Financial Institutions (Banking & Non-banking)05/02/2021
The Reserve Bank of India is the nerve centre of the monetary system of the country. It is the Central Bank of the country and it started operating since April 1, 1935 subsequent to the RBI Act in 1934 under private shareholders’ institutions.
The Central Government is now empowered to appoint Directors, Deputy Governors and Governors of the bank. The position of the bank is that it is a State-owned institution. This transfer to public ownership from private shareholders’ institution came with the RBI Act in 1948.
The Reserve Bank of India is empowered to control, regulate, guide and supervise the financial system of the country through its monetary and credit policies. This authority was derived from the various acts. These are RBI in 1934, Banking Regulations Act 1949, Companies Act 1956, Banking Laws Act 1965 (applicable to co-operative societies), and Banking Laws Act 1963.
The Reserve Bank of India has several functions to perform. Traditionally, it is the bankers’ bank, and banker to State and Central Governments. It is also a banker to the commercial banks, State co-operative banks and financial institutions of the country. It is the only bank engaged in the issue of legal tender currency.
It provides long-term credit:
(a) By subscribing to debentures of Land Development Banks,
(b) By operating the National Agricultural Credit Fund,
(c) National Agricultural Credit (Stabilisation) Funds (long-term operation fund),
(d) It has also established the Agricultural Refinance Corporation through which it gives long-term and medium-term funds.
The non-banking financial institutions are the organizations that facilitate bank-related financial services but does not have banking licenses.
- Mediators between people and stock exchange
- Money collected from people by selling their units is called the corpus
- Oldest Mutual Fund company in India is UTI (Unit Trust of India)
- Mutual Funds nearly provides all the considerations
- Collect money from the public through the sale of insurance policies
- There are two types of Insurance; Life Insurance and General Insurance
- General Insurance includes Loss of property, car, house etc.
- It also includes Health Insurance
- These are mutual funds for rich investors
- Funds are raised through the sale of their unit to High net worth Individuals and Institutional Investors
- Units of these are usually sold in chunks/groups
- There is a lock-in period for Hedge funds before which funds cannot be withdrawn
- Corpus is an investment in risky instruments with a long term perspective
Venture Capital Firms/ Companies
- They provide finance and technical assistance to firms which undertake a business project based on innovative ventures
- They provide finance for the commercial application of new technology
Merchant banks ( Investment Banks)
- Merchant banks provide financial consultancy services
- They advise firms on fundraising, manage IPO of firms, underwrite new issues and facilitate demat trading.
Finance Companies (Loan Companies)
- Financial Institutions raise funds from the public for lending purpose
e.g. – Muthoot Finance, Cholamandalam
Micro Finance Institutions (MFI)
- Raise funds from the public for lending to weaker sections
- In India, they mainly raise funds from banks
e.g. – Basix, Bandhan, SKS Micro Finance.
- These funds buy stocks of companies which are nearing bankruptcy at a very low price.
- After purchasing such stocks they initiate the recovery process to increase the price of shares and sell it at a later point of time
- These banks provide loans on the basis of Islamic laws called Sharia.
- In the law of Sharia Interest cannot be charged on the loans
- They purchase equipment and machinery and provide the same to companies on a lease.
- These companies charge rent on these machineries which is similar to EMI