BCom 3rd Year Money Financial Institutions Study Material Notes

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BCom 3rd Year Money Financial Institutions Study Material Notes 

BCom 3rd Year Money Financial Institutions Study Material Notes:  All India financial institutions Function IDBI progress of IDBI Industrial Finance Corporation of India  Assistance By Corporate Criticism of Corporations Investment Institutions Table General Insurance Corporation Financial Assistance by Corporation Exercise Questions Long  Answer Questions Short Answer Questions Objective Type Correct Options Following Statement True and False :

Institutions Study Material Notes
Institutions Study Material Notes

BCom 3rd Year Nature Importance Financial Money Study Material notes

INSTITUTIONAL FINANCIAL INSTITUTIONS

Finance plays a leading role in the industrial development of a country. Finance is needed for the industrial establishment, expansion and working capital. Long term finance is needed for the permanent assets of industries and shortterm finance for the supply of working capital. In the modern period, the shortterm capital is obtained from the capital market and the short-term capital from the commercial bank. But when the capital market had not developed the institutional financial institutions provided long term financial assistance for industries. However, today even these institutions are not less important, but some institutional financial institutions have been merged with other financial institutions of the money market.

Money Financial Institutions Study

The Institutional Financial Institutions in India can be classified as follows

A. All India Financial Institutions

1 Industrial Development Bank of India (IDBI).

2. Industrial Credit and Investment Corporation of India (ICICI).

3. Industrial Finance Corporation of India (IFCI).

4. Industrial Investment Bank of India (IIBI).

5. Small Industries Development Bank of India (SIDBI).

B. Investment Institutions.

1 Unit Trust of India (UTI).

2. Life Insurance Corporation (LIC).

3. General Insurance Corporation (GIC).

C. State Level Institutions.

4. State Finance Corporation (SFCs)

5. State Industrial Development Corporation (SIDCs)

D. Specialized Financial Institutions

6. Export-Import Bank (Exim Bank)

7. Tourism Finance Corporation of India Ltd. (TFCI)

Money Financial Institutions Study

A.ALL INDIA FINANCIAL INSTITUTIONS

1 Industrial Development Bank of India

Industrial Development Bank of India was set up as an associate organisation of the Reserve Bank of India on 1st July, 1964. The objective of its foundation was to establish co-ordination among various industrial financial institutions along with supplying the industrial finance. In 1975, an act was brought to separate IDBI from the RBI and on 16th February, 1976 it became an independent institution. A governing council consisting of 22 members was set up for its management.

So far as it’s financial resources are under consideration, these consist of money obtained from issuing shares, loans obtained from the central government loan obtained from the Industrial Credit Fund of the RBI and money obtained from the bonds issued in the market. Its Authorised Capital was 200 crores in 1980.

Functions of IDBI

IDBI has had a prominent place in the banking sector. The main functions performed by it include these :

1 Refinance of Industrial Loans : The IDBI plays an important role in arranging refinance for such industries which have already got loans from the commercial banks and any state level financial institution.

2. Bills Rediscounting Scheme: The purchasing of machines etc in industries are encouraged through this scheme. When the companies making industrial machines sell these machines to such industries, they prepare a bill. The discounting of these bills is done by the banks after being accepted. Banks get the facility of the discounting of these bills through IDBI.

3. Seed Capital Scheme: Under these schemes, those entrepreneurs get assistance who have all desired qualities to run industries but they lack capital. IDBI either gives direct assistance or provides indirect help through State Finance Corporations.

4. Development of Backward Areas : IDBI conducts the survey of the economically backward areas. It also provides help to industrialists and state Financial Corporations for the development of these areas.

5. Promotion of Institute for Small Scale Industries: Mahatma Gandhi had told that the development of India consists in the small scale and cottage industries. IDBI has encouraged the small scale Industries Development Fund and the National Equity Fund.

6. Commercial Banking: The establishment of IDBI Bank in 1995 is to fulfill the objective of providing services like other commercial banks.

7. Other Functions: Besides the above mentioned work, IDBI has shown interest in some work as well. Some examples are :

(i) It has started work of share broking.

(ii) It also does the finance work for exports.

