FINANCIAL INSTTUTIONS

A financial institution is responsible for the supply of money to the market through the
transfer of funds from investors to the companies in the form of loans, Deposits, And
investment . large financial institutions such as JP morgan chase. HSBC, goldman sachs or
morgan stanly can even control the flow of money in a economy.

The most common types of financial institutions include commercial bank, investment bank,
brokerage firms, insurance companies and asset management funds . other types included
credit unions and financial firms . Financial istitutions are regulated to control the supply of
money in the market and protect consumers

Let's look at an example.

Bank ABC is a shareholder-owned institution that offers banking and investment services to
a wide range of customers. The bank acts as an intermediary between retail and institutional
investors, who supply the funds through deposits and retail and institutional investors, who
are looking for financing. The bank pays a 2% interest on the deposits it accepts from
households and businesses from the interest earned from lending services. In addition, the
bank offers fund management and health and life" insurance services through its
subsidiaries.

Furthermore, Bank ABC operates in the wholesale market, seeking to lend large
conglomerates and corporations as well as government agencies. In this context, the bank
has a highly- equipped advisory team, which offers corporate finance, forex. capital markets
and investment management services.

The bank is regulated for the protection of consumers. Hence, its funds undergo strict
scrutiny by the Federal Deposit Insurancet Corporation (FDIC) and the Federal Reserve
System. These two Federal agencies are responsible for quaranteeing that the bank will be
able to repay the borrowed funds.

Summary Definition:

Define Financial Institutions: Financial institution means a bank that provides investment
and depository services to customers.

The Basics of Financial Institutions:

Just like any other business, a financial institution sells products to earn money so that it can
run its operations and provide services financial institutions serve most people in some way,
as financial operations are a critical part of any economy, with individuals and companies
relying on financial institutions for transactions and investing. Governments consider it
imperative to oversee and regulate banks and financial institutions because they do play
such an integral part of the economy. Historically, bankruptcies of financial institutions can
create panic.

Role of financial institutions:

All types of financial institutions are responsible for distributing financial resources in a
planned way to the potential users.

Role of Financial Institutions:

The primary functions of financial institutions of this nature are as follows:

1- Accepting Deposits:

Accepting deposits is the most important function of some financial institutions, These
institutions borrows money from the public by way of accepting different kinds of deposits.

2- Providing several types of loans:

a loan is the lending of money by one or more individuals’ organizations, or other entities to
other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt, and is
usually liable to pay interest on that debt until it is repaid, and also to repay the principal
amount borrowed.

3- Financial institutions provide services as intermediaries of financial markets.

4- Transferring money funds from investors to who in need. As the financial institutions will
provide liquidity to their clients.

5- Facilitate the flow of money throw the economy.

Types of Financial Institutions:

Financial institutions offer a wide range of products and services for individual and
commercial clients. The specific services offered vary widely between different types of
financial institutions.

there are tow major types of financial institutions:

1-Depository institutions - deposit-taking institutions that accept and manage deposits and
make loans, including:

A-Banks.

B-building societies:

building society is a financial institution owned by its members as a mutual organization.

Building societies offer banking and related financial services, especially savings and
mortgage lending. Building societies exist in the United Kingdom and Australia, and used to
exist in Ireland and several Commonwealth countries. They are similar to credit unions in
organization, though few enforce a common bond. However, rather than promoting thrift
and offering unsecured and business loans, the purpose of a building society is to provide
home mortgages to members. Borrowers and depositors are society members, setting
policy and appointing directors on a one-member, one-vote basis. Building societies often
provide other retail banking services, such as current accounts, credit cards and personal
loans. The term "building society" first arose in the 18th century in Great Britain from
cooperative savings groups.

C- Credit unions:

A credit union is a member-owned financial cooperative, controlled by its members and

operated on the principle of people helping people, providing its members credit at
competitive rates as well as other financial services.

Worldwide, credit union systems vary significantly in terms of total assets and average
institution asset size, ranging from volunteer operations with a handful of members to
institutions with assets worth several billion U.S. dollars and hundreds of thousands of
members

Credit unions operate alongside other mutual and cooperatives engaging in cooperative
banking, such as building societies.

