UNIT.

2
Banking Institutions: Commercial Bank - Co- operative Banks – Functions - Small
Savings - Unit Trust of India Mutual Funds - Non Banking Financial Institutions:
Role – Types - Loan Companies – Investment Companies – Hire Purchase Finance –
Equipment Leasing Company – Housing Finance – Mutual Benefit Financial
Company – Residuary – Non - Banking Company.

Banking in India: Definition, Functions and Types of Banks

What is a Bank?
A bank is a lawful organisation that accepts deposits which can be withdrawn on
demand. Banks are institutions that help the public in the management of their finances,
public deposit their savings in banks with the assurance to withdraw money from the
deposits whenever required.
Banks accept deposits from the general public and from the business community as well
and give two assurances to the depositors –
Safety of deposit
Withdrawal of deposit, whenever needed
Banks give interest on deposits which adds to the original deposit amount and is a
great incentive to the depositor. This promotes saving habits among the public. Bank
also grants loans based on the deposits thereby adding to the economic development of
the country and well being of the general public. With this stature, it becomes important
to understand the major functions of a bank. 
Definition of a Bank
A bank is a financial institution which performs the deposit and lending
function. A bank allows a person with excess money (Saver) to deposit his money in the
bank and earns an interest rate. Similarly, the bank lends to a person who needs money
(investor/borrower) at an interest rate. Thus, the banks act as an intermediary between
the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit
rate and lends the money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and
the interest spread constitutes the banks income.
Essential Features/functions of the Bank

Financial Intermediation
The process of taking funds from the depositor and then lending them out to a
borrower is known as Financial Intermediation. Through the process of Financial
Intermediation, banks transform assets into liabilities. Thus, promoting economic
growth by channelling funds from those who have surplus money to those who do not
have desired money to carry out productive investment.
The bank also acts as a risk mitigator by allowing savers to deposit their money safely
(reducing the risk of theft, robbery) and also earns interest on the same deposit. Bank
provides services like saving account deposits and demand deposits which allow savers
to withdraw money on an immediate basis thus, providing liquidity (which is as good
as holding cash) with security.
How Banks promote economic growth?
Types/Structure of Banks in India

Scheduled Commercial Banks

All the commercial banks in India- Scheduled and Non-Scheduled is regulated under
Banking Regulation Act 1949.
By definition, any bank which is listed in the 2nd schedule of the Reserve Bank of India
Act, 1934 is considered a scheduled bank. The list includes the State Bank of India and
its subsidiaries (like State Bank of Travancore), all nationalised banks (Bank of Baroda,
Bank of India etc), Private sector banks, Foreign banks, regional rural banks (RRBs),
foreign banks (HSBC Holdings Plc, Citibank NA) and some co-operative banks.
Till 2017, Scheduled commercial banks in India comprised 26 Public sector banks
including SBI and its associates, and 19 Nationalised Bank and IDBI. The creation of
Bhartiya Mahaila Bank has increased the total no of Public sector SCB’s to 27, but the
recent merger of the Mahaila Bank with SBI had reduced the list back to 26.
The scheduled private sector bank includes old private sector banks and new private
sector banks. There are 13 old private sector banks and 9 new private sector banks
including the newly formed IDFC and Bandhan Bank.
There are also 43 Foreign National Banks operating in India.
The Regional Rural Banks were started in India back in the 1970s due to the inability of
the commercial banks to lend to farmers/rural sectors/agriculture. The governance
structure/shareholding of RRBs is as follows:
Central Government: 50%, State Government: 15% and Sponsor Bank: 35%.
RBI has kept CRR (Cash Reserve Requirements) of RRBs at 3% and SLR (Statutory
Liquidity Requirement) at 25% of their total net liabilities.
Important Facts Relating to Scheduled Commercial Banks
In terms of Business, Public sector banks dominate the Indian Banking.
PSB accounts for close to 50% of total assets, 70% of deposits and close to 70% of the
advances.
Amongst the Public-Sector Banks, SBI and its Associates has the highest number of
Branches.
The committee on Regional Rural Bank headed by M Narasimhan recommended the
setting up of RRBs for the purpose of providing rural credit.
An RRB is sponsored by a Public-Sector Bank which also provides a part of its share
capital. Example: Maharashtra Gramin Bank (sponsored by the Bank of Maharashtra)
and the Himachal Gramin Bank (Sponsored by Punjab National Bank). RRBs were set
up to eliminate other unorganized financial institutions like money lenders and
supplement the efforts of co-operative banks.
The Private Commercial banks account for close to 1/4th of the assets of the total
banking assets.
Non-scheduled Banks
Non-scheduled banks by definition are those which are not listed in the 2nd schedule of
the RBI Act, 1934.
Banks with a reserve capital of less than 5 lakh rupees qualify as non-scheduled banks.
Unlike scheduled banks, they are not entitled to borrow from the RBI for normal
banking purposes, except, in emergency or “abnormal circumstances.”
Jammu & Kashmir Bank is an example of a non-scheduled commercial bank.
Cooperative Banks
Co-operative banks operate in both urban and non-urban areas. All banks registered
under the Cooperative Societies Act, 1912 are considered co-operative banks.
In the urban centres, they mainly finance entrepreneurs, small businesses, industries,
self-employment and cater to home buying and educational loans.
Likewise, co-operative banks in the rural areas primarily cater to agricultural-based
activities, which include farming, livestock’s, diaries and hatcheries etc.
They also extend loans to small scale units, cottage industries, and self-employment
activities like artisanship.
Unlike commercial banks, who are driven by profit, cooperative banks work on a “no
profit, no loss” basis.
Co-operative Banks are regulated by the Reserve Bank of India under the Banking
Regulation Act, 1949 and Banking Laws (Application to Co-operative Societies) Act,
1965.

