Professor Vipin 2014
Unit 2
Financial Institutions
Non Banking Financial Companies (NBFCs)
According to the Reserve Bank of India (Amendment Act) 1997, A Non-Banking Finance Company
means:
i.
ii.
iii.
A Financial Institution which is a company;
A non-banking institution which is a company and which has as its principal business
the receiving of deposits under any scheme or arrangement or in any other manner
or lending in any manner;
Such other non-banking institution or class of such institutions as the bank may with
the previous approval of the Central Government specify.
The definition excludes financial institutions besides institutions which carry on agricultural
operations as their principal business. Non-banking finance companies consist mainly of finance
companies which carry on hire purchase finance, housing finance, investment, loan, equipment
leasing or mutual benefit financial companies but do not include insurance companies or stock
exchanges or stock-broking companies.
Types of NBFCs
The Non-Banking Finance Companies operating in India fall in the following broad categories.
1. Equipment Leasing Company is a company which carries on as its principal business, the
business of leasing of equipments or the financing of such activity. Apart from their Net
Owned Funds (NOF), the leasing companies raise finds in the form of deposits from other
companies, banks and the financial institutions.
Public deposits and inter-corporate deposits account for 74 percent of their total funds.
Leasing is a form of rental system. A lease is a contractual arrangement whereby the lessor
grants the lessee the right to use an asset in return for periodical lease-rent payments.
There are two types of leases (i) operating lease, and (ii) financial or capital lease. The
operating lease is a short-term lease which can be cancelled. Financial lease is a nonconcealable contractual commitment.
2. Hire Purchase Finance Company is a company which carries on as its principle business, hire
purchase transactions or the financing of such transactions. The sources of hire-purchase
finance are
a) Hire purchase Finance Companies.
b) Retails and Wholesale Traders.
c) Bank and Financial Institutions.
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Hire-purchase finance or credit is a system under which term loans for purchase of goods,
producer goods or consumer goods and services are advanced which have to be liquidated
under an instalment plan. The period of credit is generally one to three years. The hire
purchase credits are available for a wide range of products and services. Hire-purchase
finance companies are the public or private limited companies or partnership firms engaged
in giving credit for acquiring durable goods.
3. Housing Finance Company is a company which carries on as its principle business, the
financing of the acquisition or construction of houses including the acquisition or
development of plots of lands for construction of houses. These companies are supervised
by National Housing Bank, which refinances housing loans by scheduled commercial banks,
co-operative banks, housing finance companies and the apex co-operative housing finance
societies.
4. Investment Company means any company which carries on as its principle business the
acquisition of securities. These types of companies are investment holding companies
formed by business houses. As such they provide finance mainly to companies associated
with these business houses. As compare to open-end investment companies or mutual
funds/units trust, these investment companies are close end companies having a fixed
amount of share capital. Almost all prominent industrial groups have their own investment
companies.
5. Loan Company is a company which carries on as its principle business, the providing of
finance whether by making loans or advances or otherwise for any activity other than its
own. (This category excludes No.1 to No. 3 above categories). These types of companies are
generally small partnership concerns which obtain funds in the form of deposits from the
public and give loans to wholesale and retail traders, small scale industries and selfemployed persons. These companies collect fixed deposits from the public by offering higher
rates of interest and give loans to others at relatively higher rates of interest.
6. Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is notified
by the Central Government under section 620A of the Companies Act, 1956. The main
sources of funds for nidhis are share capital, deposits from their members and deposits from
the public. Nidhis give, loans to their members-for several purposes like marriages,
redemption of old debts, construction and etc. The nidhis normally follow the easy
procedures and offer saving schemes and make credits available to those whose credit
needs remain unmet by his commercial banks.
7. Chit Fund Company is a company which collects subscriptions from specified number of
subscribers periodically and in turn distributes the same as prizes amongst them. Any other
form of chit or kuri is also included in this category. The chit fund companies operations are
governed by the Chit Fund Act, 1982, which is administered by State Governments. Their
deposit taking activities are regulated by the Reserve Bank. The chit fund companies enter
into an agreement with the subscribers that everyone of them shall subscribe a certain
amount in instalments over a definite period and that every one of such subscriber shall in
his turn, as determined by lot or by auction or by tender, be entitled to a prize amount.
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8. Residuary Non-Banking Company is a company which receives deposits under any scheme
by way of subscriptions/contributions and does not fall in any of the above categories.
