ENTREPRENEURSHIP

PROJECT

FINACIAL
INSTITUTIONS
AND ITS ROLE
 WHAT ARE FINANCIAL
TUTIONS?
• A financial institution (FI) is a company engaged in the business of dealing with financial and monetary
transactions such as deposits, loans, investments, and currency exchange.

• Financial institutions are vital to a functioning capitalist economy in matching people seeking funds with those
who can lend or invest it.

• Financial institutions encompass a broad range of business operations within the financial services sector
including banks, insurance companies, brokerage firms, and investment dealers.

• Financial institutions vary by size, scope, and geography.

• Financial institutions perform a critical role in the economy. The central government organization controls
banking and non-banking financial institutions.

• Moreover, these institutions fill the gap between idle savings and investment and its borrowers, i.e., from net
savers to borrowers.

•.
 TYPES OF FINANCIAL INSTITUTIONS
• Commercial Banks- A commercial bank is a financial institution that accepts money from individuals and
businesses and provides loans to those in need. They offer services such as loans, savings, certificates of
deposits, bank accounts, bank overdrafts, etc., to their customers.

• Investment Banks- Investment banking helps individuals, organizations, governments, and other
institutions raise capital and provide financial consultancy advice. They don’t deal with customer deposits
but rather assist with financing through securities such as bonds and stocks. 

• Credit Unions A credit union is a type of financial institution similar to a commercial bank. But is a non-
profit institution that is created, owned, and operated by its members. They provide
traditional banking services only to their members, such as account opening, issuing credit cards, loans, etc.

• Insurance Companies Insurance companies are familiar kinds of non-bank financial institutions. They
offer insurance services to both individuals and organizations. The insurance can be related to the protection
against financial risk, life insurance, health, home, shop, company, products, vehicles, etc.
 TYPES OF FINANCIAL INSTITUTIONS
• Brokerage Firms A brokerage firm or company is a middleman who connects the buying and selling
parties to facilitate the transaction. They assist in the dealing of securities such as stocks, mutual funds,
shares, bonds, options, and other financial instruments. Once the transaction is completed, brokers receive
the brokerage (commission) from both parties involved.

• Mortgage Companies Financial institutions that specialize in originating or funding mortgage loans are 
mortgage companies. While most mortgage companies serve the individual consumer market, some
specialize in lending options for commercial real estate only.Mortgage companies focus exclusively on
originating loans and seek funding from financial institutions that provide the capital for the mortgages.

• Savings and Loan (S&L) Associations Savings and loan associations provide individual consumers with
checking accounts, personal loans, and home mortgages. Financial institutions are owned by their
customers or community. A savings and loan is a type of thrift that is required by law to produce a certain
number of loans secured by residential real estate, but the aim of most savings and loans is to lend for
residential mortgages
ADVANTAGES OF FINANCIAL INSTITUTIONS
• Credit Creation: The existence of a financial institution is a kind of security that ensures that less money is left
unused in an economy. This means that financial institutions are intermediaries between the savers and the
borrowers. This process creates money out of money and boosts growth in an economy.

• Provide Funds: Financial institution is a good source of medium and long-term finance. They provide both
owned and borrowed capital to the organization.

• Economic Development: Financial institution promotes economic development in an economy by way of

funding all the development plans of government and private organizations.

• Infrastructural Development: The establishment of financial institutions builds a strong banking base in an

economy. Besides this, it offers all the financial services needed for the development and promotion of other
infrastructures, like industries, roads, hospitals, educational institutions, etc. 

• Promotes Regional Balances: Financial institution takes up their social responsibility to establish their units in
backward areas to uplift these areas by educating and providing basic monetary services to people.  The
financial institution aims to bring backward regions on equal footing with developed regions.
ADVANTAGES OF FINANCIAL INSTITUTIONS
• Employment Generation: Financial institution provides all
necessary funding to build and develop industries and
infrastructure in a country. This creates new employment
opportunities for the available manpower.

• Ensure Regional Balance The government set up financial

institutes in rural and backward areas to help local people,
small farmers, artisans, household workers, etc., with loans
and credits.

