Financial InstitutionsThe government has established numerous financial institutions all over the country to provide financial grants to business organisations (see Box E). These institutions are established by the central as well as the state governments. They offer both owned capital and loan capital for medium and long term requirements thereby supplement the traditional financial agencies like commercial banks. Since, these institutions aim at promoting the industrial development of a country, these are also called 'development banks'. Apart from providing financial assistance, these institutions also execute market surveys and provide technical and managerial services to enterpreneurs. This source of financing is considered appropriate when a huge sum is required for expansion, reorganisation and modernisation of an enterprise and can be repaid on a longer term.
The advantages of raising funds through financial institutions are as follows:
- Financial institutions grant long-term finance, which are not provided by commercial banks;
- In addition to providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms;
- Receiving loans from financial institutions increases the goodwill of the borrowing company in the capital market. Accordingly, such a company can raise funds easily from other sources too;
- Since repayment of loan can be done in easy installments, it does not substantiate as a burden on the business;
- The funds are made quickly available even during periods of low performance, when other sources of finance are unavailable.
The main drawbacks of raising funds from financial institutions are as given below:
- Financial institutions pursue rigid criteria with respect to grant of loans. Too many formalities are followed and makes the procedure time consuming and expensive;
- Certain limitations viz., restriction on dividend payment is forced on the powers of the borrowing company by the financial institutions;
Special Financial Institutions
- It is likely for the Financial institutions to have their nominees on the Board of Directors of the borrowing company thus restricting the powers of the company.