Types of Financial Institutions

 Financial institutions can be classified into two categories : 

 I. Banking Institutions 

 II. Non-Banking Financial Institutions

I. Banking Institutions: 

 Indian banking industry is subject to the control of the Central Bank (i.e. Reserve Bank of India). 

The RBI as the apex institution organizes, runs, supervises, regulates and develops the monetary system and the financial system of the country. The main legislation governing commercial banks in India is the Banking Regulation Act, 1949. 

 The Indian banking institutions can be broadly classified into two categories : 

 1. Organized Sector 2. Unorganized Sector 

1. Organized Sector: The organized banking sector consists of commercial banks, cooperative banks and the regional rural banks. 

 (a) Commercial Banks: The commercial banks may be scheduled banks or non-scheduled banks. At present only one bank is a non-scheduled bank. All other banks are scheduled banks. 

   The commercial banks consist of 27 public sector banks, private sector banks and foreign banks. Traditionally, commercial banks accepted deposits and met the short and medium term funding needs of the industry. But now, since 1990's, banks are also funding the long terms needs of the industry particularly the infrastructure sector. The liberalization measures initiated in the Indian economy, led to the entry of large private sector banks in 1993. This has increased competition among public sector banks and quality of services has improved. 

    A major development in the Indian banking industry was the entry of major banks in merchant banking. The merchant bankers are financial intermediaries providing a range of financial services to the corporate and investors. Some of the merchant banker's activities include issue management and underwriting, project counseling and finance, mergers and acquisition advice, portfolio management service etc.

(b) Co-operative Banks: An important segment of the organized sector of Indian banking is the co-operative banking. The segment is represented by a group of societies registered under the Acts of the States relating to co-operative societies. In fact, co-operative societies may be credit societies or non-credit societies. Different types of co-operative credit societies are operating in the Indian economy. 

    These institutions can be classified into two broad categories : 

    Rural credit societies which are primarily non-agricultural. For the purpose of agricultural credit there are different co-operative credit institutions to meet different kinds of needs.    For example, short and medium term credit is provided through three tier federal structure. At top is the apex body i.e., state co-operative bank ; in the middle there are district co-operative banks or central co-operative banks, at the grass root level i.e., village level there are primary agricultural credit societies. 

For medium to long terms loans to agriculture, specialized co-operative societies have been formed. These are called 'Land Development Banks'. The Land Development Banks movement started in 1929. In the beginning they were named "Central Land Mortgage Banks". Land development banking is a two tier structure. At the state level there are state or central land development banks. At local level there are branches of these banks and primary land development banks. At the national level they have formed All-India Land Development Bank's Union. 

(c) Regional Rural Banks (RRBs) : Regional Rural Banks were set by the state government and the sponsoring commercial banks with the objective of developing the rural economy. Regional rural banks provide banking services and credit to small farmers, small entrepreneurs in the rural areas. The regional rural banks were set up with a view to provide credit facilities to weaker sections. They constitute an important part of the rural financial architecture in India. There were 196 RRBs at the end of June 2002, as compared to 107 in 1981 and 6 in 1975. RBI extends refinance assistance at a concessional rate of 3 per cent below the bank rate to RRBs. IDBI, NABARD and SIDBI are also required to provide managerial and financial assistance to RRBs under the Regional Rural Bank Act.

Government decided to restructure the RRB's on the recommendation of Bhandari Committee in 1994-95. As a result, an amount of Rs.360 crores was allocated towards the restructuring programme. The State Bank of India took several measures of managerial and financial restructuring including enhancement of issued capital and placement of officers of proven ability to head the RRBs. NABARD took several policy measures such as quarterly / half yearly review of RRBs by the sponsor banks, framing of Appointment and Promotion Rules (1998) for the staff of RRBs, introduction of Kissan Credit Cards, introduction of self- help groups etc., for improving the overall performance of RRBs. 

(d) Foreign Banks : These have been in India from British days. ANZ Grindlays Bank has its presence in number of places with 56 branches. The Standard and Chartered Bank has 24 branches and Hongkong Bank has 21 branches. All other foreign banks have branches less than 10. Obviously, these banks have concentrated on corporate clients and have been specializing in area relating to international banking. With the deregulation of banking in 1993, a number of foreign banks are entering India or have got the licenses. Such new foreign banks are :

 Barclays Bank, 

Bank of Ceylon,Bank

 Indonesia International, 

State Commercial Bank of Mauritius, 

Development Bank of Singapore, 

Chase Manhattan Bank, 

Dresdner Bank, 

Overseas Chinese Bank Corporation, 

 Chinatrust Commercial Bank, 

Krug Thai Banking Public Company Ltd., 

Cho Hung Bank, Commerz Bank, 

Fuji Bank and 

Toronto Dominion Bank. 

The list is indicative of the fact that India is going to have greater presence of foreign banks in future. However, despite low deposits these foreign banks reflect greater degree of efficiency and productivity.

2. Unorganized Sector : In the unorganized banking sector are the indigenous bankers, money lenders, seths, sahukars carrying out the function of banking. 

 (a) Indigenous Bankers : These are the fore gathers of modern commercial banks. These are the individuals or partnership firms performing the banking functions. They also act as financial intermediaries. As the term indigenous indicates, they are the local bankers. The geographical area covered by the indigenous bankers is much larger than the area covered by commercial banks. They can be found in all parts of the country although their names, styles of functioning and the functions performed by the them may differ. In west India they may be known as Gujarati shroffs or Marwar, in South India they may be called Chettiars, in North India they may be called sahukars, etc. 

