Q 1. What/Who are financial intermediaries? Explain their role inthe growth of the economy.Ans: Functions of a Commercial bankCommercial banks combine various kinds of financial services with financialintermediation. These functions can be categorized as under:=> Transaction Services – Such services can be classified under threesegmentsi) Conversion of deposits into notes and coins to enable holders of deposits to carryout 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 fromone currency into cash and deposits of another currency.=> Intermediation – As discussed earlier commercial banks play a significant rolein the process of financial intermediation through which the funds/savings of thesurplus sectors is channelized to the deficit sectors.Brokerage and Asset transformation are the two types of intermediation functionperformed by commercial banks.Brokerage brings together buyers and lenders, reduces market imperfectionsthrough research, and dissemination of information. Asset transformation functionenables issue of claims against the banks themselves, which differ from the assetsthey acquire.=> Transformation services – Banks perform three transformation services whilethey perform the intermediation function. They enable liability, asset and sizetransformation as discussed earlier in this Unit. They enable maturity transformationand also risk transformation.=> Payment and Settlement System – This system can be described as onethat consists of a certain group of institutions, particular set of instruments and
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 meetcustomer requirements.Transaction support – all transactions, both in primary and secondary marketsfacilitated 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.
Q2. What do you understand by the term Micro Finance? Explain indetail the role of MFIs in the growing economy.Ans: In common parlance, the term ‘micro finance’ implies provision of thrift, creditand 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 andimprove 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 andurban areas.More than subsidies poor need access to credit. Absence of formal employmentmake them ‘non-bankable’. For example, commercial lending institutions require thatborrowers have a stable source of income out of which principal and interest can bepaid back according to the agreed terms. However, the income of many selfemployed households is not stable, regardless of its size. A large number of smallloans are needed to serve the poor, but lenders prefer dealing with large loans insmall numbers to minimize administration costs. They also look for collateral with aclear title - which many low-income households do not have. In addition bankerstend to consider low income households a bad risk imposing exceedingly highinformation monitoring costs on operation. This forces them to borrow from localmoneylenders at exorbitant interest rates.Many innovative institutional mechanisms have been developed across the world toenhance credit to poor even in the absence of formal mortgage. Micro FinanceInstitutions (MFIs) is such mechanism. The basic idea of micro-finance is simple; ifpoor people are provided access to financial services, including credit, they may verywell be able to start or expand a micro-enterprise that will allow them to break out ofpoverty.In India, the concept of Micro Finance, which was launched in the year 1992, hasplayed a significant role in alleviation and empowerment of weaker sections, in termsof scope as well as coverage. MFIs are, as mentioned above, uniquely positioned tofacilitate financial inclusion, and provide financial services to a clientele poorer and
more vulnerable than the traditional bank clientele. They help the poor undertakeeconomic 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 earliertimes, microfinance institutions have become financially viable, self sustaining, andintegral to the communities in which they operate. They have the potential to attractmore resources and expand services to clients.
Q3. Discuss the role of NABARD in the development ofmicrofinance sector.Ans: NABARD is set up as an apex Development Bank with a mandate for facilitatingcredit flow for promotion and development of agriculture, small-scale industries,cottage and village industries, handicrafts and other rural crafts. It also has themandate to support all other allied economic activities in rural areas, promoteintegrated and sustainable rural development and secure prosperity of rural areas.In its role as an apex institution for microfinance, NABARD’s strategy is to emphasison regular thrift collection and its use to solve immediate problems of consumptionand production not only helps to meet their most urgent needs, but also trains themto handle larger financial resources more skillfully, prudently and with a more lastingimpact. 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 Linkageprogramme in February 1992 could be considered as a landmark development inbanking with the poor. The SHG-informal thrift and credit groups of poor came to berecognised as bank clients under the Pilot phase. Subsequently, bank credit alsobecomes available to the Group, to augment its resources for lending to itsmembers. NABARD views the promotion and bank linking of SHGs not as a creditprogramme but as part of an overall arrangement for providing financial services tothe poor in a sustainable manner and also an empowerment process for themembers of these SHGs.Credit is a critical factor in development of agriculture and rural sector as it enablesinvestment in capital formation and technological upgradation. Hence strengtheningof rural financial institutions, which deliver credit to the sector, has been identified byNABARD as a thrust area. Various initiatives have been taken to strengthen thecooperative credit structure and the regional rural banks, so that adequate and timelycredit is made available to the needy.
