Some Components of

Financial System
Development Financial
Institutions
 DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS) WERE
ESTABLISHED WITH THE GOVERNMENT SUPPORT FOR
UNDERWRITING THEIR LOSSES AS ALSO THE
COMMITMENT FOR MAKING AVAILABLE LOW COST
RESOURCES FOR LENDING AT A LOWER RATE OF
INTEREST THAN THAT DEMANDED BY THE MARKET FOR
RISKY PROJECTS. IN THE INITIAL YEARS OF
DEVELOPMENT IT WORKED WELL. PROCESS OF
INFRASTRUCTURE BUILDING AND INDUSTRIALIZATION
GOT ACCELERATED. THE FINANCIAL SYSTEM WAS
IMPROVED CONSIDERABLY AS PER THE NEEDS OF
PROJECTS.
DEVELOPMENT FINANCE INSTITUTIONS (DFIS) ARE
DEVELOPMENT FINANCIAL INSTITUTIONS (DFIS) ARE
SPECIALIZED DEVELOPMENT ORGANISATIONS THAT ARE
FINANCIAL INSTITUTIONS THAT WERE ESTABLISHED
USUALLY MAJORITY OWNED BY NATIONAL
WITH A VIEW TO PROVIDE PROJECT APPRAISAL AND
GOVERNMENTS. DFIS INVEST IN PRIVATE SECTOR
PROJECT FINANCE TO THE INDIAN INDUSTRY. THE FIRST
PROJECTS IN LOW AND MIDDLE-INCOME COUNTRIES
DFI TO BE ESTABLISHED WAS THE INDUSTRIAL FINANCE
TO PROMOTE JOB CREATION AND SUSTAINABLE
CORPORATION OF INDIA IN 1948.
ECONOMIC GROWTH.

OBJECTIVE: ITS PRIMARY OBJECT IS TO PROMOTE

MAJOR FUNCTION: THESE INSTITUTIONS PROVIDE A
ECONOMIC DEVELOPMENT BY PROMOTING
CRUCIAL ROLE IN PROVIDING CREDIT IN THE FORM OF
INVESTMENT AND ENTREPRENEURIAL ACTIVITY IN
HIGHER RISK LOANS, EQUITY POSITIONS AND RISK
A DEVELOPING ECONOMY. IT ENCOURAGES NEW AND
GUARANTEE INSTRUMENTS TO PRIVATE SECTOR
SMALL ENTREPRENEURS AND SEEKS BALANCED
INVESTMENTS IN DEVELOPING COUNTRIES.
REGIONAL GROWTH.
Industrial Development Bank
of India
• IDBI was set up in1964 under an Act of Parliament as a wholly owned subsidiary of the RBI
• History: In 1976, the ownership of IDBI was transferred to the Government of India and it was made the principal
financial institution for coordinating the activities of institutions engaged in financing, promoting and developing
industry in India. IDBI provided financial assistance, both in rupee and foreign currencies, for green-field projects
and also for expansion, modernisation and diversification purposes.
• The main objectives of IDBI is to serve as the apex institution for term finance for industry in India. Its objectives
include:
i. Co-ordination, regulation and supervision of the working of other financial institutions such as IFCI , ICICI, UTI,
LIC, Commercial Banks and SFCs.
ii. Supplementing the resources of other financial institutions and there by widening the scope of their assistance.
iii. Planning, promotion and development of key industries and diversification of industrial growth.
iv. Devising and enforcing a system of industrial growth that conforms to national priorities.
01 02
The IDBI has been To grant loans and advances
established to perform the to IFCI, SFCs or any other
following functions- financial institution by way
of refinancing of
loans granted by such
institutions which are
repayable within 25 year.
03
To grant loans and advances
to scheduled banks or state
co-operative banks by way
of refinancing of loans
granted by such institutions
which are repayable in
15 years.
 The State Industrial Development
Corporations were set up under
the Companies Act, 1956, as wholly

States owned state

government undertakings for
promotion and development of

Industrial medium and large industries.

