FINANCIAL INSTITUTIONS AND MARKETS B.

Com 5TH Sem as per NEP

Unit-5
Banking and Development Financial Institutions

What is Banking?

Banking is directly or indirectly connected with the trade of a country and the life of each individual. It is an
industry that manages credit, cash, and other financial transactions. In banking, the commercial bank is the
most influential institution for any country’s economy or for providing any credit to its customers.

In India, a banking company is responsible for transacting all the business transactions including withdrawal
of cheques, payments, investments, etc. In other words, the bank is involved in the deposit and withdrawal
of money, repayable on demand, savings, and earning a decent amount of profits by lending money.

Banks also help to mobilise the savings of an individual, making funds accessible to businesses and help
them to start a new venture.

However, unlike commercial banks, private sector banks are owned, operated, and regulated by private
investors and have the right to operate according to the market forces.

Definition of Banking
Section 5(b) of the Banking Regulation act1949 defines “Banking as accepting for the purpose of lending
and Investment deposits of money from the public repayable on demand or otherwise and with drawable by
cheque, draft, order or other wise’’ No definition of banking can be comprehensive enough in the present
context.

Functions of Banks

Banks in India offer a wide range of banking services, such as savings and checking accounts, loans (personal,
business, and mortgages), credit cards, investment services, and electronic banking options like online and
mobile banking.

Some of the major functions of banks are mentioned below:

• Accepting Deposits: Banks provide a safe place for individuals and businesses to deposit their money,
which can be withdrawn when needed.

• Providing Loans: Banks lend money to individuals and businesses for various purposes, such as home
mortgages, business expansion, or personal loans.

• Payments and Settlements: Banks enable transactions through various payment methods, like
checks, debit/credit cards, and electronic transfers.
 • Currency Exchange: Many banks offer foreign exchange services, allowing customers to buy, sell,
or exchange foreign currencies.

• Safekeeping of Valuables: Some banks offer safe deposit boxes for customers to securely store
valuable items and documents.

• Investment Services: Banks also provide investment products like mutual funds, stocks, and bonds,
helping customers grow their wealth.

• Internet Banking Services: Banks offer online and mobile banking services, making it convenient for
customers to access their accounts, pay bills, and transfer funds.

Types of Banks in India

The Banking System in India is divided into several types, each serving specific functions and purposes.
The table below represents the different types of banks in India and how it is further divided:
Banking Classification in India

Types of Banks Sub-types

Central Bank -

Commercial Banks a) Private Sector Banks

b) Public Sector Banks
c) Regional Rural Banks
d) Foreign Banks

Co-operative Banks a) State Co-operative Banks

b) Urban Co-operative Banks

Payment Banks -

Small Finance Banks -

Scheduled Banks -

Non-scheduled Banks -

1) Central Bank
The Reserve Bank of India (RBI) serves as the Central Bank of India and is responsible for regulating and
controlling the monetary and banking system in the country.

2) Commercial Banks

These are the most common types of banks and include public sector banks, private sector banks, and foreign
banks. They provide various services like savings and current accounts, loans, and investments.

These are the most common types of banks and include public sector banks, private sector banks, and foreign
banks. They provide various services like savings and current accounts, loans, and investments.

• Public Sector Banks: Owned and operated by the government, examples include State Bank of
India (SBI), Punjab National Bank (PNB), and Bank of Baroda (BOB).

• Private Sector Banks: These are privately owned and managed banks, such as HDFC Bank, ICICI
Bank, and Axis Bank.

• Foreign Banks: These banks have branches in India and are headquartered in foreign countries.
Some examples are Citibank, Standard Chartered, and HSBC.

• Regional Rural Banks (RRBs): These banks cater to rural and semi-urban areas and are owned by
the government, commercial banks, and state governments.

The table below shows a few examples of Commercial Banks in India.

Commercial Banks in India

Public Sector Banks Private Sector Banks Foreign Banks

Here is a list of public sector Here is the list of private sector Here is a list of foreign banks that
banks in India: banks in India: operate in India:

• Bank of Maharashtra • I.C.I.C.I. Bank • Australia and New Zealand

Banking Group Ltd.
• Indian Bank • R.B.L. Bank
• National Australia Bank
• Bank of Baroda • I.D.F.C. Bank
• Westpac Banking
• Canara Bank • South Indian Bank
Corporation
• State Bank of India • IDBI Bank
 • Central Bank of India • Tamilnad Mercantile • Bank of Bahrain & Kuwait
Bank BSC
• Union Bank of India
• YES Bank • AB Bank Ltd.
• Indian Overseas Bank
• Axis Bank • Credit Agricole Corporate &
• UCO Bank
Investment Bank
• City Union Bank
• Punjab & Sind Bank
• Societe Generale
• Karnataka Bank
• Bank of India
• Deutsche Bank
• Dhanlaxmi Bank
• Punjab National Bank
• HSBC Bank
• Kotak Mahindra Bank
• PT Bank Maybank Indonesia
• D.C.B. Bank
TBK
• Karur Vysya Bank
• Mizuho Bank Ltd.
• Federal Bank
• Sumitomo Mitsui Banking
• Lakshmi Vilas Bank Corporation
• H.D.F.C. Bank • M.U.F.G. Bank, Ltd.
• Nainital Bank • Coöperatieve Rabobank U.A.
• IndusInd Bank • Sonali Bank Ltd.
• Bandhan Bank • Bank of Nova Scotia
• Jammu and Kashmir • Industrial & Commercial
Bank Bank of China Ltd.

• BNP Paribas

• Doha Bank Q.P.S.C.

3) Cooperative Banks

A Co-operative Bank is registered under the Co-operative Societies Act of 1912 and is run by an elected
managing committee. It works on a non-profit, no-loss basis and mainly serves entrepreneurs, small
businesses, self-employment, and more in urban areas.

In rural areas, it mainly functions to finance agriculture-based activities like farming, livestock, and hatcheries.
There are mainly two types of Co-operative Banks:
 Types of Description
Cooperative
Bank

State Co- A State Co-operative Bank is a federation of the central Co-operative banks that will
operative Banks act as a custodian of the Co-operative banking structure in the State.

Urban Co- The Urban Co-operative Bank is the primary Co-operative bank located in urban and
operative Banks semi-urban areas. The banks essentially lent to smaller borrowers, and businesses
centred around a community, locality, and more.

4) Payment Banks

The payment banks are a relatively new banking model in the country that has been conceptualised by the
RBI. This bank is allowed to accept a restricted deposit. This amount is limited to Rs. 1 lakh for a customer.
The bank also offers services such as ATM cards, net banking and more.

5) Small Finance Banks

These banks primarily serve the unserved and underserved sections of the population, including small
businesses and low-income individuals.

This type of bank is licensed under Section 22 of the Banking Regulation Act 1949, and it is governed by the
Provisions Act of 1934.

Here are a few examples of Small Finance Banks in India:

• AU Small Finance Bank Ltd.

