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AHSEC - Class 12: Banking Notes | Non Banking Financial Institutions for Feb' 2021 Exam

AHSEC CLASS 12 NOTES FOR 2021 EXAM
SUBJECT: BANKING
Unit – 4: Non Banking Financial Institutions

Summary chart of various Development banks to ease your study

Name

Full Form

Established on

Objective

Head Office

IFCI

Industrial Finance Corporation of India

1-7-1948

To provide medium and long term credit to industries.

New Delhi

IDBI

Industrial Development Bank of India

July, 1964

To finance industries and to promote other financial institutions

Mumbai

SFCs

State Financial Corporations

1953(Punjab)

To finance industries through subscription of securities and discounting of bills.

Every State

NABARD

National Bank for Agriculture and Rural Development

July, 1982

To provide funds in rural areas.

Mumbai

SIDCs

State Industrial Development Corporations

Not available

Development of medium and large scale industries in states.

Every state

SIDBI

Small Industries Development Bank of India

1990

To provide funds to small scale units through SFC, SIDCs and Banks.

Lucknow

NEDFI

North Eastern Development Finance Corporation

1995

To provide funds and other facilities for promotion, expansion, and modernisation of industries in NE region.

Guwahati

LICI

Life Insurance Corporation of India

1956

To promote savings and mobilises funds to cater the need of the government and industries.

Mumbai

GICI

General Insurance Corporation of India

1972

To provide loans and investments in capital market of the country.

Mumbai

UTI

 

 

Unit Trust of India

1963

To encourage and mobilise savings and to channelise it into productive ventures to promote economic development.

Mumbai

MMMFs

Money Market Mutual Funds

1992

To invest in money market instruments.

N/A

IBRD

 

International Bank for Reconstruction and Development

(World Bank)

1945

To assist in reconstruction and development of member countries by investments.

Washington

IFC

International Finance Corporation

1956

To provide long term loans in major currencies to its member company.

Washington

IDA

International development Association

1960

To provide soft loan to economically sound projects which create social capital.

Washington

IMF

International Monetary Fund

1945

To promote international co-operation amongst members on international monetary issues.

Washington

ADB

Asian Development Bank

1966

To promote public and private investment for economic development of Asian region.

Manila, Philippines

Long Answer Type Questions

Q.1. What are development banks. Mention its features and functions.                               2012, 2013, 2016, 2017, 2018

Ans: Development bank is a specialised financial institution which provides medium and long term finance to business units in the forms of loans, underwriting, investments and guarantees operations, promote entrepreneurship and upgrade knowhow and do-how. It is a multi-purpose financial institution and not just a term-lending institution. It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.

According to William Diamond, “A Development Bank has the opportunity to promote enterprises i.e. to conceive investment proposal and to stimulate others to pursue them or itself to carry them through from the ‘conception’ to ‘realisation’.

Features of Development Bank

a)      Development bank is a specialised financial institution which provides medium and long term finance to business units.

b)      It is a multi-purpose financial institution and not just a term-lending institution.

c)       It does not accept deposits from the public, unlike commercial banks. A development bank does not perform ordinary banking functions.

d)      Financial assistance is provided by a development bank not only to the private sector but also to the public sector undertakings.

e)      One of its major aims is to promote the saving and investment habit in the community.

f)       Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.

g)      Its motive is to serve the public interest. It works in the general interest of the nation rather than to make profits. A development bank is motivated by social profits.

Functions of Development Banks

a)      They provide risk capital.

b)      They provide long-term and medium-term finance to industrial undertakings for purchase of new plants and machinery, expansion, modernization, etc.

c)       They purchase the shares and debentures of companies and thus provide them long-term capital.

d)      They help the companies in raising capital from the capital market.

e)      They underwrite the public issues of shares and debentures by the companies. 

f)       They provide promotional, technical and managerial services to the industrial undertakings.

g)      They sponsor programmes for the upgradation of managerial skills and professionalism of management.

h)      They help in promotion of industrial development programmes in backward areas.

i)        They help foreign investors in finding local partners.

