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.
Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.