Unit – 4: Non Banking Financial Institutions
Q.1. What are development banks. Mention its features and functions.
Ans: Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.
According to William Diamond, “A Development Bank has the opportunity to promote enterprises i.e. to conceive investment proposal and to stimulate others to persue them or itself to carry them through from the ‘conception’ to ‘realisation’.
Features of Development Bank
a) Development bank is a specialised financial institution which provides medium and long term finance to business units.
b) It is a multi-purpose financial institution and not just a term-lending institution.
c) It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.
d) Financial assistance is provided by a development bank not only to the private sector but also to the public sector undertakings.
e) One of its major aims is to promote the saving and investment habit in the community.
f) Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
g) Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. A development bank is motivated by social profits.
Functions of Development Banks
a) They provide risk capital.
b) They provide long-term and medium-term finance to industrial undertakings for purchase of new plants and machinery, expansion, modernization, etc.
c) They purchase the shares and debentures of companies and thus provide them long-term capital.
d) They help the companies in raising capital from the capital market.
e) They underwrite the public issues of shares and debentures by the companies.
Q.2. Explain the significance of Development banks.
Ans: Objectives and Importance of Development Banks: The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:
a) Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.
b) Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.
c) Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.
d) Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.
e) Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.
f) Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.
g) Management consultancy: Financial institutions provide technical and management consultancy to industrial units.
h) Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.
i) Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.
j) Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.
k) Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.
Q.3. Distinguish between commercial bank and development bank.
Ans: Differences between Commercial Bank and Development Bank
Commercial banks are generally set up as companies under the Companies Act.
Development banks are usually set up under the special Act passed by the Government.
Commercial banks are ordinary financial institution.
Development banks are specialised multi - purpose institutions.
3. Raising of Funds
Commercial banks accept deposits from the public. These deposits are repayable on demand.
Development banks do not accept deposits like commercial banks. Their main sources of funds are borrowing, grants, selling securities etc.
There is cheque facility in case of commercial banks.
There is so such cheque facility in case of development banks.
Commercial banks mainly provide short and medium term loans.
Development banks provide medium and long-term loans.
The basic motives of commercial banks are to maximise the profits.
Development banks are motivated by social profit i.e. it aims at providing service.
7. Credit creation
Commercial banks can create credit or multiple deposits while lending.
Development banks can’t create credit.
8. Acceptance of liabilities
The commercial bank’s liabilities are accepted as means to settle transactions.
The liabilities of development banks are not accepted as a means to settle transaction.
Q.4. Write a brief note on IFCI.
Ans: The Industrial Finance Corporation of India (IFCI) was established in 1948 under a special Act of Parliament. It was the first development bank of our country. It was set up to make medium and long term credits to industrial concerns in India. IFCI grants loan mainly for starting new ventures, expansion of existing capacity, replacement or renovation. IFCI has been converted into a public limited company with effect from 1-7-1993 in which 50% shares are held by IDBI and remaining 50% shares are held by commercial banks, insurance companies and co-operative banks.
Objectives and functions of IFCI:
a) Granting loans or advances to industrial concerns repayable within a period of 25 years.
b) Underwriting and direct subscription to the shares of industrial concerns.
c) Financial assistance to industrial units to backward areas for balanced regional development.
d) Equipment financing, equipment leasing and hire purchase services to industrial concerns.
e) Financial assistance to first generation entrepreneurs, particularly technology oriented concerns and professionals.
Q.5. Write a brief note on IDBI?
Ans: The full form of IDBI is Industrial Development Bank of India. It was established in July, 1964. However, in February 1976, the IDBI was taken over by the government and was made an autonomous institution. It was established with the object of recognizing and integrating the structure of the existing financial institution in the country for gearing up the needs of rapid industrialization.
The objectives of IDBI are:
a) Planning, promoting and developing industries to full the gaps in the industrial structure in India.
b) Providing technical and administrative assistance for promotion etc.
The functions of IDBI are:
a) It renders technical, managerial and administrative assistance for promotion, management and expansion of industry.
b) It provides financing facilities to IFCI, SFC and other financial institutions approved by the Government.
c) It co-ordinates the activities of other financial institutions for the promotion and development of industries.
d) By purchasing and / or underwriting shares and debentures of industrial concerns it provides capital.
e) It also provides guarantee for deferred payments due from industrial concerns and for loans raised by them.
Q.6. Write a brief note on State Financial Corporations (SFCs).
Ans: In order to provide finance to small and medium scale industries need for a separate financial institution was felt. Accordingly, the government of India passed the State Financial Corporation Act in 1951, enabling the state government to set up State Financial Corporation. As a result, the first SFC was set up by the Punjab Government in 1953. In Assam, Assam Finance Corporation was set up in 1954. The SFC meets the financial requirements of small industrial concerns in private sector.
Objective: The main objective of the SFCs is to provide financial assistance to medium and small scale industrial concerns. SFC especially comes into the picture when traditional banking system does not provide requisite funds. The assistance by SFC is for medium and long term capital requirements. They help both new as well as existing units for purposes of establishment, modernization, renovation, expansion and diversification.
