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MODULE IV
FINANCIAL INSTITUTIONS
Financial Institutions are an important component of financial system.
Financial institutions are also known as financial intermediaries. This is because
they collect the savings from the savers and pass on the same to desired channels.
They provide finance for the development of various sectors of the economy such
as industry, agriculture, service etc. Thus financial institutions play an important
role in the financial system or economy.

Role of Financial Institution in the Financial System

o Financial institutions are financial intermediaries.

o They provide the means and mechanism of transferring the resources from
those whose income is more than expenditure to those who need these
resources for productive purposes.

o The savings of the savers will reach the borrowers through the financial
intermediaries in the form of financial instruments such as shares, stocks,
debentures, deposits, loans etc. Thus, they play the role of intermediate between
the savings and investments.

o They provide safety, liquidity and ensure return for savings.

o Financial institutions develop the saving habit among the people.

o They mobilise huge amount of savings for the industrial development as a

productive capital. The financial institutions supply capital to the
small, medium and large scale industries in India in the form of capital,
venture capital, and services to promote the industrial growth in India.

o These contribute for the growth and development of industries, agriculture etc.

Classification of Financial Institutions

All financial institutions in India may be broadly clarified into two-banking

financial institutions and non-banking financial institutions.

I. Banking Financial Institutions

Banking financial institutions are those financial institutions which carry

on banking activities. Banking business is carried on by these institutions after
obtaining an approval under Banking Regulation Act, 1949 and RBI. It accepts
deposits from the public. It lends money to people engaged in commerce,

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industry and agriculture. It finances foreign trade and deals in foreign exchange.
It provides short, medium and long term credit. It acts as an agent of RBI. It
deals in stocks and shares, trusteeship, executorships etc. In short, the bank can be
aptly described, as ‘department store of finance’ because it engages itself in every
form of banking business.

Banking financial institutions mainly comprise of commercial banks.

A. Commercial banks

A Bank is a financial Institution whose main business is accepting deposits and

lending loans. A Banker is a dealer of money and credit. Banking is an evolutionary
concept i.e. expanding its network of operations. According to Banking revolutions
Act 1949, the word BANKING has been defined as “Accepting for the purpose of
lending and investment of deposits of money from the public repayable on demand
or otherwise”.
Functions of Commercial Banks

Globalisation transformed commercial banks into super markets of financial

services. The important functions of commercial banks are explained below:

I. Primary Functions

These are further classified into 2 categories

i) Accepting Deposits: -

Deposits are the capital of banker. Therefore, it is first Primary function of

the banker. He accepts deposits from those who can save and lend it to the needy
borrowers. The size of operation of every bank is determined by size and nature of
Deposits. To attract the saving from all sort (categories) of individuals, Commercial
banks accepts various types of deposits account they are:

a) Fixed Deposits

b) Current Deposits

c) Saving Bank account

d) Recurring Deposits

ii) Lending Loans: -

The 2nd important function of the commercial bank is advancing loans. Bank
accepts deposits to lend it at higher rate of interest. Every Commercial Bank keep
the rate of interest on its deposit at lower level or less that what he charges on its loans
which is as NIM (Net Interest Margin). The banker advances different types of loans
to the individual and firms. They are: -

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a) Overdraft

b) Cash Credit

c) Term Loan

d) Discounting Bill

II) Secondary Functions

i) Agency functions:

Bankers act as an agent to the customers it means he performs certain functions

on behalf of the customers such services are called Agency Services. Example:

a) Bank pay electricity bill, water bill, Insurance Premium etc.

b) They guide the customer in Task Planning.

c) Bank provides safety locker facility.

d) Pay salaries of customer’s employees.

ii) General Utility Services: -

Bankers are the past of society. They offer: several services to general public they are:-

a) It provides cheap remittance (transfer) facilities.

b) The banks issue traveller cheque for safe travelling to its customers.

c) Banks accepts and collects foreign Bills of Exchanges.