• Utkarsh Small Finance Bank Ltd.

• Fincare Small Finance Bank Ltd.

• Ujjivan Small Finance Bank Ltd.

• Jana Small Finance Bank Ltd.

• ESAF Small Finance Bank Ltd.

• Suryoday Small Finance Bank Ltd.

 • Equitas Small Finance Bank Ltd.

• Capital Small Finance Bank Ltd.

• North East Small Finance Bank Ltd.

6) Scheduled Banks

These banks are covered under the 2nd Schedule of RBI Act 1934, and they need to have a paid-up capital of
Rs. 5 lahks or more.

7) Non-Scheduled Banks

The non-scheduled banks are local area banks that are not listed in the 2nd Schedule of the RBI Act 1934.

Types of Bank Accounts in India

Banks offer several types of bank accounts to cater to different financial needs. These bank accounts vary
from one another based on the purpose, transaction frequency and location.

Given below are the common types of bank accounts in India:

• Savings Account: This is a basic account for individuals to save money. It offers interest on deposits
and allows limited withdrawals.

• Current Account: This type of account is mainly used by businesses. It has zero or very low interest
rates but offers more transaction features, making it suitable for frequent transactions.

• Fixed Deposit Account: In this account, you deposit a lump sum for a fixed tenure at a higher interest
rate compared to savings accounts. Funds are locked in until maturity.

• Recurring Deposit Account: It is a savings plan where you deposit a fixed amount every month, and
at the end of a specified period, you receive the principal and interest.

• NRI (Non-Resident Indian) Account: These are for Indians living abroad. NRE (Non-Resident
External), NRO (Non-Resident Ordinary) and FCNR (Foreign Currency Non-Residential) accounts
are major types of NRI accounts.

• Senior Citizen Savings Account: Created for senior citizens, these accounts offer higher interest rates
and additional benefits.
 • Salary Account: This account is used by an employer to credit the salary of an employee every month.
It does not have any minimum balance requirement.

• Demat Account: This account is created primarily for holding and trading in securities electronically,
such as stocks and bonds.

• Joint Account: It is shared by two or more individuals, often used for family or business purposes.

• Minor Account: Opened on behalf of minors by parents or guardians. The minor gains control upon
reaching a certain age.

• Corporate Account: Used by companies and corporations for their banking needs, including payroll
and transactions.

DEVELOPMENT FINANCIAL INSTITUTIONS

EXIM Bank
EXIM Bank (Export-Import Bank of India) is a leading export finance-based institution in India which
engages in integrating Foreign Trade and Investment with the national economic growth. It aims to enhance
the exports from India and promote the country’s international trade. The Bank primarily lends for exports
from India, including supporting overseas buyers and Indian suppliers for export from India.

Table of Contents
Overview of EXIM Bank

Established in 1982

Headquarters Mumbai, Maharashtra

Owned by Government of India

Regulated by Reserve Bank of India (RBI)

Aim Financing, facilitating and promoting foreign trade of India

About the EXIM Bank

In September 1981, the Government of India passed the Export-Import Bank of India Act of 1981 during
the Sixth Five-Year Plan (1980-85). Under this Act, the government set up the Export-Import Bank of
India (EXIM Bank) in 1982 as a purveyor of export credit. The Bank commenced its operation in March
1982 with an initial capital of 44 crore rupees.
The Government of India wholly owns the EXIM Bank, and the Reserve Bank of India (RBI) regulates it.
The headquarter of EXIM Bank is in Mumbai, Maharashtra. Its main aim is to finance, facilitate, and
promote foreign trade in India. It provides Direct Lending and Refinancing through an institutional
agency identified by RBI.

Board of Directors

A Board of Directors governs the operations of the EXIM Bank. The Board of Directors consists of:

• Chairman,
• One Managing Director,
• Two deputy Managing Directors,
• One Director appointed by the Reserve Bank of India,
• One Director nominated by IDBI Bank Ltd.,
• One Director nominated by ECGC Ltd. (Export Credit and Guarantee Cooperation Limited),
• Not more than 12 Directors are nominated by the Central Government, of whom 5 Directors
are Central Government officials, not more than 3 Directors are from commercial banks, and
up to 4 Directors are professionals with experience in export/import or financing.
Objectives of EXIM Bank

The Objectives of EXIM Bank include:

• To provide financial assistance to exporters and importers and function as the principal
financial institution for coordinating the working of institutions engaged in financing exports
and import of goods and services, with a view to promoting the country’s international trade.
• To act on business principles with due regard to the public interest.
Vision – EXIM Bank

The EXIM Bank’s vision has transformed from a product-centric approach with Export Capability
Creation and Export Credits to a more customer-centric approach by providing a comprehensive range of
products and services to empower business at all stages of a company’s business operation.

The Bank aims to utilise the leadership and expertise in Export Finance to make a lasting difference to
Indian companies with global aspirations. Its mission is to facilitate the globalisation of Indian Business.

Functions of EXIM Bank

The main functions of the EXIM Bank are as follows:

• It finances the exports and imports of goods and services from India and countries other than
India.
• It provides refinancing services to banks and other financial institutions for their capital
requirements for foreign trade.
• It also underwrites shares/stocks/debentures/bonds of companies engaged in foreign trade.
• It offers short-term loans or lines of credit to foreign banks and governments.
• It provides technical and other assistance to importers and exporters.
• It finances the import or export of machinery and equipment on a lease or hire-purchase
basis.
 • It can also provide business advisory services and expert knowledge to Indian exporters
regarding multi-funded projects in foreign countries.
• It also facilitates investments by Indian companies abroad for setting up joint ventures,
subsidiaries or overseas acquisitions.
It serves as a growth engine for industries and SMEs (Small and Medium-sized Enterprises) through a wide
range of products and services. It plays a vital role in helping Indian companies to do business abroad and
bring in foreign exchange. The EXIM Bank’s functions take place through its financial
products and services.