Q.7. Write a brief note on NABARD.
Ans: The National Bank For Agriculture and Rural Development (NABARD), a developing bank, came into existence on July 12, 1982, under an Act of Parliament with an initial capital of Rs. 100 crores. It is an apex institution set up for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas. The NABARD has taken over the functions of ARDC (Agricultural Refinance and Development Corporation) and refinancing functions of RBI in respect of co-operative banks and the RRBs.
a) Integrated rural development is main objective of NABARD.
b) To provide training and Research facilities for rural Development.
c) To keep a check on all the projects which are refinanced by NABARD; through timely inspection, monitoring and evaluation.
d) To Act as a coordinator and regulator for rural credit institutions.
e) Promotion and development of agriculture, Small Scale industries, cottage and village industries, handicrafts and other rural crafts.
f) To formulate rural credit plans on annual basis for all districts in country.
Q.8. Write a brief note on SIDBI.
Ans: Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of parliament. It is a wholly-owned subsidiary of Industrial Development Bank of India (IDBI). It serves as the principal financial institution for Promotion, Financing, Development if industry in the small scale sector and Coordinating the functions of other institutions engaged in Similar activities. The Small Scale industry (SSI) sector, which is vibrant and dynamic sub-sector of the India’s industrial economy, is the prime area of SIDBI’s business.
Q.9. Write a brief note on State Industrial Development Corporation (SIDCs)
Ans: SIDC: The State Industrial Development Corporation were incorporated under the Companies Act, 1956 as wholly owned state Govt. undertaking for promoting industrial development. Their main objective is the development of medium and large scale industries in their respective states. At present there are 28 SIDCs in India.
Functions of SIDCs:
a) Providing term loans to medium and large scale industries.
b) Underwriting and direct subscription of shares / debentures of industries.
c) Undertaking Entrepreneurship development programmes in respective states.
d) Administration of incentive scheme of Central and State Govt.
e) Technical guidance and assistance in plant location.
Q.10. Write a brief note on North Eastern Development Finance Corporation (NEFDi)
Ans: NEDFi: The North Eastern Development Finance Corporation was incorporated under the companies Act, 1956 on 9-8-1995. It registered office was at Guwahati, Assam.
Objectives of NEFDi
a) To provide credit and other facilities for promotion, expansion and modernization of industries and infrastructural project in the NER of India.
b) To provide credit and other facilities for agriculture, poultry, dairy, farming etc. in NER of India.
Q.11. What are Mutual Funds? Mention its importance.
Ans: Mutual Funds: A mutual fund is an institutional device through which the investors pool their funds to invest in a diversified portfolio of securities. The fund is termed as “Mutual” because all the profit & losses of the fund are shared by the investors in proportion to their investments.
Benefit of Mutual Funds:
a) Professional management of funds by very qualified and full time investment manager.
b) Risk reduction through diversification.
c) Flexibility for investments in variety of schemes.
d) Higher returns on investment as compared to bank deposits.
e) Tax benefits by investing in tax saving funds.
f) Economies of large scale operations.
Q.12. What is Money Market Mutual Fund?
Ans: Money Market Mutual Fund (MMMF) was introduced by RBI in April, 1992. These mutual funds would invest exclusively in money market instruments such as TB, CP, CD etc. It bridges the gap between small individual investors and the money market. It mobilise savings from small investors and invest them in short-term debts.
Q.13. Write a brief note on UTI.
Ans: Unit Trust of India (UTI) is India’s first fund organisation. It is the single largest mutual fund is India. The UTI was established by the government of India on 1st February, 1964 as a statutory corporation in the public sector under the UTI Act, 1963. This institution began operations in July, 1964. The UTI was set up to promote savings and investment in the country. The UTI not only contributes to the industrial development and diversification of the economy but also provides the small savers the opportunity for sharing the benefits of industrial development.
Q.14. Write a brief note on LICI.
Ans: Life Insurance Corporation of India (LICI) was set up in September 1, 1956, under the LICI Act, 1956 by nationalizing 245 life insurance companies. The LICI mobilize the community’s savings and makes them available to industrial concerns in both public and private sectors. Since its inception, it has been playing a key role in the capital market by underwriting and subscribing to industrial securities. It provides long term and medium term loans in the form of direct loans.
Q.15. Write a brief note on GICI.
Ans: General Insurance Corporation of India (GICI) sell insurance against specific risks, such as loss from fire and accident, to property of various kinds, such as motor vehicles good, machinery, building etc. and also against risk of personal Accidents and sickness. The policies of these companies do not involve savings features. GICI provides loans and investment in the capital market of the country.
Q.16. Write a brief note on ‘World Bank’ or IBRD
Ans: The International Bank for Reconstruction and development (IBRD) generally known as the ‘World Bank’. This bank was established as a result of the deliberations at the economic conference held at Breton Woods in July 1944. This bank began its operations in June 1946. The World Bank was established with the object of reconstructing the economies of the war devastated countries, economic development of the member countries and to raise the standard of living of the people of the world. Initially, only nations that were member of the IMF could be members of the World Bank. But now any country can become the member of the World Bank.
