FINANCIAL NSTIO%

CHARTER Financial
Iunds
bllsew fomol deposits And
ereditor to investinent fron savers ard allates
to deflct units borowers, So they
109

unts
plin |resourc%, instrumentalfor effective channelsrdze funds froisur-
Institutions capilallormaun Consequerntly, they helo inareeconoanteffictent utilizatkm
e developren
iyough
IMONelary
LONM nd
deposls,
procedure
transactions,
uvestments.
;through which
in.l'inanclalinstitutions
el
They udngbusi nessat
are erucial tothe n d organizations that pre
orivate
financial
loans,custorner
iintermediatlon
funds
tothose financlal
who institutkons transfer noney fron those
Financlal ustitutions in borrowfunds,
who save Let's
following
of Ilowchart:
understand
relationto sources of funds elassification
generated through
LEARNING OBJÈCTIVES:
understand:
After atudylng the chapter you should be able to
Understanding the role of Financial Institutions as fnancial ln. irnstitutlon
termediary in our financial system responsible for mobilsing and
channelizing financial resources
> Classification of Financial Institutions in terms of funding source: Depository Nt

Deposit bascd and Non-Deposit Based Institutlons Depeitory

Institutons
Introduction to important deposit based financial institutions;
Comnercial Banks and Cooperative banks
> Introduction to important Non-deposit based
financial institutions: Commer Coopera
DFls,NBFCs, Mutual Funds, Insurance companies, Pension funds, cial Banks ttve Banks
and Provident Funds
Investment banking, Stock Broking firms
Prlvate Reglonal
Publle Forelgn Rural
Introduction Sector Sector Banks Banks
Banks
system is financial institutions Banks
One of the vitalcomponents of our financial
intermediary between borrowers and
which function as regulator and Institutions in India are categorized in
savers in any cconomy. Financial pertains to the financial intermediaries Stuck Invest
Insurance Penslon Fent
Mutual Bruking
twocategories. The first category regulatory institutions. DFI! NHFCs Funds
Compa Funds Frms Banking
and the second category pertains to
nles
constituents and
The regulators are allocated with the job of regulating all the accountable
are Institutions can be categorized as Depository Institutions
institutions
of the Indian financial sector. These regulatory
the national interest in the function
Financial
Non-Depository Institutions.
for upholding the transparency and organizations which mobilize
regulation. The regulatory bodies of the Institutlons are those financial depositsanddemand depos
ing of the institutions under their as follows: Ministry of Finance (MOF) beposltory consumersin form oftime as time deposits
financial institutions in India are vingsfrom retail accounts are known institutions are
Exchange Board of India and Current deposits. These deposits from
Reserve Bank of India (RBI), Securities and authority (IRDA) and Pension eg. Saving Accounts
as demand take
(SEBI), Insurance Regulatory development are named
and fixed deposits banking which
institutions in India andtermloanstotraders,
fund regulatory authority of India (PFRDA).(Depository Institutions) and also called Retail form of
credit in
retal loans
The Intermediaries include the banking public and extend
non-banking (Non-Depository) financial institutions. These institutions mo industry and farmers.
TAXMANN.
108
TAXMANN
110 FINANCIAL INSTITUTIONS
FINANCIAL INSTITUTIONS 111
rworking
functions ofcapital
Non-
Financial institutions are also called as
Non-Depository
institutions in India as these institutions cannot
lic in form of savings and fixed deposits
accounts
-Banking
raise deposits from Du
like retail banks. Tho
loans
lor
Major
recurring deposits
bankslinancingbut
and
are opening now
lending in
they
of accountsprowed
like
proiect finance too.
saving, current and
form of overdraft., cash credit
capital and loans trom Govt t loansand term loans. Other account,
raise funds through bonds,shares, venturefor
agriculture long termCompaniestenure. They ale
retail
demat account services, bullion ancillary functíons are safed deposít
1selling,
lock-
extend credit to industry andsecurities, share capital of and : ers,
pillspaymentservices, bank guarantee stockwealth
facility, broking services,
advisory, utilityof
letter
invest their funds in Govt. Mutual funds, pension fund creditfacility,foreign exchange, transfer of funds, gift cheques,! merchant
other investment avenues. All DFIs,NBFCs,
Stock Broking firms and Insurane banking,collection of Govt.taxes,salary disbursement of chents, bills dis-
provident funds, Merchant Banks,
Institutions. Now we go in detea counting(hundi) and cash management services.