NABARD
ORGANISATION
National Bank for Agriculture and Rural Development (NABARD) was established on
12 July 1982 by an Act of the Parliament to promote sustainable and equitable
agriculture and rural prosperity through effective credit support, related services,
institutional development and other innovative initiatives.
FUNCTIONS AND DUTIES
Credit NABARD extends:
Refinance support to Rural Financial Institutions (RFI’s), mainly to Cooperative
Banks and Regional Rural Banks, for Seasonal Agricultural Operations,
handloom weavers, marketing operations etc.
Refinance support to Rural Financial Institutions for increasing flow of long
term credit to create assets and capital formation in agriculture and allied
sector.
Direct refinance assistance to Cooperative Banks for providing short term
multipurpose credit.
Credit facility to Marketing Federations, Corporations and Cooperatives.
Loans to State Governments for creating rural infrastructure from Rural
Infrastructure Development Fund (RIDF).
Loans for creation of warehousing infrastructure to State Governments, State
and Central Government owned entities, Cooperatives and Federation of
Cooperatives, Corporate / Companies, Individual Entrepreneurs etc., from
Warehousing Infrastructure Fund (WIF).
Direct lending to state owned institutions /corporations, Cooperatives,
Producers’ Organizations, etc., under NABARD Infrastructure Development
Assistance (NIDA).
Developmental Initiatives:
Credit Planning, Monitoring and Coordination along with various stakeholders
in increasing the ground level credit flow and capital formation in agriculture
sector.
 Policy formulation by GOI, RBI, State Governments on agriculture credit, rural
development, institution development and related matters.
Research and studies, techno-economic and other surveys, training,
dissemination of information in agriculture and rural development and rural
banking.
Financial Inclusion for inclusive growth.
Self-Help Group Bank Linkage Programme.
Promotion of Women SHG’s in backward/left wing extremism affected
districts.
Formation of Joint Liability Groups of marginal and tenant farmers.
Promotion of livelihood opportunities and micro enterprises.
RFI’s to issue RUPAY Kissan Credit Cards.
Farmers’ Club programme.
Watershed Development Programme.
Integrated Tribal Development Programme.
Producers’ Organizations.
Pilots to mitigate the adverse impact of climate change in agriculture sector
and promoting initiatives in an ecologically sustainable manner.
Productivity augmentation and technology transfer.
Creating livelihood avenues through skills development in off-farm sector.
Institution Building Initiatives:
Building of Rural Financial Institutions, capacity building of its personnel and
Board Members of Credit Cooperatives
Developing innovative products for greater outreach and business
development of RFI’s
Core Banking Solutions in Cooperative Banks and linking them to payments
system through RTGS/NEFT
Financial inclusion by RFI’s with focus on information, communication and
technology
Development and growth of business of Primary Agriculture Cooperative
Societies (PACS) through Central Cooperative Banks
Developing Primary Agriculture Cooperative Societies (PACS) as Multi Service
Centres.
Supervision:
NABARD undertakes statutory inspection of Regional Rural Banks (RRB’s) and State
Cooperative Banks (STCB’s) and District Central Cooperative Banks (DCCB’s),
voluntary inspection of State Cooperative Agriculture and Rural Development Banks
(SCARDB’s) and their off-site surveillance.
Other – Government of India Programmes:
NABARD Coordinates with Government of India in the implementation of:
Select Government’s programmes such as National Rural Livelihood Mission
(NRLM), Prime Minister’s Jan Dhan Yojana (PMJDY), etc.
Select Government of India Capital Investment Subsidy Schemes as a pass
through agency.
SIDBI [Small Industrial Development Bank of India]
Small Industries Development Bank of India (SIDBI)
Small Industries Development Bank of India (SIDBI): SIDBI was established as a statutory body in 1988
under a special Act of the Indian Parliament, which came into force on April 2, 1990. SIDBI full form is
Small Industries Development Bank of India. SIDBI headquarter is in Lucknow, Uttar Pradesh. It is one of
the four All-India Institutions, the others being NABARD, EXIM, and NHB.
Initially, SIDBI was fully involved in industrial development activities in the country by managing SIDF
(Small Industries Development Fund) and NEF (National Equity Fund) and was the financial base for
funding the MSME (Micro, Small, and Medium enterprises) sector. SIDBI was owned by a consortium of
SBI as a share with 15.65 %, LIC as a share with 13.33 %, the Government of India as a share with 20.85 %,
NABARD as a share with 9.36 %, and other public financial institutions as share with 40.81 %.
SIDBI assists around Rs 5.45 lakh crore to the MSME sector in the country to expand the market and
develop its innovative thoughts and technologies to help to produce profitable products. SIDBI aims to work
with and reinforce the flow of credit to MSMEs and address monetary, formative, and developmental gaps in
the MSMEs industry zones across the country
SIDBI is mainly focusing on establishing more than 55% of MSMEs located in the rural areas of the
country. In 2013, the Government of India set up a committee called R.S. Gujaral’s committee of financial
exports to boost the MSME sector. To minimize human interaction in the MOU process Government of
India has implemented a module called “E-biz” under the National E-governance plan by the DIPP
(Department of Industrial Policy and Promotion).
Functions of SIDBI
Here’s a detailed look at the functions of SIDBI:
1. Financing
SIDBI provides direct and indirect financial assistance to MSMEs. Direct finance includes term loans for
setting up new industrial units and for the expansion, modernization, or diversification of existing units.
Indirect finance is provided through the refinance of loans given by primary lending institutions like
commercial banks and state finance corporations.
2. Microfinance
SIDBI is instrumental in promoting microfinance through various schemes. It extends support to Micro
Finance Institutions (MFIs) and also directly participates in micro-lending activities, aiming to reach the
underserved and financially excluded segments of society.
3. Promotion and Development
Beyond financing, SIDBI also engages in the promotion and development of MSMEs by supporting
technology upgradation, modernization, skill development, and infrastructure development.
4. Market Development
It helps in expanding marketing capabilities of MSMEs, including facilitating their participation in trade
fairs, exhibitions, and providing assistance in product marketing both domestically and internationally.
5. Venture Capital
SIDBI provides venture capital support to startups and businesses operating in emerging sectors. It aids
innovation-driven enterprises, particularly in their early stages of growth.
6. Rehabilitation of Sick Units
SIDBI takes measures for the revival and rehabilitation of sick industrial units that have potential for
recovery.
7. Credit Guarantee
Through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), SIDBI provides
credit guarantees to financial institutions for loans extended to MSMEs, thereby enhancing their
creditworthiness.
8. Cluster Development
SIDBI promotes cluster development to enhance the productivity and competitiveness of MSMEs. This
involves creating common facilities, improving technology, and strengthening market linkages.
9. Energy Efficiency
It also undertakes initiatives to promote energy efficiency and sustainable development among MSMEs,
providing financial assistance for adopting greener technologies.
10. Capacity Building
SIDBI conducts various training and development programs for entrepreneurs to enhance their managerial
and technical skills.
11. Policy Advocacy
The bank actively engages in policy advocacy by providing feedback and suggestions to the government for
shaping policies that benefit the MSME sector.
12. Information Dissemination
It serves as a repository of information related to the MSME sector, providing data, research findings, and
industry trends to stakeholders.
13. International Cooperation
SIDBI collaborates with international agencies for financial and technical cooperation, aiming to bring best
practices and global standards to the Indian MSME sector.
14. Credit Flow Enhancement
SIDBI works to enhance the flow of credit to MSMEs by developing credit products, supporting non-
banking financial companies, and fostering partnerships between various stakeholders.
Through these functions, SIDBI plays a pivotal role in empowering the MSME sector, which is a significant
contributor to India’s economic growth, employment generation, and export earnings.
MUDHRA
What is MUDRA?
MUDRA is a financial institution in India that was established by the Government of India to provide
financial support and funding to micro and small enterprises, including small businesses, entrepreneurs, and
individuals, who may not have access to traditional banking services. MUDRA aims to promote
entrepreneurship and financial inclusion by offering various loan products and refinancing options to these
smaller businesses and individuals. MUDRA aims at the advancement of the economy as a whole. MUDRA
came into existence on 8th April 2015, under Jan Dhan Yojana.
Full Form of MUDRA
MUDRA stands for “Micro Units Development and Refinance Agency.” MUDRA is a financial
institution in India that was established by the Government of India to provide financial support and funding
to micro and small enterprises.
Objectives of MUDRA
1. Financial Inclusion: To promote financial inclusion by extending financial services to those who are
traditionally underserved by the formal banking sector, including small entrepreneurs, micro-enterprises, and
self-employed individuals.
2. Funding Support: To provide funding and credit facilities to micro and small businesses to help them
start, expand, or modernise their operations. MUDRA offers various loan products designed to meet the
financial needs of different segments of micro and small enterprises.
3. Employment Generation: To facilitate the creation of job opportunities and promote entrepreneurship in
India, particularly in rural and semi-urban areas, by supporting small businesses and self-employment
ventures.
4. Economic Growth: To contribute to the overall economic growth of the country by boosting the
productivity and profitability of micro and small enterprises, which play a crucial role in the Indian
economy.
5. Skill Development: To encourage skill development and capacity building among small entrepreneurs
and individuals engaged in various trades and businesses.
6. Women Empowerment: To empower women entrepreneurs and promote their participation in economic
activities by offering financial assistance and support.