The objectives of World Bank are:
a) To provide long-run capital to the member countries for reconstruction and development.
b) To promote private capital investment by providing guarantee on private loans and capital investment.
c) To maintain equilibrium in balance of payments and balanced development of international trade.
d) When private capital is not available on reasonable terms, to supplement private investment by providing finance for productive purpose on suitable conditions.
e) To encourage the development of productive facilities and resources in less developed countries.
The functions of World Bank are:
a) It grants loans for long and medium term loans which are divided into two ways - Reconstruction loans and development loans. The first is given to countries damaged by the war, the second to all countries who require such loans for development purpose.
b) The quantities of loans, interest rate and terms and conditions are determined by the bank itself.
c) Bank provides loans to private investor of member countries on its own guarantee.
d) The bank gives loans to government and also private borrowers.
e) Loans are granted after preliminary discussions with the parties and a critical examination of the projects.
f) World Bank provides various technical services to the member countries.
Q.17. Write a brief note on International Monetary Fund (IMF)
Ans: The IMF is an international monetary institution established by 44 nations under the Bretton woods agreement of July 1944. It came into existence in December 1945 and started functioning in March, 1947. It is an autonomous organization and is affiliated to the U.N.O. It has its main office in Washington. Initially, the IMF had 30 countries as its members. At the end of 2000, the membership of the IMF was 183. It was established to promote economic and financial co-operation amongst member countries.
The objectives of I.M.F are:
a) To promote international economic and financial co-operation amongst member countries.
b) To promote exchange stability and avoid currency devaluation.
c) To promote the international trade by removing all obstacles.
d) To promote investment of capital in backward and undeveloped countries.
e) To make financial resources available to members.
f) To seek reduction on payment imbalances.
g) To elimination or reduction of existing exchange control.
The functions of IMF are:
a) It functions as a short credit institution.
b) It provides machinery for the orderly adjustments of exchange rates.
c) It keeps reserves of the currencies of all member countries.
d) It lends to the borrowing countries in the currencies which they require.
e) It promotes the expansion of International Trade for the mutual benefits of member countries.
The management of the IMF is composed of the following:
a) Board of Governors: The board of governors has the responsibility of formulating the general policies of the fund.
b) Board of Executive Directors: The board of executive directors controls the day-to-day activities of the fund.
c) Managing Director: The managing director is the chairman of the board of executive directors.
d) Interim committee: It main function is to advice Board of Governors for the improvement of supervision, management and adaptation of international monetary system from time to time.
e) Development committee: It consists of 22 members. The main function of the committee is to prepare reports, advice the Board of Governors regarding all the aspects of the transfer of resources to the developing countries as required by them and to make important suggestions for its implementation.
Q.18. Write a brief note on Asian Development Bank (ADB).
Ans: The full form of ADB is Asian Development Bank. It is a multinational regional development bank. Its purposes are lending funds, promoting investment, providing technical assistance to the developing member countries. The ADB came into existence and was formally opened for business on 19th December 1966 at Manila.
The main objectives of ADB are:
a) To promote investment in the ECAFE (Economic Commission for Asia and Far East) region of public and private capital for regional development.
b) To utilize the available resources for the financing of economic development, especially of the smaller and less developed members of the region.
c) To provide technical assistance in the execution and development of projects.
d) Undertaking of such other activities which may help to achieve its main objectives.
e) To help the regional members in the co-ordination of their plans and policies for economic development.
The ADB is managed by a president, vice-president and a board of governors along with and administrative staff. The president is the administrative head of ADB. It started its operations with an authorized capital of $ 2.9 billion which was raised to $ 25 billion in 1992.
Q.19. Write a brief note on International Finance Corporation (IFC).
Ans: The IFC is a member of World Bank Group and was established in July 1956 to provide finance to the private sector. The IFC was established with the specific purpose of providing risk capital to the private enterprises in the less developed countries without government guarantee.
The main objectives of IFC are:
a) To serve as a clearing house to bring together investment opportunities, private capital of both foreign and domestic origin and experienced management.
b) To help in stimulating the productive investment of private capital, both domestic and foreign etc.
The main functions of IFC are:
a) It offers long-term loans in major currencies at fixed or variable rates.
b) It brings together investment opportunities, private capital of both foreign and domestic origin and experienced management.
c) It assists the growth of capital market in less developed countries.
Q.20. Write a brief note on International Development Association (IDA).
Ans: The International Development Association is an affiliate of IBRD. It was establishment in 1960 to provide soft loans to less developed member countries for the purpose of slum clearance, construction of roads and bridges etc.
Objectives and functions of IDA:
a) To promote economic and infrastructural development of poor member countries.
b) To provide finance to less developed countries on easy and flexible terms.
c) To supplement the objectives and functions of World Bank.
d) To provide interest free credit.