Features & Classification of Financial Institutions

Introduction

Financial Institutions are diverse. Some accept deposits, some don't. Some lend for 1 year, some for 20 years.

1. Features of Financial Institutions

1. Intermediation: They do not produce goods; they deal in money.
2. Regulation: Highly regulated (by RBI, SEBI, IRDAI) to protect public money.
3. Trust: Their entire business is built on public confidence.
4. Risk Bearers: They assume the credit risk of the borrower.

2. Classification of FIs

A. Based on Business Activity

1. Banking Financial Institutions:
   • Accept demand deposits (Chequable).
   • Create Credit.
   • E.g., Commercial Banks, Cooperative Banks.
2. Non-Banking Financial Institutions (NBFIs):
   • Cannot accept demand deposits.
   • Provide specialized services (Insurance, Lending, Mutual Funds).
   • E.g., LIC, UTI, HDFC Ltd (formerly).

B. Based on Term of Lending

1. Money Market Institutions: Deal in short-term funds (< 1 Year). (Banks).
2. Capital Market Institutions: Deal in long-term funds (> 1 Year). (Development Banks like IFCI, IDBI).

C. Based on Ownership

1. Public Sector: Govt majority stake (SBI, LIC).
2. Private Sector: Private ownership (HDFC Bank, Bajaj Finance).
3. Foreign: Foreign ownership (Citibank, Standard Chartered).

Summary

• Banking: Accept Demand Deposits.
• Non-Banking: Specialized functions, No Cheques.
• Term: Money Market (Short) vs Capital Market (Long).

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