7. Financial Stability: To ensure the stability and sustainability of micro and small businesses by providing
them with access to affordable and convenient credit options.
8. Refinancing Support: To refinance lending institutions, such as banks, non-banking financial companies,
and microfinance institutions, that extend loans to micro and small businesses.
9. Prudent Lending: To encourage responsible and prudent lending practices among financial institutions
and ensure that loans are extended to micro and small enterprises based on their creditworthiness and
business potential.
10. Monitoring and Evaluation: To monitor and evaluate the progress and impact of MUDRA’s programs
and initiatives to ensure they are effectively achieving their objectives.
Offerings of MUDRA
MUDRA (Micro Units Development and Refinance Agency) offers various financial products and services
to support the growth and development of micro and small enterprises, as well as to promote
entrepreneurship and financial inclusion in India. Some of the key offerings provided by MUDRA include:
1. Shishu, Kishor, and Tarun Schemes: MUDRA offers three categories of loan products to cater to the
different stages and financial needs of micro and small businesses:
• Shishu: Loans up to ₹50,000 for micro-enterprises at an initial stage.
• Kishor: Loans from ₹50,000 to ₹5 lakhs for businesses looking to expand.
• Tarun: Loans from ₹5 lakhs to ₹10 lakhs for established enterprises seeking further growth.
2. MUDRA Card: The MUDRA Card is a credit card-like facility offered to eligible borrowers, allowing
them to access funds as needed within their approved credit limit. It provides flexibility in managing
working capital and business expenses.
3. Refinancing Support: MUDRA refinances various lending institutions, including banks, non-banking
financial companies (NBFCs), and microfinance institutions, to encourage them to provide loans to micro
and small businesses. MUDRA offers refinancing support for loans extended under the Pradhan Mantri
Mudra Yojana (PMMY).
4. Financial Products for Women Entrepreneurs: MUDRA provides special financial products and
schemes for women entrepreneurs to promote their participation in economic activities and self-
employment.
5. Micro-Credit Products: MUDRA extends micro-credit to individuals who may not have access to
traditional banking services, helping them start or expand small businesses and income-generating activities.
6. Interest Subvention: The Government of India has introduced interest subvention schemes for MUDRA
borrowers, where eligible borrowers receive interest rate subsidies to reduce the cost of their loans.
7. Capacity Building and Skill Development: MUDRA supports skill development and training programs
for micro and small business owners to enhance their entrepreneurial capabilities and management skills.
8. Online Application and Processing: MUDRA offers an online platform for borrowers to apply for loans
and check their loan eligibility. This digital initiative simplifies the loan application and approval process.
Functions of MUDRA
1. Refinancing: MUDRA acts as a refinancing institution for banks, non-banking financial companies
(NBFCs), and microfinance institutions that provide loans to micro and small enterprises. It provides
funding support to these institutions, which in turn, extends loans to small businesses and individuals.
2. Loan Products: MUDRA designs and offers various loan products to cater to the diverse financial needs
of micro and small enterprises. These loans are categorised under Shishu, Kishor, and Tarun schemes,
targeting businesses at different stages of development.
3. Promotion and Development: MUDRA promotes the development and growth of micro and small
enterprises by offering them affordable and accessible credit, which helps them start, expand, and modernise
their operations.
4. Financial Inclusion: MUDRA’s primary goal is to promote financial inclusion by providing financial
services to those who are underserved by traditional banking institutions, including small entrepreneurs,
self-employed individuals, and those in rural and semi-urban areas.
5. Skill Development: MUDRA supports skill development and capacity-building programs for small
business owners and entrepreneurs to enhance their skills, knowledge, and managerial capabilities, making
them more competitive and successful.
6. Targeted Schemes: MUDRA provides specific financial products and schemes for women entrepreneurs
to encourage their participation in economic activities and self-employment.
7. Interest Subvention: The agency facilitates interest subvention schemes where eligible borrowers
receive subsidies on their loan interest rates, reducing the cost of borrowing for micro and small enterprises.
8. Monitoring and Evaluation: MUDRA continually monitors and evaluates the progress and impact of its
programs and initiatives to ensure they are effectively achieving their objectives and making necessary
adjustments as needed.
9. Digital Initiatives: MUDRA has introduced digital platforms and online application processes to
streamline loan application and processing, making it more convenient for borrowers.
10. Women Empowerment: MUDRA places a strong focus on empowering women entrepreneurs by
offering financial assistance and support tailored to their unique needs and circumstances.
Interest Rate of MUDRA Loan
The interest rates for MUDRA (Micro Units Development and Refinance Agency) loans in India can vary
among different lending institutions, as they have the flexibility to determine their own interest rates. These
institutions include banks, microfinance institutions (MFIs), non-banking financial companies (NBFCs), and
regional rural banks. The interest rates are typically competitive and based on various factors, including the
prevailing market rates and the risk assessment of the borrower.
It is important to note that the government of India has introduced interest subvention schemes for MUDRA
borrowers to make loans more affordable. Under these schemes, eligible borrowers receive interest rate
subsidies, reducing the effective interest cost on their loans. These schemes may provide an interest rate
discount of 2-3% on MUDRA loans, depending on the specific subvention program in place.
Advantages of MUDRA
1. Financial Inclusion: MUDRA promotes financial inclusion by providing access to formal credit and
financial services to those who are traditionally underserved by the banking sector, including small
entrepreneurs, self-employed individuals, and those in rural and semi-urban areas.
2. Access to Credit: MUDRA loans make it easier for micro and small enterprises to access affordable
credit, helping them start, expand, and modernise their operations.
3. Job Creation: By supporting the growth and development of small businesses, MUDRA indirectly
contributes to job creation and employment generation, particularly in rural and semi-urban areas.
4. Entrepreneurship Promotion: MUDRA encourages entrepreneurship by providing financial support to
individuals looking to start their own businesses or income-generating activities.
5. Women Empowerment: MUDRA offers special financial products and schemes for women
entrepreneurs, empowering them to participate in economic activities and become financially independent.
6. Skill Development: MUDRA supports skill development and capacity-building programs for small
business owners, enhancing their entrepreneurial skills and managerial capabilities.
7. Refinancing Support: MUDRA refinances lending institutions, including banks, microfinance
institutions, and NBFCs, encouraging them to extend loans to micro and small enterprises.
Disadvantages of MUDRA
1. Risk of Over-Indebtedness: The availability of credit through MUDRA loans can sometimes lead to
over-indebtedness among borrowers, especially if they are not adequately trained or financially literate.
Borrowers may take on more debt than they can reasonably repay, which can lead to financial distress.
2. Lack of Formal Credit History: Many micro and small entrepreneurs may not have a well-documented
credit history, making it challenging for them to access MUDRA loans. This can result in limited access to
credit for those who need it most.
3. Limited Loan Amounts: While MUDRA offers loans in different categories (Shishu, Kishor, and
Tarun), the maximum loan amount may not be sufficient for some businesses with larger capital
requirements. This limitation may force such businesses to seek additional funding from other sources.
4. Interest Rates: While MUDRA loans offer competitive interest rates, some borrowers may find them
relatively high, particularly in comparison to government-sponsored agricultural loans. Lower interest rates
could make MUDRA loans even more accessible and affordable for micro and small enterprises.
5. Lack of Targeted Support: MUDRA loans do not always provide targeted support for specific industries
or sectors. As a result, businesses in niche or specialised sectors may face challenges in accessing suitable
financing options.
6. Operational Challenges: Some borrowers have reported operational challenges when dealing with
lending institutions, including lengthy application processes, documentation requirements, and delays in
loan disbursement.
7. Potential Misuse of Funds: In some cases, MUDRA loans may be misused for personal expenses rather
than for productive business purposes. This misuse can undermine the program’s intended benefits.
Conclusion
MUDRA, with its focus on financial inclusion, entrepreneurial support, and skill development, has made a
significant impact on micro and small enterprises in India. While it has several advantages, including access
to credit and employment generation, there are challenges, such as over-indebtedness and the need for a
more comprehensive support system. Addressing these challenges and expanding MUDRA’s reach can
further contribute to economic growth and inclusive development in India.
NHB [National Housing Bank]
National Housing Bank
• NHB Full Form: National Housing Bank
• Mandate: NHB has been given a mandate of operating as a principal agency for promoting housing
finance institutions both at local and regional levels and to provide financial and other services to
such institutions.
o In this goal of regulating the housing finance sector, It registers and supervises Housing
Finance Companies (HFCs), maintains surveillance through On-site and off-site Mechanisms,
and coordinates with other Regulators.
• Setting Up: The Sub-Group on Housing Finance for the Seventh Five Year Plan (1985–90) had
identified the non-availability of long-term finance to individual households as a major roadblock for
the progress of the housing sector.
o As a response, a High-Level Group under the Chairmanship of Dr. C. Rangarajan was set up
to examine the proposal of setting up the National Housing Bank as an autonomous housing
finance institution.
o The National Housing Bank (NHB) was set up on 9 July 1988 under the National Housing
Bank Act, 1987.
NHB: Its Objectives