(iii) It provides assistance to other financial institutions by making contributions in their bonds and shares.

Money Financial Institutions Study

Progress of IDBI

IDBI distributed a loan of 17,059.4 crores during 1999-2000. Its financial assistance for 2002-03 and 2003-04 were * 6,292 crores and * 5,473 crores respectively.

But it passed a special ordinance in December 2003 which came into action on 2nd July, 2004. Again from 11th October, 2004 it was converted into a scheduled bank. In other words, IDBI was merged with IDBI Bank. This bank is also a scheduled bank now according to the Reserve Bank of India Act, 1934.

2. Industrial Credit and Investment Corporation of India-ICICI

The experts of the World Bank had recommended the foundation of a separate corporation with the objective of providing assistance in the development of small and medium scale industries. In the light of this recommendation ICICI was set up as a private limited company in January, 1955.

ICICI has promoted the industrialisation in the country by providing medium and long term loans to small and medium scale industries.

According to a decision in January, 1997 Shipping Credit and Investment Company of India (SCICI) was merged with ICICI. Again in October, 2001 it was decided that ICICI should be merged with ICICI Bahk on 30th March, 2002 and it was also recommended by the RBI. After this merging, it has not remained a development finance institution. (So, there is no need of its detailed study)=

3. Industrial Finance Corporation of India

Industrial Finance Corporation of India (IFCI) is the first Development Financial Institution of India. It was founded by the government of India on 1st July, 1948.

There was a lacking of institutions making long term financial schemes for India, due to which the economic problem for the industrial sector was arising. So, the government of India took the decision of Industrial Finance Corporation of India for the industrial sector.

With the passage of time, the capital market developed in the country. The government realised in the beginning of 1990 that there is the need of more flexibility of the financial sector of the country. Then the government reorganized it in the form of a limited company according to the Indian Company Act on 1st July, 1993.

IFCI had been playing the full responsibility of making the industrial policies of the government successful before the foundation of ICICI (1956) and IDBI (1964)

Assistance by Corporation

IFCI has helped in the development of following sectors through its assistance :

(i) Services sector like hotel, hospital etc.

(ii) The capital and intermediately industries like electronic, synthetic plastic, synthetic fibre and chemicals.

(iii) Creative sector like energy, telecommunication etc.

(iv) Consumer goods like clothes, paper, sugar industries etc.

(v) Infrastructure industries like cement, iron and steel, chemical fertilizers etc.

Money Financial Institutions Study

Financial Sources of the Corporation

The share capital is the main among the capital sources of the corporation. Its authorised capital is * 1,000 crores. Its paid up capital is 790 crores. It collects its financial sources by issuing debentures and bonds also. The corporation also arranges a reserve fund for strengthening its internal economic condition. It has the right of accepting public deposit upto a certain limit. Besides these, it can obtain loans for 90 days on the securities of the central and state government

Management of Corporation

The management of the corporation is done by a board of directors which has 12 members and a chairperson. The chairperson of the management board is also the president of these corporations. Among the 12 members of the managing board, 2 are nominated by the central government and 4 by IDBI Bank. Besides these, 2 members are from the representatives of the scheduled banks, 2 from LIC and other similar financial institutions and 2 other are representatives of the cooperative banks.

Criticism of Corporations

The corporation has done many praise worthy work since its foundation. but then also it has faced criticisms from time to time. The main points of criticisms are as follows:

(i) It has been a constant criticism against the corporation that it has centralised the economic strength of the country.

(ii) It has neglected the underdeveloped and poorly developed states.

(iii) It makes unnecessary delays in granting loans.

(iv) Its rates of interest are high.

(v) There is lack of flexibility in the working system of corporation.

(vi) It gives loans only to big industries.

(vii) It has not been able to make its reputation in the capital market.

4. Industrial Investment Bank of India

Industrial Investment Bank of India was set up on 12th April, 1971. Initially its name was Industrial Reconstruction Bank of India (IRCI). It was reorganised on 20th March, 1985 and renamed as Industrial Investment Bank of India (IRBI). Again on 6th March, 1997 a bill was presented in the Lok Sabha and its name was converted into Industrial Investment Bank of India Limited (IIBIL) and it started its operation as a company after being registered under the Indian Companies Act, 1956.

