Commercial Banks vs. Other Financial Institutions

Commercial Banks vs. Other Financial Institutions- Apart from commercial banks, there are various other financial institutions (FIs) catering to the country’s needs

• Development financial institutions: IDBI, IFCI, ICICI at all India level and at state level SFCs
• Investment institutions: LIC, GIC, UTI
• Mutual Funds: UTI and others in the public and private sector
• Non-banking financial companies (NBFCs)

DFIs were set up either under the companies Act 1956 or as statutory bodies under the Acts of Parliament. The distinction between commercial banks and FIs arises because of the following.

• In the case of loans, the lending that may be safely undertaken by the bank is conditioned by the fact that in order to create money, banks have to be ready to supply cash on demand for a portion of their deposit liabilities.
• Banks have to be liquid and the bank’s liquidity of an asset depends on the time it takes to turn it into cash without loss. ‘Shift ability’ means the transition onto the central bank for the ultimate source of cash. Suitability depends on the eligibility rules for different assets for use in obtaining re-discount or other facilities at the central bank.
• Commercial banks have confined their operations to short-term or medium-term lending only. The development banks have been specifically set up to provide long-term loans for project/fixed capital formation.

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