The NHB has been set up with the following objectives:

• Promoting a viable and cost-effective housing finance system to cater to all segments of the
population and to integrate the housing finance system with the overall financial system.
• Promoting a pool of dedicated housing finance institutions to adequately serve the needs of various
regions and different income groups.
• Regulating the activities of housing finance companies based on existing regulatory and supervisory
authority derived under the Act.
• Augmenting existing resources for the housing sector.
• Making housing credit more affordable for the people.
• Providing support and aid for housing finance institutions.
• Augmenting the supply of buildable land and also building materials for the housing sector and
upgrading the housing stock in the country.
• Encouraging public authorities to emerge as facilitators and suppliers of serviced land, for housing.
NHB: Its Structure
• Governance: The general superintendence, direction, and management of the affairs and business
of NHB under the Act vests in a board of directors.
• Regulation: The Finance Act, 2019 has amended the National Housing Bank Act, 1987 to confer the
powers of regulation of Housing Finance Companies (HFCs) to the Reserve Bank of India (RBI).
NHB: Its Functions
• Supervising Housing Companies: The National Housing Bank (NHB) has the role
of supervising housing companies in the country following the Act.
• Lending Loans: It extends housing loans to individuals and housing infrastructure companies.
• Registering Housing Finance Companies: The NHB has the role of registering Housing
Finance Companies in the country.
• Refinancing: It raises Funds from the market and uses it for refinancing the housing finance
companies along with cooperative banks.
• Follow Regulatory Rules: It ensures that housing finance companies under the Act follow
the regulatory capital required as outlined in BASEL guidelines.
• Auditing Housing Companies: The NHB is tasked with auditing housing finance companies,
ensuring their compliance with the relevant guidelines.
NHB: Its Significance
• Regulates Housing Finance Sector: NHB ensures the regulation and oversight of all housing
finance companies operating throughout India.
• Liquidity for the Housing Sector: It ensures a continuous flow of liquidity to various finance
institutes working in the housing sector.
• Boosting the Housing Sector: It is also tasked with boosting the housing sector by increasing the
number of housing units in the country.
National Housing Bank
• About: Based on the directives of the Union Ministry of Finance, India’s first official housing price
index, National Housing Bank-RESIDEX was created by the National Housing Bank.
• Development: The National Housing Bank-RESIDEX was created based on the assistance of the
Technical Advisory Committee, consisting of all stakeholders.
• Objective: The objective of National Housing Bank-RESIDEX is to track changes in housing
prices at neighborhood, city, and national levels.
o Price changes will be tracked over time and across cities and various locations within cities.
• Calculation: Initially calculated using market data, it is now based on valuation data obtained from
housing finance companies (HFCs) and banks.
o Between 2013 and 2015, data was sourced from the Central Registry of Securitization Asset
Reconstruction and Security Interest of India (CERSAI).
• New Changes: To make National Housing Bank-RESIDEX more current and up-to-date with
the prevailing situation, NHB carried out a review of the processes and methodology used for
computation of the index along with the base year and segmentation used.
 oNational Housing Bank-RESIDEX has been expanded to include housing price indices (HPI),
land price indices (LPI) building materials price indices (BMPI), and also housing rental
index (HRI).
• Significance:
o Using current trends in micro as well as macro markets, National Housing Bank-RESIDEX
will predict future behavior of the housing market.
o The index will help banks, HFCs, developers, and home-buyers to identify property prices.
o The index will be useful for credit evaluation processes undertaken by lenders. This will
ensure stronger safeguards against financial lending.
o It can help policy makers and various research institutions to track inflation/deflation in
housing prices.
▪ Policy makers can use the data to develop models for more effective revenue
collection, and to design affordable housing schemes.
Conclusion:

The National Housing Bank (NHB) is a self-governing body that meets the financing needs of housing
finance companies by either fundraising for onward refinancing or through guarantees.

