2. Q 1. What/Who are financial intermediaries? Explain their role in
the growth of the economy.
Ans: Functions of a Commercial bank
Commercial banks combine various kinds of financial services with financial
intermediation. These functions can be categorized as under:
=> Transaction Services – Such services can be classified under three
segments
i) Conversion of deposits into notes and coins to enable holders of deposits to carry
out transactions in cash.
ii) Such deposits are used as a means of settling debts.
iii) In the absence of exchange controls, banks exchange cash and deposits from
one currency into cash and deposits of another currency.
=> Intermediation – As discussed earlier commercial banks play a significant role
in the process of financial intermediation through which the funds/savings of the
surplus sectors is channelized to the deficit sectors.
Brokerage and Asset transformation are the two types of intermediation function
performed by commercial banks.
Brokerage brings together buyers and lenders, reduces market imperfections
through research, and dissemination of information. Asset transformation function
enables issue of claims against the banks themselves, which differ from the assets
they acquire.
=> Transformation services – Banks perform three transformation services while
they perform the intermediation function. They enable liability, asset and size
transformation as discussed earlier in this Unit. They enable maturity transformation
and also risk transformation.
=> Payment and Settlement System – This system can be described as one
that consists of a certain group of institutions, particular set of instruments and
3. procedures, designed to ensure the circulation of money and quicken the
interbank/other settlements, resulting from various economic transactions within a
country or between countries.
RTGS is an internationally compatible and transparent system which could be used
to the full advantage of the existing client base without dispensing with the benefits
already available to the customers.
=> Other Financial Services – Commercial Banks also provide other capital
market related services, advisory services on portfolio management or investment
counseling etc. Advice on debt and equity is primarily restricted to new issues, with
secondary market investments taking a side-stand. In most cases there are no
particular charges for such services. Customers are in fact given incentives/
commission for investing through them. Here, the bank gets its income directly from
the broker/mutual fund and by cross selling other bank products. The non-
discretionary services offered by the banks can be classified as under:
Advisory services – flexible, unbiased investment advice customized to meet
customer requirements.
Transaction support – all transactions, both in primary and secondary markets
facilitated through a panel of brokers.
Custodial services – aimed at removing hassles of settlement and for efficient follow-
up of all corporate actions including both cash and non-cash actions.
4. Q2. What do you understand by the term Micro Finance? Explain in
detail the role of MFIs in the growing economy.
Ans: In common parlance, the term ‘micro finance’ implies provision of thrift, credit
and other financial services and products of very small amounts to the poor in rural,
semi-urban and urban areas for enabling them to raise their income levels and
improve living standard. In other words, it refers to small scale financial services –
both credit and savings – that are extended to the poor in rural, semi-urban and
urban areas.
More than subsidies poor need access to credit. Absence of formal employment
make them ‘non-bankable’. For example, commercial lending institutions require that
borrowers have a stable source of income out of which principal and interest can be
paid back according to the agreed terms. However, the income of many self
employed households is not stable, regardless of its size. A large number of small
loans are needed to serve the poor, but lenders prefer dealing with large loans in
small numbers to minimize administration costs. They also look for collateral with a
clear title - which many low-income households do not have. In addition bankers
tend to consider low income households a bad risk imposing exceedingly high
information monitoring costs on operation. This forces them to borrow from local
moneylenders at exorbitant interest rates.
Many innovative institutional mechanisms have been developed across the world to
enhance credit to poor even in the absence of formal mortgage. Micro Finance
Institutions (MFIs) is such mechanism. The basic idea of micro-finance is simple; if
poor people are provided access to financial services, including credit, they may very
well be able to start or expand a micro-enterprise that will allow them to break out of
poverty.
In India, the concept of Micro Finance, which was launched in the year 1992, has
played a significant role in alleviation and empowerment of weaker sections, in terms
of scope as well as coverage. MFIs are, as mentioned above, uniquely positioned to
facilitate financial inclusion, and provide financial services to a clientele poorer and
5. more vulnerable than the traditional bank clientele. They help the poor undertake
economic activity, smooth out consumption, mitigate vulnerability to income shocks
(in times of illness and natural disasters), increase savings, and support self-
empowerment.
