Unit-3

Financial Institutions and NBFCs

Financial institutions

Meaning

Financial institutions are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return.

Financial institutions also provide services to entities (individual, business, government) seeking advice on various issue ranging from restructuring to diversification plans. They provide whole range of services to the entities who want to raise funds from the markets or elsewhere.

Financial institutions are also termed as financial intermediaries because they act as middle between savers by accumulating Funds them and borrowers by lending these fund.

Definition:

Financial institution is defined as “an establishment that focuses on dealing with financial transactions, such as investment, loans and deposits.” In other words, the financial institution is an organization which may be either 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.

Unit 4 Financial services -New

Salient feature of Financial Institutions:

the following are the salient features of financial institutions: 

It is an institution as well as intermediary. 
It channelizes savings fund into investment fund. 
It creates financial assets such as deposits, loans, securities etc.
It includes banking and non-banking institutions.
It includes both organized and unorganised institutions.
Established with a clear operating function.
Regulated by the government and regulating authority. 
It accepts deposits.
It provides commercial loans, real estate loans and mortgage loans. 
Financial institutions keep money flowing through the economy among consumers, businesses and government.

Functions of Financial Institutions:

The functions of financial institutions are classified into primary functions and secondary functions.

a)Primary functions:

These are the basic functions of financial institutions which come in the respective group of institutions like banks, co-operative societies, insurance industries etc. the primary functions are as follows:

i)Accepting deposits: most of the financial institutions viz, commercial banks, cooperative societies etc., accept deposits from the public. They offer different schemes to mobilize public deposits from the customers. For the accepted deposits, financial institutions give return in the form of interest on deposit tenure basis.

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ii)Providing commercial loans: accepted deposits are used for commercial lending operations in the form of loans, advances, cash credits, bill discounting etc., these fetch good return to the financial institutions.

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ii)Providing Real estate loans: the financial institutions also provide loans and advances for real estate industries to purchase sit, build premises, construction of industrial and residential parks. 

iv)Providing mortgage loans: the financial institutions also provide loans to the needy group on mortgage of properties and collateral securities. For example, Gold loan, property loan etc. where gold and properties are mortgaged to avail the loan.

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v)Issuing share certificates: financial institutions also undertake the job of issuing share certificates of any established corporate to its share-holders. It also constitutes accepting shares investment money from the investors and issuing them certificates on behalf of the companies.

b)Secondary Functions:

these are the additional functions performed by the financial institutions along with the above primary functions.

Secondary functions are as follow: 

i)Act as an intermediary: financial institutions act as an intermediary in between the savings community and industrialist. They receive the public deposit at a lower rate of interest and lend the same fund to the needy group at higher rate of interest. The difference amount of interest is the profit for their intermediary work.

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ii Facilitate the flow of money: they also facilitate the flow/channelize the money to the investment activities. Financial institutions are the interlinked path stones to make smooth flow o fund from small savers to giant business ventures.

All India Financial Institutions(AIFI)

All India Financial Institutions (AIFI) is a group composed of financial regulatory bodies that play a pivotal role in the financial markets. Also known as "financial instruments", the financial institutions assist in the proper allocation of resources, sourcing from businesses that have a surplus and distributing to others who have deficits - this also assists with ensuring the continued circulation of money in the economy. Possibly of greatest significance, the financial institutions act as an intermediary between borrowers and final lenders, providing safety and liquidity.

1. IFCI(Industrial Finance Corporation of India)

The IFCI is the first Development Financial Institution in India. It is a pioneer in development banking in India. It was established in 1948 under an Act of Parliament.The main objective of IFCI is to render financial assistance to large scale industrial units, particularly at a time when the ordinary banks are not forth coming to assist these concerns. Its activities include project financing, financial services, merchant banking and investment.

Functions of IFCI can be classified into three:

(a) financial assistance

(b)Promotional activities, and

(a) Financial Assistance:

IFCI renders financial assistance in one or more of the following forms:

1. Guaranteeing loans raised by industrial concerns which are repayable within a period of 25 years.

2. Underwriting the issue of stock, shares, bonds or debentures by industrial concerns but must dispose of such securities within 7 years.

3. Granting loans or advances to or subscribing to debentures of industrial concerns, repayable within 25 years.

4. Acting as agent for the Central Govt. and for the World Bank in respect of loans sanctioned by them to industrial concerns.

5. Granting loans to industrial units

6. Guaranteeing deferred payments by importers of capital goods

7. Guaranteeing loans raised by industrial concerns from scheduled banks

8. Guaranteeing with the prior approval of the Central Govt. loans rose from any bank or financial institution in any country outside India by industrial concerns in foreign country.

(b) Promotional Activities:

The IFCI has been playing a very important role as a financial institution in providing financial assistance to eligible industrial concerns. It is playing a promotional role too. It has been creating industrial opportunities. It discovers the opportunities for promoting new enterprises. It helps in developing small and medium scale entrepreneurs by providing them guidance through its specialized agencies in identification of projects, preparing project profiles, implementation of the projects etc. It acts as an instrument of accelerating the industrial growth and reducing regional industrial and income disparities.