LIC[Life Insurance Corporation]

LIC stands for Life Insurance Corporation of India. It started its operations as a corporate firm in September
1956 after the Life Insurance of India Act was passed by India’s Parliament in June 1956. The LIC Act came
into effect from July 1956. It helped in the nationalization of the private insurance industry in India. LIC of
India was formed by merging 154 life insurance companies, 16 foreign companies and 75 provident
companies. It is one of the largest financial institutions in India. It has an asset value of over 2,529,390 crores.
The headquarters of LIC is in Mumbai, Maharashtra.

The main slogan of LIC is- “Yogakshemam Vahamyaham” meaning “Your welfare is our responsibility”. It
is in Sanskrit and is obtained from the 22nd verse of the Bhagavad Gita’s 9th chapter. The chairman of Life
Insurance of India is Mr M.R Kumar.
Role of LIC in Indian Economy
LIC is known as India's largest government-owned life insurance and investment corporation. The main role
of LIC is to invest in global financial markets and different government securities after gathering funds from
people through their various life insurance policies. At least 75% of these gathered funds are to be invested in
Central and State Government securities, as stated by one of the LIC rules.
Functions of LIC
The major functions of LIC are as follows:-
• Collect people’s savings in exchange for an insurance policy and promote savings in the country.
• Protect the capital of the people by investing funds into government securities.
• Issue insurance policies at affordable rates
• Provide various loans like direct loans to industries, housing loans, loans to various national projects
at reasonable interest rates.

Objectives of LIC
• LIC aims to spread awareness about the importance of life insurance among people living in rural areas
and people who are a part of socially and economically backward classes.
• It aims to meet several life insurance needs of the community people who are subjected to change with
the changing social and economic environment.
• It aims to conduct business economically while taking into consideration that the money belongs to
the policyholders.
• It aims to maximize the mobility of people’s savings through attractive insurance-linked savings.
• It aims in providing utmost job satisfaction to all the agents and employees of the corporation and
promotes building a co-operative work environment to deliver efficient service with courtesy to its
insured public.
 • It aims to deploy the funds to the best advantage of the investors and the community as well.

Types of LIC Life Insurance Plans

LIC provides numerous schemes to its policyholders. It offers different schemes for different categories and
segments of the Indian economy. It is the largest insurance policy company in terms of the number of policies
it has issued to date. Some of the policies are as follows:-
• LIC’s Jeevan Pragati
• LIC’s Jeevan Labh
• LIC’s Single Premium Endowment Plan
• LIC’S Jeevan Lakshya
• LIC’s Jeevan Tarun
What are the Basic Policies of the Life Insurance Corporation of India?
The basic policies in Life Insurance Corporation of India (LIC) are term insurance, cash value insurance,
straight life insurance, and limited payment life insurance. The details of each of these policies are given
below:

• Term insurance: This insurance is like an insurance protection contract, similar to auto insurance,
home insurance, or health insurance. Therefore, it ensures the individual against any risk of financial
loss in case of death and does not include any savings plan. In this insurance policy, the owner buys a
fixed amount of coverage and pays an annual premium based on their age. The policy is for a fixed
period of time and thus the coverage stops if it is not renewed. These policies are available for five
years, ten years or fifteen years where the amount of premium to be paid remains constant. The life
insurance can also be purchased with a condition of 65 years of age, that is, the insured does not
become 65 years of age and in this case, the amount of premium to be paid increases annually. There
is decreasing term life insurance also available wherein the coverage of the insurance decreases with
time so that the annual premium to be paid remains constant. Term insurances provide maximum
coverage to the premium spent.
• Cash value insurance: In this kind of policy, the amount of actual insurance decreases over time and
the savings component of the policy increases over time. This type of insurance is funded by the
premium payments done by the insured along with the earnings of the saving element in the policy.
These insurance policies are of two types: straight life policy and a limited payment policy that
provides coverage to the insured throughout life.

1. Straight life insurance: the insurance is throughout life. In this type of insurance, the amount
of protection decreases as the savings amount increases, though the total coverage of the policy
that includes the protection and savings elements remains the same. The premium in these
policies is higher than the term insurance which is based on the age of the individual when he
or she buys insurance. The premium for this policy remains constant. The face value of
insurance refers to the amount which is paid when the insured person dies.
2. Limited payment life insurance: in this type of policy the insured person pays the total
amount of policy in a limited number of years, that is, usually 20 to 30 years or by the age of
65. After the completion of the term, the policy remains active for the whole life of the insured
if he or she has not withdrawn the amount at any point in time. The amount of premium to be
paid every year in this policy is obviously higher than the straight life policy.

Did You Know?

The first company in India that provided insurance coverage was The Oriental Life Insurance Company,
established in 1818, in Kolkata. Surendranath Tagore founded the Hindustan Insurance Society which later
became Life Insurance Company.

GIC[General Insurance Company]

The General Insurance Corporation of India (GIC) was formed under Section 9 (1) of the General Insurance
Business (Nationalization) Act (GIBNA). As soon as the GIC was formed, the government of India
transferred all the shares of the 55 general insurance companies to GIC.
Simultaneously, the nationalized undertakings were transferred to the Indian insurance companies. After a
process of mergers among the Indian insurance companies, four of them were left as fully owned
subsidiaries of the GIC.

As of August 2020, the Chairman cum Managing Director of GIC is Mr. Devesh Srivastava

The next milestone occurred on 19th April 2000, when the Insurance Regulatory and Development
Authority Act (IRDAA) came into existence.

Roles and functions of the GIC

Now, let us understand the roles and functions of the General Insurance Corporation of India in this section.
They are as below:

o To carry on of any part of the general insurance, if it thinks it is worthwhile to do so

o To assist, advise, and aid the acquiring companies in the matter of setting up the standards of conduct
and fair practice in the business of general insurance.
o To render efficient services to the general insurance policyholders.
o To issue directives to the acquiring companies in relation to the conduct of the business of general
insurance.
o To advise the acquiring companies in the matters concerning investing their funds.
o To issue directions to the acquiring companies and encourage competition among them in order to
render efficient services.

UTI [Unit trust of India]

UTI
Unit Trust of India was first Set up in 1st February 1964 under the Unit Trust of India Act, 1963. It is a
statutory public sector investment institution having the main objective to encourage and mobilize the savings
of the community and canalize them into productive corporate investment.