Important Functions of Bank

There are two types of functions of banks:
Primary functions – being primary are also called banking functions.
Secondary Functions
Both the types of functions of bank are explained below in detail:
Primary Functions of Bank
All banks have to perform two major primary functions namely:
Accepting of deposits
Granting of loans and advances
Accepting of Deposits
A very basic yet important function of all the commercial banks is mobilising public
funds, providing safe custody of savings and interest on the savings to depositors. Bank
accepts different types of deposits from the public such as:
Saving Deposits:  encourages saving habits among the public. It is suitable for salary
and wage earners. The rate of interest is low. There is no restriction on the number and
amount of withdrawals. The account for saving deposits can be opened in a single name
or in joint names. The depositors just need to maintain minimum balance which varies
across different banks. Also, Bank provides ATM cum debit card, cheque book, and
Internet banking facility. Candidates can know about the Types of Cheques in the
linked page.
Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure.
No withdrawal money during this period allowed. In case depositors withdraw before
maturity, banks levy a penalty for premature withdrawal. As a lump-sum amount is
paid at one time for a specific period, the rate of interest is high but varies with the
period of deposit.
Current Deposits: are opened by businessmen. The account holders get overdraft
facility on this account. These deposits act as a short term loan to meet urgent needs.
Bank charges a high-interest rate along with the charges for overdraft facility in order to
maintain a reserve for unknown demands for the overdraft.
Recurring Deposits: A certain sum of money is deposited in the bank at a regular
interval. Money can be withdrawn only after the expiry of a certain period. A higher
rate of interest is paid on recurring deposits as it provides a benefit of compounded rate
of interest and enables depositors to collect a big sum of money. This type of account is
operated by salaried persons and petty traders.
Granting of Loans & Advances
The deposits accepted from the public are utilised by the banks to advance loans to the
businesses and individuals to meet their uncertainties. Bank charges a higher rate of
interest on loans and advances than what it pays on deposits. The difference between
the lending interest rate and interest rate for deposits is bank profit.
Bank offers the following types of Loans and Advances:
Bank Overdraft: This facility is for current account holders. It allows holders to
withdraw money anytime more than available in bank balance but up to the provided
limit. An overdraft facility is granted against collateral security. The interest for
overdraft is paid only on the borrowed amount for the period for which the loan is
taken.
Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks
allow the customer to take a loan against a mortgage of certain property (tangible assets
and / guarantees). Cash credit is given to any type of account holders and also to those
who do not have an account with a bank. Interest is charged on the amount withdrawn
in excess of the limit. Through cash credit, a larger amount of loan is sanctioned than
that of overdraft for a longer period.
Loans: Banks lend money to the customer for short term or medium periods of say 1 to
5 years against tangible assets. Nowadays, banks do lend money for the long term. The
borrower repays the money either in a lump-sum amount or in the form of instalments
spread over a pre-decided time period. Bank charges interest on the actual amount of
loan sanctioned, whether withdrawn or not. The interest rate is lower than overdrafts
and cash credits facilities.
Discounting the Bill of Exchange: It is a type of short term loan, where the seller
discounts the bill from the bank for some fees. The bank advances money by
discounting or purchasing the bills of exchange. It pays the bill amount to the
drawer(seller) on behalf of the drawee (buyer) by deducting usual discount charges. On
maturity, the bank presents the bill to the drawee or acceptor to collect the bill amount.
Secondary Functions of Bank
Like Primary Functions of Bank, the secondary functions are also classified into two
parts:
Agency functions
Utility Functions
Agency Functions of Bank
Banks are the agents for its customers, hence it has to perform various agency functions
as mentioned below:
Transfer of Funds: Transferring of funds from one branch/place to another. 
Periodic Collections: collecting dividend, salary, pension, and similar periodic
collections on the clients’ behalf. 
Periodic Payments: making periodic payments of rents, electricity bills, etc on behalf of
the client.
Collection of Cheques: Like collecting money from the bills of exchanges, the bank
collects the money of the cheques through the clearing section of its customers.
Portfolio Management: banks manage the portfolio of their clients. It undertakes the
activity to purchase and sell the shares and debentures of the clients and debits or
credits the account.
Other Agency Functions: under this bank act as a representative of its clients for other
institutions. It acts as an executor, trustee, administrators, advisers etc. of the client.
Utility Functions of Bank
Issuing letters of credit, traveller’s cheque, etc
Undertaking safe custody of valuables, important documents and securities by
providing safe deposit vaults or lockers
Providing customers with facilities of foreign exchange dealings
Underwriting of shares and debentures
Dealing in foreign exchanges
Social Welfare programmes
Project reports
Standing guarantee on behalf of its customers, etc.
The bank takes deposit at a much lower rate from the public called deposit rate and
lends money at a much higher rate called the lending rate.
Types of Banks
Banks can be classified into various types. Given below is the bank types in India:-
Central Bank
Cooperative Banks
Commercial Banks
Regional Rural Banks (RRB)
Local Area Banks (LAB)
Specialized Banks
Small Finance Banks
Payments Banks
This is an important topic for the IAS Exam. In this article, aspirants will get
information on the banking system in India, its function, and the type of banks in India.
Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a central
bank that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and
regulate the other banking institutions in the country.
Given below are the functions of the central bank of a country:
Guiding other banks
Issuing currency
Implementing the monetary policies
Supervisor of the financial system
In other words, the central bank of the country may also be known as the banker’s bank
as it provides assistance to the other banks of the country and manages the financial
system of the country, under the supervision of the Government.
Cooperative Banks
These banks are organised under the state government’s act. They give short term loans
to the agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing
concessional loans
They are organised in the 3 tier structure
Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
Funded by RBI, government, NABARD. Money is then distributed to the public
Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
Owned by the state government and top management is elected by members
Tier 2 (District Level) – Central/District Cooperative Banks
Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
Commercial Banks
Organised under the Banking Companies Act, 1956
They operate on a commercial basis and its main objective is profit.
They have a unified structure and are owned by the government, state, or any private
entity.
They tend to all sectors ranging from rural to urban
These banks do not charge concessional interest rates unless instructed by the RBI
Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:
Public sector Banks – A bank where the majority stakes are owned by the Government
or the central bank of the country.
Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
Foreign Banks – The banks with their headquarters in foreign countries and branches
in our country, fall under this type of bank
Given below is the list of commercial banks in our country:

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks

State Bank of India Catholic Syrian Bank Australia and New Zealand
Allahabad Bank City Union Bank Banking Group Ltd.
Andhra Bank Dhanlaxmi Bank National Australia Bank
Bank of Baroda Federal Bank Westpac Banking Corporation
Bank of India Jammu and Kashmir Bank Bank of Bahrain & Kuwait BSC
Bank of Maharashtra Karnataka Bank AB Bank Ltd.
Canara Bank Karur Vysya Bank HSBC
 Central Bank of India Lakshmi Vilas Bank CITI Bank
Corporation Bank Nainital Bank Deutsche Bank
Dena Bank Ratnakar Bank DBS Bank Ltd.
Indian Bank South Indian Bank United Overseas Bank Ltd
Indian Overseas Bank Tamilnad Mercantile Bank J.P. Morgan Chase Bank
Oriental Bank of Axis Bank Standard Chartered Bank
Commerce Development Credit Bank (DCB There are over 40 Foreign Banks in
Punjab National Bank Bank Ltd) India
Punjab & Sind Bank HDFC Bank
Syndicate Bank ICICI Bank
Union Bank of India IndusInd Bank
United Bank of India Kotak Mahindra Bank
UCO Bank Yes Bank
Vijaya Bank IDFC
IDBI Bank Ltd. Bandhan Bank of Bandhan
Financial Services.

Regional Rural Banks (RRB)

These are special types of commercial Banks that provide concessional credit to
agriculture and rural sector.
RRBs were established in 1975 and are registered under a Regional Rural Bank Act,
1976.
RRBs are joint ventures between the Central government (50%), State government
(15%), and a Commercial Bank (35%).
196 RRBs have been established from 1987 to 2005.
From 2005 onwards government started merger of RRBs thus reducing the number of
RRBs to 82
One RRB cannot open its branches in more than 3 geographically connected districts.
Aspirants can check the list of Regional Rural banks in India at the linked article.
Local Area Banks (LAB)
Introduced in India in the year 1996
These are organized by the private sector
Earning profit is the main objective of Local Area Banks
Local Area Banks are registered under companies Act, 1956
At present, there are only 4 Local Area Banks all which are located in South India
Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called
specialized banks. These include:
Small Industries Development Bank of India (SIDBI) – Loan for a small scale industry or
business can be taken from SIDBI. Financing small industries with modern technology
and equipments is done with the help of this bank
EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with  exporting or importing goods by foreign countries can be
done through this type of bank
National Bank for Agricultural & Rural Development (NABARD) – To get any kind
of financial assistance for rural, handicraft, village, and agricultural development,
people can turn to NABARD.
There are various other specialized banks and each possesses a different role in helping
develop the country financially.
Small Finance Banks
As the name suggests, this type of bank looks after the micro industries, small farmers,
and the unorganized sector of the society by providing them loans and financial
assistance. These banks are governed by the central bank of the country.
Given below is the list of the Small Finance Banks in our country:

AU Small Finance Equitas Small Jana Small Finance Northeast Small

Bank Finance Bank Bank Finance Bank

Capital Small Fincare Small Suryoday Small Ujjivan Small Finance

Finance Bank Finance Bank Finance Bank Bank

Esaf Small Finance Utkarsh Small

 Bank Finance Bank
Payments Banks
A newly introduced form of banking, the payments bank have been conceptualized by
the Reserve Bank of India. People with an account in the payments bank can only
deposit an amount of up to Rs.1,00,000/- and cannot apply for loans or credit cards
under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card can be
done through payments banks. Given below is a list of the few payments bank in our
country:
Airtel Payments Bank
India Post Payments Bank
Fino Payments Bank
Jio Payments Bank
Paytm Payments Bank
NSDL Payments Bank
Commercial Bank Vs Cooperative Bank
Definition of Commercial Bank
Commercial bank refers to the banking company, which is established to serve
individuals, organisations, and businesses. It is a financial institution, which is
authorised to accept deposits from the general public and grant credit to them. They are
governed by the Banking Regulation Act, 1949 and supervised by the Reserve Bank of
India.
Commercial Banks provide short-term, medium-term, and long-term finance to the
public. However, it usually prefers to make short-term funding. There are a variety of
products offered by the banks, to its customers such as:
Deposit accounts like fixed deposit, recurring deposit, savings account, current account,
etc.
Loans such as auto loan, home loan and so on.
ATM services
Credit and debit card facility.
Acts as an agent, for the collection of cheques, bills of exchange
Safeguards the property and wealth of persons
Merchant banking
Trade financing
Transfer of money.
Definition of Cooperative Bank
Cooperative Banks are the financial institutions that are owned and run by their
customers and operates on the principle of one person one vote. The bank is governed
by both banking and cooperative legislation, as they are registered under the
Cooperative Society Act, 1965 and regulated by National Bank for Agriculture and
Rural Development (NABARD) & Reserve Bank of India (RBI). They operate in both
rural as well as urban areas and provide credit to borrowers and businesses.
Cooperative Banks offer a range of services like accepting deposits and granting loans
to the members and even non-members. The members are the owners and customers of
the bank at the same time. The bank offers services like deposit accounts such as
savings and current account, safe keeping of valuables (locker facility), loan and
mortgage facility to the customers.
Comparison Chart

S
BASIS FOR
N COMMERCIAL BANK COOPERATIVE BANK
COMPARISON
O

1 Meaning A bank that offers banking A bank set up to provide finance

services to individuals and to agriculturists, rural industries
businesses is known as a and to trade and industry of
commercial bank. urban areas (but up to a limited
extent).

2 Governing Act Banking Regulation Act, Cooperative Societies Act, 1965

1949

3 Area of operation Large Small

4 Motive of Profit Service

operation
 S
BASIS FOR
N COMMERCIAL BANK COOPERATIVE BANK
COMPARISON
O

5 Borrowers Account holders Member shareholders

6 Main function Accepting deposits from Accepting deposits from

public and granting loans members and the public, and
to individuals and granting loans to farmers and
businesses. small businessmen.

7 Banking service Offers an array of services. Comparatively less variety of

services.