(c) Financial Services:

The following financial services are provided by IFCI.

(i) Corporate counselling for financial reconstruction

(ii) Assistance in settlement of terms and conditions with foreign collaborators.

(iii) Revival of sick units

(iv) Financing of risky projects

(v) Merchant banking services

The IFCI has promoted ICRA Ltd, a credit rating agency to help investors undertake investment decisions. It has also established Management Development Institute (MDI) with the objective of imparting training in modern management techniques to entrepreneurs, govt. officers, and people from public and private sector.

2. SIDBI-Small Industries Development Bank of India

Small Industries Development Bank of India (SIDBI) is the apex regulatory body for overall licensing and regulation of micro small and medium enterprise finance companies in India.Its purpose is to provide refinance facilities to banks and financial institutions and engage in term lending and working capital finance to industries, and serves as the principal financial institution in the micro small and medium enterprises (MSME) sector. SIDBI also coordinates the functions of institutions engaged in similar activities.

Functions of SIDBI

1.It refinances loans that are extended by the PLIs to the small scale industrial units and also offers resource assistance to them.

2.It engages in term lending and working capital finance to industries,

3.It discounts and re discounts bills

4.It offers services like factoring, leasing etc to the industrial concerns in the small-scale sector.

5.It serves as the principal financial institution in the micro small and medium enterprises (MSME) sector.

6. SIDBI also coordinates the functions of institutions engaged in similar activities.

7.It offers services like factoring, leasing etc to the industrial concerns in the small-scale sector.

8.It promotes employment-oriented industries especially in semi urban areas for creating employment and thus checking relocation of people to the urban areas.

9.It also initiates steps for modernisation and technological up-gradation of current units.

10.It also co-promotes state level venture funds.

3. NABARD-National Bank for Agriculture and Rural Development

As the name suggests NABARD is a development bank focusing primarily on the rural sector of the country.It is responsible for the development of small industries,cottage industries and any other such village or rural projects.

The bank has been entrusted with "matters concerning policy, planning, and operations in the field of credit for agriculture and other economic activities in rural areas in India"

Functions of NABARD

Frames the policy for rural credit in the country for all financing institutions
National Bank for Agriculture and Rural Development will itself provide finance and refinancing facilities to the banks and rural regional banks
Identification of credit potential and preparation of the credit plans for all districts
It also helps all regional banks and institutes under its governance with the preparation of their own credit plans and policies
Helps Regional Rural Banks establish an agreement with State Governments and other Co-op Banks and institutions
It will also monitor the implementation of such plans and track their progress
Helps banks improve their MIS system, modernize their technology, develop human resources etc
As per the Banking Regulation Act 1949, NABARD has to conduct the inspection of Regional Rural Banks and other Co-op banks
It communicates and consults the RBI in matters such as issuing of licenses for new banks, the opening of branches of Rural Banks etc.
From time to time it will also inspect the investment portfolios of Regional Rural Banks and other State Co-op Bank

4.EXIM Bank (Export and Import Bank of India )

Our economy opened up post liberalization and globalization, the import and export industry became a huge sector in our economy. Even today India is one of the largest exporters of agricultural goods. So to provide financial support to importers and exporters the government set up the EXIM Bank.

The Export and Import Bank of India, popularly known as the EXIM Bank was set up in 1982. It is the principal financial institution in India for foreign and international trade. It was previously a branch of the IDBI, but as the foreign trade sector grew, it was made into an independent body.

The main function of the Export and Import Bank of India is to provide financial and other assistance to importers and exporters of the country. And it oversees and coordinates the working of other institutions that work in the import-export sector. The ultimate aim is to promote foreign trade activities in the country.

Functions of the EXIM Bank

Some of the main functions of Export and Import Bank of India are:

Finances import and export of goods and services from India
It also finances the import and export of goods and services from countries other than India.
It finances the import or export of machines and machinery on lease or hires purchase basis as well.
Provides refinancing services to banks and other financial institutes for their financing of foreign trade
EXIM bank will also provide financial assistance to businesses joining a joint venture in a foreign country.
The bank also provides technical and other assistance to importers and exporters. Depending n the country of origin there are a lot of processes and procedures involved in the import-export of goods. The EXIM bank will provide guidance and assistance in administrative matters as well.
Undertakes functions of a merchant bank for the importer or exporter in transactions of foreign trade.
Will also underwrite shares/debentures/stocks/bonds of companies engaged in foreign trade.
Will offer short-term loans or lines of credit to foreign banks and governments.
EXIM bank can also provide business advisory services and expert knowledge to Indian exporters in respect of multi-funded projects in foreign countries

NHB-National Housing Bank

National Housing Bank (NHB), is the apex regulatory body for overall regulation and licensing of housing finance companies in India. NHB is the apex financial institution for housing. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.