Development Along with finance, they also

corporation The main objective of

establishing SIDC was to increase
the process of industrialization
in India.
provide a variety of functions like
arranging power, lands, roads,
licenses, etc. Also, they provide
sponsoring of units, moreover in
the backward areas.
 National Bank for
Agriculture and Rural
Development (NABARD)
• NABARD was established on the recommendations of B.Sivaraman Committee, (by Act 61, 1981 of Parliament) on 12 July 1982 to
implement the National Bank for Agriculture and Rural Development Act 1981. It replaced the Agricultural Credit Department (ACD) and
Rural Planning and Credit Cell (RPCC) of Reserve Bank of India, and Agricultural Refinance and Development Corporation (ARDC). It is one of
the premier agencies providing developmental credit in rural areas. NABARD is India's specialized bank for Agriculture and Rural
Development in India.
• NABARD is an apex Development Bank authorised 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 with a view to promote integrated rural development and prosperity and for matters connected
therewith.
• NABARD was established as a development bank to perform the following functions:
1. To serve as an apex financing agency for the institutions providing investment and production credit for promoting various developmental
activities in rural areas;
2. To take measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring,
formulation of rehabilitation schemes, restructuring of credit institutions and training of personnel;
3. To coordinate the rural financing activities of all institutions engaged in developmental work at the field level and liaison with the
Government of India, the State Governments, the Reserve Bank and other national level institutions concerned with policy formulation;
National Housing Bank (NHB)
• National Housing Bank (NHB), a Government of India owned entity, was set up on 9 July 1988 under the National Housing Bank
Act, 1987. NHB is an apex financial institution for housing. NHB has been established with an objective to operate as a principal
agency to promote housing finance institutions both at local and regional levels and to provide financial and other support
incidental to such institutions and for matters connected therewith.
• Under the Sites and Service Scheme of the World Bank, the borrower’s place of dwelling will be nearer to his work spot and both
are developed simultaneously. In view of the World Bank assistance, it was felt necessary to promote an apex financial institution
for providing housing finance. Hence, in the year 1988, RBI promoted National Housing Bank (NHB) as an apex institution i.e., the
leading institution for providing housing finance in the country.
• It was set-up with the objective of promoting housing finance institutions and paying focused attention on the housing finance
sector, which was hitherto not given adequate importance resulting in huge gap between the demand and supply of housing stock.
• The National Housing Bank has the following functions:
i. To promote and develop specialized housing finance institutions for mobilizing resources and extending credit for housing
ii. To provide refinance facilities to housing finance institutions and scheduled banks
iii. To provide guarantee and underwriting facilities to housing finance institutions
Small Industries Development
Bank of India (SIDBI)
• Small Industries Development Bank of India (SIDBI)
set up on 2nd April 1990 under an Act of Indian
Parliament, acts as the Principal Financial Institution
for Promotion,Financing and Development of the
Micro, Small and Medium Enterprise (MSME) sector
as well as for co-ordination of functions of
institutions engaged in similar activities.
Regional Rural Bank
(RRBs)
• Introduction: Regional Rural Banks are Indian Scheduled Commercial Banks operating at regional level in different
States of India. They have been created with a view of serving primarily the rural areas of India with basic banking
and financial services.
• History: The Regional Rural Banks were established on the recommendations of Narsimha Committee on Rural
Credit. The committee was of the view that RRBs would be much better suited than the commercial banks or Co-
Operative Banks in meeting the needs of rural areas. Considering the recommendations of the committee the
Government of India passed Regional Rural Banks Act 1976. After passing the Act within a year at least 25 RRBs
were established in different parts of India.
• The Objectives of Regional Rural Banks:
i. Bridging the credit gaps in rural areas.
ii. To develop such measures which could restrict the outflow of rural deposits to urban areas.
iii. To reduce regional imbalances and increase rural employment generation activities.
• Function: RRBs grant loans to small and marginal farmers, Agricultural laborer, Co-operative societies and to
individuals including artisans, small entrepreneurs and persons of small means.
The State Finance Corporations (SFCs)
• In any of the country, financial system plays an important role in hosting up the economy. India has established a strong financial system,
which helps in economic growth of a country. It is only the financial system, a major element, without which no economic activity can
smoothly and effectively be conducted
• OBJECTIVE: Promotion, Development & Financing Industries and Service Sector Enterprises in Micro, Small and Medium sectors in National
Capital Territory of Delhi and Union Territory of Chandigarh. Besides this, some other objectives of DFCs are: 1. To establish uniformity in
regional industries. 2. To bring efficiency in regional industrial units. 3. To provide incentives to new industries. 4. To provide finance to small
scale, medium sized & cottage industries in state. 5. To develop regional financial resources
• Functions of SFCs
• Financial Assistance to Small Units
• Guaranteeing Loans
• Subscription and Underwriting
• Guarantee for deferred Payments
• Acting as Agent of Central and State Governments
• Capital
Export Credit Guarantee Corporation of
India (ECGC)

• The need for export promotion had started immediately after Independence in 1947.
In 1953, a proposal for initiation of an export credit guarantee scheme was put forward at a meeting
of the Export Advisory Council . Ministry of Commerce & Industry analyzed in depth the pros and
cons of the Export Credit Insurance Scheme and a revised draft proposal on the scheme was
presented to the Export Advisory Council in 1955.
• Established in 1957 and headquartered in Mumbai.
• In an export trade, exporters needs the finance at different stages. The finance is required for
processing, manufacturing, assembling, procuring and packing the goods for export in the pre-
shipment stages & During the intervening period between the shipment of goods and the receipt
of payment post-shipment credit is required by the exporters at post shipment stages.
• Objectives
1. To protect exporters o-f India, from credit risks, arising from commercial and political reasons, To protect banks in
India, from risks of default or protracted delay in payment by the exporters, in respect of export finance, and
2. To encourage exporters to search out new markets and new importers abroad, by the ECGC underwriting the major
part of the credit risks. Objective and Function of ECGC.

• Functions
1. Standard policies which protect the exporters against overseas credit risks.
2. Services and construction work policies.
3. Financial guarantees.
4. Special policies
Deposit Insurance and Credit Guarantee Corporation
(DICGC)
• Introduction
- DICGC is one of the wholly owned subsidiary of the Reserve bank of India (RBI). It was established on
15 July 1978 under Deposit Insurance and Credit Guarantee Corporation Act, 1961 for the purpose of
providing insurance of deposits and guaranteeing of credit facilities to the customers of banks.
• The concept of insuring deposits kept with banks received attention for the first time in the year 1948
after the banking crises in Bengal. The question came up for reconsideration in the year 1949, but it
was decided to hold it in abeyance till the Reserve Bank of India ensured adequate arrangements for
inspection of banks. Subsequently, in the year 1950, the Rural Banking Enquiry Committee also
supported the concept.
• Serious thought to the concept was, however, given by the Reserve Bank of India and the Central
Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960. The
Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961. After it
was passed by the Parliament, the Bill got the assent of the President on December 7, 1961 and the
Deposit Insurance Act, 1961 came into force on January 1, 1962.
• Objective
1. To protect depositor
2. To ensure Financial Stability
3. To infuse confidence in the banking system
4. To help mobilize deposits
• Function
Deposit cover provided by the DICGC is available to not just the commercial banks,
but other types of banks are well including regional rural banks (RRBs), co-
operative banks, and local area banks (LABs).