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INTRODUCTIONAt the time of independence in 1947, India's capital market was relatively underdeveloped. Although there was significant demand for new capital, there was a dearth of providers. Merchant bankers and underwriting firms were almost non-existent. And commercial banks were not equipped to provide long-term industrial finance in any significantmanner. It is against this backdrop that the government established The Industrial Finance Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution in the country to cater to the long-term finance needs of the industrial sector. The newly-established DFI was provided access to low-cost funds through the central bank's Statutory Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to corporate borrowers at confessional rates. In financial economics, a financial institution acts as an agent that provides financial services for its clients or members. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses.
MEANING OF FINACIAL INSTITUTION
Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to.
DEFINITION OF FINACIAL INSTITUTION
An institution that obtains capital from individuals, businesses, and other organizations and invests it in various financial assets. A generic term for banks, trust companies, credit unions, and perhaps other investment companies that deal with money, hold money, invest money ... Any organization in the business of moving, investing or lending money, dealing in financial instruments or providing financial services. Includes commercial banks, thrifts, federal and state savings banks, savings and loan associations and credit unions. ... Any bank, savings and loan, credit union or other institution organized under either national or state banking laws capable of both accepting deposits and making loans. Private (shareholder-owned) or public (government-owned) organizations that, broadly speaking, act as A channel between savers and borrowers of funds (suppliers and consumers of capital).
FUNCTION OF FINANCIAL INSTITUTIONFinancial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitates the flow of monies through the economy. To do so, savings are pooled to mitigate the risk brought vide funds for loans. Such is the primary means for depository institutions to develop revenue. Should the yield curve become inverse, firms in this arena will offer additional feegenerating services including securities underwriting, and prime brokerage.
Liberalization financial institutionBy the early 1990s, it was recognized that there was need for greater flexibility to respond to the changing financial system. It was also felt that IFCI should directly access the capital markets for its funds needs. It is with this objective that the constitution of IFCI was changed in 1993 from a statutory corporation to a company under the Indian Companies Act, 1956. Impact of Liberalisation on the Indian Financial Sector Until 1991, the financial sector in India was heavily controlled. Commercial banks and long term lending institutions, the two dominant financial intermediaries, had mutually exclusive roles and objectives and operated in a largely stable environment, with little or no competition. Long-term lending institutions were focused on achieving the Governments various socio-economic objectives, including balanced industrial growth and employment creation, especially in areas requiring development. Long-term lending institutions were given access to long-term funds at subsidised rates through loans and equity from the Government and from funds guaranteed by the Government and originating from commercial banks in India and foreign currency resources originating from multilateral and bilateral agencies. The focus of the commercial banks was primarily on mobilizing household savings through demand and time deposits and to use these deposits to meet the short-term financial needs of borrowers in industry, trade and agriculture. In addition, the commercial banks provided a range of banking services to individuals and business entities. However, since 1991, there have been comprehensive changes in the Indian financial system. Various financial sector reforms have transformed the operating environment of the banks and long-term lending institutions. In particular, the deregulation of interest rates, emergence of a liberalised domestic capital market, entry of new private sector banks and broadening of long-term lending institutions product portfolios have progressively intensified competition between banks and long-
term lending institutions. The RBI has permitted the transformation of long-term lending institutions into banks, subject to compliance with the prudential norms applicable to banks. The Future of State-Owned Financial Institutions There is increased evidence from official development institutions and private economists around the world documenting the linkage between more rapid and stable economic growth on the one hand, and sound financial systems on the other. Despite numerous privatizations over the past decade, publicly owned banks and other state-owned financial institutions still serve the majority of individuals in developing countries, according to presentations by James Hanson, George Clarke, and Robert Cull of the World Bank. State-owned financial enterprises are less prevalent in developed economies, with very few exceptions, such as Germany and, to a lesser extent, the United States, with its large government-sponsored entities supporting residential home ownership that have implicit government backing, according to David Marston of the International Monetary Fund. Public ownership of these financial institutions and others has been rationalized on several grounds: To counter the power of strong private sector banks or to promote the development of home-grown banks in the early stages of an economy's history the socalled infant industry rationale. Both arguments helped justify the formation of the First and Second National Banks of the United States in the early 1800s, for example. To ensure that economic growth is consistent with national objectives. This is a clear rationale for socialist economies, but even in private economies there is a view that governments have better knowledge of socially beneficial investment opportunities than private banks. To ensure that underserved groups or sectors, such as agriculture and small businesses, receive credit. To respond to financial crises, which have hit developed and developing countries alike. In some of these cases, government ownership is temporary, but in some cases it lasts for significant periods. Among government officials around the world there is support for some government ownership of financial institutions based on one or more of these rationales. Economists generally, however, are skeptical of all these rationales except for the last one.
Commercial banks in India have traditionally focused only on meeting the shortterm financial needs of industry, trade and agriculture. As of September 30, 2007, there were 179 commercial banks (175 scheduled commercial banks and 4 non-scheduled commercial banks) in India with a network of 72,117 branches holding approximately Rs. 28,538.3 billion in deposits and Rs. 20,409.1 billion in loans. Scheduled commercial banks are banks listed in the schedule to the Reserve Bank of India Act, 1934, and are further categorized as public sector banks, private sector banks and foreign banks. Scheduled commercial banks have a presence throughout India, with approximately 65% of bank branches located in rural or semi-urban areas of the country. A large number of these branches belong to public sector banks. Public Sector Banks Public sector banks make up the largest category in the Indian banking system. They include the SBI and its seven associate banks, 19 nationalized banks (plus IDBI Bank) and 95 regional rural banks. Excluding the regional rural banks, the remaining public sector banks have 50,228 branches, and accounted for 70.0% of the outstanding gross bank credit and 70.6% of the aggregate deposits of the scheduled commercial banks of September 30, 2007. The public sector banks large network of branches enables them to fund themselves out of low cost deposits. The Bank is the largest public sector bank in India. As of September 30, 2007, the Bank and its associate banks had 14,150 branches.
They accounted for 22.6% of the aggregate deposits and 22.9% of the outstanding gross bank credit of all scheduled commercial banks. Private Sector Banks After the first phase of bank nationalisation was completed in 1969, public sector banks made up the largest portion of Indian banking. The focus on public sector banks was maintained throughout the 1970s and 1980s. Furthermore, existing private sector banks which showed signs of an eventual