Companies are called as Non-Depository
Institutions. ScheduledCommercial banks can be further categorizedintofour kinds of
to know more about these two banksinIndiain terms of ownership andIregistration: Public sector banks,
Institutions) Private sector banks, foreign banks and regional rural banks. There are
(1)Depository Institutions (Banking scheduled commercial banks-26
organisation that takes deposits and 81 and foreign banks in India.public sector banks, 21 in the private
Depository institution is a financial activities. These are primarily known sector, |34
transfers the deposits into financing
banks and Scheduled Cooperative Banks
as Scheduled Commercial/Retail Cooperative Banks
through Reserve Bank of India which
in India. They are regulated in India institutions
is regulator of money market of Indian financial system. TheseRBI to oper. Cooperative Banks in our country have become an essential part of the
after getting license from depository Einancial Inclusion initiative. Their success is attributable to the failure
can acquire deposits from inpublic
India that is why they are called of the commercial banks to fund and support thethe needs of small business
ate as bankíng companies were outside formal banking net.
oWners and ordinary people who
Institutions. overcome the vital market imperfections and
Cooperative Banks are listed in the Cooperative banks helped
Since these Commercíal banks and India Act, 1934 they are called scheduled servíced the poorer layers of society. The
Cooperative Credit Societies Act,
Societies in both
Schedule of the Reserve Bank of depository financial institutions mainly setting up
1904 started the process ofCooperative
Cooperative Credit
created
1912 further
banks. The financing functions of loans, commercial loans and real estate rural and urban areas. The
Societies Act of
organizations.
involve lendíng funds for mortgage for the depository financial institu central cooperative
liability apremise for non-credit societies and the biggest such networks in the
loans. The deposits create the
them come under the asset side. are one of the
tions. The credits given by Indian cooperative structuresmíllion members. It has about 67% penetration
world with more than 200 credit.
and fund 46% of the totalrural
Commercial Banks (RetailBanking) financial
invillages
In modern economy commercial Banks play significant role in the Structure of Cooperative Banking
ín India
classified into
engine for a growing economy. network in our countrycan
be
sector. The bankíng sector is the growthof deposits and transfer of credit cooperative
deployment
They play a key role in the economy. Ine structure of
to dífferent sectíons of the 2broad categories of Banks:
1949 defines banking company as "accepting
The Barnking Companies Act ofinvestment 1. Urban Co-operative Banks Institutions
or of deposit money from the public, Co-operatives Credit
for the purpose of lendingotherwise and withdraw able by cheque, drafts, . Rural
repayable on demand or scheduledand
non-sched-
and order or otherwise".
today 25
Urban Cooperatives furtherclassifiedinto i-state and sin-
muti
Modern Commercial banks are recognized as Universal Banks
functions but Urban nbe
nCooperatives cant again
categorizedinto non-scheduled and
traditional deposit and lending uled. Both the categories are the category
of
they are 1otonly dealing in fee based instruments ano banks comein
providing all kínd of financial services including
banks used to provide short teriD gde-state.
Most of these
non-fec based instruments. Hitherto, these single-state category. TAXMAN

TAXMANN°.
 112
FINANCIAL INSTITUTIONS
operationaly weak.
FINANCIAL INSTTTUTIONS 113
Banks are supervised are Multiple failures have
Banking activities of Urban Cooperative ineptitudes to the front repeatedly, many been getting management
banks with
RBL
Registration and Management
activities are handled by Registrar o runinfluence
is
poor corporate
andgovernance
co-operative banks are family
record, political interference
doeswidespread
" Cooperative and the regulatory
Societies (RCS). they function
c0-operative
not permit for framework within which
active supervision by RBL Moreover,
Rural Cooperatives rural banks are suffering
further classified into short-term
The rural cooperatives areshort-term
fund availability and debt quality. In from
where banking is gradually becomingthe
major problems related to
developing business atmosphere
cooperative banks are th afunction of technology and smart
long-term structures. The are: operations, co-operative banks are
tiered functioning in multiple states. These faced with atwo front
they have to drastically change how they operate, andchallenge.
