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Indian Financial System

Notes loans are with these organization. Commercial banks, UTI, LIC and several other government
organizations have come forward to establish the housing finance companies. All these HFCs
are governed by National Housing Bank (NHB). There are reportedly 74 HFCs with 9.6 per cent
deposit mobilization of the total NBFC and a total resource of ` 1,860 million as of 2009.

Mutual Benefit Financial Companies (MBFCs)

Mutual benefit companies or nidhis, as they are known in India are public limited joint stock
companies operating mainly in the southern India. They are old institutions and the history of
some of them dates back to 100 years. Out of 123 nidhis in 1995, 97 were in Tamil Nadu alone; and
that too in Chennai city, there were 70 nidhis. They source their capital from the members,
depositors and public at large besides the promoters. The deposits they accept are fixed and
recurring deposits. Unlike NBFIs, they also take demand deposits. The main function of the
nidhis is to advance loans to their members for the house construction or repairs, marriage and
other personal works. These loans are generally secured loans, given against the security of
tangible assets such as house property, gold, jewellery or stocks of companies and insurance
policies. The notable term of these organizations is that (1) they offer saving schemes to those
which are linked with the assurance to make credit available when required, (2) they make
credit available to those whom commercial banks may hesitate to give loans, (3) they are local
people friendly, and (4) the interest rates of these organizations are comparable to the banks.
They are incorporated bodies governed by the RBI.

Residuary Non-banking Companies (RNBCs)

Residuary non-banking companies generally tap the public saving by operating deposit schemes
akin to recurring deposit schemes of the banks. Mobilization of deposits is effected from a large
number of small and uniform depositors by expressly promising them that their money would
be invested in banks and government securities. The collection of deposits at the doorsteps of
depositors through field staff is what makes these organizations successful. These companies
acquire the funds at low cost for longer terms and deploy them at relatively higher yields. Many
of these organizations work with meagre capital.
Merchant Banks (MBs)

The activities in which the MBs are involved are quite large. They are often called "acceptance
and issue houses" in the UK and "investment banks" in the US. They offer a whole lot of financial
services and finance which include management, marketing and underwriting of new issues,
project promotions and project finance, syndication of credit and other facilities, leasing including
project leasing, corporate advisory services and investment advisory services, to name a few.
The kind of organizations which are involved in these sectors include commercial banks, all-
India financial institutions such as the IDBI, private consultancy firms such as J. M. Financial
services, technical consultancy organizations such as PWC and Ernst Young. SEBI has made
categories of MBs as I, II, II and IV on the basis of different eligibility criteria which were set by
keeping in view the different activities taken up by these MBs. The minimum net worth required
by these categories are: I= ` 5 crore, II = ` 50 lakhs, III = ` 25 lakhs and IV = nil. Despite huge
numbers available there are handful of which are doing well in the industry.
Venture Capital Funds (VCFs)

These institutions supply risk capital to new businesses. However, their activity largely remains
vague. The VCFs play an important role in developing upcoming and new industries such as
software, biotechnology firms, etc. Although venture capital provides common equity capital,
their common vehicle of finance is convertible preference shares. They do not generally provide

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