Banks and Financial Institutions - Entrepreneurial Development Policies and Programms Video Lecture | Entrepreneurship & Small Businesses - B Com

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
periods
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
economy
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
government
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
required
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