Credit unions in the US had one-fifth the failure rate of other banks during the financial crisis
of 2007-2008, and more than doubled lending to small businesses between 2008 and 2016,
from $30 billion to $60 billion, while lending to small businesses overall during the same
period declined by around $100 billion. Public trust in credit unions stands at 60%, compared
to 30% for big banks (9) Furthermore, small businesses are eighty percent less likely to be
dissatisfied with a credit union than with a big bank

Differences from other financial institutions:

Credit unions differ from banks and other financial institutions in that:

• those who have accounts in the credit union are its members and owners, and they
elect their board of directors in a one- person-one-vote system regardless of their
amount invested.
• Credit unions see themselves as different from mainstream banks, with a mission to
be "community- oriented" and "serve people, not profit".
• Credit unions offer many of the same financial services as banks but often use
different terminology. Typical services include share accounts (savings accounts),
share draft accounts (checking accounts), credit cards, share term certificates
(certificates of deposit), and online banking.
 • Normally, only member of a credit union a may deposit or borrow money. Surveys
of customers at banks and credit unions have consistently shown significantly higher
customer satisfaction rates with the quality of service at credit unions.
• Credit unions have historically claimed to provide superior member service and to
be committed to helping members improve their financial situation.

In the context of financial inclusion, credit unions claim to provide a broader range
of loan and savings products at a much cheaper cost to their members than do
most microfinance institutions.
D-Trust companies;
trust company is a corporation, especially a commercial bank, organized to perform
the fiduciary of trusts and agencies It is normally owned by one of three types of
structures: an independent partnership a bank) or a law firm, each of which
specializes in being a trustee of various kinds of trusts and in managing estates.
Trust companies are not required to exercise all of the powers that they are granted.
Further, the fact that a trust company in one jurisdiction does not perform all of the
trust company duties in another jurisdiction is irrelevant and does not have any
bearing on whether either company is truly a "trust company". Therefore, it is safe
to say that the term "trust company" must not be narrowly construed.
The "trust" name refers to the ability of the institution's trust department to act as a
trustee- someone who administers financial assets on behalf of another. The assets
are typically held in the form of a trust, a legal instrument that spells out who the
beneficiaries are and what the money can be spent for.
A trustee will manage investments, keep records, manage assets, prepare court
accounting, pay bills (depending on the nature of the trust), medical expenses,
charitable gifts, inheritances or other distributions of income and principal.

E - mortgage loan companies :

A mortgage loan or, simply, mortgage is used either by purchasers of real property to
raise funds to buy real estate, or alternatively by existing property owners to raise
funds for any purpose, while putting a lien on the property being mortgaged. The
loan is "secured" on the borrower's property through a process known as mortgage
origination. This means that a legal mechanism is put into place which allows the
lender to take possession and sell the secured property ("foreclosure" or
"repossession") to pay off the loan in the event the borrower defaults on the loan or
otherwise fails to abide by its terms. The word mortgage is derived from a Law
French term used in Britain in the Middle Ages meaning "death pledge" and refers to
the pledge ending (dying) when either the obligation is fulfilled or the property is
taken through foreclosure.

Another definition:
A mortgage can also be described as "a borrower giving consideration in the form of
a collateral for a benefit (loan)".
Mortgage borrowers can be individuals mortgaging their home or they can be
businesses mortgaging commercial property (for example, their own business
premises, residential property let to tenants, or an investment portfolio). The lender
will typically be a financial institution, such a bank, credit union or building as
society, depending on the country concerned, and the loan arrangements can be
made either directly or indirectly through intermediaries. Features of mortgage loans
such as the size of the loan, maturity of the loan, interest rate, method of paying off
the loan, and other characteristics can vary considerably. The lender's rights over the
secured property take priority over the borrower's other creditors, which means that
if the borrower becomes bankrupt or insolvent, the other creditors will only be
repaid the debts owed to them from a sale of the secured property if the mortgage
lender is repaid in full first.
In many jurisdictions, it is normal for home purchases to be funded by a mortgage
loan. Few individuals have enough savings or liquid funds to enable them to
purchase property outright. In countries where the demand for home ownership is
highest, strong domestic markets for mortgages have developed.
Mortgages can either be funded through the following:
A-banking sector (that is, through short-term deposits) > B- capital markets through
a process called "securitization", which converts pools of mortgages into fungible
bonds that can be sold to investors in small denominations.