Over the last decade, Indian microfinance has witnessed unprecedented growth.
There has been much development in this field to the extent that, unlike earlier
times, microfinance institutions have become financially viable, self sustaining, and
integral to the communities in which they operate. They have the potential to attract
more resources and expand services to clients.
6. Q3. Discuss the role of NABARD in the development of
microfinance sector.
Ans: NABARD is set up as an apex Development Bank with a mandate for facilitating
credit flow for promotion and development of agriculture, small-scale industries,
cottage and village industries, handicrafts and other rural crafts. It also has the
mandate to support all other allied economic activities in rural areas, promote
integrated and sustainable rural development and secure prosperity of rural areas.
In its role as an apex institution for microfinance, NABARD’s strategy is to emphasis
on regular thrift collection and its use to solve immediate problems of consumption
and production not only helps to meet their most urgent needs, but also trains them
to handle larger financial resources more skillfully, prudently and with a more lasting
impact. It encourages SHGs to become a forum for many social sector interventions.
The launching of its Pilot phase of the SHG (Self Help Group) Bank Linkage
programme in February 1992 could be considered as a landmark development in
banking with the poor. The SHG-informal thrift and credit groups of poor came to be
recognised as bank clients under the Pilot phase. Subsequently, bank credit also
becomes available to the Group, to augment its resources for lending to its
members. NABARD views the promotion and bank linking of SHGs not as a credit
programme but as part of an overall arrangement for providing financial services to
the poor in a sustainable manner and also an empowerment process for the
members of these SHGs.
Credit is a critical factor in development of agriculture and rural sector as it enables
investment in capital formation and technological upgradation. Hence strengthening
of rural financial institutions, which deliver credit to the sector, has been identified by
NABARD as a thrust area. Various initiatives have been taken to strengthen the
cooperative credit structure and the regional rural banks, so that adequate and timely
credit is made available to the needy.
7. In order to reinforce the credit functions and to make credit more productive,
NABARD has been undertaking a number of developmental and promotional
activities such as:
· Help cooperative banks and Regional Rural Banks to prepare development action
plans for themselves.
· Enter into MoU with state governments and cooperative banks specifying their
respective obligations to improve the affairs of the banks in a stipulated timeframe.
· Help Regional Rural Banks and the sponsor banks to enter into MoUs specifying
their respective obligations to improve the affairs of the Regional Rural Banks in a
stipulated timeframe.
· Monitor implementation of development action plans of banks and fulfillment of
obligations under MoUs.
· Provide financial assistance to cooperatives and Regional Rural Banks for
establishment of technical, monitoring and evaluations cells.
· Provide organisation development intervention (ODI) through reputed training
institutes like Bankers Institute of Rural Development (BIRD), Lucknow
(www.birdindia.com), National Bank Staff College, Lucknow (www.nbsc.in) and
College of Agriculture Banking, Pune, etc.
· Provide financial support for the training institutes of cooperative banks.
· Provide training for senior and middle level executives of commercial banks,
Regional Rural Banks and cooperative banks.
· Create awareness among the borrowers on ethics of repayment through Vikas
Volunteer Vahini and Farmer’s clubs.
· Provide financial assistance to cooperative banks for building improved
management information system, computerisation of operations and development of
human resources.
8. Q4. Describe the role of IFCI as a Corporate Advisor.
Ans: Corporate Advisory & Infrastructure services:
At a time, when India is throwing up investment avenues in newer sectors and
projects, there is a critical need to provide specialized advisory services to the Indian
Corporate Sector in their efforts towards Industrial Advancement. IFCI with its team
of seasoned professionals and rich experience of over six decades in the financial
sector is uniquely positioned to fulfill this need. As a catalyst of Industrial growth,
IFCI provides the following Advisory Services:
· Investment appraisal of Navratna (most valued public sector companies)
Companies.