d) Other than these services the bankers also provide ATM services, Internet
Banking, Electronic fund transfer (EFT), E-Banking to provide quick and proper
services to its customers.

iii) Credit Creation: -

It is a unique function of Commercial Banks. When a bank advances loan to

its customer if doesn’t lend cash but opens an account in the borrowers name
and credits the amount of loan to that account. Thus, whenever a bank grants loan,
it creates an equal amount of bank deposits. Creation of deposits is called Credit
Creation. In simple words we can define Credit creation as multiple expansions of
deposits. Creation of such deposits will results an increase in the stock deposits.
Creation of such deposits will results an increase in the stock of money in
an economy.

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II. Non-Banking Financial Institutions

These are the financial institutions which are not permitted to carry on the
banking activities as per Banking Regulation Act, 1949 and RBI regulations. These
institutions have been established by special legislations to provide finance to
specified categories of industries or persons.

Classification of Non-Banking Financial Institutions

Non-banking financial institutions can be classified to three. They are :

1. All-India Financial Institutions or All-India Development Banks or Specialised

Financial Institutions

2. State Level Financial Institutions

3. Investment Institutions

These may be described in the following pages:

A. All-India Financial Institutions

Government of India has nationalised 20 commercial banks (excluding

subsidiaries of SBI) so far. A number of financial institutions have also been set
up to supply finance to industry and agriculture. Unfortunately, these
commercial banks and financial institutions fail to provide long term finance to
industries. With the objective of giving term loans, Govt. has set up some
specialised financial institutions. These specialised financial institutions are called
development banks. The development banks have to sacrifice business principles
of conventional financial institutions and pay due regard to publicinterest so as
to act as an instrument of economic development in conformitywith national
objectives, plans and priorities.

Development banks are expected to act as catalysts in performing

developmental and promotional functions. As regards banking obligations, it is
supposed to undertake the primary task of providing financial assistance in
different forms. These are something more than pure financial institutions.
Development banks are viewed as financial intermediary supplying medium and
long term funds to bankable economic development projects and providing related
services. They are expected to mobilise large capital from other sources.
Accordingly, the task of economic transformation and rapid industrialisation can
best be handled only through development banks rather than through the normal
process of governmental machinery.

Important development or specialised financial institutions may be

discussed as follows:

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 Industrial Finance Corporation of India (IFCI)

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.

Till 1993, IFCI continued to be Developmental Financial Institution. After 1993,

it was changed from a statutory corporation to a company under the Indian
Companies Act, 1956 and was named as IFCI Ltd with effect from October 1999.

Functions of IFCI

Functions of IFCI can be classified into three: (a) financial assistance (b)
Promotional activities, and (c) financial Services.

(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, which are able

to obtain this concession from foreign manufacturers.

7. Guaranteeing loans raised by industrial concerns from scheduled banks or state

co-operative 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.

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(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.

Industrial Development Bank of India (IDBI)

The IDBI was established on July 1, 1964 under an Act of Parliament. It

was set up as the central co-ordinating agency, leader of development banks and
principal financing institution for industrial finance in the country. Originally, IDBI
was a wholly owned subsidiary of RBI. But it was delinked from RBI w.e.f. Feb. 16,
1976.

IDBI is an apex institution to co-ordinate, supplement and integrate the

activities of all existing specialised financial institutions. It is a refinancing and re-
discounting institution operating in the capital market to refinance term loans and
export credits. It is in charge of conducting techno-economic studies. It was
expected to fulfil the needs of rapid industrialisation.

The IDBI is empowered to finance all types of concerns engaged or to be

engaged in the manufacture or processing of goods, mining, transport, generation
and distribution of power etc., both in the public and private sectors.

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Assistance
The composition of assistance given by IDBI may be broadly grouped as direct
assistance, indirect assistance and Promotional activities.

Direct Assistance: Direct assistance takes the form of loan/soft loans,

underwriting/subscriptions to shares and debentures and guarantees.

