UN(T IV

: FIN.A NCIA L INST ITUT ION AND SERV (CES

financia.l system . Financ ial fostitut ions are
Fiiiancial Institutions are an importa nt compo neht of the
collecf the savings from the savers and pass on
a lso known as financial intenne diaries . This is becaus e they
for the develo pment of various sectors of the ·econom y
lh.e same to desired [Link]. They provide finance
ittstitutions t?lay an import ant role in the financial
· such as industr y, agricul ture, service etc. Thus financi al
sys1e1·11 or econom y.

Role of Financ ial Institu tions ln the Fl'nanclal System

o . Financ ial institut ions are financial intenne dlaries ;
the resourc es from those whose income is
o They provide the mean·s and mechat tism of trnlisferring
produc tive·pu tposes,
more than expend iture to those who need these resourc es for
savers will reach the borrow ers through the financial interme diaries in the form of
o The savings of the
s. loan~. e~e. Thus; they play the rdle
financi al instrum ents such e's shares, stocks, clebent utes, deposit
of intenne diate betwee n 'savings aM ihvesttrlefits.
a they provide safety, and liquidi ty and ehsure return
·
for savihgs ,
i
sav-ng l'i'abit artiohg the people.
a Financ ial institut ions develo p the
huge amouh ts of savings for industr ial de,.,elo pment as produc tive capital. The financi al
o Theym obihze
cale -industr ies in [Link] in the form 9f
(nstitutioAs ·supply capi,tal to the small, medi~r nl and large--:s
ial grqwth - in India . .
capital, venture capital , and [Link] to promo te industr
pmenl ofindus trle's, .agtjcu lture ~tc,, ,
o These contrib ute for the ·growth and develo

i~ •·ns i~ii'~·; te. ·iA-,, tiie ines~ ~t,of.,Ibnd ing

.&us. a~d, .borrow ing money
Comm erdal Banks are Uke other firia~ci, ~t..
institu't
• Jo •• - • • '

11i~th utic{ns in th:e c·ouritzy in the busines s of lending

7

or tredi t. Comm ercial Banlc1 are the .ri!ost i!'JlpQri!!n,! £re9i~

;b~rllcs -at:~ of ~[Link] hriport ance in the econom ic
and [Link] money and ·credit [Link]/ ..[Link] erdiiJ
devcJo pmen t of a countzy as well as in ·servfog tl{e fi:nand
al reqilire ments ·o'f .tlr~·sel).et~f public. : <. -~',. · f
Types Of Commercial Banks: ·
: ·· ·
Comm cr~ial banks are of three t'yp~s, whid~ ~re as fof!ows •

Sector Banks · · . . -."~ · · ·. :" .:J- ' · · · .: • ' • ,_,-·.-

1. l ublic >_ • •
1

patjonallZed 'by the go:vemmeilt of a co~try" '.'Thcy

[Link] Secter Banks are -~ ·typ~. or'tomn;ieri.:i11.'J'barik~ that: are
e th~ 50%,[Link] oythe govem menL The
are the majorl ype ,ofbank in India, wbe.r e,a major St!ike Le-mor
:are .l 2 'PuoJic Secfor Banks [Link] a...They operate
shares of these banks are listed o·n ~toek e'xcb'a11gks·. There
is the central banlc. Some of the Indian public
under the guideli nes of the Reser,v_e Banlc 6'fTnd,ia (RBI);. which
se.c tor banks are State Bank of India (SBIJ, C~Iiara .BanJ(, .
Bank Qf-Baro da etc. · .. 1
,_ _- '_,.
2. Pr·i vate Sector Ba•n ks . . , ... ~ ·:·,J·_:
4

_ .,.:. - ~,, . . ···.. · ~,

, --~ '.
_ •

to
Private [Link] Banks .r e:fer [Link]!)d of·c~~ m~r~ial ·b;mk in whicb_- a maj'ot part of share capital is held. by private
red a$ comp~n i-c;~ -wi,th i
J. mited. liability , There are two types
busines ses ~nd it)di'v1duals.·Th eselian ks. are registe
and Ne~ P~.v~te: Sector Banks .. Old Private Sector
of priv..ale banks in India nameJy Old Private·Septot Ban,\c$
alization 9f major banks but were not
Banks are thos~ banks tha~ existed in· lndia at the time of rtati,on
s, ~hese got license s to continu [Link] presen t there
nationa lized as they were. smal:l ·in [Link]·.[Link] aft,er·[Link],r,efonp
ineorpo rated after 1993, Some of the
ar.e 12 Old Private Sector Banks, The new [Link]-secto,r'banks wen.
and Lnv.e$'trri!!nl Corpor atio!l of India (ICICI )
indian private sector [Link] .a te Vysya Bailk_, lnduatr tal Credit
) B.1tnk.
Bank, and Housin g Develo pment Financ e Corpor ation (HDFC
Foreig n Banks . .. ,.
Foreign Banks· .refer 10 ommer
c" cial [Link] that are headqu anered !)1 a foreign country but operate bra~ch es in ·
India !}re Hong K9ng and Shangh ai Bankin g .,
differe nt CO\Jnt1·ies. Some of the forejgn bank~ operati ng in
St11ndard & Charte red Bank, and Grindl ay's Bank. In ,·
. Corpor ation (HSBC ), Citiban k, Americ an Expres s Bank,
j1wreuse in the numbe r of foreign banks. At
.India, sim:e the: financia -l reforms of 1-991, there has been a rapid
j'hey are govern ed by the law of their headqu arters -,
. present , there are 46 Forctign · Bank.s in India (Oct 2019).
·
country us welt as by RHI under the Bankin g Regula tion Act.

i:u·11l"liu11s uf Comllf l•rhal Banks

. ri,.- J'l,1111:ti;>I\S ofc:u111111crrn1I banks ,m· bruadly dassili ed mto.

· 0. J>nmary f'[Link] - H. Sccond ,,ry l'unct1ons
A) Primary Functions refer to the basic functions of commercial banks that include the following:

l. Accepting Deposits Implies that conimen::ial banks are mainly dependent on public dcpositSr..:.There are two
types of deposits, which are discussed as follows :
To attract savings from all sorts (of categories) of individuals, Commercial banks accept various types of
deposit accounts they are:
a)Fix,e d Deposits b)Current Deposits c) Saving Bank account d) Recurring Deposits

2. Advancing Loans refers to one of the important functions of comrnerc:ial banks, The public deposits are used
by commercial banks for the purpose of granting loans to individuals and businesses. Commercial banks grant
lo~f. in ~e fot¢ [Link]~, cash credit, an<! discounting bills of exchange, \
Co~.~rcial banks.
provide ovetdr;f\ facilities it is usually pro;ided to the.: urrent account"holders wh~e they are
al~~V{e4,to withdraW:niore inoiley than what is [Link] their accou11.~ up to ,a specified 1itnit•.The rate of interest
w:illbe,charged 011 the amount of money which ate o,verdrawn. It alsq includes discounting bills 0f exchange.
[Link]~ridary F•li~ction$ refer to crucial funttlons of comme;diil ·~[Link].' the seC'ondaJ functions can be
ci~~ifif:d under 'three leads, namely, . . :, ' . .. . .I ' ;

i) Agency functions ii. General Utility functions iii'. Other function~ .

1. Agency Functions: Implies that commercial banks act as agents of customers by performing,
i) Collecting Cheques refers to one of the import~nt functions of commerciaf banks.
The banks collect cheques and bills of exchange on behalf of their customers through clearinghouse facilities
provided by the [Link] bank.
ii) C~ll't>;cting Income: Constitute another major function of ct:>mitiercial banks. Commercial banks collect
diviije;nds; 'pensions, salaries, rents,.and interests on investments on behalf of their-customers. A credit voucher' is
se~t,' · to •C'[Link]: f(>i:, infomi'ati0n
1
when · any lnc~fiie . is;· ct>ll.~cted ·... by · the · bank,
ii,) l'-'¢.~g Expens'!S: IrnpliC$ that commercial banks make t\le
payn:'ien~ 0f v~ric5UJ; o-bljgat~ons of Cl:lstoiners., such
as tclepho11e bilis, insurance pr~miurns, s~hool fees, and rents. SimilllF to :~ iredit voucher, ·adebit voucher is sent
to customers for infopnation when .expenses 'are paid by • lhe _ _ bank.

l. General Utility Functions Include the following functions: Bankers are the past of society. They offer:
several services tQ the·general p~blic they are:,, • _ • · - - ~ · --
,
a) It pro_yj_des cheap remittance (transfer~ facilities.
b) t,he banks iss~e·
.. ,
tra;elet-ch~ques
. .: . . for safe traveling to tlieir custoih~rs
' . . . . ..
c) Banlcs accept and e01lect foreign Bills ofE:[Link].

3~ Other Functions lnclude the following:

.t, Credit Creation: It is auniq~e·function of Commercial Banks. When a [Link] i loan to its customer it
doesn't lend cash but opens an account in the borrqwer's name and credits the amount of lpan to that account.
Thus, whenever a bank grants a loan, it creates an equal amount of bank deposits. The creation of deposits is
called Credit Creation. In simple wards, we can define Credit creation as multiple expansions of deposits. The
creation of such deposits will result in-an increase in the stock dep<5sits, [Link] of such deposits will result
an increase in the stock of money in an economy.
ii) Electronic Banking: Include services, such as debit cards, credit cards, and Internet banking.
Types Of Credit Offered by Commercial Banks
There are various types of bank credit provided by a commercial bank:
[Link] Loan .
A Bank loan may be defined as the amount of money the bank grants at a specified interest rate fo~ ~ fixed
period of time. The commercial bank needs to follow certain guidelines fo extend bank loans to a client. F~r
example, •the bank requires a copy of the identity card, income pro-ofs of the client, and a guarantor to sanction a
bank loan. The banks grant loans to clients against the security of assets so that, in case of default, they can
rec0ver the loan amount. The securities used against the bank loan m11y be tangible or intangible, such as
goodwill, asset:,;, irwen,tory, and documents of ti lie of goops.

2. ·Cash Credit . . · . .·
Cash credit can be dclincd as an arrangement made by the bank for tire clients to withdraw cash excced,'.,g th c 1r
account limit. The cash credit facility is gene; sanctioned for o e ear but it may extend up to three years 111 soine
2" .

