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.

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