Role of Financial Institutions in the Financial System

Introduction

FIs are the engines of the financial system. Without them, the gears of the economy (Markets) wouldn't turn smoothly.

1. Key Roles

1. Promoting Savings Habit

• By offering various schemes (Recurring Deposits, SIPs), FIs inculcate the habit of saving among the masses.

2. Financing Industries & Agriculture

• Banks provide Working Capital (Short Term) for day-to-day operations.
• Development Banks (DFIs) provide Long Term Capital for machinery and expansion.

3. Promoting Entrepreneurship

• Institutions like SIDBI (Small Industries Development Bank of India) focus solely on funding MSMEs and startups.
• Venture Capital firms provide risk capital to new ideas.

4. Balanced Regional Development

• FIs are mandated to lend to "Priority Sectors" (Agriculture, Small Scale Ind) and open branches in rural areas.
• This reduces the gap between cities and villages.

5. Implementation of Govt Policies

• FIs implement schemes like Mudra Yojana, Stand Up India, and Housing for All by providing authorized credit.

Summary

• Savings: Mobilization.
• Industry: Term Loans & Working Capital.
• Regional: Rural branches & Priority Sector Lending.
• Policy: Implementing Govt schemes.

Quiz Time! 🎯

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