Its Authorised Capital is 1,000 crores. It is the first institution set up for the reconstruction of unhealthy ill and closed industrial units. Its headquarter is in Kolkata. It is a Grade-I merchant banker registered with SEBI. It had sanctioned 2,412 crores for the sick and closed units during 2003-04 out of which 2,252 crores were distributed.

Money Financial Institutions Study

5. Small Industries Development Bank of India (SIDBI)

Small Industries Development Bank of India (SIDBI) was founded on 2nd April, 1990 according to Small Industries Development Bank Act, 1989. Since its foundation, SIDBI has been seen as a leading institution for the development of small scale industries. The main objectives of its foundation are as follows.

(i) Promoting small scale industries.

(ii) Making arrangement of finance for small scale industries.

(iii) Making co-ordination with the institutions having similar activities.

The Issued Capital of SIDBI is 450 crores which is divided in 45 crore shares of 10 each. It is worth mentioning here that SIDBI was established as its associate bank IDBI under its ownership. So the whole-sum of 450 crore was the subscribed capital of IDBI. When SIDBI was set up, 19.21 per cent was kept up by it and the remaining 80.79 per cent was transferred to organisations under the control of the Central government such as-banks and insurance companies.

Functions of SIDBI

The imporatant functions of SIDBI are as follows:

(i) Due to being an apex organisation of the small scale industries sector, SIDBI works as a network with banks and state level financial institutions.

(ii) SIDBI makes arrangement for the refinance for the loans obtained by the small scale industries.

(iii) SIDBI helps in the discounting and rediscounting of bills of the seller of machines to small scale industries.

(iv) It finds out the ultimate borrower of the small scale industries sector and helps him.

(v) SIDBI performs the task of establishing coordinating among the financial institutions granting loans to the entrepreneurs of small scale industrial sector.

(vi) SIDBI has taken the initiative of the foundation of marketing sources as a scheme of finance scheme considering the delay in getting the amount obtained by selling the produces of small scale industries.

(vii) It has also started the loan activities for the leasing companies.

Money Financial Institutions Study

Progress of SIDBI

SIDBI has developed as the foundation pillar for the development of small scale industries in its short life span. A loan of 8,224 crores was granted by SIDBI by the year 2003-04 out of which 34,413 crores were distributed in that period. A loan of 42,223 crores was sanctioned by it in the year 2010-11, out of which 38,824 crores were distributed.

According to the London Banker Survey conducted in May 2001, SIDBI ranks 25 and the 30 development banks across the world.

The objective of SIDBI in the development of micro, small and medium enterprises is in such a way that these can create employment and also lead to the balanced regional development.

Money Financial Institutions Study

B. INVESTMENT INSTITUTIONS

1 Unit Trust of India

Unit Trust of India was established on 1st February, 1964 under the Unit Trust of India Act, 1963. It was established to promote the tendency of savings and investment among the people having small and medium income to promote saving ‘Unit Trust started the sale of its units. In the beginning the price of its unit was kept 10 but later it was arranged to sell these at market rates.

US – 64 was the initial saving scheme of Unit Trust of India. Unit Linked Insurance plan ULIP was started in 1971. It started many other schemes after the success of these two schemes. Among its scheme CGGF, MEP, Capital Gain, Capital Growth, Retirement Benefit Plan, Monthly Income Unit Scheme, Master Share etc. have been very successful.

Unit Trust of India showed much progress till 1988. But around the end of 1998 its main scheme US-64 faced crisis. The maximum part of the capital gained through this scheme had been invested in the capital market. The prices of shares in the capital market crashed so much that it lost about on third of its

investment amount. A committee was set up urgently. The committee gave us the recommendation for the consolidation of US-64 scheme in coming three years. There was an atmosphere of discouragement among the investors. Then the government assured the investors to fulfill its liabilities. Then it was blamed that the officials of the trust had invested in the companies having doubtful condition.