•
 be further extei1ded by the bank.
In rnsc or a special rcques·t by the clic111, lhe tinie limit can
1c:: extension or the all ollcd time depends on the consent
of the bank and the performance of the client. The rate
been withdrawn
r int1:res1d1argcd by the bank on cash credit depend s 011 the tirnc durution for whichofthe cash has cash.
aml the 11111uu11t
3. Bani< Ovcrdrnfi
provided by the bank. It is a facility in which
Bank uvenlran is the quickest means of the short-term lilluncing
accounts by a specified limit. The clients
the bank ~allows the cu1Tent account holders to overdraw their current
emerge ncy requirements. Bank overdraft is the most
generally avail the bank overdraft facility to meet urgent nnd
written f'oi:mnll ties j The bank charges a very low rate of
popular form of bo1rnwing and docs not require any time
bank <>Verdrafts ,up to a certain
interest 011
BIii
Discounting · of
4.
the bank llt a value lelil than the face value
Discountitig of bills is n process of settling the bill of exchange by
t 26 of Negotia ble lns(rum ents, "a bill of exchange is an unconditional
before the maturity date. According to Sec.
the person giving It, requiring the person to
order in writing addressed by one person on to another, signed by
(uture time a sum 1cer,tait1 in gone." to order
whom it is addressed to pay on demand or at a fixed or detem1jnable bearer."
or to

The facility of discounting the bill is used by the organizations Io meet their immediate need for' .casfi for settling
down currenl liabilities.
l. PROJECT [Link]

of cpntjrtuous growth and expansion oftbe

Project Finance is 01, ~ o:fthe key focus area.s in t<;>day's w0dd,b~cause
of [Link] high-risk, deyclopmer1t-,orientcd
industries at a rapid r-atc. Project linancc is a cenJurie~-old ,fomJ' . .
. . , ' '· _. .. . . .
prqjects. , where
ve·pr,0Je,ct's, wfth lorrg gestatio n periods
Project financing •is a method of financing very large capital•1~tensf
~d the 9~sh , flow generat ed by the project as a
the lenders rely on the assets created for the project ·as ,se~urity ; ,,.., ,. ·· - . - ·.· .
. _ , , , . - · ".. - .
source of fimds for repaying their dues.
Tra:ns~ctions. ··In fact, project finance is
C0mmercial banks have always had an active roldn Proj'ect Finai}<i.e1
genera II¥ 'thought to have begun in the 1930s·when a patlas bank ma~1. a non-r¢co_urs.[Link] to develop an oil and
gas industry .
~rcial bank$ are developing pew roles in
Beyond their traditional role i'n projecl firianc,e :trans.acti0'hs, toqime
to . pe)1Jianent long-term fixeii rate risk :
providing advisory services, con~t~[Link] fihanci'ng, i_ntertned1ation
g for · pr,qjects throughout the world.
- management, fore-ign tax aqsorpti'on •qntl' worJfi·ng [Link] finariein
Commercial banks play a ~ignificant role in proje~t finar(ce in India,
ate
as they a key s·ource of funding for
to in_dustrial v,en~res. J-{ere are the roles and
various types of projects, ranging from infrast):[Link]µ_re deyelopment · ·- _
functions of commercial l;>anks: in projeci tinan<;e fnIndi'a: .. · . · · . ·.' , · ' · ·_ , _. ·

sponsors~:- which can ,include businesses,

·i. Loan [Link],g: Commercial banks provide· loans fo pr0j'.ect
project These loans can cbver capital
government entities, or .¢onsorti-µms, ,to fund vario\l.s stages of ~ ,.
expe,ns,es.
ell:penditures, working capital requiremen~, and other proj~cl-'related
e on project proposa ls to s
as. ess the project~s
ii. Due Dilige11ce: Commercial banks conduct thorqugh aue dHigenc s financia l
s evaluat ing the project'
-,viability, risk fact-ors, and potential for generating returns., This .lnvoly.e
environ mental impact. .
projections,, technical feasibility, regulatory compliance, and
111 , Risk Assej•sm elll a11d Mitigatio11: ,Banks
an~lyze the risks assp-ciated _with a project and develop risk
al or guarantees to secure the loan.
mi Ligation strate_gies. They ~ay require project spqnsors to pr,ov,ide collater
or currency hedges to hedge against
Additionally, they may offer finan<lial pr_od1,1cts such as in\etest rate swaps
interest rate or currency e~change rate risks.
Jv. Fitiu11ciul A,M~·urv: li1 .[Link] to providing hnan!lit
)g, some commerci<1I banks offer finan~ial advisory
ing the project, r!lising capital, and
services .to project s_ponsors. This can include ttssistance with strn,nu.r
navigatingrej ulaLQry and l'egal recJuirements.

Sources of Project Financing

ies:
Tire va1:ious sou1Tes oi' linance can be broadly divide,I into 1wq categor
I , Equity capital 2. Debt a
c, pital (bcmow ed capital)
it will vary according to the 11ature of the
The coinbin,at)on of equ·i1y and debt should be judiciously chosen, and
any one or a combination of two or more:
project. The project ·manager can choose
, method s lo finance :
T hese
i, Sha1y ..: ap11 al- ,·qu1ty ,:aj1i1:d and pr1th:l'l'. flC.:-' capital
2. Term lnaJ\ ·.
3, lkbcnture ,·,1pi1<iJ :•
4 . Commeq:1<!1\)an.k~
5. Bills discuu.111,ng
3
 . . .• .. - .• ' ·- •••-- '!" - ·.
'·

Methods of Project Financing

Some more types of financing available are
l. Seed Capital:
In consonance with the Gavernment policy which boosts a new class of entrepreneurs and al~g aims for
wider spreading _o fownership and Control of rnanufocturing units, a distinct scheme to complefoent the
resource~ of ~ ·entrepreneur has been presented by the Government. Assistance in this sche~e is accessible in
the 'p~fw:e_pf ~~ed:papitaJ whi~h is gen~rally giv~p by way of iong-tenn interest-f~ee loan. Seed capital aid is
provided to small as well as medi'Um-scale units promoted by eligible entrepreneurs.
2.,Government subsidies , ·
Sub'~idi¢5·[Link]~ ~ut by the C~[Link] as well es State Governments fonn 11- very [Link] typ~ of funds
p~en~~g ,t~ a..cprrip~y~f9r implementifig its project,, Subsidies. Ill!IY be. !IV!lilable In the nature of absolute cash
grant$'·~r {Qrtg":tepn:if!ter~t-~e ioii\~i' . . . ~- . : · . · .. .: · ~- , • '. . • •
J:p ·f~¢~ ~lij.l_~ ,s~mjk.~~ th~ "}~,~ s ~fJ1~~Jl~~f ~~y;e@n~µt 11~~{/.dY, ~otm.~ ~Jey s~ur_ce, havink a yit~l b~aritlg on
tq~',,i ?C'·,-- ·,it.·;p~t_v-8.t ":' "- \?'-;'~,--.::'.iqtb ,/:', -:"(:::,;t.;, ir~~#~~~ 1:: , ,t:·. · .; q{ . '. /,: _... ··nl'~tjy 1 . .. pr6j¢cts. 1

Iii¥fo!~)m~¢i Wi_t~.:t:h~ ·ocfo~f!lril,ent Mlicy \~hich 'bbdst~ I!- rl~w clasll tif enfrt¥reritut~· an"d liso· aitns fot wider
~'f
sJi~t(m'_&·,9(~~~~¥R ~q e,o~µ'qt' ~~-*[Link]<:~ring unit~, ~ oi~tirtc_t s.c;hpil\e to cotttp_le~;ent the resources of a'n·
¢,~~.#~n~tif).j~ 1)~1fkf~e~t~d•_l?r tlie Ooy~~rne~t,_ A~~;i,~.~~-~~ i~P~!~ s.¢,h.«ttne, i~. _11¢:9~$S{~.{.e,ih th~ ~11wre of s~¥
capit~. whfob is gener-ally given by ws.y' of lci'ng-term interest-free Iotin. Seed c'apftai aici" is provided t'<~ small ·a.s
well as · medium-scale , uru~1 ,, . pr,omQted by · eligible- · entrepreneurs.
I.

Stage!flii·Profoct Fin'a'n'dng
I. 'P·[Link]'an~e::stige: lt' includes the fo[!awing·:
~) P.;~j_~ t: i~:ntfi~~on;- A
Project or Preject ~electea should be .fote~a.t~d with th~ Strategic Plan · of the
()i,~~sa_g _o_n,.1'11¢:.project,P.l~~ shauldmatch; qi~ ,g~ais: 0fth~.ofgaHi.¥fi0n) It.s~[Link] be r.~ lis~ic to be imple~e~ted.
l:i)s~ft~NY4!,1r~Jc:$4 mil).i?1izilig: "Tl\'~ i:i~?.tPre~~ct~~t the [Link]~~ ~t tfi~ pl_~(,-~; ~ ,d -~t tq~ right price.''.,TI1ere Q~P~
shotil~ o~ ~ a1eq1,Jate amount .0frescn,fr~es available for the-pmjectto be iµi_pl~n:ien(ef · ·
.c)' T~hj:,.ical ~d J;-ipan:~illel feasibility o~gariizatiqn before starting ariy new [Link]?ci ·c;:ir exp.i ¢dilig an existing one must
lp-0~~19 -~ a)~g each ~d :C?Yecy factar thatjs ess~~tial for ttie:project t0);e,-feasi~l~.J(must be financially as well
as . · . · ' . [Link] · · fe~ible.
i,: Fii_n~a:~clng,Stage,
:a),.[Link] equity/ debt/ loan.
b) .. . . [Link]~,tion "' IU)d .., Syndication . . ,.• i of . -;. tfie · •. same.
c) Docun;iCI1tati,Qn an_d checkin•g all [Link] rules 1µ1cl regµlations or poli'cic:;_~ relating t_6 the starting of tile prnject ..

~~•;:r:'fu~~-~fo•~·~:. _• :,. , .· .. , I ~ ·,, ~ · ·' • · · , · , .. · , . '<'•'·: •,• 1

: , , i•• ,, . .

ii) M<>ni~ring andJevi~w ofptojec_~ fr0m ti~e to time. The project mari~get mu~t ic~ep a'diec~· on the p~oper
·woriling'<if-tbepfoject" --~-'-·•. _\;_,,, .·,.·..:;.:-/''tfsi'·.',, . ,- . :- ·'• . • ,:_;,,·! ,,,,- . .. _,~,,·:,. .. ,_,. . , .'· -., '.,

&):Proj&:ttlosure{· It~endingthe:ptoject> :: i . ' · • ... " · ,_.. ·.; ·, '· .

