Page 32 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 3: Financial Institutions

3.1 Definition of Financial Institutions Notes

A financial institution is an institution that provides financial services for its clients or members.
Any institution that collects money and puts it into assets such as stocks, bonds, bank deposits,
or loans is considered a financial institution.
There are two types of financial institutions primarily, viz.,
1. Depository institutions and

2. Non-depository institutions.
Depository institutions pay you interest on your deposits and use the deposits to make loans.

Examples: 1. Banks
2. Credit unions
3. Trust companies

4. Mortgage loan companies.
Non-depository institutions, on the other hand undertake the function of selling financial
products. In other words, those government or private that serve as an intermediary between
savers and borrowers, but do not accept time deposits, are known as non-depository institutions.
Such institutions fund their lending activities either by selling securities or insurance policies to
the public. Their liabilities (depending on the liquidity of the liability) may fall under one or
more money supply definitions, or may be classified as near money.

Examples: 1. Insurance companies
2. Pension funds

3. Brokerage firms
4. Underwriting firms
5. Mutual fund companies
6. Investment trust
Many financial institutions provide both depository and non-depository services.

Probably the most important financial service provided by financial institutions is acting as
financial intermediaries. Most financial institutions are highly regulated by government bodies.
Finance companies typically enjoy high credit ratings and are hence able to borrow at the lowest
market rates, enabling them to make loans at rates not much higher than banks. Even though
their customers usually do not qualify for bank credit, these companies have experienced a low
rate of default. Finance companies in general tend to be interest rate-sensitive-increases and
decreases in market interest rates affect their profits directly.

3.2 Types of Financial Institutions

Financial institutions can be of different types in accordance with the difference in the financial
systems of different economies. In India, the financial system includes the following types of
institutions, viz.
1. Financial Authorities

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