FINANCIAL INSTITUTIONS

Introduction of the Indian Financial System

Lenders and borrowers can exchange funds through the financial system. In India, the financial system is governed by independent regulators in the insurance, banking, capital markets, and various service sectors. Thus, a financial system can play an essential role in a country’s economic growth by mobilizing surplus funds and effectively utilizing them for productive purposes.

Features of the Indian Financial System

• It is critical to a country’s economic development.
• It promotes both saving and investing.
• It brings together savers and investors.
• It aids in the formation of capital.
• It aids in risk allocation.
• It promotes the growth of financial markets.

Components/ Constituents of the Indian Financial System

The four major components of the Indian Financial System are as follows:

• Financial Institutions
• Financial Markets
• Financial Instruments/ Assets/ Securities
• Financial Services

FINANCIAL INSTITUTIONS

Financial institutions act as intermediaries, bringing together investors and borrowers to ensure the smooth operation of the financial system. They mobilize surplus unit savings and invest them in productive activities that offer a higher rate of return. Financial institutions also assist entities (individuals, businesses, and governments) seeking advice on various issues ranging from restructuring to diversification strategies. They offer a wide range of services to companies looking to raise funds from the market or elsewhere.

Financial institutions are also known as financial intermediaries because they act as a bridge between savers and borrowers by accumulating funds and lending them. It also serves as an intermediary because it accepts deposits from a group of customers (savers lend these funds to another group of customers) (borrowers). Mutual funds, like other investing institutions such as ICICI, accumulate savings and lend them to borrowers, acting as financial intermediaries.

Types of Financial Institutions

Financial institutions are divided into two types:

• Banking Institutions
• Non – Banking Financial Institutions

Banking Institutions

The Indian banking industry is governed by the Central Bank. The RBI, as the country’s apex institution, organizes, supervises, regulates, and develops the country’s monetary and financial systems. The Banking Regulation Act, of 1949 is the primary piece of legislation governing commercial banks in India.

Indian banking institutions are broadly divided into two types:

Organized Sector: Commercial banks, cooperative banks, and regional rural banks comprise the organized banking sector.

• Commercial banks: Commercial banks can be either scheduled or unscheduled. Only one bank is currently a non-scheduled hank. The remaining banks are all scheduled banks. Commercial banks are made up of 27 public sector, private sector, and foreign banks. Prior to 1969, all major banks were in the private sector, with the exception of the State Bank of India. In July 1969, 14 major private banks with deposits of 50 crores or more were nationalized, marking an important step toward public sector banking. Later that year, another six banks were nationalized, bringing the total number of nationalized banks to twenty.
• Co-operative banks: Co-operative banking is an important segment of India’s organized banking sector. The segment is represented by a collection of cooperative societies registered under state cooperative society statutes. Co-operative societies can be either credit or non-credit societies. In the Indian economy, various types of cooperative credit societies are in operation. These institutions are divided into two categories: (a) Rural credit societies primarily engaged in agriculture; and (b) urban credit societies primarily engaged in non-agriculture. There are various cooperative credit institutions to meet various types of agricultural credit needs.
• Regional Rural Banks (RRBs): Regional Rural Banks were established with the goal of developing the rural economy by the state government and sponsoring commercial banks. Regional rural banks offer banking services and credit to small farmers and business owners in rural areas. Regional rural banks were established with the goal of providing credit to underserved populations. They are an important part of India’s rural financial architecture. At the end of June 2002, there were 196 RRBs, compared to 107 in 1981 and 6 in 1975.
• Foreign Banks: Foreign banks have been present in India since the days of the British Raj. Foreign banks are defined as banks with branches in other countries but headquarters in their home country. A number of foreign banks have entered India since deregulation (the removal of government authority) in 1993. Citi Bank is an example of a foreign bank. Ceylon Banking Corporation.

Unorganized Sector: Indigenous bankers and money lenders are part of the unorganized banking sector.

• Indigenous Bankers: Indigenous bankers are private companies or individuals who operate as banks, accepting deposits and making loans. They, like bankers, act as financial intermediaries. They should be well-known professional money lenders whose primary business is not banking or lending. The indigenous banks trade in Hundies and Commercial Paper.
• Money Lenders: Moneylenders rely entirely on a single source of funding. Moneylenders can be from the countryside or the city, professional or unprofessional. There are many farmers, merchants, and traders among them. Their activities are completely unregulated. They charge exorbitant interest rates.

Non – Banking Institutions

Non-banking institutions are broadly classified into two types:

Organized Non–Banking Financial Institutions- Among the organized non-banking financial institutions are:

• Development Finance Institutions: At the national level, these institutions include IDBT, ICICI, IFCI, IIBI, and IRDC. At the state level, there are State Finance Corporations (SFCs) and State Industrial Development Corporations (SIDCs). Agriculture Development Finance Institutions such as NABARD and LDBS, among others. Development banks provide medium and long-term financing to the corporate and industrial sectors, as well as promote economic development.
• Investment Institutions: These are financial institutions that raise funds from the general public through various schemes and invest them in corporate and government securities. LIC, GIC, LTT, and mutual funds are examples of these. Non-banking financial institutions in the organized sector) have been thoroughly discussed in separate chapters of this book.

Unorganized Non–Banking Financial Institutions- Unorganized non-banking financial institutions (NBFIs) include a variety of non-banking financial companies (NBFCs) that offer a wide range of financial services. Hire-purchase 300 consumer finance companies, leasing companies, housing finance companies, factoring companies, credit rating agencies, merchant banking companies, and so on are among them. NBFCs raise public funds and make them available for lending.