Q.2. Explain the objectives and significance of Development banks.                      2013

Ans: Objectives and Importance of Development Banks: The study of the role of the development banks helps us to understand the objectives and importance of such banks. The role of development banks is presented below:

a)      Financing of industries: The foremost objective of institutional finance is to extend financial accommodation to industrial concerns on a long-term basis. Term loans are provided for setting up new concerns and also for modernisation of existing concerns.

b)      Balanced regional development: Another prime objective of institutional finance is to encourage the setting up of industries in the backward regions of the country for balanced regional development.

c)       Development of capital market: In India, financial institutions were set up to develop capital market by providing merchant banking, underwriting and issue house services to companies for raising capital from the capital market.

d)      Mobilisation of public savings: Financial institutions raise funds by issuing debentures and bonds. These funds are recycled for the industrial growth of the country.

e)      Procurement of foreign technology: Financial institutions help the industrialists to acquire latest foreign technology by extending foreign currency loans and guarantees.

f)       Gap-filler: Its major role is the gap-filler, i.e. to fill up the deficiencies of the existing financial facilities.

g)      Management consultancy: Financial institutions provide technical and management consultancy to industrial units.

h)      Training of entrepreneurs: Financial institutions train and develop entrepreneurs, help them in preparing projects reports, and provide them initial capital to launch their enterprises.

i)        Research: Development banks undertake market and investment research and surveys as also technical and economic studies related to development of industries.

j)        Co-ordination: The development banks co-ordinate the working of other financial term lending institutions engaged in financing promoting and developing industries.

k)      Assist in procuring foreign capital: Development banks acquire foreign capital and allocate it to varied industrial sectors on priority basis.

Q.3. Distinguish between commercial bank and development bank.

Ans: Differences between Commercial Bank and Development Bank

Basis

Commercial Bank

Development Bank

1. Formation

Commercial banks are generally set up as companies under the Companies Act.

Development banks are usually set up under the special Act passed by the Government.

2. Nature

Commercial banks are ordinary financial institution.

Development banks are specialised multi - purpose institutions.

3. Raising of Funds

Commercial banks accept deposits from the public. These deposits are repayable on demand.

Development banks do not accept deposits like commercial banks. Their main sources of funds are borrowing, grants, selling securities etc.

4.Cheque facility

There is cheque facility in case of commercial banks.

There is so such cheque facility in case of development banks.

5. Advance

Commercial banks mainly provide short and medium term loans.

Development banks provide medium and long-term loans.

6. Motive

The basic motives of commercial banks are to maximise the profits.

Development banks are motivated by social profit i.e. it aims at providing service.

7. Credit creation

Commercial banks can create credit or multiple deposits while lending. 

Development banks can’t create credit.

8. Acceptance of liabilities 

The commercial bank’s liabilities are accepted as means to settle transactions.

The liabilities of development banks are not accepted as a means to settle transaction.

Q.6. Write a brief note on State Financial Corporation (SFCs).

Ans: In order to provide finance to small and medium scale industries need for a separate financial institution was felt. Accordingly, the government of India passed the State Financial Corporation Act in 1951, enabling the state government to set up State Financial Corporation. As a result, the first SFC was set up by the Punjab Government in 1953. In Assam, Assam Finance Corporation was set up in 1954. The SFC meets the financial requirements of small industrial concerns in private sector.

Objective: The main objective of the SFCs is to provide financial assistance to medium and small scale industrial concerns. SFC especially comes into the picture when traditional banking system does not provide requisite funds. The assistance by SFC is for medium and long term capital requirements. They help both new as well as existing units for purposes of establishment, modernization, renovation, expansion and diversification.

