Page 146 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 8: Financial Institutions

Objectives Notes

After studying this unit, you should be able to:
 Learn the concept of financial institutions;

 Explain the banking financial institutions;
 Discuss the various types of non banking financial institutions;
 Understand development banks;
 Understanding regional rural banks.

Introduction

Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfill the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas.

8.1 Banking Financial Institutions

The name bank derives from the Italian word banco or desk/bench, used during the Renaissance
by Florentine bankers, who used to make their transactions above a desk covered by a green era
tablecloth. However, traces of banking activity can be found even in ancient times.
In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called "macella" on a long bench
called a "bancu", from which the words "banco" and bank are derived. As a moneychanger, the
merchant at the "bancu" did not so much invest money as merely convert the foreign currency
into the only legal tender in Rome - that of the Imperial Mint.

8.2 Commercial Banking

8.2.1 Meaning of Commercial Banking

It has been observed that commercial banks have two popular meaning. The two popular
meanings of commercial banking are given as below:
1. Commercial bank is the term used for a normal bank to distinguish it from an investment
bank (a form of banking where the bank takes part in the market investment process). This
is what people normally call a "bank". Since the two types of banks no longer have to be
separate companies, some have used the term "commercial bank" to refer to banks that
focus mainly on companies. In some English-speaking countries outside North America,
the term "trading bank" was and is used to denote a commercial bank. During the Great
Depression and after the stock market crash of 1929, the U.S. Congress passed the Glass-
Steagall Act 1933-35, requiring that commercial banks engage only in banking activities
(accepting deposits and making loans, as well as other fee-based services), whereas
investment banks were limited to capital markets activities. This separation is no longer

LOVELY PROFESSIONAL UNIVERSITY 141