Indirect Assistance: It provides assistance to tiny, small and medium enterprises

indirectly by way of refinance of loans granted by SFCs, commercial banks, co-
operative banks and regional rural banks, through discounting of bills of exchange
arising out of the sale of indigenous machinery on deferred payment basis and seed
capital assistance to new entrepreneurs through SFCs etc.

Promotional Activities: These include the following:

(a) Assistance for the development of backward areas: This is provided through
direct financial assistance at concessional terms and through concessional
refinance assistance to projects located in specified backward areas/districts.

(b) Assistance by way of seed capital scheme: This is to help technician

entrepreneurs who have technically feasible and economically viable projects but
do not have sufficient capital.

(c) A large range of consultancy services: Another promotional scheme is the setting
up of TCOs with the principal idea of providing different types of consultancy
services to small and medium enterprises, Government departments, commercial
banks and others engaged in industrial development. It also provides assistance to
voluntary agencies for setting up of science and technology entrepreneurship parks
etc., under its network of promotional activities.

In order to boost capital market as well as to play its catalyst role in

development and promotional activities for the benefit of industry, IDBI has set up
Small Industries Development Fund, Stockholding Co-operation of India, SEBI,
National Stock Exchange of India, OTC Ex-change of India, Entrepreneurship
Development Institute of India, SCICI, TFCI, mutual fund and commercial bank.

Functions of IDBI

1. It co-ordinates the operation of other institutions providing term finance to

industries.

2. It provides assistance to medium and large industries by way of direct finance

and refinance of industrial loans.

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3. It extends resource support to all India and state level financial institutions and
other financial intermediaries.

4. It renders services like asset credit equipment finance, equipment leasing and
bridge loans.

5. It also undertakes merchant banking.

6. It provides technical and administrative assistance to industrial concerns.

7. It guarantees deferred payments due from any industrial concern. It

guarantees loans raised by industrial concerns from any financial institution.

8. It promotes and develops key industries which are necessary to meet the overall
needs of the economy.

9. It undertakes techno-economic studies and surveys on its own with a view to

promoting the establishment of new enterprises.

Industrial Credit and Investment Corporation of India (ICICI)

ICICI was set up in 1955 as a public limited company. It was to be a private

sector development bank in so far as there was no participation by the Government in
its share capital. It is a diversified long term financial institution and provides a
comprehensive range of financial products and services including project and
equipment financing, underwriting and direct subscription to capital issues, leasing,
deferred credit, trusteeship and custodial services, advisory services and business
consultancy.

Objectives of ICICI

The main objective of the ICICI was to meet the needs of the industry for long
term funds in the private sector. Other objectives include:

(a) To assist in the creation, expansion and modernisation of industrial enterprises

in the private sector.

(b) To encourage and promote the participation of private capital, both internal
and external, in such enterprises; and

(c) To encourage and promote private ownership of industrial investment and

expansion of markets.

Functions of ICICI

1. It sanctions rupee loans for capital assets such as land, building, machinery etc,
for long term, and foreign exchange loans for import of machinery and equipment.

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2. It guarantees loans from other private investment sources.

3. It subscribes to ordinary or preference capital and underwrites new issues of

securities.

4. It renders consultancy services to Indian industry in the form of managerial

and technical advice.

5. It also undertakes financial services such as deferred credit, equipment

leasing, instalment sale etc.

As already mentioned, the ICICI was initially created to provide finance to

industrial units in the private sector only. Subsequently its scope of operations was
extended to include public and joint sectors and also the co-operative projects.

It has also set up an Asset Management Company for its mutual fund. Ithas
set up a Commercial Bank (India's first internet bank). Recently, ICICI has merged
with ICICI bank.

State Level Financial Institutions

Some financial institutions are working at the state level. The important
state level institutions are State Financial Corporations and State Industrial
Development Corporations.

Here we discuss only SFCs.