Functions of SFC:

The main function of the SFC’s is to provide loans to small and medium scale industries engaged in the manufacture, preservation or processing of goods, mining, etc., State Financial Corporations are authorised to grant financial assistance in the following forms:

1. Granting of loans or advances to Industrial concerns repayable within a period not exceeding twenty years.

2. Subscribing to the debentures of industrial concerns repayable within a period not exceeding twenty years.

3. Guaranteeing loans raised by industrial concerns repayable within twenty years.

4. Underwriting the issue of stocks, shares, bonds, or debentures by the industrial concerns subject to their being disposed off within seven years.

5. Guaranteeing deferred payment due from and individual concern in connection with purchase of capital goods in India.

6. Acting as an agent of the Central Government or the Industrial Finance Corporation of India in respect of any business with an industrial concern in respect of loans sanctioned to them.

Q.7. Write a brief note on NABARD.                       2015, 2017, 2020

Ans: The National Bank For Agriculture and Rural Development (NABARD), a developing bank, came into existence on July 12, 1982, under an Act of Parliament with an initial capital of Rs. 100 crores. It is an apex institution set up for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas. The NABARD has taken over the functions of ARDC (Agricultural Refinance and Development Corporation) and refinancing functions of RBI in respect of co-operative banks and the RRBs.

Objectives/Functions of NABARD

a)      Integrated rural development.

b)      To provide training and Research facilities for rural Development.

c)       To keep a check on all the projects which are refinanced by NABARD; through timely inspection, monitoring and evaluation.

d)      To Act as a coordinator and regulator for rural credit institutions.

e)      Promotion and development of agriculture, Small Scale industries, cottage and village industries, handicrafts and other rural crafts.

f)       To formulate rural credit plans on annual basis for all districts in country.

Q.8. Write a brief note on SIDBI.

Ans: Small Industries Development Bank of India (SIDBI) was established in April 1990 under an Act of parliament. It is a wholly-owned subsidiary of Industrial Development Bank of India (IDBI). It serves as the principal financial institution for Promotion, Financing, Development if industry in the small scale sector and Coordinating the functions of other institutions engaged in Similar activities. The Small Scale industry (SSI) sector, which is vibrant and dynamic sub-sector of the India’s industrial economy, is the prime area of SIDBI’s business.

Q.9. Write a brief note on State Industrial Development Corporation (SIDCs)

Ans: SIDC: The State Industrial Development Corporation were incorporated under the Companies Act, 1956 as wholly owned state Govt. undertaking for promoting industrial development. Their main objective is the development of medium and large scale industries in their respective states. At present there are 28 SIDCs in India.

Functions of SIDCs:

a)      Providing term loans to medium and large scale industries.

b)      Underwriting and direct subscription of shares / debentures of industries.

c)       Undertaking Entrepreneurship development programmes in respective states.

d)      Administration of incentive scheme of Central and State Govt.

e)      Technical guidance and assistance in plant location.

Q.10. Write a brief note on North Eastern Development Finance Corporation (NEFDi)

Ans: NEDFi: The North Eastern Development Finance Corporation was incorporated under the companies Act, 1956 on    9-8-1995. It registered office was at Guwahati, Assam.

Objectives of NEFDi

a)      To provide credit and other facilities for promotion, expansion and modernization of industries and infrastructural project in the NER of India.

b)      To provide credit and other facilities for agriculture, poultry, dairy, farming etc. in NER of India.

Q.11. What are Mutual Funds? Mention its importance.               2019

Ans: Mutual Funds: A mutual fund is an institutional device through which the investors pool their funds to invest in a diversified portfolio of securities. The fund is termed as “Mutual” because all the profit & losses of the fund are shared by the investors in proportion to their investments.                              2013, 2015, 2017

Benefit of Mutual Funds:

a)      Professional management of funds by very qualified and full time investment manager.

b)      Risk reduction through diversification.

c)       Flexibility for investments in variety of schemes.

d)      Higher returns on investment as compared to bank deposits.

e)      Tax benefits by investing in tax saving funds.

f)       Economies of large scale operations.

