A number of special financial institutions have been set up by the central and state governments to provide long-term finance to the business organizations. They also offer support services in launching, expansion and modernization of existing enterprises. As these institutions aim at promoting the industrial development of a country, these are also called Development banks or Development Financial Institutions (DFI).
 Main Functions of Financial Institutions:
1. Granting loans:
To grant loans for a longer period to industrial establishment.
2. Establishment of business units:
To help the establishment of business units that require large amount of funds and have long gestation period.
3. Economic development:
To provide support for the speedy development of the economy in general and backward regions in particular.
4. Advisory services:
To offer specialized services operating in the areas of promotion, project assistance, technical assistance services and training and development of entrepreneurs.
5. Help in new projects:
To provide technical and professional management services and help in identification, evaluation and execution of new projects.
Merits of Financial Institutions:
1. Long term finance:
Financial institutions provide long term finance, which are not provided by commercial banks.
2. Advisory services:
Besides providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms.
3. Increases goodwill:
Obtaining loan from financial institutions increases the goodwill of the borrowing company in the capital market which helps in raising funds easily from other sources.
4. Easy repayment:
As repayment of loan can be made in easy instalments, it does not prove to be much of a burden on the business.
5. Reliable source:
The funds are made available even during periods of depression, when other sources of finance are not available.
Limitations of Financial Institutions
1. Time consuming and expensive:
Financial institutions follow rigid criteria for grant of loans. Too many formalities make the procedure time consuming and expensive.
2. Restrictive conditions:
Certain restrictions such as restriction on dividend payment are imposed on the powers of the borrowing company by the financial institutions.
3. Interference:
Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.