.Inside,
level in states
State Cooperative Banks - They operate at the top need to compete with externally,
new entities like small finance banks and they
new age
districtlevel.
District Central Cooperative Banks -They operate at the MFIs who have been envisages
customers. It leveraging advanced technologies to win
is an uphill task for
o
Primary Agricultural Credit Societies - They operate at the rural co-operative banks to stay in competition.
lowest level.
in India (2) Non-Depository Institutions (Non-Banking Institutions)
Chart V.1: Structure of Cooperative Credit Institutions Non-Depository financialinstitutions, which are financial intermediaries that
(As at end-March 2010) cannot accept deposits but do pool the payments in the form of premiums
Cooperative Credit Institutions or contributions of many people and either invest it or provide credit to
others. Hence, non-depository organisations play vital role in the economy.
Urban Cooperative
hRural Cooperative Credit
Institutions These non-depository institutions are occasionaly mentionedintermediaries,
as the hidden
Banks banking system, because they look like banks as financial
Scheduled Non-Scheduled but they cannot lawfully take deposits. Therefore, their regulation is less
UCBS UCBs
Short-Term Long-Term
rigorous, which permits some non-depository institutions, such as NBFCs,
to take more risks for a chance to earn higher revenues. These institutions
Mulu-State Single State State Coopera Distríct Cen Primary Agricul accept the public's funds because they offer other services than just the
tive Bank tural Credit Soci individuals over
tral Cooper eties payment of interest. They can spread the financial risk of
services for greater returns or for a
ative Banks

Muti-State Single State a big group, or provide investment

|PCARDBS
future income.
of insurance companies, pension
SCARDBs
Non-Depository institutions comprises Financial Institutions, mutual funds
Tier 1 Tier II
funds, securities firms, Development providing specific financial
and finance companies. These institutions are services, stock broking
SCARDBs: State Cooperative Agriculture and Rural Development Banks. insurance services, hedging
Services to public like consumer inance,
venturecapital finance,finance,
PCARDB: Primary cooperative Agriculture and Rural Development Banks. Services, capital issuance services, micro investment
Note: (1) Figure in parentheses indicate the number of institutions at end March 2010 underwriting, factoring, leasing, hire purchase, different financial
through
managementservices Non-banking Financial
for UCBs an at end march 2009 for rural cooperative credit institutions. aavisory and pensionfunds called as
are also
(2) For rural cooperative number of banks refers to reporting banks, struments. So these corporate financial
and corporate provided
are providing retail have
Source: https://www.rbi.org.in/ Lnstitutions (NBFCs) as theyinstitutions but they not been
Cooperative Banks were expected to encourage saving at the grass ro peVices similar to banking Bankingentityin India. Butconsumers these companies
which
operate
license by RBI to inancial as a corporate and retail
leve.,and make credit available to those not served by traditional bank unl non-banking needs of
Because of being local in nature, they were also supposed to knowthe
cal business environment better and thus assist in economic developme TAXMANN®
of thecommunity. But it is also a fact that as a class co-operative ba
TAXMANN
 INANCAL INSTTUTONS

additionto
FINANCIAL INSTITUTIONS
sue highervtums tor iwstors, These NBFCSare major investory In these, there is single 115
stoxk marht and Govt,soewities market besicdes Commenial Banks, Insurance
Corporation ot India.andThe national re-insurer, namely, General
Development Financlal lnstitutions
sthe
lnsurance
Regul1999atoryunder theDevelmainopment
which waS set upin
regulator
Aut h
for
ori tyinsurance in India
of India (IRDAI)
ADElis detnnd as aninstiutionsonsored or supported by Governiney
Insurance
Regulatory
sector insurers in
and Development
general gover nment legislation known as the
Authority Act, 1999. Six public
insurers namely Agricultureinsurance sector comprises ot two specialized
manty to ode deveopmentinance to one or more sectos or sub-se
GuaranteeInsurance Company
tousof themmy Thus the bsic stress ot a DFlis on long-tem finane Credit
and Export of Lid. for Crop Insurance
and o suot f activities or setors of the eonomy where the
y nplex than that the oninary financial system is keen to aceey Mutual Funds
Corporation India for Credit Insurance.