In order to reinforce the credit functions and to make credit more productive,NABARD has been undertaking a number of developmental and promotionalactivities such as:· Help cooperative banks and Regional Rural Banks to prepare development actionplans for themselves.· Enter into MoU with state governments and cooperative banks specifying theirrespective obligations to improve the affairs of the banks in a stipulated timeframe.· Help Regional Rural Banks and the sponsor banks to enter into MoUs specifyingtheir respective obligations to improve the affairs of the Regional Rural Banks in astipulated timeframe.· Monitor implementation of development action plans of banks and fulfillment ofobligations under MoUs.· Provide financial assistance to cooperatives and Regional Rural Banks forestablishment of technical, monitoring and evaluations cells.· Provide organisation development intervention (ODI) through reputed traininginstitutes like Bankers Institute of Rural Development (BIRD), Lucknow(www.birdindia.com), National Bank Staff College, Lucknow (www.nbsc.in) andCollege 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 VikasVolunteer Vahini and Farmer’s clubs.· Provide financial assistance to cooperative banks for building improvedmanagement information system, computerisation of operations and development ofhuman resources.
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 andprojects, there is a critical need to provide specialized advisory services to the IndianCorporate Sector in their efforts towards Industrial Advancement. IFCI with its teamof seasoned professionals and rich experience of over six decades in the financialsector 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 toSelection of Projects, Preparation of feasibility studies, DPR, Capital Structuring,Techno-economic Feasibility, Financial Engineering, Project Management Designetc.· Credit Syndication including preparation of Information Memorandum, Syndicationof domestic/foreign loans, Post Sanction follow-up, Assistance in legaldocumentation etc.IFCI has fulfilled its original mandate as DFI by providing long term financial supportto all segments of Indian industry. It has also been chiefly instrumental in translatingthe Government‘s development priorities into reality. Until the establishment of ICICIin 1956 and IDNI in 1964, IFCI remained solely responsible for implementation of theGovernment’s industrial policy initiatives. Its contribution to the modernization ofIndian industry, export promotion, import substitution, entrepreneurshipdevelopment, pollution control, energy conservation and generation of both directand indirect employment is noteworthy. It played a pioneering role in the economicdevelopment of India, when capital markets were relatively underdeveloped andincapable of meeting the long-term requirements of the economy adequately.
With Pan-India presence across 17 locations in India, IFCI has been in the businessof undertaking techno-economic and financial viability studies for projects andextending financial assistance for more than six decades. In 60 years of itsexistence, IFCI has evaluated more than 4800 projects, with a well-diversified sectorportfolio and extended cumulative financial assistance of over INR 400 billion. Todaybesides providing long-term project-specific assistance, IFCI caters to the diverseneeds of the Indian and Overseas Institutions by providing a host of Advisory andConsultancy Services in the areas of Project Appraisal, Risk Analysis, CreditSyndication, Placement Of Debt and Equity, Corporate Restructuring, InfrastructureAdvisory and Legal Advisory.Aside from its role in promoting industries and creating capacities, IFCI has alsoplayed a pivotal role in institution building. Through a host of subsidiaries andassociate organizations, IFCI has emerged as a major player providingcomprehensive financial solutions ranging from Project Finance, Merchant Banking,Insurance Broking, Venture Capital, Depository Services, Factoring Services, AssetReconstruction and Securitization.IFCI now aims to establish itself as a major player in Corporate Finance byleveraging its knowledge pool, quality human capital and institution buildingcapabilities, in the buoyant economic landscape of the country with focus onmanufacturing, infrastructure and services industry.