State Finance Corporations (SFCs)

The Govt. after independence realised the need of creating a financial

corporation at the state level for catering to the needs of industrial entrepreneurs.
As a result, the Govt of India after consultation with the State governments and the
Reserve Bank of India, introduced State Finance Corporations bill in the Parliament
in 1951. SFC Act came into existence with effect from August 1, 1952. The Act
permitted the State Governments. to establish financial corporation’s for the
purpose of promoting industrial development in their respective states by
providing financial assistance to medium and small scale industries.

Functions of State Finance Corporations

The main function of the SFCs is to provide loans to small and medium scale
industries engaged in the manufacture, preservation or processing of goods,
mining, hotel industry, generation or distribution of power, transportation, fishing,
assembling, repairing or packaging articles with the aid of power etc. Other
functions are follows:

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1. Granting loans or advances or subscribing to shares and debentures of the

industrial undertaking repayable within twenty years.

2. Guaranteeing loans raised by the industrial concerns repayable within twenty

years.

3. Underwriting of the shares, bonds and debentures subject to their disposal in the
market within seven years.

4. Guaranteeing deferred payments for the purchase of capital goods by

industrial concerns within India.

5. Providing loans for setting up new industrial units as well as for expansion and
modernisation of the existing units.

6. Discounting the bills of small and medium scale industries

Kerala Financial Corporation (KFC)

KFC has been incorporated under the SFC Act 1951. It provides financial
assistance for starting of new industrial units, expansion, diversification or
modernisation of existing units. Assistance is also available for setting up of Tourist
Hotel in tourists centres and district head quarters, for the development of
industrial estates and for the purchase of vehicles for transport undertakings.
Concessional terms are offered to industrial units in the backward districts and for
small scale units.

Functions of Kerala Financial Corporation

1. To grant long term loans to new and existing small scale industrial units.
Maximum amount of loan is Rs. 60 lakh subject to the condition that the project
cost does not exceed Rs. 3 crores.

2. To underwrite shares and debentures floated in the open market.

3. To guarantee deferred payments to machinery suppliers for indigenous

machinery purchased by borrowers in Kerala.

4. To guarantee the loan raised by industrial concerns in public market. ‘

5. To provide liberalised financial assistance to entrepreneurs under ‘Techno crafts

Assistance Scheme’. The corporation is financing 90% of the cost of fixed assets
accepted as security subject to a maximum of Rs. 5 lakhs.

It gives financial assistance to professionals, Ex-servicemen technocrats,

women entrepreneurs etc. It gives working capital assistance up to a certain limit
to SSI units.

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Investment Institutions
The important investment institutions are:

1. Unit Trust of India (UTI)

2. Life Insurance Corporation of India (LIC)

3. General Insurance Corporation of India (GIC)

1. Life Insurance Corporation of India (LIC)

The Life Insurance Corporation of India was set up under the LIC Act, 1956
under which the life insurance was nationalised. As a result, business of 243
insurance companies was taken over by LIC on 1-9-1956.

It is basically an investment institution, in as much as the funds of policy holders

are invested and dispersed over different classes of securities, industries and
regions, to safeguard their maximum interest on long term basis. Life Insurance
Corporation of India is required to invest not less than 75% of its funds in Central
and State Government securities, the government guaranteed marketable securities
and in the socially-oriented sectors. At present, it is the largest institutional investor.
It provides long term finance to industries. Besides, it extends resource support to
other term lending institutions by way of subscription to their shares and bonds
and also by way of term loans.

Life Insurance Corporation of India which has entered into its 57th year has
emerged as the world’s largest insurance co. in terms of number of policies covered.
The Life Insurance Corporation of India’s total coverage of policies including
individual, group and social schemes has crossed the 11 crore.

Objectives of Life Insurance Corporation of India

The Life Insurance Corporation of India was established with the following
objectives:

1. Spread life insurance widely and in particular to the rural areas, to the socially
and economically backward claries with a view to reaching all insurable persons
in the country and providing them adequate financial cover against death at a
reasonable cost

2. Maximisation of mobilisation of people’s savings for nation building activities.

3. Provide complete security and promote efficient service to the policy-holders at

economic premium rates.