•• ' - • ' -• ~ • • • • ' I , : ' \ \ ' ,, ' !. • ' . ... ~, . ~ ; • •. ' ! .. • ' I • • ' • -

c) [Link]~t ind in9nitc;>1jhg: Tli~ llIIIount tak~n in the fqqn [Link]µi, _·equify, a,nq d¢.btfuu.~t be [Link] and proper
~~µi~i½g: .iµ;iq ,_~ntr,9j ,·. .: Rf ·. ~e , '" #\~o;e~ :· .. · be .. carried. ._~µ~,t · ' ~\ ,
WORKING CAPITAL FIN'ANCE
Working C~pital Finance may be [Link] by firms in the form of cash credit, overdraft, or bill financing.. loans,
bank guarantees, invoice factoring, and working capital demand loans. It is a finance required to meet the costs
incurred during the qperating cycle. The operating cycle involves the period from the time raw materials are
purchased t0 when the final product is sold to customer,s,
Role of Commercial Banks:
a. Cash Credit: it is the most common form of working capital finance used by businesses, Under cash credit,
the bank specifies a predetennined limit and the borrower is allowed to withdraw funds from the bank up to that
sanctioned credit limit against a bond or other security. The sanctioned 11mour1t cannot be withdrawn nt a time, it
is a periodic withdrawal depending on [Link], The interest is payable on the amount actually withdrawn
and not on the sanctioned limit.

b. Overdraft: The borrower i's allowed to withdraw funds in excess of the actual credit balance in his current
account up to a certain specified limit during a st'ipulated period against a security. It is usually available agai•nst
the security af life [Link] policies, fixed deposit recdpts, government securities, corporate bonds ere .

c. Loans: The total sanctioned amount is [Link] to the borrower's current account or released to him in cash .
The [Link] has to pay interest on the total amount sanctioned and not on the amount withdrawn. I! needs to be
usuaUy repaid in periodic instalments.
4
 . . . ...
- - --... --. ...
,. ~ ---
di~count the bills
(l , HIii 1,•1111111l'lr1111 It lt~lpH1lw lwnow41r•1o ,,lmw, 4!rcdil from a bmtk agai,ut it1 bill. The banks
'-IX(;lttt11~u the biu1k check• on the crcditworthinc11s of the drawer a~d
ol' 1J1idii111jl,1J lk l'uru dl11c1111111 l111t n bdl of'
ur 1he bill.
!'~'1111111c11 1111~

..,, Uu111, CJ 11111·1111h1t1 ft ·18 1111 lndlrcct itnd 11011-rund-bw1cd flnundna by bankt. The bank act,
u a guar~ntor t~ the
1he ~cllcr rcdt1Cd# the rl1k or non-payment by tht buyer. The guarantee as provided
1,uyl!r, 11 INo wt,y In which
1ccu1 fly uniJ #oll)c cummiuion it charged by banks.
ugnlnHI n

f, I,I'll,,,. of< ,' 1't11llt I II. iii " lc11cr wivc11 by II hu11k 011 bchul( of a buyer guaranteeing
the payment to the 1etler. 1n
payment it it 1imilar to • bank
c11H11 tlio buyul· dc,l'twltw, t,he bnnk 18 required w 1110kt the full or remaining
a1111111n1cc.
accountt reuivable to•
tt, I11v11ll'£11:11l'lnrln111 It' 111 1111 01Tnnge111e111 In which a butlne111 1ell1 all or tome of the
tlt11d r,11r1y (Hunk) 111 n dh1co11111.

DJil'J~.[Link] FINANCIAL [Link] CPFLS)

1'hc Oovcmmcnl of India es1nbli1hed the J)cvclopment Pinoncial Institutions with an
objective of providing
agriculture. infrustruct11re, housing, export finance, etc. These institutions
11c~tor-11r,ccific loan• 10 ind1JJ1tric1, and
.·
f'll'ovidc medium and lonii•tcnn finunce for the development of key sectors. in the economy

'1'111: d1f(,m:n11ypc11 of devclopmcnlol finun,ciul insthutions in,Jndia can be categorized

as:
I) lcrm lcnJins institution8 (IPCI, IDBI, ICICJ, EXIM bank)
2) 1nv1nm1nt Institutions e,1, LIC, GIC, and UTI
3) Refinance inslirutions (NAl3ARD, [Link], NHB)
-4) Suuc level institutions. ' , '

ltole Of I>c-velof)lncnt Financial J.nstitutlon1 <Dll'Is) ,In The Indian Economy

finance on a long-temi
.IJcvcloprncntal financial institutions were thus set up soon after independeQcc to prpvide
indµ_sJries and infr~truc ture developm enL
bltll ill for the development of crucial sectors like capital gootls
financia,l sector and act as a gap-filler
The role or DFI• w111 to recognize the gnps in institutions and. mar~ets in our
to the inc,apubility of o
c_mmercial baajcs to finan_ce ~ig inftW!truc \Ure project5 for long term~
which Wal m4dc due in India to
e, Govt-. of India set up specializ ed DFls
llUJlJ)ort them to Jillldn growth and financinl -teadiness. Ther,efor ns in India were
ents of industry and .agr~cultu re, The _financial institutio
fulfill -loug•lerrn project finuncing .requirem ns for the
these institutio
11ct up uudcr the full control of both C~ntrul and State Governments. Tne Government used
.11i:hic.we111e.11t11 in pl11nnit1g 1md development 0,f the -natjon as ,a whole.

l>fl• ltuve pluyed an important role/ huve the following objectfves in the 'Indian
economy in the following ways:

J. CxJ)ltal ftormatlon:
by providing long-term
l)FI, h11ve played a crucial role in accelerating th~ pace of capital formation in the country
wheQ cohlmerc ial banks focused on· the provision of
firu111ce u, the fndu1triul and infrastructure' sectors. At a tim~
sector, 19 developm ental financial institutio ns were entrusted with the
11hur1-terrn working capital to the industrial
credil for the dcve)Qpm ent of different capital goods in_d ustries and for undertaking
.r-oll: of prnviding long-tenn country.
1.111'ru~1ruc11:11·e projects in the
long-tenn funding necessary for infrastruc ture & significant
l)Flt urc crucial intcnnediaries for channelling ture raises
in order uchleve stronger economic growth.'l nadequal e & inefficien t infrastruc
1111111ulilcluri11g projecls 10
11·u1111u~1ion coHts, r.e111ricting 11n economy's development potential. Jo this case,
the government may allow
1n11titutio11» with Jon_g•term [Link], such us insurance firm11 & pension funds, tQ ~vest in stocks to augment
CIIJ>Jlllf ,

2. Su11pol'IW C:111JIC11I Mark~t:

and debentures and
llw dcvclopmcm bunk helps in the growth of capital murket!i, They invest in equity shares
the activities in the capital mark~t by underwriting
1Jtutu1ll lu11JH ol' Hcvcn1I compu11ieH listed i11 lndiu, DFls support share- capital,
slum.i» 1111d dchc111ure1 of Jndustriul concerns, directly subscribi ng 10 equity and preferem;e
pay111c1111 , conduclin g market and investmcn 1 research and rendering technical and
~u"r11111cc111g dc1crn:d entrepren eurs .
ad11111w11ni11vc ~uidancc 10

.1. f•114•ltil11h•\ l111J11stf'111t Ul Yclu1111M1I:.

1

pwJcc1s and a_lso for expansion.

IJI I, p1,,,·11l1• rup1•1• a11,t 1111·1:11111 1'11111·11n' l11,1lt~ 1'01 !l~·11rng up Ill.'\\ 11Jilus111lil
,11 , ,•i-. 1111,111 11 , 111 11fvn11~;11w11, 111 rc11111'
11 1 ll111111 ul \:Xl~l111g unils. h"l'tgn l'1Jlt'1:111.:y Ivans w~re provilled rur finan1.:mg
1111 ul ~'llilflllh.:OI umVu1 1,•~·l1111i.:11I ~now-huw 111 special cases I h~• :..:t1111g up of more mdustrial u·n,ts will
llil· 11urt
11uliri:ct ~111pl11y1111:n1, 11111kc available guods and sc1T1,·cs in the country and help in increasing
ll.~'hl'IHl4' ,111-~•l'l i1111I
 ,. - ·-•· _L,__ ._
the sta~dard of living. F;,~~~c~al insti tutions provid~ · re~~·; :·~ -fi~:~~ial , manage;i~l.-t~d~ical help for
setting up
new units.

4. ~evelopmc nt of Backward Arca:

The de~elopment bank encourages rustic and provincial development. They give money . to
beginning
org~nizations in reverse zones. Likewise, they help organizations which are in the venture iQ less-devel?
ped.
reg1ons; ,Under different schemes of financing, DFls provide projec;:t finance in backward areas on conccsston~
l
terms such as lower rate of interest, long moratorium period, extended repayment schedule, and relaxed
norms m
respect of the promoter's contribution and debt-equity ratio.

~~ [Link] .of Sclf-cmph~Y.~~n~: ._ . . .

They have ac~ieved remarkal>le success ln creating a new class of entrepreneurs and spreading industrial
culture
to newer ~ea:sand w~aker sectio_ns ~fsoci~ty. Special capital and seed capi_tal schemes were introduced to provide
equity typ~ of funding to ncW,all;d te4hnica~ly .ski\[Link] entrepreneurs who lack access to required 'financial
resources.
Promoti~nal activities like canyihg out industrial potential surveys 1 identification of pptential en~rcpreneu
rs,
conducting entrepre~c;urshiJ? d~ve1ppme nt ·pro8fams 1 artd providing technical consultancy services
have
contributed signitfoantly ta the prbcess of industrialization and effective utilization of industrial finance
by the
industry.

6. Sec~or Specific DFls:

The setting up -of
sector-specific DFis· has helped in the growth and development of each sectot~ F'o r example,
NABARD has played a crucial, role in the development of the agriculture and rural sectors, [Link]
al Housing
Bank has been making efforts to provide affordable housing to all the sections of population by making
housing
credit cost-effective, increasing the supply of housing raw materials, etc. EXlM Banlc has been able to
promote the
exports of th~-<:<>untty by provi4ing export finance, SIDBI has achieyed remarkal;>le progress in the
develop_ment
ofMSMEs set up ·across tbe country.

7. Economl.c Growth and l)evelopme nt: ,

Over th,_e y~. DFls h_~ve played· an important role in the develoP,ment of agrkulture, an,dJntema
tional trade.
hou~·ing, tourism, and infrastructure. green industries etc. The growth of these sectors has helped India
accelerate
its pace afeconomi c growth and dev¢i~tnrient: · ·
Mare than .500 Public. Deyelqprµ(? ift Fi_ha1,[Link]~l ,lnstitutions (DFis) aro)Jild t,he worlq. play aq. importa,nt
roie for
countries and S,CCtof$ in . helpmg: tlrem ~ttai~ their. plami~d visions. DFis !ire speqialtzed irtsti~tip~s
aime4 at
fulfilling certain policy [Link] 0f..pfoviding finance to those market segments that -are unli!<ely io be
funded by .
commerci3 lfinanciats ector. :A:.part frc;>Jil this PJls are also parti~ularly, itiiportant to the ge9era:l matket
during·
crises, whe~ they can counteract th~ Pf<?--~yclical nature of financial mar~ets that constrains cr;egit during
econom_ic
downturns. The .i mportance qf thes~ f>Fis ' h,ah:ome to the foi:e due to the economic disruptions caused
by. Covid
1.9; 'Puririg economic di~ruptloiis•·caus&i "'fCovid-1 9, DFis -- on a nationai, regional and muitllateral' ievel
;;.. have
as
played an impa~t role in enabling ¢cqnomic recovery. DFis have ~merged ~ so,ilrce of finance and. pr~fetre9
vebi~Ies to deliver Pl)~~i~l ~¥put~~
stfp~ori ~rovided by the gove~ent flo support struggiiP.g industries, invest
in necessary infrastructure and lead thchva.y out of a recession. This has bought into focus the importance of well-
functioning DFis to the overall econom1c developme nt of eqonomies.