Q5. NABARD is a Refinance institution. Explain this role ofNABARD in detail.Ans: Types of Refinance Agency Credit FacilitiesCommercial Banks Long-term credit for investment purposes Financing the working capital requirements of Weavers Co-operative Societies (WCS) & State Handloom Development CorporationsShort-term Co-operative Short-term (crop and other loans)Structure (State Co-operative Banks, Medium-term (conversion) loansDistrict Central Co-operative Banks, Primary Term loans for investment purposesAgricultural CreditSocieties) Financing WCS for production and marketing purposes Financing State Handloom Development Corporations for working capital by State Co-operative BanksLong-term Co-operative Term loans for investment purposesStructure Pilot scheme for financing short term loans in three(State Co-operative statesAgriculture and RuralDevelopment Banks,Primary Co-operativeAgriculture and RuralDevelopment Banks)Regional Rural Banks Short-term (crop and other loans)(RRBs) Term loans for investment purposesState Governments Long-term loans for equity participation in co-operatives Rural Infrastructure Development Fund (RIDF) loans for infrastructure projectsNon-Governmental Revolving Fund Assistance for various micro-creditOrganisations (NGOs) - delivery innovations and promotional projects underInformal Credit Delivery Credit and Financial Services Fund (CFSF) andSystem Rural Promotion Corpus Fund (RPCF) respectively
Criteria for refinance· Technical feasibility of the project and adequate response from prospectivebeneficiaries.· Financial viability and adequate incremental income to ultimate borrower to repaythe loan within a reasonable period.· Organisational capability to ensure close supervision.The refinance is provided to SCARDBs, SCBs, CBs and RRBs. However, thebeneficiaries of the programme are partnership concerns, companies, state-ownedcorporations or cooperative societies. But, finally the assistance reaches theindividuals, who are members of the primary credit institutions.The refinance is usually 50% to 95% of the project cost. The balance will be met bythe banks and the concerned state governments or the Government of India in thecase of SCARDBs. With a view to ensure credit flow to certain thrust areas, thequantum of refinance is enhanced to 100% as in the case of special categorybeneficiaries like SC/ST members and self help groups.
Q6. Write a note on the prominent DFIs operating in India, whospecialise in Infrastructure development.Ans: DFIs in India for Infrastructure Development – Products &ServicesInfrastructure Leasing & Financial Services Limited (IL&FS)Infrastructure Leasing & Financial Services Limited (IL&FS) is one of Indias leading[infrastructure development and finance companies][MD[D1]IL&FS was promoted by the Central Bank of India (CBI), Housing DevelopmentFinance Corporation Limited (HDFC) and Unit Trust of India (UTI). Over the years,IL&FS has broad-based its shareholding and inducted Institutional shareholdersincluding 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 focuseson the commercialisation and development of infrastructure projects and creation ofvalue added financial services.The organisation is widely recognised as the pioneer of Public Private Partnership inIndia. It harnesses the power of Public Private Partnership, to develop and financeinfrastructure projects across a variety of sectors. The infrastructure projects aredeveloped in conjunction with Governments, financing agencies, private sectorpartners and communities. Such Public Private Partnership helps to leverage limitedpublic funds, reduce life cycle cost, [develop and execute more projects on asustainable basis.]The organisation provides projects with financial investment, managerial expertiseand inputs that ensure efficiency in service delivery. They offer a full range offinancial, project development and management services. These services includeinvestment banking, project financing, project development, management and
implementation, asset management, merchant banking, corporate advisory servicesand back office services.IFCI Infrastructure Development Ltd. (IIDL)[IDL is an institutional endeavour of IFCI and its wholly owned subsidiary. IIDL wasformed in the year 2007 to venture into the real estate and infrastructure sector as aninstitutional player.]It has been promoted by IFCI to leverage its expertise in the emerging infrastructureand real estate sector. IFCI owns prime residential and office premises across thecountry and is also equipped with experience in appraisal and monitoring ofinfrastructure projects. It thus aims to actively leverage these strengths to make themost of emerging opportunities in the real estate sector. Besides redevelopment,modernization, ownership and management of properties owned by IFCI, IIDL’smandate is to strategically develop properties acquired through NPA resolution frombanks and FIs, or directly obtained from development authorities. It achieves itsgoals 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 forinfrastructure. Incorporated on January 30, 1997 in Chennai, it was set up on therecommendations of the Expert Group on Commercialisation of InfrastructureProjects under the Chairmanship of Dr. Rakesh Mohan.Since then, it has been a leading catalyst for providing private sector infrastructuredevelopment in India. It focuses on developing and leveraging its knowledge base inthe infrastructure space to devise and provide appropriate financing solutions to itscustomers. IDFC’s strong capitalization reflects the crucial role that it plays ininfrastructure development.IDFC focuses on supporting companies to get the best return on investments,through, financial intermediation for infrastructure projects and services, adding
value through innovative products to the infrastructure value chain or assetmaintenance of existing infrastructure projects. It works closely with governmententities and regulators to advise and assist them in formulating policy and regulatoryframeworks that support private investment and public-private partnerships ininfrastructure development.