What is Institutional Finance?

Institutional Finance:

A number of financial institutions have been set up by the Central and State government to provide long term capital to the industries and business enterprises.

Demand or long and medium-term funds that had arisen beyond the traditional source of supply funds have been met to a large extent by these institutions.

They have provided funds or the post-independence development requirements of the private sector in a planned manner.

Adequate and cheaper funds became a necessity for the rapid industrialization Of the country.

These financial institutions have also taken up the work of assessment of industrial improvement of managerial efficiency, identification of and encouragement to entrepreneurs and consultancy services.

Besides keeping the cost of financing lower cheaper, they are also paying special attention to the development needs of the backward and rural areas in line with national priorities.

Objectives of Institutional Financing:

I. Meeting long and medium-term financial needs.

2. Building and strengthening capital markets.

3. Balanced regional growth and development.

4. Accelerating the pace of industrial growth.

5. Subscribing to equity and preference shares directly and underwriting public issues.

Types of Assistance Provided by Public Financial Institutions:

The public financial institutions are providing the following assistance:

(a) Promotion of new enterprises by:

(i) identifying and formulating projects, and

(ii) training and developing entrepreneurs,

(b) Provision for long term finance to industrial units.

(c) Provision of merchant banking services to help industrial units in raising long term funds from the capital market.

(d) Mobilization of public savings for better utilization.

(e)Development of backward regions in the country.

Mertis of Institutional Finance:

 (i) They provide long term finance, not provided by commercial banks.

(ii) They provide funds during the period of depression when other sources are not available.

(iii) The goodwill of the company increases in the capital market when it raises a loan from financial institutions.

(iv) In addition to providing financial help, these institutions also provide managerial and technical advice to business firms.

(v) They facilitate repayment of the loan in easy installments, hence there is no burden on the business.

Limitations of Institutional Finance:

(i) The procedure for obtaining a loan from these institutions is time-consuming and expensive. Also, it involves many formalities.

(ii) They impose many restrictions on the powers of the borrowing company.

(iii) In order to restrict the powers of the borrowing company, these institutions have their nominees in the Board of Directors of that company.

Nature or Features  of Institutional Finance:

Following are the features of Institutional finance:

1. An indispensable organ of business management: Finance is linked to all business activities and plays an important role in the business decision-making process.

2. Continuous process: Finance has its role to play at the initial stage i.e., to start the business and to run the business smoothly. Even in case of winding up or liquidation of it has its ‘own role to play.

3. Wide scope: The function of finance starts from the estimation of capital requirement, finding out of sources of finance, determination of the sources, raising and utilizing of resources and ends with the determination of dividend policy i.e., a decision regarding the distribution of profits.

4. Measurement of performance: The business performance is measured on the basis of financial results.

5. The requirement of finance varies on the basis of the size and nature of the business organization.

6. The requirement of finance is directly related to the economic situation and government taxation policy.

Significance of Institutional Finance:

All business activities such as planning, organizing, managing, controlling, purchasing, selling, advertising, marketing, etc. cannot take place without finance.

The significance of finance has increased due to the following three reasons:

A) Increase in size and number of the organization.

B) The wide distribution of company ownership i.e., shareholders are scattered in different places.

C) The separation between ownership and management.

Frequently Questions and Answers: 

1. What are the 4 types of financial institutions?

Ans: The four types of institutional financing are:

  • Depository Institution
  • Contractual Institution
  • Retail And Commercial Institution
  • Banking institutions.

2. What is non institutional finance?

Ans: Non institutional finance means unorganised or informal finance.

3. What is institutional finance to entrepreneurs?

Ans: A number of financial institutions have been set up by the Central and State government to provide long term capital to the industries and business enterprises.

4. What are the 7 functions of financial institutions?

Ans: The 7 functions of financial institutions are already explained in paragraph 3.

5. What are financial institutions examples?

Ans: The financial institutions examples are explained below:

  • Central Bank
  • Retail and commercial banks
  • Internet bank’s.

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