banking
Non-Banking Financial Intermediaries: Non-Banking financial Intermediaries are a
heterogeneous group of financial institution, other than commercial and cooperative banks.
These institutions are an integral part of the Indian financial system. A wide variety of financial
institutions is included in it. These institutions raise funds from the public, directly and
indirectly, to lend them to ultimate spenders. The Development Banks (such as the IDBI, IFCI,
ICICI, SFCs, SIDCs, etc.) fall in this category. They specialize in making term loans to their
borrowers. LIC, GIC and its subsidiaries and the UTI are its other all India big term-lending
institutions. Out of these three, only UTI is a pure non-banking financial intermediary, the others
raise funds in the shape of premium from the sale of insurance. Besides this, there are provident
funds and post offices who mobilize public savings in a big way for onward transmission to
ultimate borrowers or spenders. A large number of small NBFs such as investment companies
loan companies, hire purchase finance companies and the equipment leasing companies, these
are private sector companies with only a few exceptions.
Functions of Non-Banking Financial Intermediaries: The main functions performed by NBFs
are as under:
1. Brokers of Loanable Funds: NBFs act as brokers of loanable funds and in this capacity
they intermediate between the ultimate saver and the ultimate investor. They sell indirect
securities to the savers and purchase primary securities from investors. Thus, they change
debt into credit. By doing so, they take risk on themselves and reduce the risk of ultimate
lenders. Not only that, by diversifying their financial assets they spread their risk widely
and thus reduce their own risk because low returns on some assets are offset by high
return on others.
2. Mobilization of Savings: These institutions mobilize savings for the benefit of the
economy. By providing expert financial services like easy liquidity, safety of the
principal amount and ready divisibility of savings into direct securities of different values
they are able to mobilize more funds and attract larger share of public savings.
3. Channelization of Funds into Investment The NBFs, by mobilizing savings, channelize
them into productive investments. Each intermediary follows its own investment policy.
For instance, savings and loan associations invest in mortgages; insurance companies
invest in bonds and securities etc. Thus this channelization of public savings into
investment helps capital formation and economic growth.
4. Stabilize the Capital Market These institutions trade in the capital market in a variety of
assets and liabilities, and thus equilibrate the demand for and supply of assets. Since they
function with a legal framework and rules and they protect the interests of the savers and
bring stability to the capital market.
5. Provide Liquidity Since the main functions of the NBF’s convert a financial asset into
cash easily, quickly and without loss in the capital value, they provide liquidity. They are
able to do so, because they advance short-term loans and finance them by issuing claims
against themselves for long periods and they diversify loans among different types of
borrowers.
11
Types of Non Banking Financial Institutions: The main types of non-banking financial
institutions/intermediaries are as under:
The Life Insurance Companies: Life Insurance Corporation of India enjoys near monopoly of
life insurance in India. It is the biggest institutional investor. The LIC was established in 1
September, 1956 by nationalizing all the life insurance companies operating in India. Prior to
nationalization of insurance companies, 245 private insurance companies operate from 97
centres. The main objectives of LIC are (i) To carry on Life Insurance business in India. Life
insurance is a very important form of long term savings. (ii) The LIC aims in promoting savings.
(iii) To invest profitability the savings collected in the form of payments received from life
insurers. The LIC has two tier of capital structure- the initial capital, and premium capital. The
initial capital of LIC is Rs. 5 crore provided by the Government of India. The premium paid by
policy holders are the principal source of funds by LIC. Besides, the LIC receives interest,
dividends, repayments and redemptions which add to its investible resources. The LIC is
required to invest atleast 50% of its funds in government and other approved securities. LIC has
to invest 10% of its funds in other investments which include loans to state governments for
housing and water supply schemes, to Municipal Corporation, and corporation, and cooperative
sugar companies, loans to policy holders, fixed deposits with banks and cooperatives societies.
The main principle involved is security of funds rather than maximization of return on
investment.
General Insurance Companies: General Insurance Corporation of India was established in
January 1973, when General Insurance Companies were nationalized. At the time of
nationalization, there were 68 Indian companies and 45 non-Indian companies in the field. Their
business was nationalized and vested in the General Insurance Company and its four subsidiaries
viz., National Insurance Company Ltd. and United India Insurance Company Ltd. The GIC is
the holding company and its direct business is restricted only to aviation insurance; general
insurance is handled by the subsidiaries of GIC and they operate various types of policies to suit
the diverse needs of various segments of the society. They derive their income from insurance
premia and invest the funds in various types of securities as well as in the form of loans. GIC has
thus emerged as an important investment institution operating in Indian capital market.
Unit Trust of India: The UTI is an investment institution which offers the small investor a share
in India’s industrial growth and productive investment with minimum risk and reasonable
returns. The UTI was established as a Statutory Corporation in February 1964 under the UTI Act
1964. It commenced its operations from 1 July, 1964. The UTI was established with the
objective of mobilizing the savings of the community and channeling them into productive
investment. Its objective is to encourage widespread and diffused ownership of industry by
affording investors particularly the small investors, a means of acquiring shares assured of a
reasonable return with minimum risk. Thus, the primary objective of the Unit Trust in two fold
(i) To stimulate and pool the savings of the middle and low income groups (ii) To enable the unit
holders to share the benefits and prosperity of the rapidly growing industrialization in the
country. The UTI is managed by a board of trustees. It consists of a chairman and 9 other
trustees. The chairman is appointed by the government of India in consultation with the IDBI, 4
trustees nominated by the IDBI, one trustee each nominated by the RBI, LIC and SBI and 2
trustees selected by other institutions which contributed to the initial capital of the UTI. The head
office of UTI is in Mumbai. It has four zonal offices at Mumbai, Kolkata, Chennai and New
Delhi. It has 51 branch offices in various parts of the country.
heterogeneous group of financial institution, other than commercial and cooperative banks.
