Banks and Financial Institutions

banks and financial institutions a

commercial bank is a type of financial

intermediary and a type of bank an

institution which accepts deposits makes

business loans and offers related

services commercial banks also allow for

a variety of deposit accounts such as

checking savings and time deposit these

institutions are run to make a profit

and owned by a group of individuals

commercial banks occupy a vital position

as they provide funds for different

purposes as well as for different time


banks extend loans to firms of all sizes

and in many ways like cash credits

overdrafts term loans purchase or

discounting of bills and issue of letter

of credit the rate of interest charged

by banks depends on various factors such

as the characteristics of the firm and

the level of interest rates in the


the loan is repaid either in lump sum or

in installments bank credit is not a

permanent source of funds though banks

have started extending loans for longer

periods generally such loans are used

for medium to short periods the borrower

is required to provide some security or

create a charge on the assets of the

firm before a loan is sanctioned by a

commercial bank merits of a commercial

bank timely assistance provided by banks

to business by providing funds as and

when needed by it information supplied

to the bank by the borrower's is kept

confidential thereby maintaining secrecy

of the business it is an easier source

of funds as formality such as issue of

prospectus and underwriting are not

required for raising loans from a bank

since the loan amount from a bank can be

increased according to business needs

and can be repaid in advance when funds

are not needed it is considered as a

flexible source of finance demerit of a

commercial bank

extension or renewal of funds is

uncertain and difficult as they are

generally available for short periods

the procedure of obtaining funds is

slightly difficult as banks make

detailed investigation of the company's

affairs financial structure etc and may

also ask for security of assets and

personal sureties in some cases

difficult terms and conditions are

imposed by banks for the grant of loan

for example restrictions may be imposed

on the sale of mortgage goods thus

making normal business working difficult

financial institutions both central and

state government have established a

number of financial institutions all

over the country to provide finance to

business organizations they provide both

owned capital and loan capital for long

and medium-term requirements and

supplement the traditional financial

agencies like commercial banks these are

also called development banks as these

institutions aim at promoting the

industrial development of a country in

addition to providing financial

assistance these institutions also

conduct market surveys provide technical

assistance and managerial services to

people who run the enterprises

this source of financing is considered

suitable when large funds for longer

duration are required for expansion

reorganization and modernization of an

enterprise merits of financial

institutions one unlike commercial banks

financial institutions provide long term

finance to these institutions also

provide financial managerial and

technical advice and consultancy to

business firms besides providing funds

three goodwill of the borrowing company

increases in the capital market by

obtaining loan from financial

institutions consequently

it is easier for such a company to raise

funds from other sources as well form it

does not prove to be much of a burden on

the business as repayment of loan can be

made in easy installments five easy

availability of funds even during

periods of depression when other sources

of finance are not available

demerits of financial institutions one

rigid criteria is followed for grant of

loans by financial institutions the

procedure becomes time-consuming and

expensive due to many formalities to

restrictions are imposed on the powers

of the borrowing company by the

financial institutions such as

restriction on dividend payment three

financial institutions may restrict the

powers of the company by having their

nominees on the board of directors of

the borrowing company thereby the

following are the various financial

institutions established by the


one Industrial Finance Corporation of

India or IFC I to state financial

corporations or SFC

three industrial credit and Investment

Corporation of India or ICICI for

Industrial Development Bank of India or

IDBI five state Industrial Development

Corporation's or si dc-6 unit Trust of

India or UTI seven industrial investment

bank of india limited to summarize

commercial banks provide short and

medium-term loans to firms of all sizes

the loan is repaid either in lump sum or

in installments and the rate of interest

charged depends upon certain factors

financial institutions are established

by both central and state governments

all over the country to provide

industrial finance to companies engaged

in business this also financing is

considered suitable when large funds are