• 11, . , .f!. • . • .. •
LIFE AND NQN-Y:,IFE INSURANCE COMPANIES IN INDIA
LIFE INSURANCE .
The tenn "life insurance" is a financi1d product that pays an insured individual's or insured individual's dependents
a sum of money either after a set period o.r upon the insured individual's death as the case may be.
Life insurance is a contract between the insurance company and a policyholder that guarantees compensati
on for
loss of life in return for payment of a specified premium. In case of loss of life of the policyholder, the
nominee
([Link]) whose name i_s mentio~ed in the contract receives mon_etary compensation.

_Types of Life Insurance Policies

1. Term Insurance Plan :

The term of the policy is fixed for a certain number of years. The basic objective of the tenn insurance
policy is
to secure the immediate needs of the nominee in the event of the sudden demise of the policyholde
r. The
policyholder does not get ~my monetary benefit at the end of the policy tenn except for the tax_benefits
he or she
can choose to avail of throughout the tenure of the policy. ln the event of the death of the policyholde
r, the sum
assured ·js paid to his or her benefieiaries. The tern, insurance policies are relatively cheaper as compared
lo other
insurance
pro:ducts.
i. Endowml•n l Policy: The policyholde r receives a lump sum amount in Gase he surviVcl- until Lhc
~late of
maturity .
.6
). Money-back Policy
wherein lhe policyholder receives a fixed
Money-back policies nrl' basicnlly nn [Link] of cndownie111 plnns
the policy , In the event of tlie death Mthc policyholder,
:111111u n1 al specific [Link] 1hro11ghout 1hc durn1io11 of
terms :,gnin might slightly vury from one insurunce company
lht: liill sum assun;d is paid lo 1/Jc bcncliciurics. The another.
10

4. Unit-lin ked lnvcstm cnl Polley

c11t c11tegory where one get, to enjoy
Unit-linked insurnnce policies ngain belong to the l1tsut1111ce-cutn•ltrvcstm
e a pnrt of the monthly premium pay-out goes towards the
ihe benefits of both insuronce end investment. Whil'
of funds that ihvest in debt and equity
insurance cover, the re1n11ini11g 1no11ey is i·nvested ht various types
to mutual funds except for the difrerenc:e that
instruments. UUP plans arc more or less similllr In cdmpnrisoli of insurance.
offer the additional benefit
OLIPs

S. Whole Life Polley

A whole life insurance plan covers the insured over hi!! life,
Whole Life Insurance offers dual benefirs • Death
premium payment HkeMonthly or Anr1uai
Benefits as well as Savings Benefits. There is flexibility to choose the
the policy is not defined so the policyholdet
mode. The primary feature of this product is that the validity of his life
the life cover through
• out
enjoys

6. Pe'nsion Pla,n :
irement. This basically is a retirement
Pension policies let individuals detennine a fixed stream of [Link]-ret
· after retirement entirely depends on
planning investment scheme where the sum assured or the monthly pay-out
&! which one
0

wi'shes to retire. There arc again several

the capital invested, the investment timeframe, ~nd the age
t investm ent needs-. Now t
i_ is recogni zed as an insurance product and
types of pension plans that cater to differen
is regulated t>y TRDA.
The life insurance companies operating in India arc: , ··
There are 24 life insurance companies op_erating in India; . ,• , ,

SIGNIFICANCE OF LIFE INSURANCE-:

1. Risk ·Coverage: Insurance provides risk cover,age ro the insured family in the form of monetary compensation
in lieu of premium paid. • ·i • • •

affer a differen t type·of plan fo the insured depending

2. Difference plans for di lferent uses: Insur-ance companies
-cotne with the higJ-ter [Link],ti,u m. · ·
on his need for insurance. Moi:e benefits
s: These policies also cover )16spita lizatiotr ·expense s· and critical illness treatment
3. Cover for-Health Expense
ai'!!O com~ with-a saving plan i.e. they invest
4. PromoteS Savmgs/ Helps in Wealth creation: Insurance policies
your money in profitable ventures.
assured amount which is payable on the
5. Guaranteed ln~me: Insurance [Link]'eies come W,ith the guaranteed sµm ·
happening of the event,. _ certain sum of
to the insureg that they eill) borrow a
6. Loan Facility: Insurance companies provide the Qption
amount. This option is available Qn selected polici'es only. · ·
I •; ·• • "• ~ ': '
; -• • • '
;,_.

GENERAL INSURANCE OR NON-LIFE INSJiRANCE

life insurance. General insurance or non-life
. Gen~ral i0$urance or non-ijfe insuranc.e covers everytl,jng other tlian
insurance policies provide payments depending on the loss
from a particular f~ancial event. It covers motor
ce, burglary insurance, marine insurance,
insurance, health insurance, home insuranae, fire insurance, Joan insuran ·
etc. ··

Tvpes of General Insurance or Non-Life Insurance

J. Molor insurauc~: Motor Insurance can be divided into
two groups, two and four-wheeled. It provides
insurance agains1 damage s 10 the vehicle due to acciden ts.
').. Health insuran ce: Heahh insuranc e provide s financi11 I relief to the individual undergoing medical
treatmen1 911 account of cl disease or injury.
loss occurring due to an c;arthquake,
3, Home Insurance: Jiome insurance provides compensation for the
lire, or any narural calamities: · ' . ·
4. Firi:, insurance. Fire lusoranc c is eompen sa1ioi1 for loliS due to tire
S. Burglary insunrnce 1s for protecti on against tliefi
6. Marine insurance; Marine insurance is an insurance cover
for any damage to products using sea
y.
1ranspon. Mos1 of the nc;>n-life insurance [Link] are renewab annuaU le

.SICNIFICANCE (.)F NON- LIFE INSUR ANCE:

1lc;rhh 111~ura11,._. ll" ,.~ y11u money when you 11:iw mcdu;al i,
clilergency,
so1m•,111c else's property or life, and
II I~ yuu ha\'c 1h1h.l -pa11y m111or insurnnn>, ii helps pay for darnagi:- to
11 s rc4u11l·d by la"
s [Link] house.
Ill . Home 111surance pro1~c1s you from lire, burglary, and natura.1 disasler

7
iv. -;~;v~l insurance he!;~-~!~~~ ym~,l~;e ~~~ bags, have an a~~id-~~l, or lose important documc~;-i~ ; n~~-~r
~~ . .
v. Commercial insurance helps businesses with employee benefits, shopkeeper msurance, and protection for
property and ships.
vi. If you have a motorcycle, you can also get insurance to protect it.
vii. Business owners can get insurance for their factories or offices and insure. th eir employees.

NON-BANKIN G FINANCIAL COMPANIES CNBFC)

NBFC or 'Non\,,.Banking Financial Company is a fmancial institution that provides banking services without
requiring to hold a bank license, However, many of its activities are similar to banks. ~FC is a c~mpany
registered under the,Compaajes Act 1952 and is regulated by RBI. The principal \,usirress of NBFC~ m_cludeJ
activities related to investments, giving loans and advances, leasing, hire-purchase, insuran~e·business, chit~fund
1:rusiµ¢$s, II-~ a'<t9~i~i{ioiu):f ~h~res, bo·n ~,- debentures, s~ocks 1 and Government or locai ~uthotjty bonds/ securities
that ate marlcetable.
. • • -:r..
~ ": . . • • :r-~ . ., · · ·

~~ tiumber ofN~_n -~icld~~ ~uiancial Corporations continued to grow year after year iii th;e nineties. During
1~96-97, the ag~ga!e dep~~its. of J3,970 Non- Banking Financial Corp~rations totaled ·tip to Rs.3,S7,1'50
ci'ores. As ·of~arch 31, 20i2, the total number ofNon-Banking Financial Corpotations registered with RBI
stood ft 12,~8~ '~9m_p~d with 12,409 in 2011. The number of deposit-taking Non-Banking Financial
Cog,o_rations ~FC-b) 1 ihcluding residuary NBFCs (RNBC), also reduced from 297 in end-March 2011 to
271 as o-n cod of. March 2012:. The size of totai assets of Non-Banking Financial Cor,porations grew from Rs
1,169 billion. tolls 1.,244 billi6n·as of the end of March 20•12. Net owned fundii ofNBFCs,l!lio grew 25% from
Rs 180 biUion in 2011 to "Rs 225 billion at the end- of March 2012. The large finance companies numbering
2,376 accounted for 63 percent of deposits. ·· .. ·

. ❖ TYPES OF NBFCs
L [Link] Finance Companies (AFCs)

Primarily cilg~ge _in [Link] sueh as ma~hinery, vehicles, equipment, & other tangible assets. AFCs. cater
to individuals-, s~1~aitfh 1J.i.~~iu111-siz~d enterprises (MSMEs), & eoq,ora~es by of(ering cu;t_p_m,ized financing
·solutions for the acql,lisiticirt of [Link] assets. By providing loans & lease opdon·s, AFCs help businesses
expand their op_~r4l_tjtj.~s ww,1~ al_s(;) prom0tipg econ0mic growth.
The uicom:e ans1.ng_ 'frgit{ ther~ sitould not fess b'e tli!h 60% o"f its total as·sets. OTI AM:c;ici:ci AMC, and BIRLA
-SUN LIFE AMC" are ._ few of
examples asset management companies_,

lL Loan· c~moa_nies,
. . .