2-Non depository institutions:

A-Insurance Companies:
What Is Insurance?
Insurance is a contract, represented by a policy, in which an individual or entity
receives financial protection or reimbursement against losses from an insurance
company. The company pools clients' risks to make payments more affordable for
the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and
small, that may result from damage to the insured or her property, or from liability
for damage or injury caused to a third party.
Understanding How Insurance Works:
There is a multitude of different types of insurance policies available, and virtually
any individual or business can find an insurance company willing to insure them-for a
price. The most common types of personal insurance policies are:
1-Individuals
A- Life insurance
is a contract between an insurance policy holder and an insurer or assurer, where
the insurer promises to pay a designated beneficiary a sum of money (the benefit) in
exchange for a premium, upon the death of an insured person (often the policy
holder). Depending on the contract, other events such as terminal illness or critical
illness can also trigger payment. The policy holder typically pays a premium, either
regularly or as one lump sum. Other expenses, such as funeral expenses, can also be
included in the benefits.
Life policies are legal contracts and the terms of the contract describe the limitations
of the insured events. Specific exclusions are often written into the contract to limit
the liability of the insurer, common examples are claims relating to suicide, fraud,
war, riot, and civil commotion.

B-Property insurance

as fire Property insurance provides protection against most risks to property, such as
fire, theft and some weather damage. This insurance, home includes specialized
forms of insurance such insurance, flood insurance, earthquake insurance, or boiler
insurance. Property is insured in two main ways-open perils and named perils.
Open perils cover all the causes of loss not specifically excluded in the policy.
Common exclusions on open peril policies include damage resulting from
earthquakes, floods, nuclear incidents, acts of terrorism, and war.
Named perils require the actual cause of loss to be listed in the
C-Health insurance, which sometimes sell life insurance or employee benefits as
well.
D-Vehicle insurance (also known as car insurance, motor insurance, or auto
insurance), car insurance is required by
This kind of Insurance is insurance for cars, trucks, motorcycles, and other road
vehicles. Its primary use is to provide financial protection against physical damage or
bodily injury resulting from traffic collisions and against liability that could also arise
from incidents in a vehicle. Vehicle insurance may additionally offer financial
protection against theft of the vehicle, and against damage to the vehicle sustained
from events other than traffic collisions, such as keying, weather or natural disasters,
and damage sustained by colliding with stationary objects. The specific terms of
vehicle insurance vary with legal regulations in each region.

Types of car Insurance:

Here are a few of the basic car insurance types, how they work and what they cover.
A-Liability coverage:
Liability coverage is required in most countries around the world, as a legal
requirement to drive a car. Liability insurance may help cover damages for injuries
and property damage to others for which you become legally responsible resulting
from a covered accident.
B-Collision insurance:
Collision insurance may cover damage to your car after an accident involving another
vehicle and may help to repair or replace a covered vehicle.
C-Comprehensive insurance:
Comprehensive insurance can provide an extra level of coverage in the instance of
an accident involving another vehicle. It may help pay for damage to your car due to
incidents besides collisions, including vandalism, certain weather events and
accidents with animals.
D-Uninsured motorist insurance:
Uninsured motorist insurance can protect you and your car against uninsured drivers
and hit-and-run accidents. This coverage is often paired with underinsured motorist
insurance.

E- Medical payments coverage:

Medical costs following an accident can be very expensive. Medical payments
coverage can help pay medical costs related to a covered accident, regardless of who
is at fault.
F- Personal injury protection insurance:
Personal injury protection insurance may cover certain medical expenses and loss of
income resulting from a covered accident. Depending on the limits of a policy,
personal injury protection could cover as much as 80% of medical and other
expenses stemming from a covered accident.

