Types of Financial Institutions and their Working
There is a variety of financial institutions in India. Starting from Commercial banks to brokerage firms, there is a diverse role of all these institutions. This post discusses the types of financial institutions in India and their working.
What is a Financial Institution (FI)?
A Financial Institution or FI is a company which is engaged in the financial transaction related activities such as deposits, loans, investments and currency exchange. It offers a broad range of business operations within the financial services sector. Every person living in a developed or developing economy avails the services of any or many of these institutions.
The operations performed by the FIs are the critical part of any economy. Individuals and corporates rely on these institutions for their financial transactions and investments. Every government regulates these institutions through various regulators. These regulators monitor and control their activities on a regular basis.
Types of Financial Institutions
There are various types of financial institutions. A brief description of these varieties of institutions is given below:-
Commercial banks are those who are involved in CASA (Current Account/Savings Account) services. Their primary functions are accepting demand deposits (CASA) and time deposits (FD/RD). They also accept banker cheque and they can issue demand drafts. The primary motive of establishing banking services was to provide customers with the safety of their money. They also provide loan facilities to customers who is either individual or corporates in order to help those buying goods or expanding business. State Bank of India, Punjab National Bank, HDFC Bank etc. are the examples of commercial banks
There are further following types of commercial banks in India:-
- Public Sector Banks
- Private Sector Banks
- Foreign Banks
- Regional Rural Banks
Investment banks are different from commercial banks. Investment banks do not accept deposits and cannot issue demand drafts. They work as a financial intermediary for individuals, corporates, and governments. They usually assist the firms in raising capitals acting as the agent of their clients. They also assist their clients in issue/exchange of securities. They facilitate merger and acquisition (M&A) and reorganizations of corporates. Investment banks also provide ancillary services such as market making, trading of derivatives and equity securities. Morgan Stanley, Goldman Sachs, JP Morgan etc. are the world’s best-known investment bankers.
These type of companies are those financial institutions which help individuals and corporates transfer risk of their possible losses. The individual and corporate customers use insurance companies to protect their loss caused by death, disabilities, accidents and any other misfortunes. Life Insurance Corporation (LIC), SBI Life etc. are examples of insurance companies.
A brokerage firm works as an intermediary between buyers and sellers and facilitates security transactions. They compensate their effort via commissions after the transaction. There are two types of brokerages firms- full and discount. Full brokerage firms provide investment advice, trade execution, and portfolio management services to customers. Discount brokerage firms do not give any advice to its clients, it allows to do them their own research. Zerodha, Angel Broking, SMC etc. are the well know brokerage forms in India.
Investment companies pool money from individuals or corporates or any other investor and invest it in a diversified, professionally managed portfolio of securities. The most common type of investment companies is mutual funds. Aditya Birla Capital, L&T Finance, Reliance Capital etc. are the well-known investment companies in India.
(Types of Financial Institutions)
Non-Banking Financial Companies (NBFC)
A Non-Banking Financial Company (NBFC) is a type of financial institution involved in the business of loans and advances, acquisition of securities, hire-purchase insurance business etc. These companies cannot accept deposits (CASA) and cannot issue demand drafts. However, they may provide saving facilities in terms of investment. ICICI Prudential, Edelweiss, IIFL Holdings etc. are the popular NBFCs in India. There are following type of services provided by the of NBFCs:-
- Asset Finance: Its principal business is the financing of the physical asset such as automobile, tractors etc.
- Infrastructure Finance: They provide infrastructure loans.
- Gold Loan: They provide loans against the gold as a collateral.
- Other Loans: They provide other types of loans such a persona, business loan etc.
- Investment: They pool money from the customer and invest in a portfolio.
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