Sunday, 24 November 2019

Unit 8: Financial Institutions


                                               Unit 8: Financial Institutions    

Banking, per se, commercial banking, has a long history.

Starting its journey from the traders of Rome, it traces its way to the modern day prime intermediation.

The history of banking is by far the history of the State Bank of India, being the oldest bank in the country.

The post-independence economic scenario forced the Government of India to nationalize the banks.

These banks acted as a major source of institutional support for the Indian financial system.

NBFCs occupy a large segment of Indian financial system.

They have evolved over age.

Starting from small mutual benefit organizations, today they are there in almost all walks of life, touching millions of people of the country.

The most common of them are equipment leasing, hire purchase and housing finance companies.

These companies offer public deposit as well as provide loans to business houses.

It has been observed that there were hardly any regulations on these organizations.

In order to regulate them and protect investors' interests, several committees and groups were established by the Government of India.

Based on the recommendation of these committees, there have been several liberalization and control steps to make these organizations more accountable and vibrant.

The role played by all these leading development banks in the promotion of large scale, medium, small scale and micro and cotton industries is commendable.

The establishment of these banks has facilitated and supported the promotion of industry.

By providing the entrepreneurs by means of project assistance, planning, capital requirements, training, marketing and special assistance to promote exports and imports finance etc.

These banks have taken up a variety of new activities as desired by the  
of India from time to time to establish business in production and service sectors .

The SIDCs are primarily conceived as development institutions they have not built up a well-developed organizational framework to undertake challenging tasks to develop small and medium industries as desired by the Central Government.

To improve their functioning they have to equip with technological competencies to project guidance and to undertake economic potential surveys to identify new sectors of development, which can provide more employment.

Gaining of such expertise is important     

Financial Institutions for SIDCs to help the business units to assist them in providing marketing and production management and warehousing, exporting kind of areas.

The SIDCs in Andhra Pradesh, Maharashtra, Gujarat, Tamil Nadu, Karnataka have shown promising performance.

RRBs have had a definitive role to play in the development of rural India.

Directly under the supervision of the RBI, it has been a major channeliser of livelihood and other rural employment schemes of the Government of India.

Despite the fact that effort has been put to create wealth for the poor through RRBs, the gap between the objectives and the achievements for RRBs have been large.

Bank risk: Banks in the process of providing financial services assume various kinds of risks, credit, interest rate, currency, liquidity and operational risks.

Credit risk is the risk of loosing money when loans default.

Credit risk or default risk gives rise to problems of bank management.

Development banking is the financing of projects assessed on the basis of their viability to generate cash flows to meet the interest and repayment obligation.

They have an in-built promotional aspect, because projects have to fall within the overall national industrial priorities, located preferably in backward areas and promoted by entrepreneurs.

Liquidity risk refers to the bank’s ability to meet its cash obligations to depositors and borrowers.

A liability-sensitive position than to assets of interest rates reduces the liquidity position of a bank.

Unit banking consists of provision of banking services by a single institution.

The size as well as the area of operation is small and far more limited than branch banking.

However, the unit bank may have branches within a strictly limited area.

Venture capital is long-term risk capital to finance high technology projects, which involve risk, but at the same time has strong potential for growth.

Venture capitalist pools their resources including managerial abilities to assist new entrepreneurs in the early years of the project .

Once the project reaches the stage of profitability, they sell their equity holdings at high premium.

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