UTI – Unit Trust of India

A unit trust is an investment plan in which the funds are pooled together and then invested. The fund which is
pooled is then unitized and the investor who is one party to the unit trust is called a unitholder, holding a certain
number of units.

A second party i.e the manager is responsible for the day-to-day running of the trust and for investing the funds.

The trustee, governed by the Trust Companies Act 1967, is the third party, and their role is to monitor the
manager’s performance against the trust’s deed.

The deed outlines the objectives and vital information about the trust. Also, the assets of the trust are held in the
name of the trustee and then they are held “in trust” for the unitholders.

Objectives of Unit Trust of India (UTI)

Unit Trust of India Provides to the investor a safe return of the investment whenever they require funds. UTI
provides daily price record and advertises it in the newspapers.
Thus, two prices are quoted on a daily basis, the purchase price and the sale price of the units. This price may
fluctuate daily, but the fluctuations are nominal on a monthly basis.

The price varies between the month of July and the month of June. The purchase price of the various units is the
lowest in the month of July.

An investor who wants to make an investment may purchase his units at this time of the year and receive the
lowest offer price for the units.

The basic objective of the UTI is to offer both small and large investors the means of acquiring shares in the
properties resulting from the steady, industrial growth of the country.

Primary Objectives of UTI

• to promote and pool the small savings from the lower and middle-income persons who cannot
have direct access to the stock exchange, and

• to provide them with an opportunity to share the benefits of prosperity resulting from rapid
industrialization in India.

Functions of UTI

• Mobilize the saving of the relatively small investors.

• Channelize these small savings into productive investments.

• Distribute the large scale economies among small income groups.

• Encourage savings of lower and middle-class people.

• Sell nits to investors in different parts of the country.

• Convert the small savings into industrial finance.

• To give investors an opportunity to share the benefits and fruits of industrialization in the country.

• Provide liquidity to units.

• Accept discount, purchase or sell bills of exchange, warehouse receipt, documents of title to
goods etc.,

• To grant loans and advances to investors.

• To provide merchant banking and investment advisory service to investors.

• Provide leasing and hire purchase business.

• To extend portfolio management service to persons residing in other countries.

• To buy or sell or deal in foreign currency.

• Formulate a unit scheme or insurance plan in association with GIC.

• Invest in any security floated by the RBI or foreign bank.

SFC’s[State Finance Corporations]
The State Finance Corporations (SFCs) are an integral part of institutional finance structure of a country.
Where SEC promotes small and medium industries of the states. Besides, SFC help in ensuring balanced
regional development, higher investment, more employment generation and broad ownership of various
industries.
At the time of setting up of the Industrial Finance Corporation of India, the necessity of establishing similar
other institutions at the state level for assisting the smaller industrial concern had not been recognised because
it was not possible for a single institution to satisfy the capital needs of smaller concerns spreaded all over the
country. In 1951, the State Financial Corporation was passed by the Central Government to create a separate
financial corporation for the states. The S.F.C. meets the financial requirements of small industrial concerns
in the private sectors.

Objectives and Scopes

The main objectives of the S.F.C are to provide financial assistance to medium and small scale industries
which are outside the scope of I.F.C.I. The main function of S.F.C. is limited within its states. It covers not
only public limited companies but also private limited companies, partnership firms and proprietary concerns.

Functions of SFC

• It grants loan and advances to industrial concerns that are repayable within the maximum period of 20
years.
• It subscribes the shares and debentures of industrial concerns.
• It underwrites the shares and debentures of the industrial concerns.
• It guarantees loans raised by the industrial concerns repayable within 20 years.
• Guarantees deferred payments for purchase of capital goods with India.
• It acts as an agent of the State and central Government.

According to section 2(C) of the SFC Act 1951 as amended in 1961, the SFC can assist an industrial concern
that is engaged in any of the following activities:

• Manufacture, preservation or processing of goods

• Hotel Industries
• Road Transport
• Generation or distribution of electricity or any other form of power
• Development of any area of land as industrial estate.
• Fishing or providing facilities for fishing or manufacture of fish products.
• Providing special or technical knowledge or other services for the promotion of industrial growth.

SFC provides foreign exchange loans under World Bank schemes.

The SFC occupies an important place as an institution for industrial development in the country. The major
beneficiaries of the SFC are assistances are the following industries:

• Food Processing
• Textile Chemical and Chemical Products
• Metal Production

Function of State Financial Corporation’s (SFCs) in India

Under the provision of the State Financial Corporation Act, 1952, the SFCs are set up in the different states
for providing term finance to medium and small scale industries.
There are 18 SFCs (including the Tamil Nadu Industrial Investment Corporation Ltd.) operating in seventeen
different states and Delhi (Union Territory). The SFCs are under the diarchical control of the State
Government and the IDBI.
The SFCs have functions similar to those of the IFCI. They are empowered to provide financial assistance in
the form of loans and advances, subscription to shares and debentures, underwriting of new issues, and
guarantee of loans. But, in practice, they have concentrated mostly on loans and advances only. There is,
therefore, a need for reorientation of their loans policy.
During the year 1995-96, the total assistance sanctioned by all the SFCs together amounted to Rs. 3,999 crore
and disbursement was up to Rs. 2,572 crore.
An important feature is that, in recent years, a large part of their assistance has gone to small-scale industries
and in backward regions.
It has been observed, however, that there has been uneven development of industries with SFCs’ assistance in
different states and regions. Thus, the SFCs have failed to bring about a regional balanced growth of industries
in a proper order. They have also favoured many large scale industries rather than small and medium industries
in providing their assistance.
It is, therefore, suggested that they should take greater care towards dispersal of industries in rural and
backward areas. They should also support self-employment schemes and provide composite finance (fixed
plus working capital) to the prospective entrepreneurs.
NBFC’s[Non-Banking Financial Institutions]

