Page 37 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Financial institutions are the key players in the development of the capital market in any
economy. But even after their great performance, there generally remain some sectors
comparatively more challenging. For them there developed a special need for special financial
institutions. In fact, the need for establishing such financial institutions arose mainly because of
the following causes:
1. It has been difficult for industry in general to procure sufficient long- term funds in the
capital markets. There has been a lack of financial institutions to supply long-term finance
to industry. AS we know, traditionally, and more popularly, commercial banks provided
only short term finance. Thus some Special Financial Institutions (SFIs) were established
to ensure that industry got sufficient long-term funds in the desired sectors. And that too
in accordance with the priorities determined.

2. Certain specific sections of the industry faced greater difficulties as compared with the
others in procuring long-term finance. Some such sections were:
(a) Small and medium sized organisations

(b) Specific industries requiring funds for modernisation
(c) New concerns set up by new entrepreneurial groups
(d) Concerns involved in innovation and new technological developments
(e) Concerns requiring extra-ordinarily large amounts of finance for a long gestation
period
(f) Concerns in backward areas. One of the very important needs for SFIs was to meet
the long-term financial requirement of such organisations on economic and social
grounds.
In general it can be said that the gap between the demand for and supply of finance in general
and industrial finance more specifically, is sought to be filled through term loans being offered
by various financial institutions. And this makes itself as the most important need for financial
institutions.

3.4 Commercial Banks

Commercial bank is the term used for a normal bank to distinguish it from an investment bank.
This is what people normally call a "bank". The term "commercial" was used to distinguish it
from an investment 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 which 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-Steagal Act 1930 (Khambata 1996) requiring that
commercial banks only engage 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 mandatory.
It raises funds by collecting deposits from businesses and consumers via checkable deposits,
savings deposits, and time (or term) deposits. It makes loans to businesses and consumers. It
also buys corporate bonds and government bonds. Its primary liabilities are deposits and primary
assets are loans and bonds.

Commercial banking can also refer to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses, as opposed to normal individual
members of the public (retail banking).

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