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What is Financial Institution? – GIC

Last updated date: 26th Feb 2024
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Financial Institution

A financial institution is a type of a company doing business that deals with all sorts of monetary and financial transactions such as currency exchange, loans, deposits and investments. There is a wide spectrum of financial services actually held and that is trust companies, brokerage firms, insurance companies, investment dealers and banks. Everybody who lives in a developed economy is a dire need for these financial services. 

In this article, we will go over the 

  • definition of financial institution

  • the types of financial institution

  •  the features of  financial institution 

  • GIC Definition 

  • The GIC functions

Types of Financial Institutions 

1. Commercial Bank 

A financial institution that offers different checking account services, takes official business, personal, helps to mortgage loans, accepts deposits and offers some financial instruments like certificates of deposits and saving accounts for business and for individuals is known as a Commercial Bank. Unlike an investment Bank, a commercial bank is where people do their banking activities. Commercial Banks are commonly known for helping its account holder with Savings account, loans, mortgages and loans for commercial customers like retail. These banks also help in creating different methods of payments like wire transfer, currency exchange and credit facilities.

2. Investment Banks

Investment banks are much different from commercial banks as they provide a whole host of services that cater to facilitate different business operations like equity offering and capital expenditure financing that offer Initial public offerings. Most of the services provided are for investors in brokerage services that help facilitate trading exchanges, acquisitions, help manage mergers and various other corporate structuring services.

3. Insurance Companies 

There are different non-banking financial institutions and one the most common and familiar is insurance companies. These companies offer services to different corporations or individuals by providing insurance. They can use this insurance to protect themselves against financial risk in an unexpected accident through these secured insurance products. It is essential for corporations and individuals to protect their assets to help in their economic growth in the long run.

4. Brokerage Firms 

These firms specialize in various investment services that include mainly two things that are financial advisory and wealth management. These firms also provide ways to invest in assets such as bonds and stocks that can help individuals grow their wealth and help them diversify their portfolios, such as private equity investments and hedge funds.  These firms include Investment companies and brokerages that deal in the exchange-traded fund and mutual funds.

 Features of  Financial Institutions 

  1. The licensing framework is usually 90 days( 3 months)

  2. Companies issue shares to get more investments and financial institutions help with that by providing collection services and underwritings.

  3. Providing guarantee is a key element when it comes to business and these financial institutions help them guarantee that. 

  4. After the year 2000, a lot of financial institutions started offering its payments through offline and online mode.

  5. Financial Institutions are a major contributor to financial leasing 

  6. They also provide a lot of financial lending services like financing of commercial transactions or helping with personal credits

  7. Financial Institutions aren't allowed to take loans from the general public by using their palpable funds or deposits.

GIC Definition 

The General Insurance Corporation is a government-funded Financial Institution. Its main speciality is that it is the only company in India that deals with sole reinsurance before the Indian market has opened in 2016 for foreign participation. After the year  2016, a lot of the foreign participants came from countries like France, Germany and Switzerland. Under the GINA (General Insurance Business Act ) of 1972, it existed under that.

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A lot of companies have started to invest in debentures and shares from the corporate sector under GIC. But there was a restriction where the investment could not exceed five per cent of the total subscribed capital from a single company. The GIC also provides facilities such as underwriting of new debenture and shares.

GIC Functions 

  1. The financial asset cannot be purchased under GIC but only the service can be bought. 

  2. Some of its major services include providing insurance against certain calamities like personal sickness, loss of a physical asset and any accident. 

  3. Since the nationalisation of the GIC, there were around 100 companies in the market. 

FAQs on What is Financial Institution? – GIC

1. What role do financial institutions play in the country?

Financial Institutions play a pivotal role in any country's economy. They help in the circulation of money throughout the country by bringing it from foreign countries and help in the circulation domestically. Without the establishment of this sector, the Indian economy would be in a lot of trouble. We have a lot of Indian Banks like SBI and  PNB and also international banks like Citibank and HSBC which provide for a lot in the country. With the establishment of these banks, there can be more infrastructural and developmental changes within the country.

2. What are some of the features of Financial Institutions?

Financial Institutions have the following features-

  1. Financial Institutions provide a lot of financial lending services like financing of commercial transactions or helping with personal credits. By providing these lending services there is more circulation of money in the economy. 

  2. Financial institutions take underwriting and collection services which help companies issue shares and debentures

  3. The licensing framework is for a total of 3 months