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4. Conduct business with utmost economy and with the full realisation that the
money belong to the policy holders.

5. Act as trustees of the insured public in their individual and collective capacities.

6. Meet the various life insurance needs of the community that would arise in the
changing social and economic environment

7. Involve all people working in the corporation to the best of their capability in
furthering the interest of the insured public by providing efficient service with
courtesy.

Role and Functions of Life Insurance Corporation of India

The role and functions of Life Insurance Corporation of India may be

summarised as below:

1. It collects the savings of the people through life policies and invests the fund in
a variety of investments.

2. It invests the funds in profitable investments so as to get good return. Hence

the policy holders get benefits in the form of lower rates of premium and increased
bonus. In short, Life Insurance Corporation of India is answerable to the policy
holders.

3. It subscribes to the shares of companies and corporations. It is a major

shareholder in a large number of blue chip companies.

4. It provides direct loans to industries at a lower rate of interest. It is giving loans

to industrial enterprises to the extent of 12% of its total commitment.

5. It provides refinancing activities through SFCs in different states and other

industrial loan-giving institutions.

6. It has provided indirect support to industry through subscriptions to shares and

bonds of financial institutions such as IDBI, IFCI, ICICI, SFCs etc. at the time
when they required initial capital. It also directly subscribed to the shares of
Agricultural Refinance Corporation and SBI.

7. It gives loans to those projects which are important for national economic
welfare. The socially oriented projects such as electrification, sewage and water
channelising are given priority by the Life Insurance Corporation of India.

8. It nominates directors on the boards of companies in which it makes its

investments.

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9. It gives housing loans at reasonable rates of interest.

10. It acts as a link between the saving and the investing process. It generates the
savings of the small savers, middle income group and the rich through several
schemes.

11. Formerly LIC has played a major role in the Indian capital market. To stabilise
the capital market it has underwritten capital issues. But recently it has moved to other
avenues of financing. Now it has become very selective in its underwriting pattern.

2. General Insurance Corporation of India (GIC)

General insurance industry in India was nationalised and a

government company known as General Insurance Corporation of India was
formed by the central government in November, 1972. General insurance
companies have willingly catered to these increasing demands and have offered a
plethora of insurance covers that almost cover anything under the sun. Any
insurance other than ‘Life Insurance’ falls under the classification of General
Insurance. It comprises of:-

a. Insurance of property against fire, theft, burglary, terrorism, natural

disasters etc

b. Personal insurance such as Accident Policy, Health Insurance and liability

insurance which cover legal liabilities.

c. Errors and Omissions Insurance for professionals, credit insurance etc.

d. Policy covers such as coverage of machinery against breakdown or loss or

damage during the transit.

e. Policies that provide marine insurance covering goods in transit by sea, air,
railways, waterways and road and cover the hull of ships.

f. Insurance of motor vehicles against damages or accidents and theft

All these above mentioned form a major chunk of non-life insurance business.

General insurance products and services are being offered as package

policies offering a combination of the covers mentioned above in various
permutations and combinations. There are package policies specially designed for
householders, shopkeepers, industrialists, agriculturists, entrepreneurs,
employees and for professionals such as doctors, engineers, chartered
accountants etc. Apart from standard covers, General insurance companies also
offer customized or tailor-made policies based on the personal requirements of the
customer.

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Classification of Indian General Insurance Industry

General Insurance is also known as Non-Life Insurance in India. There are

totally 16 General Insurance (Non-Life) Companies in India. These 16 General
Insurance companies have been classified into two broad categories namely:

a) PSUs (Public Sector Undertakings)

b) Private Insurance Companies

a) PSUs (Public Sector Undertakings):-

These insurance companies are wholly owned by the Government of India.