IDBI
IDBI Bank Limited (IDBI) is an Indian financial service company headquartered in Mumbai, India. RBI
has categorised IDBI as an "other public sector bank". It was established in 1964 by an Act of
Parliament to provide credit and other facilities for the development of the fledgling Indian industry.
It is currently 10th largest development bank in the world in terms of reach with 2245 ATMs, 1390
branches including one overseas branch at DIFC, Dubai and 819 centres including two overseas
centres at Singapore & Beijing.[3] IDBI Bank is on a par with nationalized banks and the SBI Group as
far as government ownership is concerned. It is one among the 26 commercial banks owned by the
Government of India.
Objectives of IDBI:
a) Co-ordination, regulation and supervision of the working of other financial institutions such
as IFCI , ICICI, UTI, LIC, Commercial Banks and SFCs.
b) Supplementing the resources of other financial institutions and there by widening the scope
of their assistance.
c) Planning, promotion and development of key industries and diversification of industrial
growth.
d) Devising and enforcing a system of industrial growth that conforms to national priorities.
Functions of IDBI
a) To grant loans and advances to IFCI, SFCs or any other financial institution by way of
refinancing of loans granted by such institutions which are repayable within 25 year.
b) To grant loans and advances to scheduled banks or state co-operative banks by way of
refinancing of loans granted by such institutions which are repayable in 15 years.
c) To grant loans and advances to IFCI, SFCs, other institutions, scheduled banks, state cooperative banks by way of refinancing of loans granted by such institution to industrial
concerns for exports.
d) To discount or re-discount bills of industrial concerns.
e) To underwrite or to subscribe to shares or debentures of industrial concerns.
f) To subscribe to or purchase stock, shares, bonds and debentures of other financial
institutions.
g) To grant line of credit or loans and advances to other financial institutions such as IFCI, SFCs,
etc.
h) To grant loans to any industrial concern.
i) To guarantee deferred payment due from any industrial concern.
j) To guarantee loans raised by industrial concerns in the market or from institutions.
k) To provide consultancy and merchant banking services in or outside India.
l) To provide technical, legal, marketing and administrative assistance to any industrial concern
or person for promotion, management or expansion of any industry.
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m) Planning, promoting and developing industries to fill up gaps in the industrial structure in
India.
n) To act as trustee for the holders of debentures or other securities.
SFC
The State Finance Corporations (SFCs) are the integral part of institutional finance structure in the
country. SEC promotes small and medium industries of the states. Besides, SFCs are helpful in
ensuring balanced regional development, higher investment, more employment generation and
broad ownership of industries.
At present there are 18 state finance corporations (out of which 17 SFCs were established under SFC
Act 1951). Tamil Nadu Industrial Investment Corporation Ltd. established under Company Act, 1949,
is also working as state finance corporation.
Objectives of SFC
a)
b)
c)
d)
e)
To establish uniformity in regional industries,
To provide incentive to new industries
To bring efficiency in regional industrial units
To provide finance to small-scale, medium sized and cottage industries in the state
To develop regional financial resources.
Functions of SFC
a) The SFCs grant loans mainly for acquisition of fixed assets like land, building, plant and
machinery.
b) The SFCs provide financial assistance to industrial units whose paid-up capital and reserves
do not exceed Rs. 3 crore (or such higher limit up to Rs. 30 crore as may be specified by the
central government).
c) The SFCs underwrite new stocks, shares, debentures etc., of industrial concerns.
d) The SFCs provide guarantee loans raised in the capital market by scheduled banks, industrial
concerns, and state co-operative banks to be repayable within 20 years.
EXIM Bank
The Export-Import Bank of India, commonly known as the EXIM bank, was set up on January 1, 1982
to take over the operations of the international finance wing of the IDBI and to provide financial
assistance to exporters and importers to promote India’s foreign trade. It also provides refinance
facilities to the commercial banks and financial institutions against their export-import financing
activities.
Functions of EXIM Bank
1. Financing of export and import of goods and services both of India and of outside India.
2. Providing finance for joint ventures in foreign countries.
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3. Undertaking merchant banking functions of companies engaged in foreign trade.
4. Providing technical and administrative assistance to the parties engaged in export and
import business.
5. Offering buyers’ credit and lines of credit to the foreign governments and banks.
6. Providing advance information and business advisory services to Indian exports in respect of
multilaterally funded projects overseas.
