Role of financial institutions in India

Financial sector plays an indispensable role in the overall development of a country. The most important constituent of this sector is the financial institutions, which act as a conduit for the transfer of resources from net savers to net borrowers, that is, from those who spend less than their earnings to those who spend more than their earnings.

Ok, now before continuing to explain the role of financial institutions in the development of industries, let's take a little bit brief detail of financial institutions in Indian context.

Financial Institution:

Financial Institution is not a new concept in financial history. The evolution of financial institutions must be differentiated from economic history and history of money. In Europe, it may have started with the first commodity exchange, the Bruges Bourse in 1309 and the first financiers and banks in the 1400-1600s in central and Western Europe. The first global financiers the Fuggers (1487) in Germany; the first stock company in England (Russia Company 1553); the first foreign exchange market; the first stock exchange.

In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government bodies. Broadly speaking, there are three major types of financial institution.

  1. Deposit-taking institutions that accept and manage deposits and make loans;
  2. Insurance companies and pension funds;
  3. Brokers, Underwriters and investment funds

Functions of financial institutions:

Why these institutions exit.... Or simply saying, what are the basic functions of these financial institutions....? To know the role of these institutions, let's discuss its main functions that they provide.

As we have already discussed that, there are numbers of financial institutions in financial market like banks, credit unions, asset management pension providing institutions, risk management institutions, which serve some purposes as follows:

  1. Accepting Deposits
  2. Providing Commercial Loans
  3. Providing Real Estate Loans
  4. Providing Mortgage Loans
  5. Issuing Share Certificates

At the same time, there are several governmental financial institutions assigned with regulatory and supervisory functions. These institutions have played a distinct role in fulfilling the financial and management needs of different industries, and have also shaped the national economic scene. Here is the list of various financial institutions.

  1. Maharashtra State Financial Corporation
  2. The State Industrial and Investment Corporation of Maharashtra Ltd
  3. The Public/National Financial institutions
  4. All nationalized banks
  5. All scheduled banks
  6. All co-operative banks
  7. Regional Development corporations
  8. Housing Development Finance Corporation
  9. Export-Import bank of India

So these are the various financial institutions existing in India. All have their own contribution in development of economy of India if we talk about that.

Let's talk about State Bank of India (SBI).

State Bank Of India:

SBI (State Bank Of India) is the largest bank of India. It is considered as 29th most reputable company in the world according to Forbes. It is one of big four banks of India with ICICI bank, Axis bank and HDFC Bank.

State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955. Seven banks of SBI formed subsidiary and was nationalized on 19th July, 1960. The State Bank of India is India's largest commercial bank, as already said above. It serves 90 million customers through a network of 9,000 branches. It has largest ATM network all over India.

There are six associate banks that fall under SBI, and together these six banks constitute the State Bank Group. All use the same logo of a blue keyhole and all the associates use the "State Bank of" name followed by the regional headquarters' name.

SBI Bank India has 52 Foreign Offices in 34 countries. SBI India serves the international needs of its foreign customers, in addition to conducting retail operations. The focus of the offices of SBI is India-related business. Few of the countries where SBI Bank has branches are as under:

  1. Australia
  2. Bahamas
  3. Bahrain
  4. Bangladesh
  5. Belgium
  6. Bhutan
  7. Canada
  8. France
  9. Germany

And also other than these are USA, UK, South Africa and Sri Lanka.

Functions of SBI:

What are major functions of State Bank of India that are served? Let's try to find answer of that question then we will continue to discuss about its contribution to industrial development of India.

As it comes under the category of Public/Nationalized banks, so it has directly link with public and other banks too. The State bank of India acts as an agent of the Reserve Bank of India and performs the following functions:

  1. It borrows money from the public by accepting deposits such as current account deposits, fixed deposits and saving deposits.
  2. It lends money to merchants and manufacturers for short periods. It also lends to farmers and co-operative institutions.
  3. It acts actually as the banker's bank. In discharging this responsibility, the bank provides loans to commercial bank when required and also re-discount their bill. It also acts as the clearing house of the commercial bank.
  4. State Bank of India also acts as an agent of Reserve bank of India. As an agent, the State bank of India maintains the treasuries of the State Government.
  5. It also performs various subsidiary services also. It collects checks, drafts, bills of exchange, dividends interest, salaries and pensions on behalf of its customers.

So these are some of the functions that are performed by SBI.

Contribution toward Industrial Development:

Coming to major purpose of out term paper assignment, let's discuss about contribution to development of Indian Industries.

As we know, financial institutions deal with various financial activities associated with bonds, debentures, stocks, loans, risk diversification, insurance, hedging, retirement planning, investment, portfolio management, and many other types of related functions. With the help of their functions, the financial institutions transfer money or funds to various tiers of economy and thus play a significant role in acting upon the domestic and the international economic scenario.