Then, according to an ordinance issued on 30th, October, 2002, Unit Trust of India has been classified into two groups which got converted into UTI-I and UTI-II. UTI-I includes the government assured return schemes including US64, while UTI-II includes Net Asset value based scheme. UTI-II was named ‘UTI Mutual Fund’ and the management of its assets was done by LIC, SBI, BOB and PNB. Now these four organisations have paid its total value to the government and its ownership and the management of UTI-MF has been obtained by these. These four organisations have a share of 25:25:25:25 in UTIMF.

Now it is the scheme of the government that UTI-I will be closed after finishing all its liabilities.

2. Life Insurance Corporation of India

Before the foundation of Life Insurance Corporation of India there were 245 native and foreign insurance companies operating in India. First of Oriental Life Insurance Company of India was set up in Kolkata in 1818. Again, Bombay Life Insurance Company in 1923 and Madras Equitable Life Insurance Society was set in Chennai in 1829.

Indian Insurance Company Act was implemented in India for the first time in 1912, again, many amendments were made in it in 1928, 1938 and 1950. 154 native, 16 foreign and 75 provident committees were operating in the Life Insurance enterprise in India by 1956.

The central government undertook all 245 indigenous and foreign insurance companies under its control on 19th January, 1956 and nationalised it on 18t| September, 1956.

The headquarter of Life Insurance Corporation is in Mumbai. It also has 8 regional offices and 116 divisions office. It is operating as a leading organisation in the field of insurance through its more than 2 thousand branches is spread across the country. It also performs the insurance activities in foreign through its foreign offices. Its foreign offices are located in Mauritius, Fiji, Nepal, Sri Lanka, Kenya, Bahrain, Kingdom of Saudi Arabia, Singapore and United Kingdom.

Life Insurance Corporation set up with a capital of * 5 crores by the government of India. India performs its insurance activities through different schemes. Among its various scheme Jivan Anand, Anmol Jivan, Amulya Jivan, Jivan Akshaya, Jivan Shri I, Bima Niwesh, New Bima Gold, Jivan Amrit, Jivan Mitra, Jivan Saral, Jivan-Sathi Plus, Jivan Tarangi, Komal Jivan, Jivan Kishore, Jivan Surabhi etc. are prominent.

Insurance Regulation and Development Authority (IRDA) was set up on 19th April, 2000. According to the standards of this authority LIC has to invest its capital. Its investment is presented in the table.

Money Financial Institutions Study

3. General Insurance Corporation

The general insurance originated in India in 1950 when Tritan Insurance Company Limited was set up in Kolkata. Many private companies were operating in India before independence but the government took over the control of all insurance companies and under the General Insurance Business (Nationalisation) Act, 1972 it nationalised the insurance sector on 1st January, 1973. However, the foundation of general Insurance Corporation of India is considered to have taken place on 22nd November, 1972 as on this date the government of India had set up a government company named General Insurance Corporation (GIC) which started working from 1st January, 1973.

107 indigenous and foreign companies operating in India were divided into four groups before nationalization. These are as follows:

(1) National Insurance Company Limited

(II) New India Insurance Company Limited

(III) Oriental Insurance Company Limited and

(IV) United India Insurance Company Limited.

The headquarters of these companies are at Kolkata, Mumbai, Delhi and Chennai respectively. Originally all these four companies were the subsidiary companies of General Insurance Corporation of India and the latter retained the ownership of all the shares of these companies as a holding company. But on 3rd November, 2000 it was separated from its subsidiary companies GIC has been enlisted as Indian Insurer. At present all these five organisations are government companies and all these shares are with the government. GIC has now started granting industrial loan also.

C. STATE LEVEL INSTITUTIONS

4. State Finance Corporation

The government of India passed the State Finance Act on 28th December, 1951 to fulfill the financial needs of the State level small and medium scale industries. According to it, the state governments got the right of Finance Management Corporation in their states. At present there are 18 State Finance Corporation out of which 17 are set up according to State Finance Act, 1951 and the remaining one is Tamil Nadu Industrial Investment Corporation Limited Its foundation was done in 1949 as Chennai Industrial Investment Corporation under the Company Act. It is also operating completely as a State Finance Corporation.