Dh may also laya grvatnole in enoraging equity and debt markes
bv sellng their own shares and bonds (i) serving the aided enterptiv Amutual fund is a professionally
that w plar their svuities and (ù) selling trom their own porttolio o moncytrom many investors to buy managed investment trust that
to form a portfolio oncollects
VONRNts The tnanial institutions in ndia were established under tbe ofinvestor and investor is allotted securities
in return of investment inbehalf
nhustNIdofoth Cntral and State Govemments, The all lndia inan, mutualffund. Amutual fund scheme isunits
S that
cial instittns can b categoried under the tollowing heads according to agement company (AMC) that normally operated by an asset man-
te nwNmi mwtance carries together aset of people and invests
heirmoney stocks, bonds and other financial instruments on their behalf.
in
L Alllatia vekopment Rnks Each Scheme is associated with NAV which is called Net
etates market value of one unit of specific mutual fundAsset Value which
2 Sallaed Fnancial lustitutions scheme. These
nits can be bought or cashed as required
hwestment ustitutins value (NAV). AMFIis advisory organization atwhich
the fund's present net asset
issues recommendations
4 Statekvl àistitutions for operations and management of mutual fund schemes bv mutual fund
5 Qther institutins companies in India. SEBI is regulator of mutual fund sector
Smr of deveknent fnancial nstitutios set up under the different acts main advantage of investing through a mutual fund is thatinitIndia. The
provides
o arianmmt are: lFCL 1948; ICICL, 1956; IDBI, 1964; IIBI, 1971; small investors reach to professionaly-managed, diversified portfolios of
190 DFC, 1997; ENIM bank, 1982; NABARD, 1982; LIC, 1956; GIC,SIDBL,
1973;
equities, bonds and other instruments, which would be quite hard to make
UTL 194 and TFC 1989, with a small amount of wealth. There are various types of schemes based
on nature of securities in portfolio of a scheme eg. Equity oriented funds,
Insurance Companies Income Funds, Hybrid/Balanced funds, Index Funds and sectoral Funds
There are 46 Mutual Funds Companies in India as of June 2016.
lusuranecompanies
can
safeguard their clientsfrom the financial distress that
tecausd unanticipated
by
Thev pool the small premiumsevents, suchas accidents
of the insured to pay theorpremature death Non-Banking Finance Companies (NBFCS)
thse wto have koses The premium payments are larger claims to ANon-Banking Financial Company (NBFC) is acompany registered under
are imegular, both ìn tìmùng and amount. An regular while the loSses the Companies Act, 2013 of India, involved in the trade of loans and ad
protit beause it can accurately estimate insurance company can earn vances, procurement of shares, stock, and bonds, hire-purchase,insurance
the pavment of claims over alarge business or chit business but does not involve any institution whose maina
group by using statistics and it can ìnvest its surplus for greater returns
which helps to lower premiums to be competitive. business involves agriculture, industrial activity or the sale, purchase
of India has 53 insurance The insurance industry erection of immovable property. The functioning and operations of NBFCs
companies out of which 24 are
business and 29 are in generalinsurance in life insurance e controlled by the Reserve Bank of India (RB) wìthin the structure of
sector. Among
Insurance Corporation (LIC) is the single public sector the life insurers, Lite the Reserve Bank of India Act, 1934 (Chapter 1 B) and the instructions
that, among the non-ife insurers there are company. Besides
only six public sector insurers ued by it. Under the Act, it is obigatory for aNBFC to get itself registered
withthe RBI as adeposit accepting company.
