FINANCIAL INSTITUTIONS

A financial institution is an establishment that conducts financial transactions such as

investments, loans and deposits. Almost everyone deals with financial institutions on a regular
basis. Everything from depositing money to taking out loans and exchanging currencies must be
done through financial institutions. Here is an overview of some of the major categories of
financial institutions and their roles in the financial system.

 Reserve Bank of India (RBI)

The Indian Banking structure has a wide and comprehensive form. Apex Institutions in
the form of banking institutions are playing important role in the country. The chief regulator of
banking system in our country is the Reserve Bank of India. The Reserve Bank of India (RBI) was
established in April 1935 under the provisions of the Reserve Bank of India Act, 1934 in Calcutta,
eventually moved permanently to Mumbai, with a share capital of Rs. 5 Crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided into shares of
Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The
Government held shares of nominal value of Rs. 2,20,000.
The Reserve Bank of India was set up as a private shareholder bank under the Reserve
Bank of India Act, 1934 and it started functioning as the central bank since 1st April 1935. RBI is
known as the “Banker’s bank”.
Objectives of RBI: The following were the objectives of RBI when it was set up:
 To manage adequate money and credit in the country
 To maintain the stability of rupee internally and externally
 Balanced and well managed banking development in the country
 To develop well organized money market
 To provide adequate agriculture credit
 Ti manage public debt
 To seek international monetary co-operation
 Centralization of cash reserves of commercial banks
 To set up Government banks
 To set up Government banks
  Publication of data
Functions & Role of RBI:
RBI is an apex banking institution of the country. It carries on several functions as a
central bank. According to RBI Act, 1934, “the principal function of RBI is to issue notes and
maintain reserves, currency and credit to maintain monetary stability in the general interest of
the nation.”
As a central banking authority RBI carries on the following functions:
1. RBI regulates issue of bank notes above one rupee denomination
2. Undertakes distribution of all currency notes and coins on behalf of the government
3. Acts as the banker to the Government of India and the State governments, Commercial and
Cooperative banks
4. Formulates and administers the monetary policy
5. Maintain exchange value of rupee
6. Represent India at the International Monetary Fund (IMF)
7. Developmental role: RBI performs a wide range of promotional functions to support national
objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.
8. RBI acts as a banker for all the commercial banks. All scheduled banks come under the direct
control of RBI. All commercial as well as schedule bank has to keep a minimum reserve with
the RBI. They have to submit weekly reports to RBI about their transactions. By performing 3
functions, the RBI helps the member banks significantly. They are given below such as:
 It acts as the lender of the last resort.
 It is the custodian of cash reserves of commercial banks.
 It clears, transfers the transaction. It acts as the central clearing house.
9. Regulation of Banking system
10. Credit control

 Industrial Development Bank of India (IDBI)

Industrial Development bank of India (IDBI) was constituted under Industrial
Development bank of India Act, 1964 as a Development Financial Institution (DFI) and came
into being as on July 01, 1964 as a wholly owned subsidiary of RBI. In 1976, the ownership of
IDBI was transferred to the Government of India and it was made the principal financial
institution for coordinating the activities of institutions engaged in financing, promoting and
developing industry in India.
IDBI provides financial assistance to industrial concerns by way of variety of products
and services which include project finance, equipment finance, asset credit, equipment lease,
technology up gradation fund scheme, refinance for medium scale industries and bill finance. It
provides as well as for expansion, diversification and modernization of existing industrial
enterprises. In response to the changing financial needs of industries, IDBI has also designed
other products to meet the short term funding, core working capital and other short term
requirements of industrial units.
Role of IDBI
As an apex development bank, the IDBI’s major role is to co-ordinate the activities of
other development banks and term-financing institutions in the capital market of the country.
i. Direct Financial Assistance: The IDBI provides direct financial assistance to the industrial
concerns in the form of (a) granting loans and advances; and (b) subscribing to,
purchasing or underwriting the issues of stocks, bonds or debentures.
ii. Indirect Financial Assistance: The IDBI provides indirect financial assistance to the small
and medium industrial concerns through other financial institution, such as, State
Finance Corporations, State Industrial Development Corporations, Cooperative banks,
regional rural banks, commercial banks.
iii. Promotional Function: Besides providing financial assistance, the IDBI also undertakes
various promotional activities such as marketing and investment research, techno-
economic surveys. It provides technical and administrative advice for promotion,
expansion and better management of the industrial concerns.
iv. IDBI is the leader, coordinator and innovator in the field of industrial financing in our
country. Its major activity is confined to financing, developmental, co-ordination and
promotional functions.
v. Planning, promoting and developing industries with a view to fill the gaps in the
industrial structure by conceiving, preparing and floating new projects.
 vi. Development Assistance: The creation of the Development Assistance Fund is the special
feature of the IDBI. The Fund is used to provide assistance to those industries which are
not able to obtain funds in the normal course mainly because of heavy investment
involved or low expected rate of returns.