The functions of financial institutions, such as stock exchanges, commodity markets, futures, currency, and options exchanges are very important for the economy. These institutions are involved in creating and providing ownership for financial claims. These institutions are also responsible for maintaining liquidity in the market and managing price change risks. As part of their various services, these institutions provide investment opportunities and help businesses to generate funds for various purposes.

If we talk about SBI, the State Bank began an era of expansion, acting as a motor for India's industrial and agricultural development that was to transform it into one of the world's largest financial networks. Indeed, by the early 1990s, the State Bank counted nearly 15,000 branches and offices throughout India, giving it the world's single largest branch network.

Industrialization and Financial Institution:

As we know that industrialization is the most important method by which any country can make its growth rapid and reliable. In the long-run it is regarded as the means to full employment, high productivity and better living standards. It is also the only way through which other objectives of national economic policy like removal of poverty, balanced regional development and national defense can be effectively realized.

In India, at present, we have a fairly well-developed framework to cater to the financial requirements of the industrial sector, specifically of medium and long term finances. With a variegated structure, the financial institutions have played a signified part in the industrial development via investment market and have emerged as backbone of the financial system.

State Bank of India has also contributed more in the development of industrial sector of India. Its roles fall in two categories:

  1. Qualitative
  2. Quantitative

State Bank of India for carrying out its business operations, financial institutions implement different types of economic models. It like other financial institutions assists their clients and investors to maximize its profits by rendering appropriate guidance. This financial institution also imparts a wide range of educational programs to educate the investors on the fundamentals of investment and also regarding the valuation of stock, bonds, assets, foreign exchanges, and commodities.

Since 1973, bank is actively involved in non-profit activity called Community Services banking. In the words of chairman of SBI, business is more than banking because by this we can touch the lives of people anywhere in many ways.

At a macro level, SBI would likely be a key beneficiary of the economy returning back to a potential growth path through rising demand for loans as the economy rebounds to higher activity levels.

Further, SBI could raise its productivity in the long run through potential mergers with its subsidiary banks and through revenue/cost synergies. With this, the number of SBI associates would come down to five. Further with a continued rebound in capital market activity and the life insurance and AMC, the business is picking up steam.

Whatever the case, it is evidently clear that though the stock is looking a little expensive today, it is and will remain a blue-chip till the India story hold good. If the economy is back on the fast track, the banking system will have to show a robust growth led by none other than this banking behemoth.

As there is linear relationship between economic growth and financial institutions, without financial institutions interference, any country cannot imagine growth of its economy.

Financial institutions not only help industries by providing direct loans and subsidies to them but also providing finance education and skills indirectly.

Since liberalization, the government has approved significant banking reforms. While some of these relate to nationalized banks like encouraging mergers, reducing government interference and increasing profitability and competitiveness, other reforms have opened up the banking and insurance sectors to private and foreign players.

Currently, in 2007, banking in India is generally mature in terms of supply, product range and reach-even, though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies of Asia. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate.

Currently, India has 88 scheduled commercial banks (SCBs) — 28 public sector banks (that is with the Government of India holding a stake), 29 private banks, these do not have government stake; they may be publicly listed and traded on stock exchanges, and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. The public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. And if we talk about SBI, it has largest ATM network all over India.

SBI is a commercial bank. Commercial banks play an important role in economic development of developing country. Economic development involves investment in various sectors of economy. The banks collect savings from the people and mobilize saving for investment in industrial project. The investors borrow from banks to finance the projects. Promote the growth rate through the reorientation of loan policy. Special funds are provided to the investors for the completion of projects. The banks provide a guarantee for industrial loan from international agencies. The foreign capital flows to developing countries for investment in projects.

Besides normal banking the banks perform agency services for the client. The banks buy and sell securities, make rent payments, receive subscription funds and collect utility bills for the Government departments. Thus these banks save time and energy of busy peoples. Banks arrange foreign exchange for the business transaction with other countries. The facility of foreign currency account has resulted in an increase of foreign exchange reserves. By opening a letter of credit the banks promote foreign trade.

The banks are not simply collecting funds but also serve as a guide to the customer investment of their funds. The policy of banks is an instrument in wide dispersal of credit in country.

It is said that if the banking system in a country is effective, efficient and disciplined, it brings about a rapid growth in the various sectors of the economy.


After a deep study about the role of State Bank of India in the development of industrial sector, we arrive at the conclusion that without the financial assistance, the industrial sector cannot seek growth and this financial assistance can only be provided by banking sector, and major contribution to this is by commercial banks. State Bank India generally acts as a development bank and provides short and long term loans to entrepreneurs to invest in new enterprises and adopt new methods of production. As soon as the SBI has caught growth, there has been noticeable growth in trade and industry.



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