8 Interest rate on Less Slightly higher

deposits

Non Banking Financial Companies (NBFC)- Types and Functions

The non-banking financial institutions are the organizations that facilitate bank-related
financial services but does not have banking licenses.
An NBFC (Non-Banking Financial Company) is a company registered under Company
Act 1956/ 2013. Its principal business is receiving deposits and providing loans under
any scheme. NBFCs perform the basic business of the bank without the license. NBFCs
are regulated by RBI. The minimum asset value needed for starting the functioning of
an NBFC is  200 lakhs (2 crores).
Non- Banking Financial Institutions – Types
Mutual Funds
Mediators between people and stock exchange
Money collected from people by selling their units is called the corpus
Oldest Mutual Fund company in India is UTI ( Unit Trust of India)
Mutual Funds nearly provides all the considerations
Insurance Companies
Collect money from the public through the sale of insurance policies
There are two types of Insurance – Life Insurance and General Insurance
General Insurance includes Loss of property, car, house etc.
It also includes Health Insurance
IRDA Act, 1999
As per the Insurance Regulatory and Development Authority Act, Insurance companies
were opened up for private companies. The objective was to promote competition FDI
was allowed up to 26% (Recently increased to 49%) IRDA was established as the
regulator of the insurance sector
LIC – Life Insurance Corporation
Set up in 1956 by the government by nationalising all the existing private sector life
insurance companies
This was done due to large scale defaults
2. GIC – General Insurance Corporation
It was established in 1973
Subsidiaries of GIC are:-
NICL – National Insurance Company of India Limited
United India Insurance Company Limited
Oriental Insurance Company of India Limited
New India Insurance Company of India Limited
ULIP – Unit Linked Insurance Plans
A mixture of Insurance and Mutual Funds
Hedge Funds
These are mutual funds for rich investors
Funds are raised through the sale of their unit to High net worth Individuals and
Institutional Investors
Units of these are usually sold in chunks/groups
There is a lock-in period for Hedge funds before which funds cannot be withdrawn
Corpus is an investment in risky instruments with a long term perspective
Venture Capital Firms/ Companies
They provide finance and technical assistance to firms which undertake a business
project based on innovative ventures
They provide finance for the commercial application of new technology
Merchant banks ( Investment Banks)
Merchant banks provide financial consultancy services
They advise firms on fundraising, manage IPO of firms, underwrite new issues and
facilitate demat trading.
Finance Companies (Loan Companies)
Financial Institutions raise funds from the public for lending purpose
e.g. – Muthoot Finance, Cholamandalam
Micro Finance Institutions (MFI)
Raise funds from the public for lending to weaker sections
In India, they mainly raise funds from banks
e.g. – Basix, Bandhan, SKS Micro Finance.
To know more about Micro-Finance in India, check the linked article.
Vulture Funds
These funds buy stocks of companies which are nearing bankruptcy at a very low price.
After purchasing such stocks they initiate the recovery process to increase the price of
shares and sell it at a later point of time
Islamic Banks
These banks provide loans on the basis of Islamic laws called Sharia.
In the law of Sharia Interest cannot be charged on the loans
Leasing Companies
They purchase equipment and machinery and provide the same to companies on a
lease.
These companies charge rent on these machineries which is similar to EMI
Functions of NBFC
Leasing
Hire purchase
Insurance
Investment in stocks, bond and debentures
Sales/Purchase
Difference between a Bank and an NBFC
Bank NBFCs
Can accept Demand Deposits Cannot accept Demand Deposit
Can Issue Cheque &Demand draft Cannot issue Cheque & Demand draft
Insurance to money by DICGC Money not insured by DICGC
Can undertake Agriculture Activity Cannot undertake Agriculture Activity
Can undertake Industrial Activity Cannot undertake Industrial Activity
Foreign investment allowed up to 74% Foreign investment allowed up to 100%
 Maximum term for deposit – 60 months
 Maximum Interest Rate Offered- 12.5%
Types of NBFCs
There are 10 different types of NBFCs
1. Asset Finance Company
An AFC is a financial institution whose primary business is financing physical assets
supporting production or economic activity.
2. Investment Company
IC is an NBFC carrying out the business of acquisition of securities including bonds,
securities and debentures.
3. Systematically Important Core Investment Company
CIC-ND-SI is an NBFC carrying acquisition of shares and securities under certain
conditions
(a) minimum of 90% of its total assets must be invested in equity shares.
(b) minimum of 60% of its share of total assets must be invested in equity shares
(c) must have an asset of minimum 100 crores
(d) Should accept public funds.
4. Loan Company
NBFC with a primary business of providing finance either by making loans or advance
or otherwise for any activity other than its own but does not include an Asset Finance
Company.
5. Infrastructure Finance Company (IFC)
An NBFC which invest a minimum of 75% or above of its asset in infrastructure
development projects. It should have a minimum capital of 300 crores. It should also
possess a credit rating of ‘A’ or equivalent and CRAR (Capital to Risk Asset Ratio)
of 15 %.
6. NBFC- Micro Finance Institution
MFI is a non- deposit taking NBFC having not less than 85%of its assets in the nature of
qualifying assets which satisfy the following conditions
(a)  loan disbursed to a borrower with a rural household annual income not exceeding
Rs. 1,00,000/- or urban and semiurban household not exceeding Rs. 1,60,000/-.
(b) Loan amount should not exceed Rs. 50,000/- in the first cycle and R. 1,00,00/- in the
second cycle.
(c) The total indebtedness of the borrower does not exceed Rs.1,00,000/-
(d) The tenure of the loan is not less than 24 months for loan amount in excess of
Rs.15,000/- with prepayment without penalty.
(e) loan to be extended without collateral
(f) Aggregate amount of loans, given for income generation is not less than 50% of the
total loans given by the MFIs.
(g) The loan is repayable on weekly, fortnightly or monthly installments.
7. NBFC- Factors
NBFC- Factor is a non- deposit taking NBFC engaged in the principal business of
factoring. The financial assets in the factoring business should constitute at least 50%  of
the total assets and its income derived from factoring business should not be less than
50% of its total income.
8. Mortgage Guarantee Company (MFC)
MGC is a financial institution for which at least 90% of the business turnover is
mortgage guarantee business or at least 90% of the gross income is from mortgage
guarantee business and the net owned fund is 100 crores.
9. NBFC- Non-Operative Financial Holding Company
NOFHC is a financial institution through which promoter/ promoter groups will be
permitted to set up a new bank. It’s a wholly-owned Non- Operative Financial Holding
Company (NOFHC) which will hold the bank as well as all other financial services
companies regulated by RBI or other financial sector regulators, to the extent
permissible under applicable regulatory prescriptions.
10. Infrastructure Debt Fund: Non-Banking Finance Company
1DF- NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resource through the issue of Rupee or Dollar
denominated bonds of minimum 5 years maturity. Only Infrastructure Finance
Companies can sponsor IDF-NBFC.
The Reserve Bank Of India has defined NBFC as the  Companies which are  registered
under the Companies Act, 1956 and are engaged in the business of loans and advances,
acquisition of shares/ stocks/ bonds/ debentures/ securities issued by Government or
local authority or other marketable securities of a like nature, leasing, hire-purchase,
insurance business, chit business but they does not include any institution whose
principal business is that of agriculture activity, industrial activity, purchase or sale of
any goods (other than securities) or providing any services related to it and
sale/purchase/construction of immovable property are known as Non-Banking
Financial Company. Reserve Bank Of India has further extended the definition of
NBFC as the Companies having   principal business of receiving deposits under any
scheme or through any arrangement in one lump sum or in installments by way of
contributions or in any other manner.
Functions of NBFC
 Hire Purchase Services
Hire purchase service is a way through which the seller delivers the goods to the buyer
without transferring the ownership of the goods. The payment of th goods is made in
installments. Once the buyer pays all the installments of the goods, the ownership of the
good is automatically transferred to the buyer.
Retail Financing 
Companies that Provides short term funds for Loan against shares, gold, property,
primarily for consumption purposes
Trade finance 
Companies dealing in Dealer/distributor finance so that they can for  working capital
requirements, vendor finance, and other business loans.
Infrastructural Funding 
This is the largest section where major NBFCs deal in. A lot of portion of this segment
alone makes up a major portion of funds lent, amongst the different segments. This
majorily includes Real Estate, railways or Metros, flyovers, ports, airports, etc.
Asset Management Company:
Assets management companies are those companies consists of fund managers (who
invest in equity shares to gain handsome gains) who invest the funds pooled by small
investors and actively manage it.

Leasing Services 
The companies that deals in leasing or for a better understanding of this word we can
understand it in such a way that the way we rent property or flat for living similary
these companies provide property to small businesses or sometime even larger ones
who cannot afford it for whatsoever reason. The only difference between renting and
leasing is that in leasing contracts are made for fixed period of time.
Venture Capital Services
The companies that invest in the small businesses which are at their initial stage but
their success rate is high and are promising enough of sufficient return in coming time.
Micro Small Medium Enterprise (MSME) Financing
MSME is one of the roots of our economy and millions of livelihood depends on this
sector that is why government announced such luring schemes for MSME sector to
promote its growth.
Unit Trust of India: Objectives, Functions and Schemes
Unit Trust of India (UTI) is a statutory public sector investment institution which was
set up in February 1964 under the Unit Trust of India Act, 1963.
UTI began operations in July 1964. It provides opportunity for small-savers to invest in
areas where their risk is diversified.
The Unit-holders, if necessary, can sell their units to UTI at the prices determined by
UTI. One of the attractions is that the investment in UTI has an income-tax rebate and
the income from the UTI is exempted; from income-tax subject to certain limits.
Objectives
The primary objectives of the UTI are
(i) To encourage and pool the savings of the middle and low income groups.
(ii) To enable them to share the benefits and prosperity of the industrial development in
the country.
Organisation and Management
UTI was established with an initial capital of Rs. 5 crore, contributed by the RBI, LIC,
SBI and its subsidiaries and scheduled banks and financial institutions. The initial
capital of Rs. 5 crore was divided into 1,000 certificates of Rs. 50,000 each. To
supplement its financial resources, the trust can borrow from the Reserve Bank of India,
the amount being repayable on demand’ or within a period of 18 months.
UTI is managed by a Board of Trustees, consisting of a chairman and four members
nominated by Reserve Bank of India, one member nominated by LIC, one member
nominated by the State Bank of India, and two members elected by the contributing
institutions.
Functions of UTI
The UTI functions are discussed below:
(i) To accept discount, purchase or sell bills of exchange, promissory note, bill of lading,
warehouse receipt, documents of title to goods etc.,
(ii) To grant loans and advances.
(iii) To provide merchant banking and investment advisory service.
(iv) To provide leasing and hire purchase business.
(v) To extend portfolio management service to persons residing outside India.
(vi) To buy or sell or deal in foreign exchange dealings.
(vii) To formulate unit scheme or insurance plan in association with or as agent of GIC.
(viii) To invest in any security floated by the Central Government, RBI or foreign bank.
Activities of UTI:
The UTI can sell and purchase the units issued by it, investing, acquire, hold or dispose
off securities. Keep money on deposit with the scheduled banks and undertake related
functions incidental or consequential to that. All the units issued by the UTI are of the
value of Rs. 10 each. These units were put on sale at face value and thereafter at prices
fixed daily by the UTI. Units can be purchased in ten or multiples of ten.
Schemes of UTI:
The familiar schemes of UTI are given below
(i) Unit scheme—1964.
(ii) Unit Linked Insurance Plan—1971.
(iii) Children Gift Growth Fund Unit Scheme—1986.
(iv) Rajyalakhmi Unit Scheme—1992.
(v) Senior Citizen’s Unit Plan—1993.
(vi) Monthly Income Unit Scheme.
(vii) Master Equity Plan—1995.
(viii) Money Market Mutual Fund—1997.
(ix) UTI Growth Sector Fund—1999.
(x) Growth and Income Unit Schemes.
Advantages of Unit Trust:
The advantages of Unit Trust are:
(i) The investment is safe and the risk is spread over a wide range of securities.
(ii) The Unit-holders will be getting regular and good income, as 90 percent of its
income will be distributed.
(iii) Dividends up to Rs. 1,000 received by the individual are exempt from income-tax.
(iv) There is a high degree of liquidity of investment as the units can be sold back to the
trust at any time at prices fixed by trust.
Mutual Funds-Types and Features
What is Mutual Fund?
When it comes to mutual fund, it is one such investment instrument in which many
investors pool in their finances on trust basis. Yes, this trust is then managed by an
highly experienced team of financial experts, known as Assest Management Company,
who further invest this accumulated capital in numerous financial assets such as stocks,
bonds, equities and many more.
Moreover, the people who invest in mutual funds usually have one common
investment goal, and it would not be wrong to say that the earned dividends from such
type of investment is proportionately distributed to the invested capital. Few banks that
offer mutual funds are-  ICICI, SBI,Federal Bank,HDFC Bank,Induslnd Bank etc.
However, when it comes to eligibility and documentation, different banks have
different set of norms, so you need to check with the bank itself, before you invest in
mutual funds.
Now, let’s try to understand that why one should invest in mutual funds, and what
significance it has.