These institutions are an integral part of the Indian financial system. A wide variety of financial
institutions is included in it. These institutions raise funds from the public, directly and
indirectly, to lend them to ultimate spenders. The Development Banks (such as the IDBI, IFCI,
ICICI, SFCs, SIDCs, etc.) fall in this category. They specialize in making term loans to their
borrowers. LIC, GIC and its subsidiaries and the UTI are its other all India big term-lending
institutions. Out of these three, only UTI is a pure non-banking financial intermediary, the others
raise funds in the shape of premium from the sale of insurance. Besides this, there are provident
funds and post offices who mobilize public savings in a big way for onward transmission to
ultimate borrowers or spenders. A large number of small NBFs such as investment companies
loan companies, hire purchase finance companies and the equipment leasing companies, these
are private sector companies with only a few exceptions.
Functions of Non-Banking Financial Intermediaries: The main functions performed by NBFs
are as under:
1. Brokers of Loanable Funds: NBFs act as brokers of loanable funds and in this capacity
they intermediate between the ultimate saver and the ultimate investor. They sell indirect
securities to the savers and purchase primary securities from investors. Thus, they change
debt into credit. By doing so, they take risk on themselves and reduce the risk of ultimate
lenders. Not only that, by diversifying their financial assets they spread their risk widely
and thus reduce their own risk because low returns on some assets are offset by high
return on others.
2. Mobilization of Savings: These institutions mobilize savings for the benefit of the
economy. By providing expert financial services like easy liquidity, safety of the
principal amount and ready divisibility of savings into direct securities of different values
they are able to mobilize more funds and attract larger share of public savings.
3. Channelization of Funds into Investment The NBFs, by mobilizing savings, channelize
them into productive investments. Each intermediary follows its own investment policy.
For instance, savings and loan associations invest in mortgages; insurance companies
invest in bonds and securities etc. Thus this channelization of public savings into
investment helps capital formation and economic growth.
4. Stabilize the Capital Market These institutions trade in the capital market in a variety of
assets and liabilities, and thus equilibrate the demand for and supply of assets. Since they
function with a legal framework and rules and they protect the interests of the savers and
bring stability to the capital market.
5. Provide Liquidity Since the main functions of the NBF’s convert a financial asset into
cash easily, quickly and without loss in the capital value, they provide liquidity. They are
able to do so, because they advance short-term loans and finance them by issuing claims
against themselves for long periods and they diversify loans among different types of
borrowers.
11
Types of Non Banking Financial Institutions: The main types of non-banking financial
institutions/intermediaries are as under:
The Life Insurance Companies: Life Insurance Corporation of India enjoys near monopoly of
life insurance in India. It is the biggest institutional investor. The LIC was established in 1
September, 1956 by nationalizing all the life insurance companies operating in India. Prior to
nationalization of insurance companies, 245 private insurance companies operate from 97
centres. The main objectives of LIC are (i) To carry on Life Insurance business in India. Life
insurance is a very important form of long term savings. (ii) The LIC aims in promoting savings.
(iii) To invest profitability the savings collected in the form of payments received from life
insurers. The LIC has two tier of capital structure- the initial capital, and premium capital. The
initial capital of LIC is Rs. 5 crore provided by the Government of India. The premium paid by
policy holders are the principal source of funds by LIC. Besides, the LIC receives interest,
dividends, repayments and redemptions which add to its investible resources. The LIC is
required to invest atleast 50% of its funds in government and other approved securities. LIC has
to invest 10% of its funds in other investments which include loans to state governments for
housing and water supply schemes, to Municipal Corporation, and corporation, and cooperative
sugar companies, loans to policy holders, fixed deposits with banks and cooperatives societies.
The main principle involved is security of funds rather than maximization of return on
investment.
General Insurance Companies: General Insurance Corporation of India was established in
January 1973, when General Insurance Companies were nationalized. At the time of
nationalization, there were 68 Indian companies and 45 non-Indian companies in the field. Their
business was nationalized and vested in the General Insurance Company and its four subsidiaries
viz., National Insurance Company Ltd. and United India Insurance Company Ltd. The GIC is
the holding company and its direct business is restricted only to aviation insurance; general
insurance is handled by the subsidiaries of GIC and they operate various types of policies to suit
the diverse needs of various segments of the society. They derive their income from insurance
premia and invest the funds in various types of securities as well as in the form of loans. GIC has
thus emerged as an important investment institution operating in Indian capital market.
Unit Trust of India: The UTI is an investment institution which offers the small investor a share
in India’s industrial growth and productive investment with minimum risk and reasonable
returns. The UTI was established as a Statutory Corporation in February 1964 under the UTI Act
1964. It commenced its operations from 1 July, 1964. The UTI was established with the
objective of mobilizing the savings of the community and channeling them into productive
investment. Its objective is to encourage widespread and diffused ownership of industry by
affording investors particularly the small investors, a means of acquiring shares assured of a
reasonable return with minimum risk. Thus, the primary objective of the Unit Trust in two fold
(i) To stimulate and pool the savings of the middle and low income groups (ii) To enable the unit
holders to share the benefits and prosperity of the rapidly growing industrialization in the
country. The UTI is managed by a board of trustees. It consists of a chairman and 9 other
trustees. The chairman is appointed by the government of India in consultation with the IDBI, 4
trustees nominated by the IDBI, one trustee each nominated by the RBI, LIC and SBI and 2
trustees selected by other institutions which contributed to the initial capital of the UTI. The head
office of UTI is in Mumbai. It has four zonal offices at Mumbai, Kolkata, Chennai and New
Delhi. It has 51 branch offices in various parts of the country.
Comments
Post a Comment