• . Financial Consultation Financial institutions provide

people with finances and guide them with the right
investment plans and policies. Investment banks inform
businesses and individuals about the proper techniques for
generating profits. They help their clients raise capital, issue
new IPOs, etc.
DISADVANTAGES OF FINANCIAL INSTITUTIONS
• Complex Process: 
The process of granting loans by Financial Institutions is rigid and involves lots of paperwork. This makes the
process time-consuming and expensive.

• Restriction on the Borrower: 

The financial institutions have a right to have their nominee on the Board of Directors of the borrowing company,
which restricts the power of the company. Besides this, they may directly interfere with the dividend distribution
decision of the borrowing company.

• System of Collateral Securities: 

Financial institutions are governed under strict rules of the Government, which requires them to grant loans only
against some security. Due to this, sometimes deserving organisations fail to get financial assistance due to a lack
of security.

. Security Deposit
In order to take a loan from these financial institutions, one has to keep any security and bear Due other
restrictions set by them. Also, loans are given at high-interest rates, which burdens individuals and businesses.
DISADVANTAGES OF FINANCIAL INSTITUTIONS
• Hidden Risk Involved
If the management of the financial institution’s done defaults, then the customers will
have to deal with even worse situations. They might not be able to get their invested
money back. The principal amount is only sometimes guaranteed to be recovered
because the government may declare a specific amount to be reimbursed in the event
of default. 
• Limitation on the Borrower
The financial institutions are entitled to have a representative on the borrowing
company’s board of directors, which limits the company’s authority. Additionally,
they may directly influence the borrowing company’s dividend distribution choice.
ROLES OF FINANCIAL INSTITUTIONS
1 – Regulation of Monetary Supply- Financial institutions like the Central Bank help regulate the money
supply in the economy to maintain stability and control inflation. For example, the Central Bank applies various
measures like increasing or decreasing repo rate, cash reserve ratio, and open market operations, i.e., buying
and selling government securities, to regulate liquidity in the economy.

2 – Banking Services- Financial institutions, like commercial banks, help their customers by providing savings
and deposit services. In addition, they offer credit facilities like overdraft facilities to the customers to cater to
the need for short-term funds. Commercial banks also extend loans like personal loans, education loans, 
mortgages, or home loans to their customers.
3 – Insurance Services- Financial institutions, like insurance companies, help to mobilize savings and investment
in productive activities. In return, they assure investors against their life or some particular asset at the time of
need. In other words, they transfer their customer’s risk of loss to themselves.
4 – Capital Formation- Financial institutions help in capital formation, i.e., increase in capital stock like the
plant, machinery, tools and equipment, buildings, transport, communication, etc. Moreover, they mobilize the idle
savings from individuals in the economy to the investor through various monetary services.
ROLES OF FINANCIAL INSTITUTIONS
5 – Investment Advice There are many investment options available at the disposal of individuals and businesses. But
it is not easy to choose the best option in the current swiftly changing environment. Almost all financial institutions
(banking or non-banking) have an investment advisory desk that helps customers, investors, and businesses to select
the best investment option available in the market according to their risk appetite and other factors.
6 – Brokerage Services These institutions provide their investors access to several investment options available in the
market, ranging from stock bonds (common investment alternative) to hedge funds and private equity investment
(lesser-known alternative).
7 – Pension Fund Services Through their various kinds of investment plans, financial institutions help individuals
plan their retirement. One such investment option is a pension fund. The individual contributes to the investment pool
by employers, banks, or other organizations and gets the lump sum or monthly income after retirement.
8 – Trust Fund Services Some financial organizations provide trust fund services to their clients. They manage the
client’s assets, invest them in the best option available in the market, and take care of its safekeeping.
ROLES OF FINANCIAL INSTITUTIONS

•9 – Financing the Small and Medium Scale Enterprises

• Financial institutions help small and medium-scale
enterprises set up themselves in their initial business
days. They provide long-term as well as short-term funds
to these companies. The long-term fund helps them form 
capital, and short-term funds fulfill their day-to-day 
working capital needs.
•10 – Act as A Government Agent for Economic Growth
• The government regulates financial institutions on a
national level. They act as a government agent and help
grow the nation’s economy. For example, to help out an
ailing sector, financial institutions, as per the guidelines
from the government, issue a selective credit line with
lower interest rates to help the industry overcome the
issues it is facing.
 FINANCIAL INSTITUTIONS SUPPORTING SMALL SCALE
INDUSTRIES IN INDIA

• State Finance Corporations (SFCs):- These institutions extend term loans for the purchase of land,
construction of factory premises and purchase of machinery and equipment for the setting up of new industries
or for expansion and modernization of the existing ones. SFCs generally prescribe a margin of 25 per cent and
allow an initial holiday of two years for the loan repayment (this period can be increased to five years in
backward districts).