Why You Should Invest in Mutual Funds?

People prefer to invest in mutual funds for not only one, but for many reasons. Yes,
because investing in mutual funds is undoubtedly a sensible decision for the below
reasons-
Investing in mutual funds is nothing less than a professional management of your
investments.
With having the large pool of resources, the investors usually do not fulfill the
minimum investment need that they possibly would in individual stocks.
With the help of a professional fund manager along with a diversified portfolio in asset
investment the risk can be periodically tracked for the financial growth, which
ultimately minimizes the chances of loss.
Types of Mutual Funds
Well, depending on the objective of investments, mutual funds have following types:
Equity Funds
In equity funds, the funds are mainly invested in stocks.
Returns are higher in it, but so are the risks involved.
Equity funds can be rewarding because the long-term capital gains are exempted from
tax.
Debt Funds
In debt funds, the funds are mainly invested in government or corporate securities &
bonds.
Here investments can be short- term or long term, and you will get the fixed returns
with lower risk.
To save on tax in long-term investments, you can avail the indexation benefits.
Balanced Funds
Balanced funds generate high income from equity as well as steady returns, which
ultimately helps in balancing the risk factor from equity.
Index Funds
Index funds are designed to replicate the portfolio of the market index.
You don’t need to aggressively monitor them.
The risk involved is proportionate to the index fluctuations.
Gilt Funds
Investment is completely in government securities, where there is no risk involved by
default.
The value of gilt funds units is dictated by the market volatility.
Here, the risk- return ratio is as same as in equity funds.
Global Funds
In global funds, the funds are invested in the assets outside of India.
It adds an additional layer in the domestic diversification
It is for those investors, who know the international market very well, understand the
risks involved.
Fund of Funds
Here the funds are invested in mutual funds directly, instead of assets.
Your investment is diversified in the mutual funds instead of market instruments.
The returns will be an average of all the funds.
Features & Benefits of Mutual Funds
Beat Inflation
Expert Managers
Convenience
Low Cost
Diversification
Liquidity
Higher Return Potential
Safety &Transparency
Benefits of Mutual funds
There are a couple of benefits in investing in a mutual fund.
For example, if there is an investor who wants to invest in stocks but has no time to
analyze and create a portfolio. Then he can be benefited from the mutual fund. This
investor just has to buy a mutual fund and hence, in a single purchase he gets an
investment similar to purchasing the entire portfolio of stocks.
The various benefits of investing in a mutual fund are described below:
A simple way to make a diversified investment: A mutual fund has a number of
securities like stocks, bonds, fixed etc already in its portfolio. Therefore, buying a
mutual fund is a simple way to make a diversified investment. Further, diversification
also reduces risk which is an added benefit of buying a mutual fund.
Managed by a financial professional: The Fund manager or managers actively manage
a mutual fund. They try to give the maximum returns to the investors using their
professional expertise. Hence, those investors who don’t have time to invest by their
own can get benefits from the expertise of these fund managers.
Allow investors to participate in a wide variety of investments: This is one of the
greatest advantages of buying a mutual fund. There are a variety of mutual funds
available to invest in equity fund (Index funds, growth funds, etc.), fixed income funds,
income tax saver funds, balanced funds etc. An investor can easily select the best one
which suits his strategy.
Investors can buy/sell/increase/decrease their mutual funds whenever they
want: There is great flexibility to for the investors while investing in mutual funds.
They can easily buy, sell, increase or decrease their investment in different funds within
seconds. However, please note that it’s suggested to read the mutual fund prospectus
carefully before subscribing as some mutual funds have an entry or exit-load.
Disadvantages of Mutual Funds:
Here are the few disadvantages of buying a mutual fund:
Fees and Expenses: There are a couple of possible fees in mutual funds like expense fee,
exit fees etc which might reduce the overall returns.
No Insurance: There is no guarantee of success in the mutual funds. The mutual fund
providing companies always state the following in the declaimer in their
advertisements:
Mediocre Performance: On an average, a majority of mutual funds are not able to beat
the market indices.
Loss of Control: The fund managers are responsible for buying and selling of the
securities and you have no say in managing the portfolio. You are trusting someone else
with your money when you invest in mutual funds.
Types of Mutual Funds
Mutual funds in India are broadly classified into equity funds, debt funds, and balanced
mutual funds, depending on their asset allocation and equity exposure. Therefore, the
risk assumed and returns provided by a mutual fund plan would depend on its type.
We have broken down the types of mutual funds in detail below:
Equity funds, as the name suggests, invest mostly in equity shares of companies across
all market capitalisations. A mutual fund is categorised under equity fund if it invests at
least 65% of its portfolio in equity instruments. Equity funds have the potential to offer
the highest returns among all classes of mutual funds. The returns provided by equity
funds depend on the market movements, which are influenced by several geopolitical
and economic factors. The equity funds are further classified as below:
Small-Cap Funds
Small-cap funds are those equity funds that predominantly invest in equity and equity-
linked instruments of companies with small market capitalisation. SEBI defines small-
cap companies as those that are ranked after 251 in market capitalisation.
Mid-Cap Funds
Mid-cap funds are those equity funds that invest primarily in equity and equity-linked
instruments of companies with medium market capitalisation. SEBI defines mid-cap
companies as those that are ranked between 101 and 250 in market capitalisation.
Large-Cap Funds
Large-cap funds are those equity funds that invest mostly in equity and equity-linked
instruments of companies with large market capitalisation. SEBI defines large-cap
companies as those that are ranked between 1 and 100 in market capitalisation.
Multi-Cap Funds
Multi-Cap Funds invest substantially in equity and equity-linked instruments of
companies across all market capitalisations. The fund manager would change the asset
allocation depending on the market condition to reap the maximum returns for
investors and reduce the risk levels.
Sector or Thematic Funds
Sectoral funds invest principally in equity and equity-linked instruments of companies
in a particular sector like FMCG and IT. Thematic funds invest in equities of companies
that operate with a similar theme like travel.
Index Funds
Index Funds are a type of equity funds having the intention of tracking and emulating
the performance of a popular stock market index such as the S&P BSE Sensex and NSE
Nifty50. The asset allocation of an index fund would be the same as that of its
underlying index. Therefore, the returns offered by index mutual funds would be
similar to that of its underlying index.
ELSS
Equity-linked savings scheme (ELSS) is the only kind of mutual funds covered
under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up
to Rs 1,50,000 a year by investing in ELSS.
Debt Mutual Funds
Debt mutual funds invest mostly in debt, money market and other fixed-income
instruments such as treasury bills, government bonds, certificates of deposit, and other
high-rated securities. A mutual fund is considered a debt fund if it invests a minimum
of 65% of its portfolio in debt securities. Debt funds are ideal for risk-averse investors as
the performance of debt funds is not influenced much by the market fluctuations.
Therefore, the returns provided by debt funds are very much predictable. The debt
funds are further classified as below:
Dynamic Bond Funds
Dynamic Bond Funds are those debt funds whose portfolio is modified depending on
the fluctuations in the interest rates.