Q.14. Write a brief note on LICI.                               2019

Ans: Life Insurance Corporation of India (LICI) was set up in September 1, 1956, under the LICI Act, 1956 by nationalizing 245 life insurance companies. The LICI mobilize the community’s savings and makes them available to industrial concerns in both public and private sectors. Since its inception, it has been playing a key role in the capital market by underwriting and subscribing to industrial securities. It provides long term and medium term loans in the form of direct loans.

Objectives of LICI:

a)      Spread Life Insurance much more widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching all insurable persons in the country and providing them adequate financial cover against death at reasonable cost.

b)      Maximize mobilization of peoples savings by making insurance linked saving adequately attractive.

c)       Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest on the community as a whole, the funds to be deployed to the best advantage of the investors as well as the community as a whole; keeping in views national priorities and obligations of attractive return.

d)      Conduct business with utmost economy and with the full realisation that the money belongs to the policyholders.

e)      Act as trustees of the insured public in their individual and collective capacities.

f)       Meet the various life insurance needs of the community that would arise in the changing social and economic environment.

Functions of LICI:

a)      To invests the funds of the corporation in such a manner that will give maximum return.

b)      To acquire, hold and dispose of any property for the purpose of its business.

c)       To advance or lend money upon the security of any movable or immovable property or otherwise.

Q.15. Write a brief note on GICI.              2020

Ans: Before independence, the general insurance business in India was done by foreign companies. After independence, the general insurance business was completely owned by the government. In 1972, the government nationalized the general insurance business and 107 insurer were amalgamated and grouped into four companies, namely The National Insurance Company Limited, The New India Assurance Company, The Oriental Insurance Company Limited and the United India Assurance Company Limited. The General Insurance Corporation of India was setup in 1972 as a holding company of these four general insurance companies.

General Insurance Corporation of India (GICI) sell insurance against specific risks, such as loss from fire and accident, to property of various kinds, such as motor vehicles good, machinery, building etc. and also against risk of personal Accidents and sickness. The policies of these companies do not involve savings features. GICI provides loans and investment in the capital market of the country. GICI invests in shares and debentures, underwriters and invests in new issues of the corporate sector, grants loans and advances to companies.

Objective and Functions of GICI:

a)      The carrying on of any part of general insurance business as deemed desirable.

b)      Aiding, assisting and advising the companies in the matter of setting up of standard of conduct and sound practice in general insurance business and rendering efficient customer service.

c)       Advising the acquiring companies in the matter of controlling the expenses including the payment of commission and other expenses.

d)      Advising the acquiring companies in the matter of investment of funds.

e)      Issuing directions to acquiring companies in relation to the conduct of general insurance business.

Q.16. Write a brief note on ‘World Bank’ or IBRD                             2012, 2014, 2016, 2018, 2019

Ans: The International Bank for Reconstruction and development (IBRD) generally known as the ‘World Bank’. This bank was established as a result of the deliberations at the economic conference held at Breton Woods in July 1944. This bank began its operations in June 1946. The World Bank was established with the object of reconstructing the economies of the war devastated countries, economic development of the member countries and to raise the standard of living of the people of the world. Initially, only nations that were member of the IMF could be members of the World Bank. But now any country can become the member of the World Bank.

The objectives of World Bank are:

a)      To provide long-run capital to the member countries for reconstruction and development.

b)      To promote private capital investment by providing guarantee on private loans and capital investment.

c)       To maintain equilibrium in balance of payments and balanced development of international trade.

d)      When private capital is not available on reasonable terms, to supplement private investment by providing finance for productive purpose on suitable conditions.

e)      To encourage the development of productive facilities and resources in less developed countries.

The functions of World Bank are:

a)      It grants loans for long and medium term loans which are divided into two ways - Reconstruction loans and development loans. The first is given to countries damaged by the war, the second to all countries who require such loans for development purpose.

b)      The quantities of loans, interest rate and terms and conditions are determined by the bank itself.

c)       Bank provides loans to private investor of member countries on its own guarantee.

d)      The bank gives loans to government and also private borrowers.

e)      Loans are granted after preliminary discussions with the parties and a critical examination of the projects.

f)       World Bank provides various technical services to the member countries.