There are totally 4 PSUs in India namely:-

• National Insurance Company Ltd

• Oriental Insurance Company Ltd

• The New India Assurance Company Ltd

• United India Insurance Company Ltd

b) Private Insurance Companies:-

There are totally 12 private General Insurance companies in India namely:-

• Apollo DKV Health Insurance Ltd

• Bajaj Allianz General Insurance Co. Ltd

• Cholamandalam MS General Insurance Co. Ltd

• Future General Insurance Company Ltd

• HDFC Ergo General Insurance Co Ltd

• ICICI Lombard General Insurance Ltd

• Iffco Tokio General Insurance Pvt Ltd

• Reliance General Insurance Ltd

• Royal Sundaram General Insurance Co Ltd

• Star Health and Allied Insurance

• Tata AIG General Insurance Co Ltd

• Universal Sompo General Insurance Pvt Ltd

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3. Unit Trust of India (UTI)

The Unit Trust of India was set up in February 1964 under the Unit Trust of
India Act of 1963, in the public sector. It plays an important role in mobilising
savings of investors through sale of units and channelizing them into corporate
investments. Over the years, it has introduced a variety of growth schemes to meet
needs of diverse section of investors. After an amendment to its Act in April 1986,
Unit Trust of India has started extending assistance to corporate sector by way of
term loans, bills rediscounting, equipment leasing and hire purchase facilities.

The management of the trust is entrusted to the Board of Trustees. The

chairman of the Board and 4 other trustees are appointed by the RBI. One trustee
each is nominated by the LIC and the SBI, and 2 other trustees are elected by
other subscribers to the capital of the trust.

Unit Trust of India has recently set up an Asset Management Company to

bring some of its mutual fund schemes under its purview. It also engaged in
investment banking business, stock broking, consultancy etc.

Sanctions up to March, 1993, amounted to Rs. 7520.6 crores. One of the striking
features of purpose-wise UTI sanctions reveals that working capitalrequirements of
industrial concerns have received the maximum attention (over50-55%). Similarly
private sector accounts for the highest share in Unit Trust of India sanctions (about
67%) followed by public sector (32%). Unit Trust of Indiais the first unit trust in
the public sector in the world.

Objectives of Unit Trust of India

The basic objective of the establishment of Unit Trust of India was to encourage
investment and participation in the income, profits and gains accruing to the
corporation from the acquisition, holding, management and dispersal of securities.
The other objectives are as follows :

1. To stimulate and pool the savings of the middle and low income groups.

2. To enable unit holders to share the benefits and prosperity of the rapidly
growing industrialisation in the country.

3. To sell units among as many investors as possible.

4. To invest the money raised from the sale of units and its own capital in
corporate and industrial securities

5. To pay dividend to the unit holders.

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Advantages of Units of Unit Trust of India

1. Investment in units is safe.

2. Units are highly liquid.

3. Unit holders get a steady and decent income in the form of dividend.

4. Dividend on unit is exempt from income tax upto a certain amount.

5. Wealth tax payers get a benefit.

Disadvantages of Units of Unit Trust of India

1. Unit holders have no right to attend the annual general meeting of the Unit
Trust of India.

2. Unit holders are not entitled to certain concessions which are offered to
shareholders by certain companies

3. Only 90% of the income of the trust can be distributed among the unit
holders.

IV. Non-Banking Financial Corporation (NBFC)

Financial intermediaries are that institution which link lenders and borrows.

The process of transferring saving from savers to investors is known as financial

intermediation. Commercial banks and cooperative credit societies are called
“finance corporations”, or “finance companies”. These finance companies with very
little capital have been mobilizing deposits by offering attractive interestrates and
incentives and advance loans to wholesale and retail traders, small industries and
self-employed persons. They grant unsecured loans at very ratesof interest.
These are non-banking companies performing
the functions of financial intermediaries. They cannot be called banks.

A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956 and is engaged in the business of loans and advances,
acquisition of shares, securities, leasing, hire-purchase, insurance business, and
chit business.