Income Funds
Income Funds invest in securities that come with a long maturity period and therefore,
provide stable returns over time. The average maturity period of these funds is five
years.
Short-Term and Ultra Short-Term Debt Funds
Short-term and ultra short-term debt funds are those mutual funds that invest in
securities that mature in one to three years. These funds are ideal for risk-averse
investors.
Liquid Funds
Liquid funds are debt funds that invest in assets and securities that mature within
ninety-one days. These mutual funds generally invest in high-rated instruments. Liquid
funds are a great option to park your surplus funds, and they offer higher returns than
a regular savings bank account.
Gilt Funds
Gilt Funds are debt funds that invest in high-rated government securities. It is for this
reason that these funds possess lower levels of risk and are apt for risk-averse investors.
Credit Opportunities Funds
Credit Opportunities Funds mostly invest in low rated securities that have the potential
to provide higher returns. Naturally, these funds are the riskiest class of debt funds.
Fixed Maturity Plans
Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income
securities such as government bonds. You may invest in FMPs only during the fund
offer period, and the investment will be locked-in for a predefined period.
Balanced or Hybrid Mutual Funds
Balanced or hybrid mutual funds invest across both equity and debt instruments. The
main objective of hybrid funds is to balance the risk-reward ratio by diversifying the
portfolio. The fund manager would modify the asset allocation of the fund depending
on the market condition, to benefit the investors and reduce the risk levels. Investing in
hybrid funds is an excellent way of diversifying your portfolio as you would gain
exposure to both equity and debt instruments. The debt funds are further classified as
below:
Equity-Oriented Hybrid Funds
Equity-oriented hybrid funds are those that invest at least 65% of its portfolio in equities
while the rest is invested in fixed-income instruments.
Debt-Oriented Hybrid Funds
Debt-oriented hybrid funds allocate at least 65% of its portfolio in fixed-income
instruments such as treasury bills and government securities, and the rest is invested in
equities.
Monthly Income Plans
Monthly income plans (MIPs) majorly invest in debt instruments and aim at providing
a steady return over time. The equity exposure is usually limited to under 20%. You can
decide if you would receive dividends on a monthly, quarterly, or annual basis.
Arbitrage Funds
Arbitrage funds aim at maximising the returns by purchasing securities in one market
at lower prices and selling them in another market at a premium. However, if the
arbitrage opportunities are not available, then the fund manager may choose to invest
in debt securities or cash equivalents.
Why Should You Invest in Mutual Funds?
Investing in mutual funds provides several advantages for investors. To name a few,
flexibility, diversification, and expert management of money, make mutual funds an
ideal investment option.
Investment Handled by Experts (Fund Managers )
Fund managers manage the investments pooled by the asset management companies
(AMCs) or fund houses. These are finance professionals who have an excellent track
record of managing investment portfolios. Furthermore, fund managers are backed by a
team of analysts and experts who pick the best-performing stocks and assets that have
the potential to provide excellent returns for investors in the long run.

No Lock-in Period
Most mutual funds come with no lock-in period. In investments, the lock-in period is a
period over which the investments once made cannot be withdrawn. Some investments
allow premature withdrawals within the lock-in period in exchange for a penalty. Most
mutual funds are open-ended, and they come with varying exit loads on redemption.
Only ELSS mutual funds come with a lock-in period.
Low Cost
Investing in mutual funds comes at a low cost, and thereby making it suitable for small
investors. Mutual fund houses or asset management companies (AMCs) levy a small
amount referred to as the expense ratio on investors to manage their investments. It
generally ranges between 0.5% to 1.5% of the total amount invested. The Securities and
Exchange Board of India (SEB) has mandated the expense ratio to be under 2.5%.
SIP (Systematic Investment Plan)
The most significant advantage of investing in mutual funds is that you can invest a
small amount regularly via a SIP (systematic investment plan). The frequency of your
SIP can be monthly, quarterly, or bi-annually, as per your comfort. Also, you can decide
the ticket size of your SIP. However, it cannot be less than the minimum investible
amount. You can initiate or terminate a SIP as and when you need. Investing via SIPs
alleviates the need to arrange for a lump sum to get started with your mutual fund
investment. You can stagger your investments over time with an SIP, and this gives you
the benefit of rupee cost averaging in the long run.
Switch Fund Option
If you would like to move your investments to a different fund of the same fund house,
then you have an option to switch your investments to that fund from your existing
fund. A good investor knows when to enter and exit a particular fund. In case you see
another fund having the potential to outperform the market or your investment
objective changes and is in line with that of the new fund, then you can initiate the
switch option.

Goal-Based Funds
Individuals invest their hard-earned money with the view of meeting specific financial
goals. Mutual funds provide fund plans that help investors meet all their financial
goals, be it short-term or long-term. There are mutual fund schemes that suit every
individual’s risk profile, investment horizon, and style of investments. Therefore, you
have to assess your profile and risk-taking abilities carefully so that you can pick the
most suitable fund plan.
Diversification
Unlike stocks, mutual funds invest across asset classes and shares of several companies,
thereby providing you with the benefit of diversification. Also, this reduces the
concentration risk to a great extent. If one asset class fails to perform up to the
expectations, then the other asset classes would make up for the losses. Therefore,
investors need not worry about market volatility as the diversified portfolio would
provide some stability.
Flexibility
Mutual funds are buzzing these days because they provide the much-needed flexibility
to the investors, which most investment options lack in. The combination of investing
via an SIP and no lock-in period has made mutual funds an even more lucrative
investment option. This means that people may consider investing in mutual funds to
accumulate an emergency fund. Also, you can enter and exit a mutual fund plan at any
time, which may not be the case with most other investment options. It is for this reason
that millennials are preferring mutual funds over any other investment vehicle.
Liquidity
Since most mutual funds come with no lock-in period, it provides investors with a high
degree of liquidity. This makes it easier for the investor to fall back on their mutual
fund investment at times of financial crisis. The redemption request can be placed in
just a few clicks, and the requests are processed quickly, unlike other investment
options. On placing the redemption request, the fund house or the asset management
company would credit your money to your bank account in just business 3-7 days.

