Other Financial Institutions Part 3

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Apart from the above special financial institutions, there are a few other organizations, which act as important source of long-term finance. These are:

Image of financial institutions

Image of Financial Institutions

Image of financial institutions

Life Insurance Corporation of India (LIC)

It was set up in 1956 on nationalisation of life insurance business in India. Primarily it carries on the business of life insurance and deploys the funds in accordance with national priorities and objectives. It invests mainly in government securities and shares, debentures and bonds of companies. It also extends financial assistance to banks and other institutions for social development and infrastructure facilities. It also underwrites new issues of shares and grant loans to the corporate sectors. Its performance with regard to assistance to corporate sector has been significant both in terms of sanctions and disbursements.

General Insurance Corporation of India (GIC)

It was established in 1973 on nationalization of general insurance business in India. Like LIC, its investment priority is socially oriented sectors of the economy, and invests its funds in government securities and share and debentures of companies. It also provides term loans and underwriting facility to new and existing industrial undertakings.

Unit Trust of India (UTI)

It was set up in 1964 as an investment trust with capital of Rs. 5 crores subscribed by Reserve Bank of India, LIC, State Bank of India and other financial institutions. It has been playing an important role in mobilizing the savings of the community through sale of units under various schemes (most well-known being US-64 and master shares) and canalizing them into corporate investments. It has also been extending financial assistance to the companies by way of term loans, bills rediscounting, equipment leasing and hire purchase financing.

Export and Import Bank of India (EXIM Bank)

The Export and Import Bank of India was set up on January, 1982 to take over the operations of international finance wing of the IDBI and act as an apex institution in the field of financing foreign trade. The main functions of the Bank are:

  • Financing of export and import of goods and services;

  • Granting deferred payment credit for medium- and long- term duration;

  • Providing loans to Indian parties to enable them to contribute to share capital of joint ventures in foreign countries and;

  • Extending refinance facilities to commercial banks in respect of export credit. Recently it has introduced production equipment finance programme under which it provides rupee term finance to export oriented units for acquisition of equipment. Apart from these, the Exim Bank also undertakes merchant banking and development banking functions as considered necessary to finance promotional activities and providing counselling services to persons engaged in export-import business.

Venture Capital Institutions

Venture Capital is a form of equity finance designed especially for funding high risk and high reward projects of young entrepreneurs. It helps them to turn their research and development projects into commercial ventures by providing them the initial capital and managerial assistance. The initial capital is provided in the form of equity participation through direct purchase of the share and debentures of the enterprise set up for the purpose. The institutions providing venture capital also actively participate in the management of the entrepreneurs’ business. By actively involving and supporting the enterprises, they able to protect and enhance the value of their investment. The development of venture capital institutions is of recent origin in India. The concept was formally introduced in 1986-87 when the Government announced the creation of a venture fund to be operated by IDBI. It was followed by ICICI, IFCI and two public sector banks (State Bank of India and Canara Bank) who set up separate companies for the purpose. Some state government-controlled development financial institutions viz., Gujarat Industrial Investment Corporation and Andhra Pradesh State Corporation also promoted their venture capital companies. In 199293, SIDBI also set up a venture capital fund for providing financial assistance for innovative ventures in small-scale sector.

Banks

In the previous lesson you learnt that commercial banks usually provide short-term finance to business firms in the form of loans and advances, cash credit, overdraft etc. But now-a-days, most of the commercial banks have also started term lending (long and medium term) and providing need-based finance of different time periods to firms of all sizes. Consistent with the policy of liberalization, the banks have been allowed to evolve their own methods of assessing financial needs of the borrowers and extend them the term loans for larger size and longer periods. Some of the banks have also started their industrial branches to finance exclusively to industrial enterprises. Thus, the commercial banks also now act as an important source of medium term and long-term finance for the business.

Non-Banking Financial Companies (NBCs)

You must have heard about various housing finance companies, investment companies, vehicle finance companies etc. operating in private sectors different parts of our country. These companies are categories under Non-Banking Financial Companies, because they perform the twin functions of accepting deposits from the public and providing loans. However, they are not regarded as banking companies as they do not carry on the normal banking activities. They raise funds from the public by offering attractive rate of interest and give loans mainly to the wholesale and retail traders, small-scale industries and self-employed persons. The loans granted by these finance companies are generally unsecured and the interest charged by them ranges between 24 to 36 percent per annum. Besides giving loans and advances, the NBFCs also have purchase and discount hundis, undertaken merchant banking, housing finance, lease financing, hire purchase business etc. In our country, NBFCs have emerged as an important financial intermediary due to simplified loan sanction procedure, attractive rate of return on deposits, flexibility and timeliness in meeting the credit needs of the customers.