Financial institutions in India

Financial sector plays an important role in the overall development of a nation. The most important aspect of this sector is the role of the financial institutions. Financial institutions provide service as an intermediary of the financial markets. They are responsible for transferring funds from investors to companies who are in need of funds. The financial institutions play an important role in complementing the facilities offered by the banks in an economy. In fact, the existence of Banking and Non Banking Financial Institutions is supported by efficient money and capital markets keep the financial sector complete and enhance the overall growth of the economy.

Financial institutions can be of different types in accordance with the financial systems of different economies. In India, the financial system includes various types that are as follows:

·         Central Bank

The central bank of the country is the Reserve Bank of India (RBI); it is the apex financial institution of the country. It is needed to regulate and control the monetary system of the economy. It has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union. Other functions include; issue of currency notes, banker’s bank, custodian of Foreign Exchange reserves, Clearing House functions, etc.

·         Commercial Banks

A commercial bank is a type of financial institution and intermediary. It is provides deposits and lending services to its customers. It is the most important part of modern banking set up. Its functions are confined not only to advancing loans to the public and accepting their deposits but also their contribution in accelerating the rate of economic development of the country. They also facilitate the flow of goods and services from producers to consumers and helps in financial activities of the government. They provide a large portion of our medium of exchange and they are the media through which monetary policy is affected. The commercial banks can be categorized into three types:

o   Public sector banks

o   Private sector banks and

o   Foreign banks

·         Credit Rating Agencies:

Credit Rating Agencies provide grading of corporate debt instruments and assist lenders to form an opinion on the relative capacities of the borrowers to meet their obligations. A credit rating for an issuer takes into consideration the issuer's credit worthiness and affects the interest rate applied to the particular security being issued. The Credit Rating Agencies play an important role in assessing risk and its location and distribution in the financial system. By facilitating investment decisions they can help investors in achieving a balance in the risk return profile and at the same time assist firms in accessing capital at low cost. They assist and form an integral part of a broader programme of financial disintermediation and broadening and deepening of the debt market. A credit rating can for a company, an individual or even a country.  The main credit rating agencies in India are:

§  Credit Rating Information Services of India Limited (CRISIL)

§  ICRA Limited (Controlled by Moody’s)

§  Credit Analysis & Research Limited (CARE)

§  Fitch Ratings India Private Limited (Fitch)

§  Brickwork Ratings India Private Limited

§  SME Rating Agency of India Limited (SMERA)

·         Insurance Companies:

Insurance companies are in the business of assuming risk on behalf of their customers in exchange for a fee, termed as premium. The companies earn through by charging premiums that are sufficient to pay the expected claims to the company including a profit. The types of insurances are categorized into two:

§  Life Insurance and

§  General Insurance.

       The various insurance companies in India are:

§  Life Insurance Corporation of India

§  National Insurance Company Ltd

§  New India Assurance

§  Bajaj Allianz Life Insurance Company Limited

§  Reliance General Insurance

§  Tata AIG General Insurance, etc.

·         Merchant Banks:

Merchant banks deals mostly in international finance, long-term loans for companies and underwriting. They do not provide regular banking services to the general public. They also provide services like syndication of financing, promotion of projects, investment management and advisory services. Merchant banking is generally also understood to mean negotiated private equity investment by financial institutions in the unregistered securities of either privately or publicly held companies. Both commercial banks and investment banks may engage in merchant banking activities.

·         Mutual Funds:

A mutual fund is a trust which is professionally-manages various types of collective investment schemes that pools money from many investors who share a common financial goal. Each scheme of a mutual fund can have different character and objectives. The money collected is invested in various capital market instruments as defined for that particular scheme. Mutual funds are meant mostly for small investors, as investments in stock markets require careful analysis of companies which is not possible for a small investor. Mutual funds are usually fully equipped to carry out thorough analysis and can provide superior returns. The various mutual funds in India are:

§  HDFC Mutual Fund

§  Prudential ICICI Mutual Fund

§  Tata Mutual Fund

§  Franklin Templeton India Mutual Fund

§  Kotak Mahindra Mutual Fund, etc.