State Finance Corporations provide aids to industries in the form of direct share in term loans, share capital and debentures. According to the act the minimum limit of the authorised capital of State Finance Corporation was fixed at 50 lakh and maximum limit of 5 crores which was raised up to 50 crores by the amendment in 1985 and a provision was also made to leave an option to raise it up to 100 crores. According to the amended act at any time in these corporations the share of the State government, SIDBI and other government controlled institutions will not be less than 51 per cent of their total capital.

State Finance Corporation can grant loans up to the 50 per cent of the price of the fixed assets on the security of such assets. According to the amended act companies and cooperative committees can get a maximum of 60 lakh and for joint and single trade a maximum of 30 lakh as loans through State Finance Corporation.

Loans Sanctioned and Distributed by Corporation

The loans accepted and distributed by State Finance Corporation are as follows:

Table

Year Sanctioned Loan Distributed Loan
1980-81 370 250
1990-91 1,860 1,270
2000-01 2,800 2,000
2003-04 1,130 860

 

It is clear from the above table that loans of 2,800 crores were sanctioned by State Finance Corporation during the year 2000-2001 out of which 2,000 crores was distributed also but there came drastic decline in it after that loans of only 1,130 crores were sanctioned during the year 2003-04, out of which only 860 crores was distributed. The cause of this decline is a big part of its capital being in the form of Non-performing Assets. It means, there is some lacking in the management of these corporations. That is why; the state finance corporations could not be very popular.

State Finance Corporations in India

18 State Finance Corporations set up in India are as follows:

1 Assam : Finance Corporation

2. Bihar : State Finance Corporation

3. Andhra Pradesh : State Finance Corporation

4. Delhi : Finance Corporation

5. Gujarat : State Finance Corporation

6. Haryana : Finance Corporation

7. Himachal Pradesh : Finance Corporation

8. Jammu and Kashmir : State Finance Corporation

9. Karnataka : State Finance Corporation

10. Kerela : Finance Corporation

11. Madhya Pradesh : Finance Corporation

12. Maharashtra : State Finance Corporation

13. Orissa : State Finance Corporation

14. Punjab : Finance Corporation

15. Rajasthan: Finance Corporation

16. Tamil Nadu: Tamil Nadu Industrial Development Corporation Limited.

17. Uttar Pradesh : Finance Corporation

18. West Bengal : Finance Corporation

5. State Industrial Development Corporation

State Industrial Development Corporations are the institutions under the complete ownership of the state government. The beginning of its foundation started in 1960. At present, there are 26 corporations operating in the country.

Objectives and Functions of Corporation

The objectives of State Industrial Development Corporations include developing industrial sector and founding new development cente? In this light, the main functions of the corporation can be as follows:

(i) Providing infrastructural facilities for the establishment of industrial

enterprises.

(ii) Establishing industrial settlements.

(iii) Searching facilities for the new industries.

(iv) Providing economic assistance to established industries.

(v) Conducting economic and technical survey for the specific sector

(vi) Re-encouraging the sick industrial units.

Financial Assistance by Corporation

Various industries have been given financial assistance by the various state finance corporations of the country. The most of its finance has been granted to garment, chemical food material producing industries etc. The sanctioned and distributed loans by the corporations can be explained by the following table:

Table

Year Sanctioned Loan Distributed Loan
1980-80 213 125
1984-85 478 298
1990-91 815 590
2000-01 2,080 1,664
2001-02 1,594 1,418

 

6. EXPORT-IMPORT BANK OF INDIA-EXIM BANK

6. Export-Import Bank of India-EXIM Bank

EXIM Bank was established in 1st January, 1982. The objective of its foundation was providing financial assistance to exporters and importers and establishing co-ordination in the work of those financial institutions which arrange finance for exports and imports of goods and services.

The Authorised capital of the EXIM Bank at the time of its foundation was *200 crores which was later raised to 500 crores and then in 1998 upto 1,000 crores. Its paid up capital in 2001 was 550 crores. The head office of the EXIM Bank is in Mumbai and one more has been opened in Delhi. Its foreign offices have been opened in Washington, Singapore, Abidjan and Budapest.

In 2008-09, in the 27th year of its foundation, the profit before tax of the EXIM Bank was 610 crores and profit after tax was 477 crores while its profit after tax in 2003-04 was only 229 crores. Net Profit during 2009-10 was 513 crore. The Capital Adequacy Ratio of the bank on 31st March, 2008 was 15.13 per cent which became 21.6 per cent on 31st March, 2011.