During the year 1994-95, the EXIM Bank introduced the ‘Clusters of Excellence’ programme for upgradation of quality standards and obtaining ISO 9000 certification in various parts of the country.
The Bank also entered into framework cooperation agreement with European Bank for
Reconstruction and Development (EBRD) for acquiring advance information on EBRD funded
projects in order to enter into co-financing proposals with EBRD in Eastern Europe and CIS.
SIDCs
At the state-level, too, there is a combination of financing agencies and industrial development
banks, mainly for the development of medium and small-scale industries in respective states, with
some emphasis on the industrial development of their backward regions. They are State Financial
Corporation’s (SFCs) which are primarily financing agencies. Besides, most individual states have
either a State Industrial Development Corporation (SIDC) or a State Industrial Investment
Corporation (SIIC). In 1994-95, there were 18 SFCs and 26 SIDCs/SIICs. We study the two kinds of
institutions separately.
Functions of SIDCs
The SIDCs/SIICs came on the scene much after the SFCs. Whereas the SFCs of the state governments
and IDBI (earlier, the RBI) the SIDCs/SIICs have been set up entirely by state governments. Besides
providing finance, these institutions perform a variety of functions, such as arranging for land,
power, roads, licenses for industrial units, sponsoring the establishment of such units, especially in
backward areas, etc.
They score over other development banks in that about one-third of their total finance is provided in
the form, of underwriting/direct subscription assistance and only about two-thirds of it in the form
of term loans. Since inception up-to March 1995 the total amount of assistance sanctioned and
disbursed by them was about Rs. 9,800 crores and Rs. 7,000 crores, respectively.
A significant part of this assistance goes to units in the joint sector and the public sector and only the
rest to the units in the private sector. The funds are raised from the usual sources, viz., share capital
and reserves, borrowings from the IDBI, the state governments and banks, and bonds and
debentures. These institutions also suffer from the problems of defaults, inadequate and
inexperienced staff, and organizational deficiencies.
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LIC
The Life Insurance Corporation of India (LIC) came into existence on July 1, 1956 and the LIC began to
function on September 1, 1956.
The LIC gets a large amount of insurance premium and has been investing in almost all sectors of the
economy, viz, public sector, private sector, co-operative sector, Joint Sector and now it is one of the
biggest term-lending institutions in the country. LIC was established to spread the message of Life
Insurance in the country and mobilise people’s savings for nation-building activities
Objectives of LIC
1. To mobilise maximum savings of the people by making insured savings more attractive.
2. To extend the sphere of life insurance and to cover every person eligible for insurance under
insurance umbrella.
3. To act as trustees of the insured public in their individual and collective capacities.
4. Promote all employees and agents of the LIC, in the sense of participation and job
satisfaction through discharge of their duties with dedication towards achievement of LIC
objectives.
5. To ensure economic use of resources collected from policy holders.
6. To conduct business with utmost economy and with the full realization that the money
belong to the policy holders.
Functions of LIC
1.
Saving Institution: Life insurance both promotes and mobilises saving in the country. The
income tax concession provides further incentive to higher income persons to save through
LIC policies. The total volume of insurance business has also been growing with the spread of
insurance-consciousness in the country. The total new business of LIC during 1995-96 was
Rs. 51815 crore sum assured under 10.20 lakh policies.
The LIC business can grow at still faster speed if the following improvements are made: The
organisational and operational efficiency of the LIC should be increased.
a.
b.
c.
d.
New types of insurance covers should be introduced.
The services of LIC should be extended to smaller places.
The message of life insurance should be made more popular.
The general price level should be kept stable so that the insuring public does not get
cheated of a large amount of the real value of its long-term saving through inflation.
2. Term Financing Institution: LIC also functions as a large term financing institution (or a
capital market) in the country. The annual net accrual of investible funds from life insurance
business (after making all kinds of payments liabilities to the policy holders) and net income
from its vast investment are quite large. During 1994-95, LIC's total income was Rs.
18,102.92crore, consisting of premium income of Rs. 1152,80 crore investment income of
Rs. 6336.19crore, and miscellaneous income of Rs. 238.33crore.