A Loan Company·~ Hs tui~t states is a fihand~l institution that offers loans for various pqqios~ other than the
AMC which also. _includes the H~using Finance Firms. These ~ompanies are significant playgts in the consumer
[Link], offering personal; home; and education loans, & more. Additionally, tQ~y ~x~~nd credit facilities
to b~inesses, in the fonp, Qfworking 'c apltal IO!llis, trade finance, & project financing, Lo~ companies fill the
gap left by traditional l>a"-~ by serving custo~ers with specific financial ii~~ds· or limit~d access to foonal
c.r~it channels. Lie Finance Ltd, PNB ifousing Finance Finn, and HDFC are some examples of Loan companies.
iii. 'Infrastructure Finance Companies (IFCs)
With the objective of fund.i ng infrastructure projects, IFCs play a c~cial role, in supporting the nation's
infrastructural .development. IFC!! primarily finance projects in sectors lik,e power, roads,
telecommunications.• & transportation. By providing long-term loans & project-specific funding. IFCs
contribute to the creation of robust Infrastructure, enabling economic progress & enhancing the overall quality
oflife. A fow examples are GMR °Infrastructure Ltd and Hindustan Construction Company.

iv, Microfinance Institutions (MFis)

.Microfinance institutions have emerged as esscntinl pl·a ycrs in financial inclusion, la~geting t~e ccono~1 lc;ally
disadvantaged sections of society. MFis provide small loans, also known as m1croloa11s to low-mc?me
i11dividuals & self-help groups (SHGs). By extending credit to mlcro-entr_e ~reneurs & marginahze~
communities, MFls empower th.e m to [Link] or expand sin all businesses, hftmg them out o_f poverty _&
fostering sustainable livelihoods-. Now, here th.e n,ic;[Link]!l'cc company com_~~ out, ~nd they pro~ide linanc•~,~
help to these underprivileged pe0plc_. Bandhan Financial Service Ltd and UJJtvan Fmanc1al Sen 1cc arc a fc
.examples.

8
 • :t
,'"

lnvcslmcnl cornpnnics :

It is a n,mn cial instil'Ul_ion whose J1rincipnl business is the acquisition of securities. In simple
terms, these
cD111pa111cs takl! monc~ lrom th~ public which is i1wcs1cd in various securities and financial products. Thereafter,
the company deducts lls operational cost from lhc earned profit and [Link] distrihutes 'it to shareholders .
These companies are predominantly engaged in the R~qulsltlon & management of financial assets such as stocks,
bom/:;•, m111rw/ funds, & securitit!f. These NBCs enter lo both retall & lnttltuflonal lnvestort, facilitating
investment opportunities across various asset classes. through their expertise itl financial markets, Investment
companies contribute to capital form1ftlon ; moblllzlha funds fot productive use & encouraging responsible
investing practicl!s, Bajaj Alliance Genera'! Insurance Company, IDFC, and HDJ.'C mutual fund are examples of
some Investment companies,

vi. Systemically t.m oortanl Core lnvestmen,t Companies (ClCs•Sl)

Systemically Important Core lnvestment Companies (ClC-SI) are a subset or intestmenf Companie.
that
piny n significant role in the lndian finattcial sy.sten1, A ClC-SI is an NBFC that holds at feast 90o/, of Ifs total
assets m the form of in\'estmenl5 in the ~q11i1J' sha,·es, debt, or othet fl11at1clal asset, of its group companlet.
These entities are systematically Important due to their potential to ltnpact the stablllty or the financial sector.
To maintain financial stability, \he RBI regulates & supervises these companies more closely.

'FUNCTIONS OF NBFCs
~ Hire Purchase sen1ices-the seller delivers the good_ s to the buyer without transferring the ownership of
the goods & ·payment is to be made in lristaUment s, Once the buyer pays all the installments of rhe
goods, then only ownership of the goods is transferred to the buyer,
,. Retail Financing- Companies that provide short-term funds for loans against shares, gold, & property,
primarily for consumption purposes.
-~ Trude Finance- Companies dealing in Dealer/ Distributor (lnance so that they can for working capital
requirements, vendor finance, & o,her business loans.
'" ,[Link] Fund'ing-This is the largest section where major NBFCs deal. This majority includes.
Real Estate, Railways or ¥etros, Flyovers, Parts, Airports, etc·. ,· ·
,. Asset Management Company-Asset Management Coqipanies are those companies [Link] of fund
managers (who invest in equity shares to gain handsome gains) who invest the funds pooled by small
investors & actively manage them. ·
.. Ventur.e Capital Services- The companies that invest in small businesses are at their initial stage but
their success rate is high & are promising enough of su(ficient return .in the coming time.
MSME .Financing- MSME is·one of the-routs ofour econ0my ffe. mi_llions of livelihoods depend on·this
sector that is why the government announced such luring schemes for this sector to promote its growth.
' ••• ' ' ' I • • • '

ROLE/ SIGNIFI CANCE OF NBFC IN INDIA

to
.I. Growth; In terms of year-to-year growth rate, the NBFC sectdr beat the banking sectol' in contributing
in 'its initial stages. Despite the
the economy every year. On average, this segJI1ent grew ~y -22% every year,
slowdown in lhe economy and various setbacks faced in the last few years, the sector is still growing and
:enhancing operations. _
l. f>rofitability: NBFCs have been mote profitabl~ than the banking sector because [Link] costs. This enabled
them to offer cheaper .credit to customers. As Ii. result, the amount of money lent to customers by NBFCs is
.higher than ihat of the banking sector with more customers opting for NBFCs
3. -Enhancing the Financial MarkeJ~ An NBfC caters to the urban ahd rural poor companies. These financial
companies bring diversity to the mar:ket by [Link] the risks_, in~reasing liquidity in the markets, and
.promoting financial stabi'lity in the financial sector. They highlight the public issues of [Link] a~ well
.as providing funds needed by the start-up fompanies as e11pital. The [Link] market i~ dependent op, the
functions thJt are taken care ofby- these lending companies.
4. Infrastructure Lending•: NBFCs by )ending to infrastructure projects, contribute largely, to the. economy.
This is very .important for the growth of a developing country like India. Tile amount involved is quite large,
the projects being rlsky, with no ~urety of [Link], and profits occurring after ii longer time•frame. These
factors deter banks from financioi 1hese [Link]. Since their inception, NHFCs h,we contributed inore to·
infrastructure lending 1han banks.
5. Promoting Inclusive Growth: All 1h~ !op NBFCs in India cater to a wide variety of customers - both in
urban and rural areas. They linancc projects of small-scale companies, which is important 'for the growth in
rural areilS They ulso providl· sniall-11tkc1 loans for ijffordabk housing 1)rojects, Microfinance provided
by
1lil·1n play~ a11 i111porta111 foic ,111 a11a1n111g stable f11u111l'!UI in1:h1)tl)llS /\II thCSt' activities by the ins1i1u1ion with
an ~[Link]·.rn~: help prun1111c ·rndus1, 1• gnm th 111 the l.'lJlllltry
6. llplil'lmc111 ill lhl' E111ploy111c11J Sl'l'tor: \.\ 1th the growth In llJll'l'atWII~ of small industries a11d
1 bus1n.:'SSt'S,
1h..- 1,olu:1(s of NUFCs ar( [Link])111g the o
J, b situation Mqre opporJµn1.11c s for employment are arising wiLh the
rnllucnce of the NBFCs in ~he priv.i1e as well as government sc_C'lors. The business [Link] in the private
q
 secto r prov t'd···e more empl oym ent oppo1 1,
1un1t· 1es
·
and occu patio·
n prac t'1ccs • And NBFC plays a key role in their • .. ,
grow th and stabi lity. ·•. 1
7. l<lnanclng for Long -Ter m: NBF
C play s a key role in prov iding firms
parti cipat ion. As again st tradi tiona l bnnk
.
with funds throu g~ equit y
.. ,
_(. ·
'I

s, NBFCs supp ly long -nm credi t to the trade

Th~y facil itate to funding large infrastn1cture and com merc e industry.
proje cts and boos t econ omic deve lopm
perm its grow th with stabl e [Link] soft inter ent. L9ng -term finance
est rates. The econ omy thrives when busin
flo\fiish. esses cif•SSis and MSM Es
8. · Rais ing the Stan dard ofLl vlng : NBF
Cs colla bora te with the gove rnme nt for
NBF Cs attra ct depo sits from the general the uplif \men t of socie ty. The
publ ic nnd conv ert it into capital for Indus
smoo th econ omic deve lopm ent. The rise trial and othe r secto rs for
in b\1sinesses cons eque ntly raise s the dema
· creat es ~pto ymc nt oppo rtuni ties raisi nd for work force at'ld
ng the purc hasin g pow er of indiv idual s and,
·. ·;1_d~m'a)?:ds. This work!; to upgrad~•t.l)e livit) subs eque ntly; :rais ing·
g ,ta~dat,9s Of I\ llO,~le~i .·... , ·.. ,
~- Inn'ovatlve Prod uch~ ~fCs,
1
1 by bein g
trtote flexible th,1tetm s' ciNcnditlg and investment: oppo · .. ·
b~ ;\.,re ~~.r:c pi,paclive .i" i~[Link]
finadcial t,roduct!I .. This facilitates their
rtunities than ~
~ ,tb_Jtt 'th~;d eveto pfog econ oniy1. For ,nstan growth are-the gam e chan gers
';\ • \ . -~ .
cie1·the fa"Ct6rization & bill pb~~ht scirvie~ has
been revo lutio nized .