Seamless Process
Investing in mutual funds is a relatively simple process. Buying and selling of the fund
units are all made at the prevailing net asset value (NAV) of the mutual fund plan. As
the fund manager and his or her team of experts and analysts are tasked with choosing
shares and assets, investors only need to invest, and the rest would be taken care of by
the fund manager.
Regulated
All mutual fund houses and mutual fund plans are always under the purview of the
Securities and Exchange Board of India (SEBI) and Reserve Bank of India(RBI). Apart
from that, the Association of Mutual Funds in India (AMFI), a self-regulatory body
formed by all fund houses in the country, also governs fund plans. Therefore, investors
need not worry about the safety of their mutual fund investments as they are safe.
Ease of Tracking
One of the most significant advantages of investing in mutual funds is that tracking
investments is easy and straightforward. Fund houses understand that it is hard for
investors to take some time out of their busy schedules to track their finances, and
hence, they provide regular statements of their investments. This makes it a lot easier
for them to track their investments and make decisions accordingly. If you invest in
mutual funds via a third party, then you can also track your investments on their portal.
Tax-Saving
ELSS or Equity-Linked Savings Scheme is an equity-oriented mutual fund which
provides tax deductions of up to Rs 1,50,000 a year under the Section 80C provision. By
making full utilisation of the Section 80C limit, you can save up to Rs 46,800 a year in
taxes. ELSS is the most popular tax-saving investment option under Section 80C of the
Income Tax Act, 1961. It comes with a lock-in period of just three years, the shortest of
all tax-saving investments. Investing in ELSS provides you with the dual benefit of tax
deductions and wealth accumulation over time.
Rupee Cost Averaging
On investing in mutual funds via an SIP, you get the benefit of rupee cost averaging
over time. When the markets fall, you buy more units while you purchase fewer units
when the markets are booming. Therefore, over time, your cost of purchase of fund
units is averaged out. This is called the rupee cost averaging. Investing in mutual funds
via an SIP is beneficial during both market ups and downs, and there is no need to time
the markets. This benefit is not available when you invest in mutual funds via a lump
sum.
No Need to Time Markets
When you are investing in mutual funds via an SIP, there is no need to time markets.
This is because the rupee cost averaging phenomenon ensures that your cost of
purchase of fund units is on the lower side. However, you have to continue investing
via an SIP for a long period. Therefore, you can invest in mutual funds whenever you
feel like. There is no ‘right time’ as such to investing in mutual funds. The best time is
now!
Hire Purchase: Meaning, Features, Advantages and Disadvantages
Meaning:
Hire purchase is a method of financing of the fixed asset to be purchased on future date.
Under this method of financing, the purchase price is paid in installments. Ownership
of the asset is transferred after the payment of the last installment.
Features of Hire Purchase:
Features of Hire purchase are provided and discussed as below-
The payment of the installments is to be done by the buyer i.e., the hirer to the seller
over the specified period of time.
Buyer gets the possession of the goods immediately.
In case of any default of installment payment by the hirer, the vendor has the right to
repossess the goods. In that case, the payment already received by the vendor from
hirer will be treated as hire charged for the period for which the goods were held.
The ownership of goods is transferred to the buyer only upon the payment of last
installment.
The hire purchase installment amount includes the principal amount as well as the
interest charged upon it.
Interest is generally charged on the flat rate
Advantages of Hire Purchase System
(1) Convenience in Payment:
The buyer is greatly benefited as he has to make the payment in installments. This
system is greatly advantageous to the people having limited income.
(2) Increased Volume Of Sales:
This system attracts more customers as the payment is to be made in easy installments.
This leads to increased volume of sales.
(3) Increased Profits:
Large volume of sales ensures increased profits to the seller.
(4) Encourages Savings:
It encourages thrift among the buyers who are forced to save some portion of their
income for the payment of the installments. This inculcates the habit to save among the
people.
(5) Helpful For Small Traders:
This system is a blessing for the small manufacturers and traders. They can purchase
machinery and other equipment on installment basis and in turn sell to the buyer
charging full price.
(6) Earning Of Interest:
The seller gets the installment which includes original price and interest. The interest is
calculated in advance and added in total installments to be paid by the buyer.
(7) Lesser Risk:
From the point of view of seller this system is greatly beneficial as he knows that if the
buyer fails to pay one installment, he can get the article back.
Disadvantages of Hire Purchase System
(1) Higher Price:
A buyer has to pay higher price for the article purchased which includes cost plus
interest. The rate of interest is quite high.
(2) Artificial Demand:
Hire purchase system creates artificial demand for the product. The buyer is tempted to
purchase the products, even if he does not need or afford to buy the product.
(3) Heavy Risk:
The seller runs a heavy risk under such system, though he has the right to take back the
articles from the defaulting customers. The second hand goods fetch little price.
(4) Difficulties in Recovery of Installments:
It has been observed that the sellers do not get the installments from the purchasers on
time. They may choose wrong buyers which may put them in trouble. They have to
waste time and incur extra expenditure for the recovery of the installments. This
sometimes led to serious conflicts between the buyers and the sellers.
(5) Break Up Of Families:
The system puts a great financial burden on the families which cannot afford to buy
costly and luxurious items. Recent studies in western countries have revealed that
thousands of happy homes and families have been broken by hire purchase buying’s.
Lease: Definition, Features, Advantages, Disadvantages, Types
Lease Financing
Lease financing is the source of payment which comes when the owner of assets
(lesser) ready to provide their assets to another person in exchange of that lessor
provides some agreed payment. In this way, the lessor leases the assets for a period of
time on rent and lesser gets funds from the lessor. The periodical payment made by the
lessee to the lessor is called the lease rental.
Under lease financing, the lessee is given the right to use the asset but the ownership
lies with the lessor and at the end of the lease contract, the asset is returned to the lessor
or an option is given to the lessee either to purchase the asset or to renew the lease
agreement.
Leasing is the process by which a firm can obtain the use of certain fixed assets for
which it must make a series of contractual, periodic, tax-deductible payments. A lease is
a contract that enables a lessee to secure the use of the tangible property for a specified
period by making payments to the owner.

