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Unit 3: Financial Institutions

10. Specialised Financial Institutions: They are government undertakings established with a Notes
view to offer financial as well as technical assistance to the Indian industries. The list of
specialized financial institutions in India mainly includes:
(a) Export-Import Bank of India
(b) Board for Industrial & Financial Reconstruction
(c) Small Industries Development Bank of India

(d) National Housing Bank.
11. Venture Capitalists: Venture capitalists are the institutions that deal in venture capital.
Venture capital (also known as VC or Venture) is a type of private equity capital typically
provided to early-stage, high-potential, growth companies in the interest of generating a
return through an eventual realization event such as an IPO or trade sale of the company.

Examples: 1. 2i Capital (India) Private Limited
2. Avon Capital Services Ltd

3. Baring Private Equity Partners (India) Limited
4. Canbank Venture Capital Fund Limited.

3.3 Role in Economic Development

Financial institutions have been there in the world markets for a long time now. They have also
made significant contributions. The two main reasons for the existence of financial institutions
are:
1. Economic development

2. Financial stability.
If we penetrate a little, we will find that the second reason for the existence of financial institutions
leads to the first again. In the first place, banks offer deposits that claim to be capital certain. If
this promise is to be honoured, then there must be limits to the range and nature of assets that
a bank can reasonably take on to its balance sheets. More generally, financial institutions perform
a plethora of activities through their provision of liquidity, divisibility, informational efficiencies
and risk pooling services which broaden the spectrum of risks available to investors. In this
way, they encourage and improve the efficiency of investment and savings in the economy.
Through the provision of a broader range of financial instruments, they are able to foster a risk
management culture by attracting customers who are not as much able to bear risks.
Also, from the view of financial stability, in an economy in which the institutions are
comparatively less developed, banks will inevitably be required to assume risks that otherwise
might be borne by the stock market, collective investment schemes or insurance companies.
One way of minimizing financial fragility in the developing economies is to encourage a diversity
of financial institutions, where investors are able to assume a variety of risks outside the banking
system itself. Without this diversity, there is a tendency for all risks to be bundled within the
balance sheet of the banking system, which more likely may lead to severe financial crises.
The financial institutions play an important role in complementing the facilities offered by the
banks in an economy. In fact, the existence of Banking Financial Institutions (BFIs) and Non-
banking Financial Institutions (NBFIs) supported by efficient money and capital markets, keep
the financial sector complete and enhance the overall growth of the economy.

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