Q.17. Write a brief note on International Monetary Fund (IMF).               2013, 2015, 2017

Ans: The IMF is an international monetary institution established by 44 nations under the Bretton woods agreement of July 1944. It came into existence in December 1945 and started functioning in March, 1947. It is an autonomous organization and is affiliated to the U.N.O. It has its main office in Washington. Initially, the IMF had 30 countries as its members. At the end of 2000, the membership of the IMF was 183. It was established to promote economic and financial co-operation amongst member countries.

The objectives of I.M.F are:

a)      To promote international economic and financial co-operation amongst member countries. 

b)      To promote exchange stability and avoid currency devaluation.

c)       To promote the international trade by removing all obstacles.

d)      To promote investment of capital in backward and undeveloped countries.

e)      To make financial resources available to members.

f)       To seek reduction on payment imbalances.

g)      To elimination or reduction of existing exchange control.

The functions of IMF are:

a)      It functions as a short credit institution.

b)      It provides machinery for the orderly adjustments of exchange rates.

c)       It keeps reserves of the currencies of all member countries.

d)      It lends to the borrowing countries in the currencies which they require.

e)      It promotes the expansion of International Trade for the mutual benefits of member countries.

The management of the IMF is composed of the following:

a)      Board of Governors: The board of governors has the responsibility of formulating the general policies of the fund.

b)      Board of Executive Directors: The board of executive directors controls the day-to-day activities of the fund.

c)       Managing Director: The managing director is the chairman of the board of executive directors.

d)      Interim committee: It main function is to advice Board of Governors for the improvement of supervision, management and adaptation of international monetary system from time to time.

e)      Development committee: It consists of 22 members. The main function of the committee is to prepare reports, advice the Board of Governors regarding all the aspects of the transfer of resources to the developing countries as required by them and to make important suggestions for its implementation.

Q.18. Write a brief note on Asian Development Bank (ADB).

Ans: The full form of ADB is Asian Development Bank. It is a multinational regional development bank. Its purposes are lending funds, promoting investment, providing technical assistance to the developing member countries. The ADB came into existence and was formally opened for business on 19th December 1966 at Manila.

The main objectives of ADB are:

a)      To promote investment in the ECAFE (Economic Commission for Asia and Far East) region of public and private capital for regional development.

b)      To utilize the available resources for the financing of economic development, especially of the smaller and less developed members of the region.

c)       To provide technical assistance in the execution and development of projects.

d)      Undertaking of such other activities which may help to achieve its main objectives.

e)      To help the regional members in the co-ordination of their plans and policies for economic development.

The ADB is managed by a president, vice-president and a board of governors along with and administrative staff. The president is the administrative head of ADB. It started its operations with an authorized capital of $ 2.9 billion which was raised to $ 25 billion in 1992.

Lending Procedure: The lending operations of the ADB may be classified into two categories: (a) ordinary operations, (b) special operations.

1. Ordinary Operations: Ordinary Operations refer to those lending activities which are financed out of ordinary capital resources of the Bank. The loans under this category are provided in two forms: (a) in the form of foreign currencies, and (b) in the form of national currency of the borrower. The Bank also lends funds to the central bank of a member country, which then re-lends them to the specific institutions for the specific projects.

2. Special Operations: Special operations refer to those lending activities which are financed out of the special funds of the Bank, such as, multi-purpose special funds, the Asian development fund, agricultural special funds, technical assistance special fund, etc. the loans provide out of the special funds are on liberal terms; they carry low interest rates and for longer duration.

Q.19. Write a brief note on International Finance Corporation (IFC).

Ans: The IFC is a member of World Bank Group and was established in July 1956 to provide finance to the private sector. The IFC was established with the specific purpose of providing risk capital to the private enterprises in the less developed countries without government guarantee.

