Chapter 4.2, Problem 2R

Solution

To Discuss: The main functions and type of financial institutions:

Introduction:

Financial sector plays an important role in development of a country, and financial institutions act as conduit for the transfer of resources from net savers to net borrowers. The financial institutions have been the major source of long term funds in development of economy.

Economic reforms deprived the development financial institutions of their access to cheap funding via the statutory pre-emption from the banking system.

Types:

• Commercial Banks: Commercial banks comprising of public sector banks, foreign banks and private sector banks. It represents the most important financial intermediary in the Indian financial system.

• Insurance Companies: Insurance sector is broadly controlled by two public sector companies i.e. Life insurance corporation of Indian and the General insurance corporation of India, which is a holding company that has four fully owned subsidiaries in its fold.

Functions:

• Liquidity: Liquidity refers to quick spendable cash, which consist of mainly currency and spendable currency held in banks, credit unions and other institutions.

• Risk Credit: Risk credit occurs when someone transfer risk exposure and by this they willing to accept that risk, reduction occurs when there is a diversity across the vide variety of different assets.