MlJ''tUAt. FU ND ,[Link]'RY:_. IN,.IN JllA

·'fh:'e :~utual .fund industQr in india is expanding gcographicaliy alohg
~as~. ~µtu :_a). funds-nave bec~ me a: majp r·p\a yer in the equit with a strong and evet~fnere asing inves
tor
y.·an
d cotpq t,[Link],d m·arkct and ~1st> prov ide
~~~}!!~~~ ~~ 't·~~:_
,~
~p~ ey m!i:~c;t. ~e ~utu al [Link]~ indu~
lt},i:i~..
cruci al
Q8 o.':1.t fo p~ th~ fast~st-growing and the tµnif
most-com petit tve segment of hld1a•s finan cial
secto r. , • •
Adv~n&t~ ot'~utu-1 Funds .
• • ~ • • • , '
. .;, . !_' ' •
1, -Dlvenlfication _ of Wea lth:- Mutu al fund s help ·to inve st in_ari appropria C

obje ctive ·o f'ma [Link] iiing gafo s and mini mizi te combinati-on of asset s with the
ng risk. Mutu al ·funds is a1comb inati on of
diffe rent 'll.l'dtistrics .with vary ing ·m aturi investilient in secu rities of
ties and issuer~. Niulu
,a[fu:nds hdp' to diversify faster as comp
b~& -~ ~~ ye_inclividu~l sccu ri_ties; ared to
-~. ~on~~i;~ of S~le ~ M:utuai furids prov ide the advantag~. . . · ., ··. · · ! •
~d ~-v~ -tp~ ii:[Link] from :the num erou s of econ omie s ofs~ ale. investing a sin•g lc mutu
s transaction~ and coilinl'.js~Iotl ~hnfgc:s al in
Portfo
\~ •
lio,,1; :..:.> ,, ·
l '> .. ._....
· ·· · ,
l.,. . ·
•
·~ ~. · •
needed .to .crea te a diver sified
3. Liqu id Inve stme nt Mutu al fund s can
• I ••
~. ~
'
~
·,• ,-. · • • • _.: • • • l • •
be easil y trade d on majo r ·stoc}c exchange
l,i~c f-~ ~t:o ,l~t.... . _- s. This make s them a high ly
4, P_:rq't~~i~ii...M~~agement: Mut ua\ fund ' 1 • - _. --~' ·:
·t · .!, •. '. . ..,, , ' ..._ •
.Ii< ; ., .; ·, • •••
s are mana ged b)I fim4 in.~Ii~ger~ wl1<;> are highl
;to · d~ ·iJi·seciµities ud ·devi se appr opria y qual1 fled and train ed
te inve stme nt strat egt& . ·pfofessiona1 mana
Jiid_iyi.4~ ~v~~rs ~ ~:cciuire th~ [Link] ·of the geme nt of funds enables .
·$. Cbrii~i 6( Miibiar Funds: the different typessto~k mar~ et at a relativeiy lbw_cost. · · .·.
i'q ~'~ d-'thil.'fsuitirt!ieirJ•~p~ iffch:equire
of i:nu'ttiiii)'tih4s-: p_tqVi4e llfl ,cfpiiob for ~ves tors to choose a•
merlt$. Tiie' MF industfy-' oft'ers incotne
~4s~:-~d-x iio~ ~-ina rkct-'i n\ltu ai,ftµ i& fuiids 1 growth funds~ balan ced
, ··
6.-:~~tumi:. In India di"id eild rece ived by inves ,t :,· :· ' ; 1
- /
• ,!' .
tors is tax,.;f
re~. This · enhan9es . the yield on mutu
~ Y -.s com pare d to inco me from .othe al funds
r inves tmen t optio n_s. Also; in the ,t;ase
the 'inv ~.: bcnefits troni-indcx-atid of long~term capit al gains.
7. Fi.e:tlbtiity:: FeatureJ:of·a [Link] n•ftirtd
·[Link] capital gairr tax·,·: ,• .,;·.,.,:,.;:,• ~ -~ •· -~.:
's~herile such a~ regiilar inv~s
J ·· ·1· · i •· • • • · •·
divid end reinv estm ent plans allow inve tin~rit plans; regular withdrawal pians, and
stors to syste mati cally inves t or with draw
[Link] conv enien ce. funds a~cording to their needs
8. Wel l Regulated: Alt mutu al funds are
regis tered with SEB I and they function
-regu latio ns desig ned ;to pro ~t ,t he inter within the provisions ofstr ict
est of-in vesto rs. The SEB I regul arly moni
Man agem ent Com pany . tors the operations of an Asset

Disa dvan tage s of Mutual Funds

1. Retu rns are not Gua rant eed:
The retur ns in mutu al funds like 11-ny othe . .
r investment in the stock market are fluctu
to mark et risk. Econ omic or polit ical facto ating. The returns arc sub,i~ct
rs may lead 10 Ouctuation in market price
or depr eciat ion in the valu e of mutu al fund s leading to cit!lcr appreciatton
s.

2 Dive rsifi catio n of Inve stme nt :

M r
.:;y ertai n mutual funds tend to over comp lical
i~es , c S cl
e matters as they invest in the ..
same types ofscc unt1 cs of
d 1ueren1 issuers. u 1 ,·nves. tmen l does nol reduce lhe risk 0finves1me111 and in fnc1, it foils lo provide the
·'~ hcncli1~
or dive rsific ation .
~·
J. Rcst'ricted Choi ce :
The choice of an individual investor is restr .
icted only to th e selection of a mutual r,un d
·
10
 l.-.

1'YPES OF MUTU AL FUNDS

I. BASEi ) ON STRUC TURE

The structural classification are quite brond & includes:

Close-e nded funds Interval funds
Open-ended funds
se & sell the individual fund unjt.
The difft:rcn u ntion depends primarily on the nexibil ity to purcha
particu lar constra ints such u a specific period or
a. Open- Ended Funds: Open-e nded funds do not have any
rs to trade funds at their conven ience & exii when
number of un its that can be traded . These funds allow it1vesto
unit capital continu ally change s with new entries
require d al the prevailing NA V. This is the sole reason Why
the
taking new it1vestors if they do not want to or cannot manage
& exits. An Open-ended fund can also decide to stop
·
significant funds.
to invest Is pre-def ined. This means that the fund
b. Close- [Link] Funds: In close-e nded fonds, the unit capital
of Units. Some funds also come with a New Fund Offer
compan y cannot sell more than the pre-agr eed number
NFOs come with pre-def ined maturit y tenure with fund
a
(NFO) period wherein there is a deadlin e to buy units.
that investo rs be given the optjon-to either-r epurcha se
managers:open to any fund size. Hence, SEBI has mandat ed
s,
option or list the funds on stock exchan ges to exit the scheme
ded & close-e nded fupds. These funds are open for
,c. Interva l Funds: Interval funds have _traits of both open-en
d by the fund house) & close the test of tpt time.
purchase or redemption only during specific intervals (decide
These funds are suitable for investo rs looking to
Also, no transactions will be permitt ed for at least two years.
save a lumpsum amount for a short-te rm financial goal (about
3;-12 months).

l . BASED IN INVES TMEN TS , ; ,,

ation in ·the J9ng run. They invest most of
!i- Gr-0wt h Funds: Main objecti ve ofthis is capital -appreci
the corpus in equity shares with signific ant growtlt potenti al
& offer liiglter returns to investors in
a major part qf their fund in equitie s.
the long run at average, ris~. These schemc;s. nonna! iy invest
b. tncume Funds: They are also known l!S debt sc~eme
. The aim of these scheme s is to provide
ly invest [Link] fn:~d-iocome securities
regula r & steady income to investors. These scheme s general
., . . .
such -as bonds & corpora te·deben~ res.
y, preserv :t,tion of capital &
e. c. Money Mar}{et Mut ual Fundsl [Link] to prov,_ide easy
l~guidit
r, short-te rm instrum ents such as b"C3$UJY
mod.e rate income . Th_ese sc~em~s [Link], [Link] in saff
& so oh. This fund has the highest liquidit y with
bills, cenific ates of deposit s, comme rcjal paper
k risks. · · · · _, · · ,. ·
lower rate of return at least possib
ly suitable fot long term goals. This is.
d. Pension Fun~s! Such type of mutuai funds are generai
~arkets .·Here equity is risky but offers.
because thes.e [Link] distl'i~ut~-~[Link] among equities & debt
· ·
highe,r returns . .

ROLE OF MUTUAL FUNDS INTff E CAPITAL MAR KET ,

.,

a large pod! of investors ·outside its realm. As:

•
j

.I ,The risk and c;omplexity of the capital market usually keeps

an.d directio n; th~y 'do not prefer investment. in the
ordinary investors are .unable to keep track 9f its movem ent
es that could be ~ised by corpora tes in the capital
[Link] market. This adversely affects th~ quantu m of r~sourc
pas\ throµgb investm ent in [Link] funds. Mutual
market. This issue has appropriately address ed in the recent
rs who are interested in reapi•n g the bel).efits of the
funds hav.e become an investment vehicle for all those investo
y in India tlas made substan tial progres s from
C<Jpital 111arke1 whhouJ taking a high risk, Tl}e nn1tual fund industr •
revised from time to time.
th.e time Si.:.81 brouglu in r~gulatj6ns in 1993 and which are
diary in the capital m1Jrket as it helps to pool in
[Link] fund industry has emerged .as a strong 'financial interme
of industries. This helps to bri!lg in Stabilit y to the
large resources and alfo.ca1es j1 efficiently in different Jype,s
ation of high r~tums, lo,w risk and safe and liquid
l'i1u111cml sys1c1n of the country. Mutual funds are p good combin
portfolios into diffc:n;nt types of securiti es with a
111vcstm cnt. Mutua l funds '<11'1.! h,dping [Link]; [Link] jhcir
lowc;:r cost.
[Link] 19 choose the [Link] that suits their
?. - The diJ"kre111 types of mutual funds provide a wide choice lo (}11:
rs to invest in equities wherea s income funds
rnqtiircrnents .. For instance. growth funds have enabled tnvesto
cd in [Link] g rn·both cquil1t's and bonds can do so
p,uv1d.: ,1 sari.- ,111tl s•~·ad~ flu" uf income . l11d1v1duab 11ncres1
lu1t11J1I\ ,an 111H•s1 1n money mark~• mutual funds _Tht' wide
1hrn ugh [Link] a11c·,·d !'111,ds wl11t.- 111,·cs1ors looking li11
hdp111g 11wcstnr-s t>:\plorc thl' cap11al market qu11e
"''.':1c1y of pri,dur: IS :n ;11lahlc 1,1 1 lhc 111111,ual flll1d u11l11s11 y i,;
c llcc1.1vcly .

I1
 - ~ :-· -:-::;r:- - - -'-·• · • ·• •Y - ~
. . ..... • • ·:.= x=-• - ·• ·•
• - _ _ _ ...

4. Mutual funds are also enabling corporntc houses to obtain fonds at a lower cost as compared O
t sin t,~~o~in
g
the market. As returns from mut\1111 fonds nrc subject to market risk, corporates arc not compelled lo assure a fixed
percentage of returns to their investors. A report of RBI suggests thnt, during the period 20 I3 - ~ 8, the_ now of
resources to banks had declined whereas the now of funds to mutual funds and insurance companies reg, 5lered 11
significant increase.

[Link]~I funds l\l'C also contributing to the growth and cicpansion of the industrial sector. The investment in
scctor-·specific funds arc enabling respective sccto~ to modernize, grow and diversify. Thus, the mutual fund
industry indirectly helps in gcnct'ftting employment and incren11ing the pace of capital formation and economic
growth.

[Link] fundi: arc becoming l preferred option o( invegtmcnt not only of the Investors based in metro cities but