NBFCs are financial institutions that offer various financial services similar to traditional banks, but they
operate without a banking license. Unlike banks, NBFCs cannot accept demand deposits, but they can
provide loans and advances, asset financing, wealth management, and other financial products. A Non-
Banking Financial Company (NBFC) is a company that is registered under the Companies Act, 1956 or the
Companies Act, 2013 engaged in the business of advancing a loan, acquisition of
stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of
leasing, hire-purchase, insurance business, chit business. It does not include any institution whose principal
business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than
securities), or providing any services and sale/purchase/construction of immovable property.
Full Form of NBFC
NBFC stands for Non-Banking Financial Companies. NBFCs are financial institutions that offer various
financial services similar to traditional banks, but they operate without a banking license. Unlike banks,
NBFCs cannot accept demand deposits, but they can provide loans and advances, asset financing, wealth
management, and other financial products.
Role of NBFCs
1. Providing Credit Needs: NBFCs play an important role in the Indian financial system, especially
because their role is vital in providing credit to sectors that are not served by traditional banks. This helps
the financial inclusion of the ignored sector.
2. Cater Requirements of Ignored Sectors: NBFCs are important as they cater to the needs of small
businesses, low-income households, and other underserved markets, filling the gaps that are left by banks.
NBFC helps to sort out the needs of unorganised sectors.
3. Fulfill Fund Requirements: NBFCs also play a significant role in the growth of the economy by
providing fund requirements for investment and infrastructure projects.
4. Other Financial Products: The role of NBFCs in India is very vast and fast-growing, given the
increasing demand for credit and financial services in developing nations like India. They offer a wide range
of financial products and services that are boon for the public at large, such as Personal Loans, Business
Loans, Vehicle Loans, Loan Against Property, and other credit facilities.
5. Manages Investments: NBFCs also provide investment opportunities to the public as they offer a wide
range of mutual funds, fixed deposits, and other investment products, and they also provide investment
advisory for investment-related schemes.
History of NBFCs
The concept of NBFCs came to India in the 1960s, it was seen as an alternative for individuals whose
financial needs were not sufficiently met by the existing banking system due to less credibility or due to
strict paperwork. In the early days of inception, Non-Banking Financial Companies were initially small
organisations and did not make much impact on the financial industry at large. In December 1964, The
Reserve Bank of India amended the RBI Act, of 1934, and new rules and regulations were established for
NBFCs. This act helped NBFCs to get established in India. Later, the government of India established two
committees to review the existing structure and working of NBFCs in India.
1. James S Raj Committee: This Committee was established in the 1970s to study the existing framework
of NBFCs. The committee made a recommendation to establish uniform chit-fund legislation for the entire
nation.
2. Chakravarty Committee: This Committee committee was established in 1982 to review the monetary
system which was working in India. The committee made a recommendation for a complete evaluation of
interlinking between the banking sector and NBFCs.
As of today, NBFCs have grown exponentially in terms of operations, range of instruments and market
products, technological advancement, and customer base.
Objectives of NBFCs
1. Financial Inclusion: NBFCs’ main objective is to promote financial inclusion by extending credit and
financial services to ignored sectors of the economy, as the primary banking sector relies on collaterals and
stringent documentation which many unorganised sectors lack in.
2. Meeting Specific Needs: NBFCs help to cater the specific financial needs like consumer finance,
microfinance, housing finance, vehicle finance, etc. This helps individuals to overcome the challenges of
short-term requirements and maintain the standard of living in the growing modern era.
3. Investment Services: NBFCs also provide investment-related services like portfolio management, wealth
management, securities trading, mutual funds, etc. to their customers. They also provide investment advisory
to their customers allowing them to stay aware of the changing investment market and generate value by
successfully investing in the most favorable investment schemes.
4. Asset Financing: NBFCs specialise in asset financing, by offering loans and credit facilities at the best
rates for purchasing assets like vehicles, machinery, and equipment. This service of NBFCs not only help big
businesses but also helps small businessman to set up their business and manage fund requirements for
establishing capital assets which are crucial for the establishment of business and adds to nation-building.
Functions of NBFCs
1. Lending and Credit: NBFCs provide flexible lending solutions and credit facilities, which include
personal, vehicle, housing financing, etc., to individuals and businesses.
2. Asset Financing: NBFCs are engaged in asset financing, which includes satisfaction of funds requirement
for the purchase or leasing of capital assets such as machinery, equipment, vehicles, or real estate.
3. Investment and Advisory Services: NBFCs offer investment advisory, portfolio management, and risk
assessment services in some cases. NBFCs also facilitate investments in securities, mutual funds, and other
financial instruments to the public and businesses.
4. Leasing and Hire-Purchase: NBFCs also take part in leasing and hire-purchase activities, enabling
individuals and businesses to acquire assets without full payment and subscribe to the asset on payment of
periodic installments.
5. Factoring and Invoice Discounting: NBFCs provide factoring and invoice discounting services. This
helps individuals and businesses with immediate liquidity, which helps them to overcome working capital
needs.
6. Foreign Exchange Services: NBFCs also offer foreign exchange services, which include currency
exchange and remittance transactions.
Types of NBFCs
1. Asset Finance Company: AFC is a financial institution that facilitates the service of financing the
various assets for individuals and businesses which include machinery, heavy equipment, production and
farming equipment, and large power generators which involves large capital expenditure. The income
arising should not less be than 60% of their total assets. UTI AMC, ICICI AMC, and BIRLA SUN LIFE
AMC are a few examples of asset finance companies.
2. Investment Company: These are the financial institutions whose principal business is the acquisition of
securities. These companies take money from the public and invest in various securities and financial
products. Thereafter, the company deducts its operational cost or expense ratio from the earned profit, and
later profit is distributed to shareholders. Bajaj Alliance General Insurance Company, IDFC, and HDFC
mutual fund are popular examples.
3. Loan Company: Loan Company as its name suggests, is a financial institution that offers loans for
various purposes other than of the AMC which includes the Housing Finance Firms. LIC Finance Ltd, PNB
Housing Finance Firm, and HDFC are some popular examples.
4. Infrastructure Finance Company: It is a Non- Banking Finance Company, that deploys three-fourths of
its total assets in infrastructure loans and has a minimum Net Owned Fund of 300crores and That has
minimum ‘A’ credit rating or equivalent CRAR of 15% Few examples are GMR infrastructure ltd,
Hindustan Construction Company. IFC’s finance projects in sectors of power, roads, telecommunication, etc.
5. Systematically Important Core Investment Company: It is a NBFC that deploys 90% of its total assets
in the form of investment in shares, stocks, debt, or loan group companies. Out of a total of 90%, 60% of the
total assets should be invested in equity shares or those which compulsorily converted later into equity
shares.
6. Infrastructure Debt Fund: IDFs raise resources through bonds for long-term infrastructure projects. The
bonds are issued in multiple currencies to ensure that have they a five–year maturity for investors.
7. Microfinance Company: People in the urban, semi-urban, or rural areas of India need financial help to
start their business and fulfill other requirements but they are hesitant to seek help from banks because of the
formalities that need to be fulfilled to get the required money. Now, here the microfinance company comes
out, and they provide financial help to these underprivileged people. Bandhan Financial Service Ltd and
Ujjivan Financial Service are a few examples.
8. NBFC (Factor): These types of NBFCs in India are low. These companies usually buy loans at a much
discounted rate from lenders and after that, they adjust the repayment table of the debtor to ensure a facile
settlement adding a small profit.
9. Mortgage Company: It is a financial institution where at least 90% of the business turnover is of
mortgage guarantee or at least 90% of the gross income is from mortgage guarantee business or net owned
fund is 100 crores.
10. Non-Operative Financial Holding Company: It is a separate category of NBFCs which is a wholly
owned non-operative financial holding company permitted to set up or hold the bank as well as another
financial service with the permission of RBI under applicable regulatory prescription.