Page 166 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 8: Financial Institutions

At the state level; there are 18 State Financial Corporations (SFCs) and 28 State Industrial Notes
Development Corporations (SIDCs).
The Specialised Financial Institutions (SFIs) comprise Export-Import Bank of India (EXIM Bank)
and National Bank for Agriculture and Rural Development (NABARD). Hitherto, SFIs included
three institutions, namely, IFCI Venture Capital Funds Ltd., ICICI Venture Funds Management
Company Limited, and Tourism Finance Corporation of India Limited. However, due to the
tiny nature of their operations, these institutions have been excluded from the category of SFIs.

The investment in situations are Life Insurance Corporation of India (LIC), General Insurance
Corporation of India (GIC), and Unit Trust of India (UTI).
The financial institutions were functioning in a highly regulated regime up to 1991. The DFIs
were mostly engaged in consortium lending and they offered similar services at uniform prices.
In the administered interest rate regime, the cost of borrowings of DFIs was substantially lower
than the return on financing (lending). Long-term lending involves uncertainties and to handle
this, the DFIs used to get concessional funds up to the nineties. The Reserve Bank and the Central
Government used to finance these institutions by subscribing to the share capital, allowing
them to issue government guaranteed bonds and extending long-term loans at concessional
rates. However, this concession all ending was phased out in the 'nineties' with the initiation of
financial sector reforms. Interest rates were deregulated and the facility of issuing bonds eligible
for SLR investments was withdrawn. Now, these financial institutions have to rely on equity
and debt markets for financing their needs. These DFIs have resorted to market-based financing
by floating a number of innovative debt and equity issues. They also raise resources by way of
term deposits, certificates of deposits and borrowings from the term money market within the
umbrella limit fixed by the Reserve Bank in terms of net owned funds. Wore stringent
provisioning norms have come into operation. Many of the DFIs including IDBI have lost heir
tax-exempt status.
Moreover, with deregulation, the distinction between different segments of financial
intermediaries has blurred. The commercial banks are now financing the medium- and long-
term capital needs of the corporate sector and the DFIs have started extending short-term/
working capital finance. This has led to a stiff competition between banks and DFIs. As a result,
the focus of DFIs has shifted from the purpose for which they were set up.
With globalisation and liberalisation, the financing requirements of the corporate sector has
undergone a tremendous change. Many foreign players entered into strategic alliances with
Indian firms. There was an increase in research and development activities as well as the
diversification plans of firms. Investment in technology and infrastructure became crucial. With
a view to taking advantage of the new opportunities, the financial institutions started offering
a wide range of new products and services. These DFIs set up several subsidiaries/associate
institutions which offer various services such as commercial banking. Consumer finance-, investor
and custodial services, broking, venture capital finance. Infrastructure financing, registrar and
transfer services, and e-commerce.

DFIs are in the process of converting themselves into universal banks. ICICI has become a
universal bank by a reverse merger with its subsidiary ICICI Bank. IDBI is in the process of
transforming itself into a universal bank. The Reserve Bank of India has issued guidelines for
DFIs to become commercial Banks. These guidelines are the same as for commercial banks
under the Banking Regulation Act. It is envisaged that will be only two types of financial
intermediaries in future, that is, commercial banks and non-banking ace companies (NBFCs).
Universal banking is a one-stop shop of financial products and services. Universal banks provide
a complete range of corporate financial solutions under one roof -everything from term finance,
working capital, project advisory services, and treasury consultancy. Universal banking

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