 Small Industries Development Bank of India (SIDBI)

Small Industries Development Bank of India (SIDBI), set up on April 2, 1990 under an Act
of Indian Parliament, presently acts as the Principle Financial Institution for the Promotion,
Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and also
co-ordinates the functions of the institutions engaged in similar activities. SIDBI is an
independent financial institution aimed to aid the growth & development of micro, small &
medium scale enterprises (MSME). SIDBI was established as a wholly-owned subsidiary of
Industrial Development Bank of India (IDBI).
It is the principal institution for promotion, financing and development of industries in
the small-scale sector. It also coordinates the functions of institutions engaged in similar
activities. For this purpose, SIDBI has taken over the responsibility of administrating Small
Industries Development Fund and National Equity Fund from IDBI.
Objectives of SIDBI
In the setting up of SIDBI, the main purpose of the government was to ensure larger flow
of assistance to the small-scale units. To meet this objective, the immediate thrust of the SIDBI
was on the following measures:
(i) Initiating steps for technological upgradation and modernisation of existing units;
(ii) Expanding the channels for marketing the products of the small scale sector; and
(iii) Promotion of employment-oriented industries, especially in semi- urban areas to create
more employment opportunities and thereby checking migration of population to urban
areas.
Functions of SIDBI
i) It refinances loans and advances provided by the existing lending institutions to the small-
scale units.
(ii) It discounts and rediscounts bills arising from sale of machinery to and manufactured by
small-scale industrial units.
(iii) It extends seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi
and Mahila Vikas Nidhi and seed capital schemes.
(iv) It grants direct assistance and refinance loans extended by primary lending institutions for
financing exports of products manufactured by small-scale units.
(v) It provides services like factoring, leasing, etc. to small units.
(vi) It extends financial support to State Small Industries Corporations for providing scarce raw
materials to and marketing the products of the small-scale units.
(vii) It provides financial support to National Small Industries Corporation for providing; leasing,
hire purchase and marketing help to the small-scale units.

 National Bank for Agriculture and Rural Development (NABARD)

NABARD is designated as an apex development bank in the country. This national bank
was established in 1982 by a Special Act of the Parliament, with a mandate to uplift rural India
by facilitating credit flow in agriculture, cottage and village industries, handicrafts and small-
scale industries. It is also required to support non-farm sector while promoting other allied
economic activities in rural areas. NABARD functions to promote sustainable rural development
for attaining prosperity of rural areas in India.
It is basically concerned with “matters concerning policy, as well as planning and
operations in the field of credit for agriculture and other economic activities in rural areas in
India”.
Role of NABARD:
i. It is an apex institution which has power to deal with all matters concerning policy,
planning as well as operations in giving credit for agriculture and other economic
activities in the rural areas.
ii. It is a refinancing agency for those institutions that provide investment and production
credit for promoting the several developmental programs for rural development.
iii. It is improving the absorptive capacity of the credit delivery system in India, including
monitoring, formulation of rehabilitation schemes, restructuring of credit institutions,
and training of personnel.
 iv. It co-ordinates the rural credit financing activities of all sorts of institutions engaged in
developmental work at the field level while maintaining liaison with Government of
India, and State Governments, and also RBI and other national level institutions that are
concerned with policy formulation.
v. It prepares rural credit plans, annually, for all districts in the country.
vi. It also promotes research in rural banking, and the field of agriculture and rural
development.
Functions of NABARD:
I. Credit Functions:
 Framing policy and guidelines for rural financial institutions.
 Providing credit facilities to issuing organizations
 Monitoring the flow of ground level rural credit.
 Preparation of credit plans annually for all districts for identification of credit potential.
II. Development Functions:
 Help cooperative banks and Regional Rural Banks to prepare development actions plans
for themselves.
 Help Regional Rural Banks and the sponsor banks to enter into Memorandum of
Understanding (MoUs) with state governments and cooperative banks to improve the
affairs of the Regional Rural Banks.
 Monitor implementation of development action plans of banks.
 Provide financial support for the training institutes of cooperative banks, commercial
banks and Regional Rural Banks.
 Provide financial assistance to cooperative banks for building improved management
information system, computerisation of operations and development of human
resources.
III. Supervisory Functions:
 Undertakes inspection of Regional Rural Banks (RRBs) and Cooperative Banks (other
than urban/primary cooperative banks) under the provisions of Banking Regulation Act,
1949.
  Undertakes inspection of State Cooperative Agriculture and Rural Development Banks
(SCARDBs) and apex non- credit cooperative societies on a voluntary basis.
 Provides recommendations to Reserve Bank of India on issue of licenses to Cooperative
Banks, opening of new branches by State Cooperative Banks and Regional Rural Banks
(RRBs).
 Undertakes portfolio inspections besides off-site surveillance of Cooperative Banks and
Regional Rural Banks (RRBs).

 INTERNATIONAL MONETARY FUND (IMF)

The International Monetary Fund is a global organisation founded in 1944. It aims was
to help stabilize exchange rates and provide loans to countries in need. Nearly all members of
the United Nations are members of the IMF with a few exceptions such as Cuba, Lichtenstein
and Andorra.
Main objectives of IMF:

1. To promote exchange rate stability among the different countries.

2. To make an arrangement of goods exchange between the countries.

3. To promote short term credit facilities to the member countries.

4. To assist in the establishment of International Payment System.

5. To make the member countries balance of payment favourable.

6. To facilitate the foreign trade.

7. To promote the international monetary corporation.

Functions of IMF
 International Monetary Cooperation
 Promote exchange rate stability
 To help deal with Balance of Payments adjustment
 Help deal with economic crisis by providing international coordination
The purposes of the International Monetary Fund are as follows:
i. To promote international monetary cooperation through a permanent institution which
provides the machinery for consultation and collaboration on international monetary
problems
ii. To facilitate the expansion and balanced growth of international trade, and to contribute
thereby to the promotion and maintenance of high levels of employment and real
income and to the development of the productive resources of all members as primary
objectives of economic policy.
iii. To promote exchange stability, to maintain orderly exchange arrangements among
members, and to avoid competitive exchange depreciation.
iv. To assist in the establishment of a multilateral system of payments in respect of current
transactions between members and in the elimination of foreign exchange restrictions
which hamper the growth of world trade.
v. To give confidence to members by making the general resources of the Fund temporarily
available to them under adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without resorting to measures
destructive of national or international prosperity.