The main objectives of IFC are:

a)      To serve as a clearing house to bring together investment opportunities, private capital of both foreign and domestic origin and experienced management.

b)      To help in stimulating the productive investment of private capital, both domestic and foreign etc.

The main functions of IFC are:

a)      It offers long-term loans in major currencies at fixed or variable rates.

b)      It brings together investment opportunities, private capital of both foreign and domestic origin and experienced management.

c)       It assists the growth of capital market in less developed countries.

Investment Policy of IFC: The following are the main features of the investment policy of the IFC:

a)      The IFC considers only those enterprises which are predominantly industrial and contribute to economic development of the country.

b)      The project to be financed by the IFC must be in the private sector and must be productive in nature.

c)       Before making any investment, the Corporation satisfies itself that the enterprise has experienced and competent management.

d)      The IFC’s loan will not be more than half of the capital needed for an enterprise.

e)      The minimum investment to be made by the IFC to a single enterprise is fixed at $ 100,000: no upper limit is fixed.

f)       The rate of interest for the IFC loan is determined by mutual negotiation, depending upon the degree of risk involved and other terms of investment.

g)      The IFC’s loans are disbursed in lump-sum or in installments and are repayable in a period of 5 to 15 years.

Q.20. Write a brief note on International Development Association (IDA).

Ans: The International Development Association is an affiliate of IBRD. It was establishment in 1960 to provide soft loans to less developed member countries for the purpose of slum clearance, construction of roads and bridges etc.

Objectives and functions of IDA:

a)      To promote economic and infrastructural development of poor member countries.

b)      To provide finance to less developed countries on easy and flexible terms.

c)       To supplement the objectives and functions of World Bank.

d)      To provide interest free credit.

Lending Procedure: The World Bank provides financial assistance in the following three forms:

1.       Loans out of Own Funds: The World Bank can grant direct loans out of its own funds up to the 20% of the total subscribed capital. The Bank’s own funds consist of the contributions made by the members and the accumulated profits.

2.       Loans out of Borrowed Capital: The World Bank also provides direct loans out of its borrowed funds on the approval of the country from which the funds have been borrowed.

3.       Guarantee of Loans: The World Bank lends indirectly by guaranteeing loans made by private investors. Thus, the Bank acts as guarantor between the lender and the borrower. In case of default by the borrower, the Bank may call up its uncalled reserves to cover the default. The ultimate limit to the Bank’s lending operation is that the total outstanding loans and guarantees must not exceed the Bank’s total subscribed capital resources and surplus.

Conditions for Loans: Before the World bank provides a loan, either directly or indirectly through guarantee, certain conditions must be fulfilled. These Conditions, as stated in the Article III of the Articles of Agreements, require that:

a)      The World Bank lends only to governments or have guarantee of the government in whose territory the borrower is located as to the repayment of the principal and the payment of the interest and other charges.

b)      The competent committee of the World Bank reports favourable on the project.

c)       The World Bank is satisfied that the borrower is unable to obtain the loan otherwise on reasonable terms.

d)      In the opinion of the World Bank, the rate of interest and other charges are reasonable and such rate, charges and the schedule for repayment of principal are appropriate to the project.

e)      In guaranteeing a loan made by other investors, the World Bank receives suitable compensation for its risk.

Financing Procedure of IDA: The IDA loans are different from the conventional loans. The following are the distinctive features of the financing policy of the IDA:

a)      The IDA grants loans for protects whether they are directly productive or not.

b)      The IDA loans are interest free; only a nominal annual rate of 3.4% on the amounts withdrawn and outstanding is charged to meet the administrative expenses.

c)       The IDA loans are for long periods, i.e., for 50 years.

d)      There is a 10 years of grace and no amount is repayable during this period of grace. After this only 1% of the principal is to be repaid annually for 10 years and 3% annually for the remaining 30 years.

e)      IDA loans are generally repayable in foreign exchange.

f)       IDA loans are granted to the government of the country concerned.

 

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