· Project Conceptualization and related services, including Guidance in relation to
Selection of Projects, Preparation of feasibility studies, DPR, Capital Structuring,
Techno-economic Feasibility, Financial Engineering, Project Management Design
etc.
· Credit Syndication including preparation of Information Memorandum, Syndication
of domestic/foreign loans, Post Sanction follow-up, Assistance in legal
documentation etc.
IFCI has fulfilled its original mandate as DFI by providing long term financial support
to all segments of Indian industry. It has also been chiefly instrumental in translating
the Government‘s development priorities into reality. Until the establishment of ICICI
in 1956 and IDNI in 1964, IFCI remained solely responsible for implementation of the
Government’s industrial policy initiatives. Its contribution to the modernization of
Indian industry, export promotion, import substitution, entrepreneurship
development, pollution control, energy conservation and generation of both direct
and indirect employment is noteworthy. It played a pioneering role in the economic
development of India, when capital markets were relatively underdeveloped and
incapable of meeting the long-term requirements of the economy adequately.
9. With Pan-India presence across 17 locations in India, IFCI has been in the business
of undertaking techno-economic and financial viability studies for projects and
extending financial assistance for more than six decades. In 60 years of its
existence, IFCI has evaluated more than 4800 projects, with a well-diversified sector
portfolio and extended cumulative financial assistance of over INR 400 billion. Today
besides providing long-term project-specific assistance, IFCI caters to the diverse
needs of the Indian and Overseas Institutions by providing a host of Advisory and
Consultancy Services in the areas of Project Appraisal, Risk Analysis, Credit
Syndication, Placement Of Debt and Equity, Corporate Restructuring, Infrastructure
Advisory and Legal Advisory.
Aside from its role in promoting industries and creating capacities, IFCI has also
played a pivotal role in institution building. Through a host of subsidiaries and
associate organizations, IFCI has emerged as a major player providing
comprehensive financial solutions ranging from Project Finance, Merchant Banking,
Insurance Broking, Venture Capital, Depository Services, Factoring Services, Asset
Reconstruction and Securitization.
IFCI now aims to establish itself as a major player in Corporate Finance by
leveraging its knowledge pool, quality human capital and institution building
capabilities, in the buoyant economic landscape of the country with focus on
manufacturing, infrastructure and services industry.
10. Q5. NABARD is a Refinance institution. Explain this role of
NABARD in detail.
Ans: Types of Refinance
Agency Credit Facilities
Commercial Banks Long-term credit for investment purposes
Financing the working capital requirements of
Weavers' Co-operative Societies (WCS) & State
Handloom Development Corporations
Short-term Co-operative Short-term (crop and other loans)
Structure (State Co-
operative Banks, Medium-term (conversion) loans
District Central Co-
operative Banks, Primary Term loans for investment purposes
Agricultural Credit
Societies) Financing WCS for production and marketing
purposes
Financing State Handloom Development
Corporations for working capital by State
Co-operative Banks
Long-term Co-operative Term loans for investment purposes
Structure Pilot scheme for financing short term loans in three
(State Co-operative states
Agriculture and Rural
Development Banks,
Primary Co-operative
Agriculture and Rural
Development Banks)
Regional Rural Banks Short-term (crop and other loans)
(RRBs) Term loans for investment purposes
State Governments Long-term loans for equity participation in
co-operatives
Rural Infrastructure Development Fund (RIDF) loans
for infrastructure projects
Non-Governmental Revolving Fund Assistance for various micro-credit
Organisations (NGOs) - delivery innovations and promotional projects under
Informal Credit Delivery 'Credit and Financial Services Fund' (CFSF) and
System 'Rural Promotion Corpus Fund' (RPCF) respectively
11. Criteria for refinance
· Technical feasibility of the project and adequate response from prospective
beneficiaries.
· Financial viability and adequate incremental income to ultimate borrower to repay
the loan within a reasonable period.