also those from small cities. nms, mutul\l. funds !Ire becoming broad based in terms of spalial distribution and
investors profile ,.

[Link]
. . ' \ . ·~· . . ..1 .. '.

F~ancial setviecs are the services wh~ch ~ offered,~)' the fln1u1ilial companies. Financial ~mpanies comprise
bot~ asset m&nagemcnt companies and liability inanagetnctit companies. Asset management 'companies include
leas1ng1 mutual funds, m-erehant bankers and issues bf portfolio management. On the other hand, in liability
1

management, companies have bill discounting and acceptance houses, '

trt ·o'ther ·_words, financial service ,s referred to as the products and services which are offered by banks as they
provide kinds of facilities or financial transactions and other investment opportunities and money management
.also gives infonnatiort on the stock market. The basic aim of the sector is to act as an intermediary Between
individuals and institutional investors which will help in financial transactions.

I
Objecti\'eS of financial services

1. To provide i~dividuals and busi~esses w·ith financial resour~es in order to grow amt pr~sper.
2. To help people save for the future and manage their moner wisely.
3. To provide a safety net for people in case of financial emergencies.
4. To promote economic stability and prosperity.
5. To protect consumers from unfair and dcccpti,;,e pfactic~.

The. term merchant bank refers to a financial .institution that cqrlducts underwriting; lOaJ\ services, financial
:advising, .and ·fund-rajsing·serviccs for llh-ge coi:pot'8,tioiis}and higM1et-worth individuals (HWNls). Merchant
:banks arc experts in international trade, which makes them specialists in dealing with multinational corporations.
Unlike retail or commerc~ banks, merchant ban,ks do not [Link] financial services to the general public.
Some oJtb.e largest merchant bank1, in the world include J.P. ¥organ _f:hase, Goldman S11;hs, an<!, Citigroup.
Merchant banking can also be pursued by entities other than baillcs provided they are registered with SEBi. In·
case a bank pursues merchant banking activities, it would need a banking license from RBI (to carry out banking
activities) and-a SEBI registration under the SEBI Merchant Bankers Regulations to carry out merchant banking
business. Examples of Merchant Bankers in India are SBI capital markets ltd., Punjab national hank, IFCI
Financial Seiviccs [Link].
SEBI started to regulate merchant banking activity in t9n & a majority of the merchant bankeri. who
registered with SEBJ were either in issue management or associated activity such as underwriting or advisors.
The highest number of merchant bankers with SEBI was seen in the mld-90s but has reduced due to the inactivity
in the primary market. Currently, there are more than 200 SEBl-registered merchant banks in lndia.
• Different lYJ>es of organizations in India which provide merchant baking services:
i. Commercial Banks ii. All India Financial Institutions iii. Private Consultancy Finns iv. Technical
Consultancy Organizations.
Thr funt'tions or merchant banking are listed as follows:
I. tur! lj~i9 Ma11aµcmc111 : Mcrchan1 banking provides investment advice to the investors Lo make mveSlmcnt
tlc1:isiuus. The merchant bank provides pol'tfolio managing assistance to the rnvcSlors
by 1rmlj,!!g i;ecuritics on their behalf.

12
 the dom ~d( &
Raising fuuds for clicnls i Merchantities.
2 b11nks assisr clients In rnlslng runds from
i11tcruatlon11l nu1rkc1s by buying secur ncu ln9tltute in its
bunk also helf)S in the (lromotlon or the [Link]
J. P,:~motionul IIClivitics: The 111crd111nl Idell & lo get 11pp roval from the
work on tllcir buslncu
lllHHtl st ages, It helps the org1111izntio11 10
government.
its clients/or raising, credit/ram
4. Lonn Syndicullon :This is lhc service 1;1·oviJcd by tnetchatll banks to
.
ba11ks &Ji11aricial i1mi1u1iori~·.
de leuln g services to the•ir cuslutner, ,
S. Leasing Ser"ices: Merchant banks aiso provi

amount or sffares and

organization for tht sale of certain minimum
Underwriting is an act of guarantee by an
debentures issued by a company.
financial risk for a
h an Individual' or institution takes on
Underwriting is the process through whic fair borrowing rates for
insurers' business. Underwriting helps to set
fee. Underwriters assess the degree of risk of pricing investment risk.
create a market for securities ·by accurately
loans, establish appropriate premiums 1 and ed, and provides the
for an !PO will, raise the amount of c11pital need
Underwriting ensures that a company filing ·
services.. . ', ·
underwriters with a premium or profit for their
function in the financial
time:, underwritin~ c~[Link] ·today as a key
Althou_gh the mechanics have changed over
· ·· . .- .-:, ,,
world . ';;.:
.' \"·.,.··.. '.'/
.:,
There are rwo types of underwriters. They ar.e
UT{ SBI Ca~i'ta!Jv1,arkets,
· I. Jnstitulional underwriters. - IDBI, IFCI, -,.·,~(- .
' :' ·' '- _t,;,.
q.
2. Non-Institutional underwriters, A~y NBF
·,·: ·,:,,-;:. :t ,,_. ,,': , ,.
lmpo .r:tance of Underwriting . .. . . . ·...{.... ·( , /· :' . . :.J/- • ' :,__ :'- '.' ,· .'
de§. _an insurance against the risk.
·. .
sue.?:fshates ~i~qej t_prov{
Under w,riting ensures success of the [Link])~ ·":_-,1:· ·•,.'11!:· ;:•;·..,_~,·... ) ~- 1.1;·,'-:·· ; '
,, • j' •. • ' jj ::·· ,· -~;,
.• • •
. • •

; :·:·, : ,: ;; .. , .'
r~d ,mi,nimum su~scripti'o?i •·, ;•,;.
Underwriting enables a compai:iy·to get'.the [Link]
who .are called the lead
0

cohfid~nt'e, fg 'inv,e_star-s ifh'r :!llld'etwriters

The reputation of the underwriter act•s.,as ;fl
:

c. Thus, the [Link]

_ cothpiihj,•\vhose~ha:res ·ate iss~edio ,th~ pubn
managers provide financial [Link] -to the, • .- J .
·
1

se of,tije _reputatj01rofunderwriters i; · ' , .

,ofthe issuing company also•i'!lproves·becau :;=-!·.I_:"'"?.· ·. (
,:. ;,, ,~.. ·t .,..' . ,;. ' ,:i :1: '
' , ,, J

,r · (·,._ •,: ..._ •. . ; _ ., ~·r '. •

_~fypes of Underwriting : .·::

~:_,; ~ '':· ,, 1 1
1

cial records, and

chec:king_ the 'applitt ant's '.Credit history,. finan
] . Loans Th,e underwriting in [Link] i~vd)ves All the facto rs that are checked
~ime 9f ~[Link] ,the loan.
the value of the collateral which is offered !!,tlh~ \l appra isal proce ss may ·take a
wjJI depend upon the-size, ~cf fyp¢ of fol!-n
,tQat ·if requested·ancl the overa
ing is invol ved in mort gage lbans.
on type of lo,a~ underwrit
Jew minutes {O .a few week$. Th~ tnosi comm
ho 1s. the person
.fQC!JS is on \he potenB~i policyholder'w
2. Jnsur-ance bi insurance uncle'rwritihg, the iwrit ing may involve the
rs checked in ih'e insuranoe unde
· requesting health or Hfe insun1nce, The facto and other facto rs which are
history, .occupation, ,family
policyholder'.s- ,age, health,. lifestyle, medical · ·
determineq by l:he underwri,t!l.r,
often an investme,nt
rmed on behalf of the potential investor or
·1 Securities Securities underwriting i~ perfo more common in
opriate p:rice pf a particular security. This is
bauk Jo seek [Link] assessment ofrisk and ;1ppr 's IPO will raise the
This process ensures that the company
the case -of Initial [Link] Offer/ll'g· Pr !PO. ·
needed capital and provide the µudcrwritcr~
with the specified premium,

groups, businesses, non~·

tworthiness of entities such as individuals,
[Link] ratin~ is _a way of assessing the credi analy ze their financial risk
countries. Special credi! rating agencies.
profit organizations, govemments and even able to pay back loans on time, ·
r.o See wb'rlhcr or not these borrowers will
bt'
urcditworthine~s. T-ha1 is,
ud assess-cs an jndi,;1dual's or a company•~
A n yd,1 r: µ agciH:y (('RAJ cnilu ;ttcs .a
11111
r 's abil11y to '[Link] tlw [Link] or if
1l.' :i11d cred11 lin,•s 1C1 illl:ilyn! the dd>1o
[Link]'sl' ,J~,m:1l·s ,·1ms1Lh:r a dc-btul \ i11ron
ifJL'h' ,, uny l '.I cdw risk nssocratl'd
.
.

analy z~ an organiia11on,
;{.tl'.J )g P,.·oc"'. dur.c is earn ed [Link] by rrcd1
1 l~ating Ag_~ucics. Crcdii i'alrng a~c11c1es
rile agen cies hav~ [Link] au thority 10 rate companies, sta(c
1111111
,du,ll., 01 l'lllity and Hss1gn nl'lrng s ·tu 11. These
13
 \

~ -- - ·- .. · · • ---- ~ ·· -· ... -·- · · · - --:-- ~ · · · ., l I · vemment, b~di;s·

··and special purpose
f d bt I d'
• - :\ I

govcmmcn~, non-profit orgamzat1onf:, countnes, ?.ecuritics, oca go _. '

entities. Many fact<>rs arc considered while settling with a rating such as fin~nc,al statementS, type
and borrowing history, repayment capability, p11st credit repayment behavior, and more.
O
c • en mg \ \
\
Each ofthc:11e f-actors contribute., to a specified share in comruting the end re.~uft, credit score. The ~rcdit_ ~ating
·agency docs not .provide any decision to fim,ncifll institutions on whether an entity should get Ii credit fac,hty or
not; Tather it providO!I the report and addition11l inrmts making ii easier for the lender to analyi;c and make a
dccisiotl.
Types of Credit Retlng
The various ct-edit ratln~ 11gcncle.11 mie similar "Alph11bctiCAI tytnbol!I to determine credit rating!!. However, these
ratings .lire ah,o grouped into two types of gmdes- 'hwcstmcnt Grade' and /or 'Speculafive Orade'.
lnvcs~cnt grade: these ratings refer yo tbe fact that the [Link] made is solid & te borro-wcr will most likely
r m~t the repayment term~. Thus they arc often pric;-ed le.~~. :
Spec.P,leti:C Qf1!~c: These r9Ung! s1to":J~,t th~ tnve..~tmcnts !re at a higher rbk,.and they often have higher intere8t
rates, · .,.,, • • ·•

List of Registered Ctedt~ Ratihg [Link]?I

" Credit Rating lnf-onnarion Services oflndia limited (CRISJL)

" lndia Ratings and ltcscarch, a wh~tly-owned subsidiary of Pitch Group
.. 'The lnvestment Information and Credit Rating Agency (ICRA
·• Credit Analysis ilnd Research Limited (CARE
Brickwork Ratings India Pvt Ltd
SMERA Ratings Limited

