of the funds in the marketplace. Since this is the case, an investor can
convert the asset to cash by quickly selling it to another investor.

Professional Management- Mutual funds do not require a great deal of time or

knowledge from the investor because they are managed by professional fund
managers. This can be a big help to an inexperienced investor who is looking to
maximize their financial goals.

Ease of Comparison- Mutual funds are also convenient because they are easy to
compare. This is because many mutual fund dealers allow the investor to compare
the funds based on metrics such as level of risk, return and price. Because the
information is easily accessible, the investor is able to make wise decisions.

Disadvantages

Cost- One downside to mutual funds is that they have a high cost associated with
them in relation to the returns they produce. This is because investors are not only
charged for the price of the fund but they will often face additional fees.
Depending on the fund, commission charges can be significant. You will also need
to pay a fee that will go towards the fund manager.

Index Does Better- In some cases, the stock index may outperform the mutual
fund. However, this is not always the case as it depends in large part on the mutual
fund the investor has invested in, as well as the skill set of the fund manager.
Therefore, it is a good idea to do your research before investing in a fund. If the
historical data indicates that it consistently underperformed compared to an index,
then it is not a wise investment.

Fees- The fees that are charged will depend on the type of mutual fund purchased.
If a fund is riskier and more aggressive, the management fee will tend to be higher.
In addition, the investor will also be required to pay taxes, transaction fees as well
as other costs related to maintaining the fund.
Unpredictable- Although expected returns will be quoted, it is impossible to find a
mutual fund with a guaranteed return. This is because all assets carry some degree
of risk. However, some mutual funds will carry a higher level of risk than others
depending on how well it is diversified.