     Indigenous bankers provide finance for productive purpose directly to trade and industries, and indirectly, through money lenders and traders to agriculturists with whom they find it difficult to establish direct relations. They keep in touch with traders and small industrialists and finance marketing on a sizeable scale. Lending is conducted on the basis of promissory notes, or receipts signed by borrowers acknowledging loans, and stating the agreed rate of interest, or bonds written out on stamped legal forms, or through signing of bankers books by borrowers. For large land, houses or other property are held as mortgage.

(b) Money Lenders : Money lenders depends entirely on their own funds for the working capital. Money lenders may be rural or urban, professional or non-professional. They include large farmers merchants, traders, arhatias, goldsmiths, village shopkeepers, sardars of labourers, etc. The methods and areas of operation differ from money lender to money lender. 

II. NON-BANKING INSTITUTIONS:   

The non-banking institutions may be categorized broadly into two groups : 

 (a) Organized Financial Institutions.  

(b) Unorganized Financial Institutions.

(a) Organized Financial Institutions: The organized non-banking financial institutions include : 1. Development Finance Institutions : 

These include : 

 (a) The institutions like IDBI, ICICI, IFCI, IIBI, IRDC, at all India level.

 (b) State Finance Corporation (SFCs), State Industrial Development Corporation (SIDCs) at the state level.

 (c) Agriculture Development Finance Institutions as NABARD, Land Development Banks etc. Development banks provide medium and long term finance to the corporate and industrial sector and also takes up promotional activities for economic development of the country. 

 2. Investment Institutions : It includes those financial institutions which mobilize savings of the public at large through various schemes and invest these funds in corporate and government securities. 

These include LIC, GIC, UTI, and mutual funds. 

 (b) Unorganized Financial Institutions : The unorganized non-banking financial institutions include number of non-banking financial companies (NBFCs) providing whole range of financial service. 

These include hire-purchase and consumer finance companies, leasing companies, housing finance companies, factoring companies, credit rating agencies, merchant banking companies etc. NBFCs mobilize public funds and provide loanable funds. There has been remarkable increase in the number of such companies since 1990's. 

SETTING UP OF FINANCIAL INSTITUTIONS:

  Government control over the sources of credit and finance led to the establishment of many financial institutions in the public sector. The main objective was to provide medium and long-term industrial finance to the corporate sector. These financial institutions included :

Development Finance Institutions 

 Development banks are the institutions engaged in the promotion and development of industry, agriculture and other key sector. A number of development finance institutions at National/All India Level as well as Regional/State Level were set up. The foreign rulers in India did not take much interest in the industrial development of the country. They were interested to take raw materials to England and bring back finished goods to India. 

The Government did not show any interest for setting up institutions needed for industrial financing. The recommendation for setting up industrial financing institutions was made in 1931 by Central Banking Enquiry Committee but no concrete steps were taken.

 In 1948, Reserve Bank had undertake a detailed study to find out the need for specialized institutions. It was in 1948 that the first development bank i.e. industrial Finance Corporation of India (IFCI) was established.

 IFCI was assigned the role of a gap- filler which implied that it was not expected to compete with the existing channels of industrial finance. It was expected to provide medium and long term credit in industrial concerns only when they could not raise sufficient finances by raising capital or normal banking accommodation. In view of the vast size of the country and needs of the economy it was decided to set up regional development banks to cater to the needs of the small and medium enterprises. In 1951, Parliament passed State Financial Corporation Act. 

Under this Act state governments could establish financial corporation for their respective regions. At present there are 18 State Financial Corporations (SFC's) in India. The IFCI and State Financial Corporation served only a limited purpose. There was a need for dynamic institution which could operate as true development agencies. 

 National Industrial Development Corporation (NIDC) was established in 1954 with the objective of promoting industries which could not serve the ambitious role assigned to it and soon turned to be a financing agency restricting itself to modernization and rehabilitation of cotton and jute textile industries.

The Industrial Credit and Investment Corporation India Ltd. (ICICI) was established in 1955 as a joint stock company. ICICI was supported by Government of India, World Bank, Common Wealth Development Finance Corporation and other foreign institutions. It provides term loans and take an active part in the underwriting of and direct investment in the shares of industrial units. 

Though ICICI was established in private sector but its pattern of shareholding and methods of raising funds gives it the characteristic of a public sector financial institution. ICICI Ltd. has now merged into ICICI Bank. 

 Another institution, Refinance Corporation for Industry Ltd. (RCI) was set up in 1958 by Reserve Bank of India, LIC and Commercial Banks. The purpose of RCI was to provide refinance to commercial banks and SFC's against term loans granted by them to industrial concerns in private sector. 

In 1964, Industrial Development Bank of India (IDBI) was set up as an apex institution in the area of industrial finance. RCI was merged with IDBI, IDBI was a wholly owned subsidiary of RBI and was expected to co-ordinate the activities of the institutions engaged in financing, promoting to developing industry. However, it is no longer a wholly owned subsidiary of the Reserve Bank of India. Recently it made a public issue of shares to increase its capital. 

 In order to promote industries in the state another type of institutions, namely, the State Industrial Development Corporations (SIDC's) were established in the sixties to promote medium scale industrial units. The state owned corporation have promoted a number of projects in the joint sector and assisted sector. At present there are 28 SIDC's in the country. 

The State Small Industries Development Corporations (SSIDC's) were also set up to cater to the needs of industry at state level. These corporations manage industrial estates, supply raw materials, run common service facilities and supply machinery on hire-purchase basis. Some states have established specialized corporations for the development of infrastructure, agro–industries, etc.