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3. Investment Institutions: LIC is a big investor of funds in government securities. Under the
law, LIC is required to invest at least 50% of its accruals in the form of premium income in
government and other approved securities. LIC funds are also made available directly to the
private sector through investment in shares, debentures, and loans. LIC also plays a
significant role in developing the business of underwriting of new issues.
4. Stabiliser in Share Market: LIC acts as a downward stabiliser in the share market. The
continuous inflow of new funds enables LIC to buy shares when the market is weak.
However, the LIC does not usually sell shares when the market is overshot. This is partly due
to the continuous pressure for investing new funds and partly due to the disincentive of the
capital gains tax.
Mutual Funds
A Mutual Fund is formed by the coming together of a number of investors who hand over their
surplus funds to a professional organization to manage it through investments in capital market.
(Mutual Funds are known as 'Unit Trusts' in England).
A Mutual Fund is basically a risk reducing tool. Risk reduction is achieved by diversi-fication of the
portfolio. Diversification means that a Mutual Fund invests in a large num-ber of shares and financial
instruments thereby lowering the overall risk.
Types of Mutual Funds
Based on the maturity period
Open-ended Fund: An open-ended fund is a fund that is available for subscription and can be
redeemed on a continuous basis. It is available for subscription throughout the year and investors
can buy and sell units at NAV related prices. These funds do not have a fixed maturity date. The key
feature of an open-ended fund is liquidity.
Close-ended Fund: A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years.
These funds are open for subscription for a specified period at the time of initial launch. These funds
are listed on a recognized stock exchange.
Interval Funds: Interval funds combine the features of open-ended and close-ended funds. These
funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals
on the prevailing NAV.
Based on investment objectives
Equity/Growth Funds: Equity/Growth funds invest a major part of its corpus in stocks and the
investment objective of these funds is long-term capital growth. When you buy shares of an equity
mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio.
Equity funds invest minimum 65% of its corpus in equity and equity related securities. These funds
may invest in a wide range of industries or focus on one or more industry sectors. These types of
funds are suitable for investors with a long-term outlook and higher risk appetite.
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Debt/Income Funds: Debt/ Income funds generally invest in securities such as bonds, corporate
debentures, government securities (gilts) and money market instruments. These funds invest
minimum 65% of its corpus in fixed income securities. By investing in debt instruments, these funds
provide low risk and stable income to investors with preservation of capital. These funds tend to be
less volatile than equity funds and produce regular income. These funds are suitable for investors
whose main objective is safety of capital with moderate growth.
Balanced Funds: Balanced funds invest in both equities and fixed income instruments in line with the
pre-determined investment objective of the scheme. These funds provide both stability of returns
and capital appreciation to investors. These funds with equal allocation to equities and fixed income
securities are ideal for investors looking for a combination of income and moderate growth. They
generally have an investment pattern of investing around 60% in Equity and 40% in Debt
instruments.
Money Market/ Liquid Funds: Money market/ Liquid funds invest in safer short-term instruments
such as Treasury Bills, Certificates of Deposit and Commercial Paper for a period of less than 91 days.
The aim of Money Market /Liquid Funds is to provide easy liquidity, preservation of capital and
moderate income. These funds are ideal for corporate and individual investors looking for moderate
returns on their surplus funds.
Gilt Funds: Gilt funds invest exclusively in government securities. Although these funds carry no
credit risk, they are associated with interest rate risk. These funds are safer as they invest in
government securities.
Other Schemes
Tax-Saving (Equity linked Savings Schemes) Funds: Tax-saving schemes offer tax rebates to investors
under specific provisions of the Income Tax Act, 1961. These are growth-oriented schemes and
invest primarily in equities. Like an equity scheme, they largely suit investors having a higher risk
appetite and aim to generate capital appreciation over medium to long term.
Index Funds: Index schemes replicate the performance of a particular index such as the BSE Sensex
or the S&P CNX Nifty. The portfolio of these schemes consist of only those stocks that represent the
index and the weightage assigned to each stock is aligned to the stock’s weightage in the index.
Hence, the returns from these funds are more or less similar to those generated by the Index.
Sector-specific Funds: Sector-specific funds invest in the securities of only those sectors or industries
as specified in the Scheme Information Document. The returns in these funds are dependent on the
performance of the respective sector/industries for example FMCG, Pharma, IT, etc. The funds
enable investors to diversify holdings among many companies within an industry. Sector funds are
riskier as their performance is dependent on particular sectors although this also results in higher
returns generated by these funds.
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