2-Business:

Businesses require special types of insurance policies that insure against specific
types of risks faced by a particular business. For example, a fast food restaurant
needs a policy that covers damage or injury that occurs as a result of cooking with a
deep fryer. An auto dealer is not subject to this type of risk but does require
coverage for damage or injury that could occur during test drives.
There are also insurance policies available for very specific needs, such as kidnap
and ransom (K&R), medical malpractice, and professional liability insurance, also
known as errors and omissions insurance
Insurance Policy Components
When choosing a policy, it is important to understand how insurance works.
[Important: Three crucial components of insurance policies are the premium, policy
limit, and deductible.]
A firm understanding of these concepts goes a long way in helping you choose the
policy that best suits your needs.
B-Pension/Provident Funds:
Pension funds are financial institutions which accept saving to provide pension and
other kinds of retirement benefits to the employees of government units and other
corporations. Pension funds are basically funded by corporation and government
units for their employees, which make a periodic deposit to the pension fund and
the fund provides benefits to associated employees on the retirement. The pension
funds basically invest in stocks. bonds and other type of long-term securities
including real estate

C-Mutual Funds:
A mutual fund is a trust that pools the savings of a number of investors who share a
common stock and other securities Mutual funds are open-end investment
companies. They are the associations or trusts of public members and invest in
financial instruments or assets of the business sector or corporate sector for the
mutual benefit of its members. Mutual funds are basically a large public portfolio
that accepts funds from members and then use these funds to buy common stocks,
preferred stocks, bonds and other short-term debt instruments issued by
government and corporation.
Advantages and Disadvantages OF MUTUAL FUNDS
1- diversification
2. Liquidity:
Diversification in the portfolio of fund helps in mitigating the risk. This attribute
makes the equity funds most suitable for small individual investors.
Risk mitigation ensures that many equity mutual funds are well diversified across
stocks and sectors. So that they are not over- exposed to any particular stock or
sector.
Equity Mutual Funds give you an automatic diversification in many different stocks.

You can redeem all your investments in the time of need or when a Net Asset Value
(NAV) higher than NAV at the time of purchase.
3. Professional Fund Management

• An Asset Management Company (AMC) works in a professional set-up with

individual functions of research, analysis and trading being carried out by
experts. AMC will have a more comprehensive industry perspective and
outlook than an individual.
• Money invested in equity markets is managed professionally by fund
managers
• Mutual fund experts visit conferences and interact with companies in which
they invest. Besides, a mutual fund also continuously monitors economic,
geo-political, sector, asset class and stock level developments at a micro level
to gauge possible opportunities going forward.
• Thus, Most of the fund managers regularly beat their fund's

4. Small Ticket size (you can start small)

• If you try to build a diversified portfolio with all types of stocks by buying
them directly, you would need relatively large amount of funds.
5. Systematic/Regular Investments:
 • Equity mutual fund schemes offer you a facility to invest small sums at
regular intervals through systematic investment plans (SIP). SIP makes it
simpler for the beginners to invest in equity mutual fund schemes
• These small sums that you invest regularly are invested to buy stocks. This
also develops a regular habit of investing which is useful in long term wealth
creation

:Tax Benefits .6

• If the holding period of the investments in equity mutual funds is more than 1 year,
the capital gain is exempted from tax liabilities.

Exceptional past returns .7

• Equity funds are known to provide higher returns as compared to other funds, such
as Debt funds. The returns on equity fund are in the form of dividends as well as
capital gains.

:Disadvantage of MUTUAL FUNDS

•
Not for Short term: Equity fund can't be an investment option for short term. Since
the returns are very volatile for short period.
• 2. No Control: Investor has no control over his/her investments as all the decisions
are taken by the fund manager.
• 3. Higher Costs: Since the funds are professionally managed they entail higher costs.
There are fees associated with investment in mutual funds. For Example- HDFC
Equity Fund has an expense ratio of 2.04% per annum
• .4Choice Overload: There are over 500 schemes of Equity Mutual Funds to choose
from, with many different objectives. You should always talk to your advisor before
finalizing the scheme.