Number of Non-Banking Financial Corporation s

The number of Non-Banking Financial Corporations continued to grow year after

year in the nineties. During 1996-97, the aggregate deposits of 13,970 Non-
Banking Financial Corporations totalled up to Rs.3,57,150 crores. As on March 31,
2012 the total number of Non-Banking Financial Corporations registered with RBI
stood at 12,385 compared with 12,409 in 2011. The number of deposit
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taking Non-Banking Financial Corporation’s (NBFC-D), including residuary

NBFCs (RNBC), also reduced from 297 at end-March 2011 to 271 as on endMarch
2012. The size of total assets of Non-Banking Financial Corporations grew from Rs
1,169 billion to Rs 1,244 billion as at end March 2012. Net owned funds of NBFCs
too grew 25% from Rs 180 billion in 2011 to Rs 225 billion at end- March [Link]
large finance companies numbering 2,376 accounted for 63 per cent of deposits.

Functions of Non-Banking Financial Corporations:

The functions performed by Non-Banking Financial Corporations may be

described as under:

• They are able to attract deposits of huge amounts by offering attractive rates of
interest and other incentives. Half of the deposits are below two years time
period.

•
They provide loans to wholesale and retail merchants’ small industries, self empl
oyment schemes.

• They provide loans without security also. Hence they are able to charge 24 to 36 per
cent interest rate.

• They run Chit Funds, discount hundies, provide hire-purchase, leasing finance,
merchant banking activities.

• They ventures to provide loans to enterprises with high risks. So they areable
to charge high rate of interest. They renew short period loans from time to time. They
therefore become long period loans.

• They are able to attract deposits by offering very high rate of interest. In the
process many companies sustained losses and went into liquidation. The
bankruptcy of many companies adversely affected middle-class and lower income
people. There is no insurance protection for deposits as in the case of bank
deposits.

• The finance companies are able to fill credit gaps by providing lease finance, hire
purchase and instalment buying. They provide loans to buy scooter, cars,TVs
and other consumer durables. Such extension of functions makes them almost
commercial banks. The only difference is that Non-Banking Financial Corporations
cannot introduce cheque system. This is the difference b/w the two

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Difference between banks & Non-Banking Financial Corporations:

Non-Banking Financial Corporations are doing functions similar to that of banks;

however there are a few differences:

1) A Non-Banking Financial Corporations cannot accept demand deposits,

2) It is not a part of the payment and settlement system and as such cannot
issue cheques to its customers,

3) Deposit insurance facility of DICGC is not available for Non-Banking Financial

Corporations depositors unlike in case of banks

Different types of Non-Banking Financial Corporations:

There are different categories of Non-Banking Financial Corporations 's operating

in India under the supervisory control of RBI. They are:

1. Non-Banking Financial Companies (NBFCs)

2. Residuary Non-banking Finance companies (RNBCs).

3. Miscellaneous Non-Banking Finance Companies (MNBCs)

Residuary Non-Banking Company is a class of Non-Banking Financial

Corporations, which is a company and has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other manner and not being
Investment, Leasing, Hire-Purchase, Loan Company. These companies are required
to maintain investments as per directions of RBI, in addition to liquid assets. The
functioning of these companies is different from those of NBFCs in terms of method
of mobilization of deposits and requirement of deployment of depositors' funds.
Peerless Financial Company is the example of RNBCs.

Miscellaneous Non-Banking Financial Companies are another type of Non-

Banking Financial Corporations and MNBC means a company carrying on all or any
of the types of business as collecting, managing, conducting or supervisingas a
promoter or in any other capacity, conducting any other form of chit or kuri which
is different from the type of business mentioned above and any other business
similar to the business as referred above.

Type of Services provided by Non-Banking Financial Corporations:

Non-Banking Financial Corporations provide range of financial services to their

clients. Types of services under non-banking finance services include the
following:
1. Hire Purchase Services
2. Leasing Services
3. Housing Finance Services
4. Asset Management Services
Indian Financial Management Page 89