TAXMMANN TAXMANN
 FINANCIAL INSTITUTIONS
116
FINANCIAL INSTITUTIONS 117
Types of NBFCs in India areas
follows: fund regulatory. authorityand
of India
Finance Company (AFC)- An AFCis acompany whichisa
financing financa (Depository nstítutíons) (PFRDA).The Intermediaries)financial
non-banking ínclude the banking
those financial(Non-Depsitory)which mobilize
Asset busincss the of Deposltory institutions.
organization carrying on as its main
such as automobiles, physi,latchae
tractors, Institutions are
from retail consumners in form
assets assisting
productivelecononnic,
moving and material handling. Accounts and Current of organizations
time deposits and dernand deposíts e.g savings
Saving
moving ongenerator
machines, own power andearth
sets,
equipmen,
general purpose industrial machines.. Primary
business for this purpose is demarcated as collective of financing rea
accounts are known as tine depositsand fixed deposits are
named as demand deposits,
Non-Depository Financial institutions are also called as Non-Bankinginstitutions
physical assets assisting economic activity and income rising there fro tndia as these institutions cannot raise deposits frorn public in form of
assets and total income respectively. dfixed deposits accounts like savings
not less than 60% of its total retail banks.
Investment Company (IC) 1C means any company which a financisl. Denository institution is a financial organisation that takes
stitution is carrying on as its main business the procurement of securit he deposits into financing activities.
These are primarity deposits and transfers
known as Scheduled
Loan Company (LC)- LC means any financial institution whOse Commercial/Retail bankS and Scheduled Cooperative Banks in India.
advan Gcheduled Commercial banks can be further
business is that of giving finance, whether by advancing loans orequipme in India in terms of ownership and registration:categorized into four kinds of banks
or otherwise for any action other than its own (excluding any banks, foreign banks and regional rural banks. Public sector banks, Private sector
leasing or hire-purchase finance activity). Thestructure of COoperative network in our country can be
Infrastructure Finance Company (IFC) - IFC is a non-banking finane. categories of Banks classified into2 broad
organization a) which transfers at least 75 per cent of its total assets in 1. Urban Cooperative Banks
infrastructure loans, b)has a least Net Owned Funds of 3 300crore, c) has Rural Cooperatives Credit Institutions
a least eredit rating of 'A' or same d) and a CRAR of 15%.
Non-Depository institutions comprises of insurance
Deposit insurance scheme of Deposit Insuranceand Credit Guarantee Cor. securities firms, Development Financial Institutions, companies, pension funds,
mutual funds and finance
poration (DICGC) is not accessible to investors of NBFCs, not like in case of companies.
banks. NBFC cannot receive demand deposits. In terms of Section 45-lA of ADFI is defined as an institution sponsored or supported by
the RBIAct, 1934, no NBFCcan start or hold on business of a non-bankinp Government mainly to
provide development finance to one or more sectors or sub-sectors
financial institution without a) attaining a certificate of registration from of the economy.
the Bank and without having a Net Owned Funds of 25 lakhs ( TwD Insurance companies safeguard their clients from the financial distress that can be
crore since April 1999). Although Housing Finance Companies, Merchant caused by unanticipated events, such as accidents or premature death. They pool
Banking Companies, Stock Exchanges, Companies engaged in the business the smallpremiums of the insured to pay the larger claims to those who have losses.
of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi A mutual fund is a professionally managed investment trust that collects money
Companies, Insurancecompanies and Chit Fund Companies ar'e NBFCs but from many investors to buy securities to form a portfolio on behalf of investor and
they have been excused from the obligation of registration under Section investor is allotted units in return of investment in that mutual fund.
45-1A of the RBIAct, 1934 subject to definite situations. ANon-Banking FinancialCompany (NBFC) is acompany registered under the Com
panies Act, 2013 of India, involved in the trade of loans and advances, procurement
of shares, stock,and bonds, hire-purchase, insurance business or chit business but
does not involve any institution whose main business involves agriculture, industrial
Summary activity or the sale, purchase or erection of immovable property.
Financial Institutions in India are categorized in two
pertains to the financial intermediaries categories. The first
and the second category pertainscategon)
ulatory institutions. to reg
The regulaory bodies of the Review Questions
financial
of Finance (MOF), Reserve Bank of institutions India are as follows: Minisuy
in 0.1Discuss the role of depository institutions in mobilization of smallhelpful
savings
India (RB), in
of India (SEBI), Insurance
Regulatory developmentSecurities and Exchange Boau
authority (IRDA) and Pens
of retail investor in our country. How depository institutions are
economic development?
'TAXMANN® TAXMANN.