· Organisational capability to ensure close supervision.
The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, the
beneficiaries of the programme are partnership concerns, companies, state-owned
corporations or cooperative societies. But, finally the assistance reaches the
individuals, who are members of the primary credit institutions.
The refinance is usually 50% to 95% of the project cost. The balance will be met by
the banks and the concerned state governments or the Government of India in the
case of SCARDBs. With a view to ensure credit flow to certain thrust areas, the
quantum of refinance is enhanced to 100% as in the case of special category
beneficiaries like SC/ST members and self help groups.
12. Q6. Write a note on the prominent DFIs operating in India, who
specialise in Infrastructure development.
Ans: DFIs in India for Infrastructure Development – Products &
Services
Infrastructure Leasing & Financial Services Limited (IL&FS)
Infrastructure Leasing & Financial Services Limited (IL&FS) is one of India's leading
[infrastructure development and finance companies][MD[D1]
IL&FS was promoted by the Central Bank of India (CBI), Housing Development
Finance Corporation Limited (HDFC) and Unit Trust of India (UTI). Over the years,
IL&FS has broad-based its shareholding and inducted Institutional shareholders
including State Bank of India, Life Insurance Corporation of India, ORIX Corporation,
Japan and Abu Dhabi Investment Authority.
Its agenda is to catalyse the development of infrastructure in the country. It focuses
on the commercialisation and development of infrastructure projects and creation of
value added financial services.
The organisation is widely recognised as the pioneer of Public Private Partnership in
India. It harnesses the power of Public Private Partnership, to develop and finance
infrastructure projects across a variety of sectors. The infrastructure projects are
developed in conjunction with Governments, financing agencies, private sector
partners and communities. Such Public Private Partnership helps to leverage limited
public funds, reduce life cycle cost, [develop and execute more projects on a
sustainable basis.]
The organisation provides projects with financial investment, managerial expertise
and inputs that ensure efficiency in service delivery. They offer a full range of
financial, project development and management services. These services include
investment banking, project financing, project development, management and
13. implementation, asset management, merchant banking, corporate advisory services
and back office services.
IFCI Infrastructure Development Ltd. (IIDL)
[IDL is an institutional endeavour of IFCI and its wholly owned subsidiary. IIDL was
formed in the year 2007 to venture into the real estate and infrastructure sector as an
institutional player.]
It has been promoted by IFCI to leverage its expertise in the emerging infrastructure
and real estate sector. IFCI owns prime residential and office premises across the
country and is also equipped with experience in appraisal and monitoring of
infrastructure projects. It thus aims to actively leverage these strengths to make the
most of emerging opportunities in the real estate sector. Besides redevelopment,
modernization, ownership and management of properties owned by IFCI, IIDL’s
mandate is to strategically develop properties acquired through NPA resolution from
banks and FIs, or directly obtained from development authorities. It achieves its
goals either by making these acquisitions independently or through joint ventures/
SPVs.
Projects undertaken by IIDL include residential, commercial and hospitality related.
Infrastructure Development Finance Company Ltd. (IDFC)
The IDFC Group was born out of the need for a specialized financial intermediary for
infrastructure. Incorporated on January 30, 1997 in Chennai, it was set up on the
recommendations of the 'Expert Group on Commercialisation of Infrastructure
Projects' under the Chairmanship of Dr. Rakesh Mohan.
Since then, it has been a leading catalyst for providing private sector infrastructure
development in India. It focuses on developing and leveraging its knowledge base in
the infrastructure space to devise and provide appropriate financing solutions to its
customers. IDFC’s strong capitalization reflects the crucial role that it plays in
infrastructure development.
IDFC focuses on supporting companies to get the best return on investments,
through, financial intermediation for infrastructure projects and services, adding
14. value through innovative products to the infrastructure value chain or asset
maintenance of existing infrastructure projects. It works closely with government
entities and regulators to advise and assist them in formulating policy and regulatory
frameworks that support private investment and public-private partnerships in
infrastructure development.