Functions of National Housing Bank

Regulation and Supervision of Housing Companies operating in India is one of the most important and foremost functions of this apex Institute, powers of which are derived from the National Housing Bank Act.
Raising of Funds on large scale and onward refinancing to Housing Finance companies, Cooperative Banks and other housing agencies for onward lending to Individual and Infrastructure companies in Housing Segment.
Ensure Housing Finance Companies meet regulatory Capital requirements as required by BASEL norms, have proper risk management framework in place, good governance practices, etc.

Nonbanking finance companies (NBFCs)-

A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFC facilitate bank-related financial services such as investment,contractual savings and market brokering. Examples of these include insurance firms, pawn shops, cashier's check issuers, check cashing locations, currency exchanges and microloan organisations.

Characteristics of NBFC

NBFCs cannot offer interest rate higher than the ceiling rate prescribed by RBI from time to time

NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

NBFCs should have minimum investment grade credit rating.

The deposits with NBFCs are not insured.

The repayment of deposits by NBFC is not guaranteed by RBI.

The NBFCs are allowed to accept /renew public deposits for a minimum period of 12 months and maximum period of 60 months.

They cannot accept deposits repayable on demand.

Functions of NBFC

i)Hire Purchase Services-A hire purchase service is a way through which the seller delivers the goods to the buyer without transferring the ownership of the goods. The payment of the goods is made in instalments. Once the buyer pays all the instalments of the goods, the ownership of the good is automatically transferred to the buyer.

ii)Retail Financing Companies that provides short term funds for Loans against shares, gold, property, primarily for consumption purposes.

iii)Trade finance Companies dealing in Dealer/distributor finance so that they can for working capital requirements, vendor finance, and other business loans.

iv)Infrastructural Funding-This is the largest section where major NBFCs deal in. A lot portion of this segment alone makes up a major portion of funds lent, amongst the different segments. This majority includes Real Estate, railways or Metros, flyovers, ports, airports, etc.

Types of NBFC 's

Based on their liability structure, NBFC 's have been divided into two categories.

Category ‘A’ companies (NBFCs-D) accept public deposits
Category ‘B’ companies do not accept public deposits
1. Category ‘B’ companies with under a billion euros (NBFCs-ND)
2. Category ‘B’ companies with over a billion (systemically important, NBFCs-ND-SI)

1. NBFC-D- Category ‘A’ companies (NBFCs-D) accept public deposits

They are subject to requirements of capital adequacy, liquid assets maintenance, exposure norms (including restrictions on exposure to investments in land, building and unquoted shares), asset and liability management (ALM) discipline and reporting requirements.

2. NBFC-ND- Category ‘B’ companies do not accept public deposits and under a billion euros

Till 2006, NBFC-ND were subject to minimal regulation. Prudential regulations, such as capital adequacy requirements and exposure norms with reporting requirements, apply to these companies. The ALM reporting and disclosure norms have also been made applicable to them at different points in time.

NBFC-ND-SI-Category ‘B’ companies do not accept public deposits and over a billion euros

Since April 1, 2007, non-deposit taking NBFCs with assets over one billion are classified as systemically important.

Difference between a bank and a financial institution

Meaning of Bank

Bank falls under one category of financial institutions known as banking financial institutions. A bank is known as financial intermediaries that act as middlemen between depositors or suppliers of funds and lenders who are the users of funds.

The main tasks of a banking financial institution are to accept deposits and then to use those funds to offer loans to its customers, who will in turn utilize them to fund purchases, education, to expand business, to invest in development, etc.

A bank also acts as a payment agent by offering a host of payment services including debit cards and credit cards, cheque facility, direct deposit facilities, bank drafts, etc. The primary purposes in depositing funds in banks are convenience, interest income, and safety. A bank’s ability to lend out funds is determined by the amount of excess reserves and the ratio of cash reserves held by the bank.

Meaning of Financial Institution

There are also a number of non-banking financial institutions, which include investment banks, leasing companies, insurance companies, investment funds, finance firms, etc. A non-banking financial institution offers a range of financial services. Investment banks offer services to corporations which include underwriting of debt and share issues, securities trading, investment corporate advisory services. Financial institutions such as insurance companies offer protection against specific losses for which an insurance premium is paid. Pension and mutual funds act as savings institutions in which investors are able to invest their funds in collective investment vehicles, and receive interest income in return.

Difference between a bank and financial institution

Bank vs Financial Institution

• Financial institutions can be divided into two types: banking financial institutions and non-banking financial institutions.

• A bank is known as financial intermediaries that act as middlemen between depositors or suppliers of funds and lenders who are the users of funds.

• The main tasks of a banking financial institution are to accept deposits and then to use those funds to offer loans to its customers.

• There are also a number of non-banking financial institutions which include investment banks, leasing companies, insurance companies, investment funds, finance firms, etc. A non-banking financial institution offers a range of financial services.

• The main difference between the two types of financial institutions is that banking financial institutions can accept deposit into various savings and demand deposit accounts, which cannot be done by a non-banking financial institution.

• The primary purposes in depositing funds in banks are convenience, interest income, and safety. Whereas the primary purpose in investing funds in non-banking financial institutions is to gain additional income.