The sanctioned and distributed loans of the EXIM Bank can be clear by the following table.

Table

Year Sanctioned Loan  Distributed Loan
2000-01 2,386 2,071
2004-05 15,853 11,435
2007-08 33,628 28,933
2008-09 34,505 29,152
2010-11 51,015 35,577

 

7.Tourism Finance Corporation of India Ltd.

The government of India founded Tourism Finance Corporation of India Ltd. for the development of tourism industry in the country. This corporation was set up as a public sector company on 27th January, 1989 according to the Company Act, 1956. It started its work on 1st February, 1989. Its registered office is in Delhi.

Tourism Finance Corporation of India Ltd. has been founded by the cooperation and encouragement of many financial institutions. So, its maximum shares are retained by these institutions. The shareholding of different shareholders has been clarified in the following table : (On 31st march, 2008)

The operation cost of the corporation on 31st March, 2009 was 6,727.21 lakh and other management cost was 368.73 lakh.

The corporation grants loan for hotel, restaurant, holiday resorts, amusement parks, rope way, transport, air service etc services.

EXERCISE QUESTIONS

Long Answer Type Questions

1. Explain the functions and progress of Indsutrial Development Bank of India.

2. Describe the establishment, functions and progress of Small Industries development Bank of India.

3. Write an essay on Industrial Finance Corporation of India.

4. Describe the role of State Finance corporation in Industrial Development of theState.

5. Describe the main institutions supplying Industrial Finance in India.

Short Answer Type Questions

1. Write a note on Industrial Investment Bank of India.

2. Explain the role of Export-Import Bank of India.

3. Explain the main criticisms of Industrial Finance Corporation of India.

4. Write a note on Tourism Finance Corporation of India Limited.

5. Write a note on Division of Unit Trust of India.

Money Financial Institutions Study

III. Objective Type Questions

Choose the correct options

1. SIDBI is …….

(a) All India Financial Institution

(b) State Level Financial Organisation

(c) Investment Institution

(d) None of these

2. IDBI was merged with …

(a) ICICI

(b) IDBI Bank

(c) SIDBI

(d) IFCI

3. The act for separating IDBI from the RBI was passed in.

(a) 1964

(b) 1975

(c) 1980

(d) 2004

4. Industrial Investment Bank of India was set up in

(a) 1971

(b) 1985

(c) 1997

(d) 2001

5. The present name of Industrial Investment Bank of India is ….

(a) IIBI

(b) IRCI

(C) IRBI

(d) IIBIL

6. The important organisation of the development of small scale industries is……..

(a) SIDBI

(b) EXIM Bank

(c) IDBI

(d) All of these

7. The year of the foundation of Unit Trust of India is …

(a) 1964

(b) 1971

(c) 1980

(d) 1998

8. Before the establishment of Life Insurance Corporation there were indigeneous and foreign insurance companies operating in India.

(a) 107

(b) 245

(c) 263

(d) 305

9. Insurance Regulation and Development Authority was set up on …………

(a) 1st January, 1973

(b) 3rd November, 2000

(c) 19th April, 2000

(d) 30th October, 2002

10. Where is the headquarter of National Insurance Company Limited ?

(a) Mumbai

(b) Kolkata

(c) Delhi

(d) Chennai

11. The state Finance Corporation Ltd. of this state has been set up according to which Company Act ?

(a) Andhra Pradesh

(b) Madhya Pradesh

(c) Karnataka

(d) Tamil Nadu

[Ans: 1(a), 2 (b), 3 (b), 4 (a), 5(d), 6 (a), 7 (a), 8 (b), 9 (c), 10 (a), 11 (d)

IV. State whether the following statements are True or False :

1. IDBI Bank is a schedule bank.

2. IFCI was founded in 1948.

3. SIDBI was founded in 1980.

4. UTI is an investment institution.

5. UTI was established in 1964.

6. EXIM Bank is a Commercial Bank.

[Ans.: 1. True, 2. True, 3. False, 4. True, 5. True, 6. False.]

Money Financial Institutions Study

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