I
Infometrics Valuation and Rating Pvt Ltd:

4. ~Bl-~1~
The tcnn venture capital comprises of'two words, namely, 'venture' and 'capital'. The term 'venture' literally
means.a ..course~ or "proceeding', .the ~~tco~e ofwhic~ is u~certain Ci:~•• involving risk). Th~ tenn capital refers
to the resources to start the cnterpnse. Thus venture·capital refers to ca:pifal investment in a new and risky business
.... - -
:enterprise. Money is invested in such enterprises because these have high growth potential.
.. . .
Venture Capital Finance is a private or institutional inveitment m~de ·in~o early-stage/ start-~p companies (new
... ; .
ventures). Ventures involverislc (having uncertain outcome) in the expectation ofa sizeable giin. Venture Capital
is money invested in businesses that are small; or exist only as an initiative, but have huge potential to grow. The ·
peopl~ who invest Uus money are called venture capitalists. The venture capital investment is made when a
v~hu:c capitalist buys shares of such a company and becomes a firiancfal partJ}er in the busin~s. Venture Capital ..
generally comes form wcll~ff investors, investment banks & any other financial institutions;.
•
Venture capital ~ be visualized as 'your ideas and our money' concept of developing business. It is 'patient'
~ital that seeks a -~ thg,ugh long term capjtal ga~ rather than immed_iate an4 regular interest pa~ents !S
in the case of debt financing. · ·

Venture Capital invesbnent is also referred to risk capital or patient risk capital, as it includes the risk of losing
the money if the venture doesn't succ~ _a nd takes medium to long tenn period for the investments to fructify. It
is the money provided by an outside investor to finance a new, growing, or troubled business. The venture·
capitalist provides the funding knowing that there's a significant risk associated with the company's future profits
and cash flow, Capital is ,inwested in exchange for an equity stake i.n the business rather than given as a loan ..
Venture Capital is the most suitable option for funding a costly capital source for companies and most for
businesses having large up-front capital requirements which have no other cheap alternatives,
Features of Venture Capital Investments

I. II mainJy focuses on financing young bw;incsscs that are having trouble entering rhc cal)ital 1mu·kct 111 their
initial stages of growth.
2. To provide a fixed return for the venture capital somces, this financing may also be loan-based or in the-
fonn of inco11ver1ible deb1 securities.
J . hwcslun, 111 vt'-nlurc cupiuil lilTk 10 profil rmanl·ially from the sun;c:;!s of the hus1111.:s, ihal lmnows .
4. ft ii; an in -, ·e:-lmt:nl for Lhc long 1crn1 ,,nd 1s plac~:d in husim•si,cs w1lh ~IH>I\!! ~••l\•lh l' 111 spt'(.l~ - 1he
allociit11'l1J of "cnture copit<1I will reo;ult 11 1 the comp1111y'~ [Link] cxp 1111~ 1011 .

14
 ,·-·:---~ -~~~~~.' ~ .; ·i t~;·~-<-~1),·. ,~ L;-· _.~. :_ . "J -, •• • ""\ ·; ·-:;~.
, I ·- · •• ~ ~ ;-;

i Thit ❖ehlllt'.e c11,i1r1a, l ·;ir(ivi'cier \.iiiU 1 . . · ·. . . · . ·. ; . .

_ J"·I 1 , • .• . . .:· ·: . ··, ·:· . · a S<> pt!rtt~' tpall! Ill tire boi-rowiri'g business; iu do•i11g so; they ~"ill provide
I ,,1nc1,1 [Link]) .111~! numagcnal ~xpertisc. .
Types of Ve1rh111e Cl1pitnl'fu11dlng

Thf [Link] types of vcntut'c capital ~re cfossllied 11s ,,e,· thcl1· applications at various stages or a business
.
. · . , ·
The three principal types of venture ca1>ltal ore:
I. ·Early Stage Financing, ,
2, . Expansion Financing And· .
3. .· .[Link]/13uyou1 .Financing ,
A) Rarly Stage l<'lnancing

··Early-stage financing has three sub-divislot1~1 ,; •I I ' / , • . .

of being eligible
• Seed financing is defined as a small .amount th1:1t 1m erittepre,teur recei-ves for the purpose
foi' a start-up loan. Tf yqu,w;m\ to stat't a tiftn, [Link] ·ult, seed. il?.oi\ey. option. Some,ve
ntute capitalists
though the fund
are willing \<> invest now, .even ffyout p1;oduc:t or business i~11 t (µHy' de~eldped .. Even
1

only hns a ~\pall amount, the business con bene,fit fro_ m it,' Fol' lris~nce, io (l~:0.l~t J:itlliket rest;arch, pay
for omce ex.pc11scs, ot create product smnples. ' . ,. . i :: ;
·• Start~up fin,ancing is given to comparyie s fo,r,,the
1
p~tpose 9f [Link] ih.e dev,~Jopment of products and
by '!startup capital."
services, Ass'isting the [Link]~ess ip ~-r~;~1.i11g ;1 fu1)ption;!l p,r~Jotwe ~s w,l1a( is i:neant
g more market
· For iustancd; invc~ting in office buil9iogs ; r~crui~,iJi~ llC}Y ·e~ployee~; .and conductin
11esearth. At .this point; a few ventl}re 9apitalisJ:~ a~e ,vJWng:to provide mone_y
, [Link] n,ohnuch. . ·.
~pen:t their startiM capital qi need finance for beginnin g 1
· "' First Stage financing.: Companie.s that have ijll
the·First §tage fiilan~!ng . ~
business activities at the fufl .scale ate tn~·¢1,liJ:oi' ~eneficia riesrof .r

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B) li:XPANSION FINANCIN(;r_ ':, .·.

f ' ,

E"pansionfi_nam:ingmaybe .catf g~~~~f ')~t~'.' -~·:·.-·•. ,•--:_:>: ';_ ·_:· , . ··:/ ,,. , • •• , .
_,· , , ,,.,:
1

their exp~nsion.'It is also

,. Second-stage financing i,s prdyide4 tq. poir)pan'ies ror,t9e: purpose· c;,fbegill!ling'
. 'known as mezzan(n.e financing. H1 ' t pr6vjded foi-'.lhe purpO'se,.of_assfstiqg·a particular company to expand -
· ·,.·' · · · · ,• .. ·
·in:a. major way. · · ,·. ·, ·. ' ·-,: , ·'. ,. ? ' · · ·
0

• Bridge financing may' ti,~ p·r,0vide·d ~~ a shprt-tenn fnter~s t-onfy ,fin~ric~ ,opt'ion
a~ well as·a form of
business strategy~ · ,
monetaf)' assistanc~ to c.:ompa~ies _tliat empl0r the Initial Public _Off~r~ ·a~ a 1m~jor
q ACQUISITION OR 'BUYOUT·. FINANC ING. : ;; ·'
·'. ..,
" .-:· ,,
·:.,, . . -,

. Acqu'isifio~ or buyout flnancing 'is 'sat~gbrized (nt9i . '.

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Acquisition· financing ~sisti; -~ ~0mpart~ t,?;ll~<[Link]~~ c.~rtai'n p~s or ~~ -~ntfr~ ~omp~y1

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to obtain a particular product

Management or leveraged [Link] financing he\p:s a particular .managemerit,gtoup
of angther ~ompany. · · · · 1•

. ;·. ), "

Advantag es of Venture Capi~~l .

• They bririg wealth and expertise t~ the·eompany

-• L;irgnum o.f cqu•ity finance can be provided ··:

• The busines,s does not. st~od th~ obligiifio,; to r~pay th¢ -~oney
a business
· : t;~~e:~1~~ion I~ capjtal; .it _proviqes ·~aluable iqt'~r;natioi1, [Link], technical assistanc~ to make

Dis:rdvant:ig,cs ot: Vc111iirc Cn1ri1a1

• As the !11v).!,[Link] become part owners, the autonomy 1111 d contrni'ofthe founder
is lost

· 1.t is a lengthy and conrp,lcx process

• .t1 .i_S iiu\ 11n:r1:111) fon,11 -01' li11a11l'ing . . ,

• lfr.1:1~r11 fru.111 surh 1"111a11..:mg can bi! waltzi:;J Ill lllll~ fllll ·1111lv. .,,• ,'lj .

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n as Financial
'
ded by qualified and caring professionals know
Financial Counselling is a free se_rvice provi help us to plan
ssionals who guide us through our options and '
Counsellors. Financial counsellors arc skilled profe
I

get our finances bock under control.

our way out of debt. They manage our debts and
sclling, and debt
cial literacy, financial education, credit colih
Financial counselling means providing finan cial mana geme nt-bu dgeting, saving
guidance on personal finan
manag~ment for thos9 in financial distress I.e. that saving
money for a secure future. lt is important .~o know
and credit issues/debt management, and managing h creation. By savings alone one
leads to investment and asset creation. Appropriate asset allocal1011 leads to wealt selling is
caMot µieet ·,1i [Link] al\a ·future needs ; Whic
1
h alsc, depends uport the given lifestyle. Thus, CQun
la.l distress ts part of the pt()cess, :,
essentlaily for li~,IJhood, ind mitigating firtatic
c! or [Link].
take lhformed decisions before av91lirig 6( it produ
The counselling p~~ s enal,les customers tQ utilize the resou rce~; earm arked for the
is ean then gainfully
Hence, there less .s~pc -for grievances. L~nd~rs
resorts tq responsible botrowing, it results in ~~e
yiability of credit
grievanc~ ~s •l:m_~ch~i~Jrt. ·As a cus~[Link] s rather than
comfortable dealiftg with t@1-P,artisa~ ct>~nsellor
fqr tQ~ 1~~~-~!J}~l~~~lt,. ~~!om~fS ~~u\~;pe mo~ to accept the suggestions' madt &y the counsellors, then the
tend
~ lenders tljemselv~s fotthc purpose, lt lenclers a possible
's a~6t buroetfis initig'ated and at the same time, the lender car\ avoid the butdert of•handling
cils'tomef an~ the servi ce provi ders.
tageo~s to both the customers
bad asset or di~ute. th~s,; cou~selling is advan
Financial [Link] able to assis
t you by:
, assets and
ion - including regular income and expenditure
• Doing a full as~es~m~t of your financial situat
on,
liabilities - to bcip you .fully understand your positi
providers
creditors, government agencies or other business
• Providing advice on how to negotiate with your
n circumstances
,. Negotiating 9irectly with yom creditors in certai
esponsibilities you may have
.. Providing [Link] what options, rights and:r
tion services,
such as legal services, crisis food .and accommoda
• Referring you to other services you may need,
·
.and health setyices .
ut:
They can ·[Link]:informatlof! and [Link]
.. Credit aµd debt:related,m.a):ters
. ; l,

• The rights -0f debtp~ . .

• The pro~ ~4
. . ofbl!fikniptcy
cpris . . .

• Workin~ out a ~lis!Jc payment plan for debts

.
i .
.. '
, legal ai~ and
including gambling, family, personal. couns~lling
• How to access either sp~ialist support services, .
emergency j:elief.
Financial coun,!II:sellors don't :
e
• Charge set up fees and/or ongoing fees for servic
• Complete tax returns
cial planner)
• Provide investment advice (that's the role of finan

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