Financial Institutions

 

Concept of Financial Institutions

Financial institutions are organizations that deal with the transaction of financial claims and financial assets. They issue financial claims against themselves for cash and use the proceeds from this issuance to purchase primarily the financial assets of others. Financial institutions primarily collect saving from people, businesses, and the government by offering accounts and by issuing securities. The savings are lent to the user of the funds. They also work as the intermediaries between the issuer of securities and the investing public. Thus, financial institutions are the specialized firms that facilitate the transfer of funds from savers to borrowers. They offer accounts to the savers and in turn, the money deposited is used to buy the financial assets issued by other forms.  Similarly, they also issue financial claims against themselves and the proceeds are used to buy the securities of other firms. Since financial claims simply represent the liability side of the balance sheet for an organization, the key distinction between the financial institution and other types of organizations involves what is on the assets side of the balance sheet.

For example, a typical commercial bank issues financial claims against itself in the form of debt (for instance, checking and saving accounts) and equity; and so does a typical manufacturing firm. However, the structure of assets held by a commercial bank reveals that most of the bank's money is invested in loans to individuals, corporations, and the government as well. On the other hand, typical manufacturing firms invest primarily in real assets. Accordingly, banks are classified as financial institutions and manufacturing firms are not. Besides commercial banks, other examples of financial institutions are finance companies, insurance companies, credit unions, pension funds, mutual funds savings and loan associations, and so on.

Financial intermediation 

The Institutions in the financial market such as Banks & other non banking financial intermediatory undertakes the task of accepting deposits of money from the public at large and employing them deposits so pooled in the forms of loans and investment to meet the financial needs of the business and other classes of society i.e. they collect the funds from the surplus sector through various schemes and channelized then to the deficit sector. 

These financial intermediaries act as mobilisers of public saving for their productive utilization. Funds are transferred through the creation of financial liabilities such as bonds and equity shares. Among the financial institutions, commercial banks account for more than 64% of the total financial sector assets. Thus financial intermediation can enhance the growth of the economy by pooling funds of small and scattered savers and allocating them for investment in an efficient manner by using their formational advantage in the loan market. They are the principal mobilizers of surplus funds to productive activity and utilize these funds for capital formation hence promote growth.

Commercial Bank

The commercial bank was established during the First World War, while as many as twenty scheduled banks came into existence after independence - two in the public sector and one in the private sector. The United Bank of India was formed in 1950 by the merger of four existing commercial banks. Certain non-scheduled banks were included in the second schedule of the Reserve Bank. Given these facts, the number of scheduled banks rose to 81. Out of 81 Indian scheduled banks, as many as 23 were either liquidated or merged into or amalgamated with other scheduled banks in 1968, leaving 58 Indian schedule banks. 

It may be emphasized at this stage that the banking system in India came to be recognized at the beginning of the 20th century as powerful instrument to influence the pace and pattern of economic development of the country. In 1921 need was felt to have a State Bank endowed with all support and resources of the Government with a view to helping industries and banking facilities to grow in all parts of the country. It is towards the accomplishment of this objective that the three Presidency Banks were amalgamated to form the Imperial Bank of India. The role of the Imperial Bank was envisaged as "to extend banking facilities, and to render the money resources of India more accessible to the trade and industry of this country, thereby promoting a financial system which is an indisputable condition of the social and economic advancement of India." 

Until 1935 when RBI came into existence to play the role of Central Bank of the county and regulatory authority for the banks, Imperial Bank of India played the role of a quasi-central bank. It functioned as a commercial bank but at times the Government used it for regulating the money supply by influencing its policies. Thus, the role of commercial banks in India remained confined to providing a vehicle for the community's savings and attending to the credit needs of only certain selected and limited segments of the economy.

Banks and Other Lending Institutions

Banks are financial intermediaries that accept deposits and make loans. Banks offer several advantages in connecting borrows and lenders. By pooling the funds of thousands of different depositors they can make large loans beyond the means of any individual investor. In addition, because they deal in such a large volume of loans, their costs to making a loan are smaller than for a single investor. 

Credit Unions and Savings 

Banks Savings banks, savings and loans, and credit unions are just other kinds of banks. Their primary business is to take in deposits and make loans. They differ somewhat from standard commercial banks in how they are regulated and their tax treatment. 

Credit Scoring and Risk Management 

 One of the important decisions made by bank managers is whether or not someone should be offered a loan. The primary consideration is whether the borrower will pay the money bank – higher interest rates are of no value to the bank if the loan is not repaid. 

Investment Banks

Investment banks specialize in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). They also commonly offer brokerage services for investors, act as market makers for trading exchanges, and manage mergers, acquisitions, and other corporate restructurings.

Insurance Companies

Among the most familiar non-bank financial institutions are insurance companies. Providing insurance, whether for individuals or corporations, is one of the oldest financial services. Protection of assets and protection against financial risk, secured through insurance products, is an essential service that facilitates individual and corporate investments that fuel economic growth.

Brokerage Firms

Investment companies and brokerages, such as mutual fund and exchange-traded fund (ETF) provider Fidelity Investments, specialize in providing investment services that include wealth management and financial advisory services. They also provide access to investment products that may range from stocks and bonds all the way to lesser-known alternative investments, such as hedge funds and private equity investments.

Mortgage Companies

Financial institutions that originate or fund mortgage loans are mortgage companies. While most mortgage companies serve the individual consumer market, some specialize in lending options for commercial real estate only.