• National Small Industries Corporation (NSIC) and State Small Industries Corporations (SSICs) provide
machinery on hire-purchase basis to small scale and ancillary industries, the value of which would not exceed
Rs. 60 lakhs and Rs. 75 lakhs, respectively inclusive of the value of machinery and equipment already installed.

• The payment for the machinery and equipment is made directly to the suppliers. The hire-purchase value is
generally recovered in 13 half-yearly installments and a rebate of 2 per cent is given if the installments are paid
on or before the due date.
 FINANCIAL INSTITUTIONS SUPPORTING SMALL SCALE
INDUSTRIES IN INDIA

• Commercial Banks: These mostly provide short term and, in some cases, medium term financial assistance
to small scale units. Short term credit facilities are granted for working capital requirements like those for raw
materials, goods-in-process, finished products, bills receivables, and book debts.

• Medium term loans are granted for the acquisition of land, construction of factory premises, purchase of
machinery and equipment, and operative expenses. These loans are generally granted for periods ranging from
five to seven years. Banks also establish letters of credit on behalf of their clients favouring suppliers of raw
material/machinery (both Indian and foreign) which extend the bankers assurance for payment and thus help
their delivery.

• Certain transactions, particularly those in contracts of sale to Government departments, may require guarantees
being issued in lieu of security/earnest money deposits for release of advance money, supply of raw materials
for processing, full payment of bills on assurance of performance, etc. Commercial banks also issue such
guarantees.
 FINANCIAL INSTITUTIONS SUPPORTING SMALL SCALE
INDUSTRIES IN INDIA
• Small Industries Development Bank of India (SIDBI): The Small Industries Development Bank of India—the apex bank for small
scale industries—extends assistance to SSI units through various schemes.

• The activities of SIDBI are as follows:

• i. Refinancing of loans and advance extended by the primary lending institutions to industrial concerns in the small scale sector and
also providing resource support to them;

• ii. Discounting and rediscounting of bills arising from sale of machinery to, or manufactured by, industrial concerns in the small
scale sector;

• iii. Extension of seed capital/soft loan assistance under National Equity Fund, Mahila Udyam Nidhi, and Seed Capital Schemes
through specified lending agencies;

• iv. Granting direct assistance as well as refinancing of loans extended by primary lending institutions for financing export of
products manufactured by industrial concerns in the small scale sector;

• v. Providing services like factoring, leasing, etc., to industrial concerns in the small scale sector;
• vi. Extending financial support to State Small Industries Development Corporations for providing scarce raw materials to small scale
units and marketing their end-products ;

• vii. Extending financial support to National Small Industries Corporation for providing leasing, hire-purchase, and marketing support
to SSI units.
 FINANCIAL INSTITUTIONS SUPPORTING SMALL SCALE
INDUSTRIES IN INDIA

• various schemes of financial assistance for SSI units are listed as follows:

• Refinance scheme for industrial loans for small and village industries

• Composite loan scheme

• Scheme for Scheduled Caste/Scheduled Tribe and Physically Handicapped entrepreneurs

• National Equity Fund Scheme

• Special scheme of assistance to ex-servicemen

• Seed Capital Scheme

• Single Window Scheme

• Scheme for women entrepreneurs

• Mahjila Udyam Nidhi Scheme

• Refinance scheme for quality control

• Schemes of incentives for exports

 CONCLUSION
• Financial institutions are the backbone of the economy. Without the help of these
institutions, the economy will go down and cannot stand up.
• Due to their pivotal role in the development and growth of the economy, the
government regulates these institutions through the central bank, insurance regulators,
pension fund regulators, etc.
• Over the years, their role has expanded from accepting and lending funds to larger
service areas.
 MADE BY -
ROHAN TYAGI
ADITYA SARRAF
DEVANSH GAUNIYAL
CHIRAG PRATAP
AYUSH RAJ GIRI