Major Features of Lease

The major features or elements of the leasing are the following:
The Contract: There are essentially two parties to a contract of lease financing, namely
the owner and the user.
Assets: The assets, property to be leased are the subject matter lease financing contract.
Lease Period: The basic lease period during which the lease is non-cancelable.
Rental Payments: The lessee pays to the lessor for the lease transaction is the lease
rental.
Maintain: Provision for the payment of the costs of maintenance and repair, taxes,
insurance, and other expenses appertaining to the asset leased.
Term of Lease: The term of the lease is the period for which the agreement of lease
remains in operation.
Ownership: During the lease period, ownership of the assets is being kept with the
lessor, and its use is allowed to the lessee.
Terminating: At the end of the period, the contract may be terminated.
Renew or Purchase: An option to renew the lease or to purchase the assets at the end of
the basic period.
Default: The lessee may be liable for all future payments at once, receiving title to the
asset in exchange.
Advantages of Lease Financing
The advantages from the viewpoint of the lessee
Saving of Capital: Leasing covers the full cost of the equipment used in the business by
providing 100% finance. The lessee is not to provide or pay any margin money as there
is no down payment. In this way, the saving in capital or financial resources can be
used for other productive purposes, e.g., purchase of inventories.
Flexibility and Convenience: The lease agreement can be tailor-made in respect of lease
period and lease rentals according to the convenience and requirements of all lessees.
Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The
rentals can be paid out of the cash coming into the business from the use of the same
assets.
Improvement in Liquidity: Leasing enables the lessee to improve its liquidity position
by adopting the sale and leaseback technique.
Shifting of Risk of Obsolescence: The lessee can shift the risk upon lessor by acquiring
the use of assets rather than buying the asset.
Maintenance and Specialized Services: In case of special kind of lease arrangement,
the lessee can avail specialized services of the lessor for maintenance of asset leased.
Although lesser charges higher rentals for providing such services, leases see overall
administrative and service costs are reduced because of specialized services of the
lessor.
Off-the-Balance-Sheet-Financing: Leasing provides “off-balance-sheet” financing for
the lessee in that the lease is recorded neither as an asset nor as a liability.
The advantages from the viewpoint of the lessor
There are several extolled advantages of acquiring capital assets on lease:
Higher profits: The Lessor can get higher profits by leasing the asset.
Tax Benefits: The Lessor being the owner of an asset, can claim various tax benefits
such as depreciation.
Quick Returns: By leasing the asset, the lessor can get quick returns than investing in
other projects of the long gestation period.
Disadvantages of Lease Financing
The disadvantages from the viewpoint lessee
Higher Cost: The lease rental includes a margin for the lessor as also the cost of risk of
obsolescence; it is, thus, regarded as a form of financing at a higher cost.
Risk: Risk of being deprived of the use of assets in case the leasing company winds up.
No Alteration in Asset: Lessee cannot make changes in assets as per his requirement.
Penalties On Termination of Lease: The lessee has to pay penalties in case he has to
terminate the lease before the expiry lease period.
The disadvantages from the viewpoint lessor
High Risk of Obsolescence: The Lessor has to bear the risk of obsolescence as there are
rapid technological changes.
Price Level Changes: In the case of inflation, the prices of an asset rises, but the lease
rentals remain fixed.
Long term Investment: Leasing requires the long term investment in the purchase of an
asset, and takes a long time to cover the cost of that asset
Types of the Lease
1. Financial Lease:
This type of lease which is for a long period provides for the use of asset during the
primary lease period which devotes almost the entire life of the asset. The lessor
assumes the role of a financier and hence services of repairs, maintenance etc., are not
provided by him. The legal title is retained by the lessor who has no option to terminate
the lease agreement.
The principal and interest of the lessor is recouped by him during the desired playback
period in the form of lease rentals. The finance lease is also called capital lease is a loan
in disguise. The lessor thus is typically a financial institution and does not render
specialized service in connection with the asset.
2. Operating Lease: It is where the asset is not wholly amortized during the non-
cancellable period, if any, of the lease and where the lessor does not rely for is profit on
the rentals in the non- cancellable period. In this type of lease, the lessor who bears the
cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full
cost of equipment and other incidental charges during the initial period of lease.
The lessee uses the asset for a specified time. The lessor bears the risk of obsolescence
and incidental risks. Either party to the lease may termite the lease after giving due
notice of the same since the asset may be leased out to other willing leases.
3. Sale and Lease Back Leasing:
To raise funds a company may-sell an asset which belongs to the lessor with whom the
ownership vests from there on. Subsequently, the lessor leases the same asset to the
company (the lessee) who uses it. The asset thus remains with the lessee with the
change in title to the lessor thus enabling the company to procure the much needed
finance.

4. Sales Aid Lease:

Under this arrangement the lessor agrees with the manufacturer to market his product
through his leasing operations, in return for which the manufacturer agrees to pay him
a commission.
5. Specialized Service Lease:
In this type of agreement, the lessor provides specialized personal services in addition
to providing its use
6. Small Ticket and Big Ticket Leases:
The lease of assets in smaller value is generally called as small ticket leases and larger
value assets are called big ticket leases.
7. Cross Border Lease:
Lease across the national frontiers is called cross broker leasing. The recent
development in economic liberalisation, the cross border leasing is gaining greater
importance in areas like aviation, shipping and other costly assets which base likely to
become absolute due to technological changes.
Housing Finance Company
Definition: The Housing Finance Company is yet another form of non-banking
financial company which is engaged in the principal business of financing of
acquisition or construction of houses that includes the development of plots of lands
for the construction of new houses.
The Housing Finance Company is regulated by the National Housing Bank. Any non-
banking finance company can operate as a housing finance company, subject to the
fulfillment of basic requirements as specified in the Companies Act, 1956.
The company should have its primary business of providing finance for housing,
whether directly or indirectly.
The company should obtain a certificate of registration (COR) from the National
Housing Bank (NHB). The company conducting such business without a COR is an
offense punishable under the provisions of the National Housing Bank Act, 1987, also
the NHB can demand the winding up of such company.
The company should have minimum Net Owned Fund of Rs 10 Crore.
Once these basic requirements are fulfilled, the company should comply with the
following conditions to get registered as a Housing Finance Company:
The company shall be in such a position that it is able to meet the full claims of its
present as well as future depositors as and when these accrue.
The affairs of the housing finance company should not be detrimental to the interest of
the present and future depositors.
The management of the company should not be prejudicial towards public interest or to
the interest of its depositors.
The Company should have an adequate capital structure and better income prospects.
The certificate of registration shall not be prejudicial to the operation and growth of
housing finance sector of the country.
so. all the above conditions must be met by the non-banking finance company to
perform the business of financing of houses (construction and acquisition).
Residuary Non-Banking Company
Definition: The Residuary Non-Banking Company is yet another form of a financial
institution engaged in the principal business of accepting deposits, under any scheme or
arrangement or in any other form and not being asset financing, investment, loan
company.
Simply, the Residuary Non-Banking Company primarily deal in accepting deposits in
any form and investing these in the approved securities. The operations of such
company are regulated by RBI and in addition, to the liquid assets it maintains its
investments as per the RBI directions.
According to the Reserve Bank of India, a residuary non-banking company is:
A financial or a non-banking institution, being a company
A company that accepts deposits in a lump sum or installments under any scheme or
arrangement such as by way of contributions, or subscriptions, or by a sale of units or
certificates or in any other manner.
A company, which is according to the Miscellaneous Non-Banking Companies
(Reserve Bank) Directions, 1977 is not:
A hire-purchase company
A housing finance company
An equipment leasing company
A mutual benefit company
A loan company
An investment company
An insurance company
A mutual benefit financial company
A miscellaneous non-banking company
The Residuary Non-banking company differs from the other non-0banking financial
companies in terms of the methods being used in the mobilization of deposits and the
requirements of depositors with respect to the funds deployment.
Dr.K.Ramesh, MCS., M.Phil., MBA., M.Com, Ph.D., SET.
Professor of Commerce,
KSR College of Arts and Science (Autonomous),
Tiruchengode-637215