Hello everyone, in the previous topic we were talking about the Reserve Bank of India. Today we are going to talk about Financial Institution, its role, types, features, advantage, and disadvantage, and how it is different from banks.

Financial Institution (FI)

Introduction

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 encompass a broad range of business operations within the financial services sector including banks, trust companies, insurance companies, brokerage firms, and investment dealers. Financial institutions can vary by size, scope, and geography.

In other words, we can say that financial institutions provide means and mechanisms of transferring resources from those who have an excess of income over expenditure to those who can make productive use of the same.

Role of Financial Institutions

The role of this institution is-

a. Providing funds

These institutions help a large number of persons for taking up some industrial activity. The addition of new industrial units and increasing the activities of existing units will certainly help in accelerating the pace of economic development. Financial institutions have large investible funds which are used for productive purposes.

b. Infrastructural facilities

Financial institutions prepare their investment policies by keeping national priorities in mind. The institutions invest in those areas which can help in increasing the development of the country.

Types of Financial Institutions

Following are the types of financial institutions-

1. Commercial Banks

Commercial Banks worked directly with businesses. Currently, the majority of large banks offer deposit accounts, lending, and limited financial advice to both demographics.

2. Investment Banks

Investment banks do not take deposits; instead, they help individuals, businesses and governments raise capital through the issuance of securities. Investment companies which are more commonly known as mutual fund companies, pool funds from individual and institutional investors to provide them access to the broader securities market.

3. Brokerage Firms

Brokerage firms assist individuals and institutions in buying and selling securities among available investors.

4. Insurance Company

Financial institutions that help individuals transfer the risk of loss are known as insurance companies. Individuals and businesses use insurance companies to protect against financial loss due to death, disability, accidents, property damage, and other misfortunes.

5. Mortgage

Most mortgage companies serve the individual consumer market; some specialize in lending options for commercial real estate only.

6. Investment Company

Investment companies, more commonly known as mutual fund companies, pool funds from individual and institutional investors to provide them access to the broader securities market.

Features of Financial Institutions 

Following are the features of financial institutions:-

1. The licensing frameworks of the financial institutions usually have 90 days or 3 months.
2. Companies issue shares to get more investments and financial institutions help with that by providing collection services and underwritings.
3. Providing a guarantee is a key element when it comes to business and these financial institutions help them guarantee that. 
4. After the year 2000, a lot of financial institutions started offering their payments through offline and online modes.
5. Financial Institutions are a major contributor to financial leasing. 
6. They also provide a lot of financial lending services like financing of commercial transactions or helping with personal credits.
7. Financial Institutions aren’t allowed to take loans from the general public by using their palpable funds or deposits.

Advantages and Disadvantages of Financial Institutions

Following are the advantages and disadvantages of financial institutions:-

Advantages

•  As these institutions carry out a systematic investigation before conceding support to an apprehension, a relationship with them helps to increase the creditworthiness of a company.

• Besides providing funds, many of these institutions endow with financial, administrative, and industrial guidance and consultancy to business firms. Assistance is obtainable when recourse to usual sources is impossible or unbeneficial.

•  Financial institutions provide long-term finance, which is not provided by commercial banks.

• The rate of interest and repayment measures is convenient and economical. Facilities for repayment in simple installments are made obtainable to the deserving concerns.

•  For long-term business funds requirements, financial institutions are preferable as they provide long-term finance, which is not provided by commercial banks. Modernization and development plans can be financed without much strain on the financial organization of the company.

• Besides providing funds, many of these institutions provide financial, managerial, and technical advice and consultancy to business firms.

•  Obtaining a loan from financial institutions increases the goodwill of the borrowing company in the capital market. Consequently, such a company can raise funds easily from other sources as well.

• As repayment of loans can be made in easy installments, it does not prove to be much of a burden on the business.

• Loans and guarantees in foreign currency and deferred payment facilities are obtainable for the import of required technology and equipment.

• The funds are made available even during periods of depression when other sources of finance are not available.

• Along with finance, a company can obtain specialist guidance and direction for the successful planning and management of projects.

Disadvantages

• Restriction on dividend payment is imposed on the powers of the borrowing capacity of financial institutions.
• These institutions come under the government criteria hence; they follow rigid rules for granting these loans.
• Too many formalities are attached which is indeed time-consuming.
• Financial institutions have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company to borrow funds.

Difference between Banks and Financial Institutions

In financial economics, a financial institution acts as an agent that provides financial services for its clients. Financial institutions generally fall under financial regulation from a government authority. Common types of financial institutions include banks, building societies, credit unions, stock brokerages, asset management firms, and similar businesses.

Financial institutions provide a service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitates the flow of monies through the economy.

To do so, savings accounts are pooled to mitigate the risk brought by individual account holders in order to provide funds for loans. It is the primary means for depository institutions to develop revenue.

For the yield curve become inverse; firms in this arena will offer additional fee-generating services including securities underwriting, sales & trading, and prime brokerage whereas a bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit.

A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional-reserve banking. Some banks (called Banks of issue) issue banknotes as legal tender. Many banks offer ancillary financial services to make an additional profit; for example, most banks also rent safe deposit boxes in their branches.

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Grooming Urban

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