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
The licensing framework is usually 90 days( 3 months)
Companies issue shares to get more investments and financial institutions help with that by providing collection services and underwritings.
Providing guarantee is a key element when it comes to business and these financial institutions help them guarantee that.
After the year 2000, a lot of financial institutions started offering its payments through offline and online mode.
Financial Institutions are a major contributor to financial leasing
They also provide a lot of financial lending services like financing of commercial transactions or helping with personal credits
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
The financial asset cannot be purchased under GIC but only the service can be bought.
Some of its major services include providing insurance against certain calamities like personal sickness, loss of a physical asset and any accident.
Since the nationalisation of the GIC, there were around 100 companies in the market.
FAQs on Financial Institutions: Understanding GIC
1. What is a GIC in the context of Indian commerce and finance?
In finance, GIC can refer to two different concepts relevant to a commerce student. Firstly, a Guaranteed Investment Certificate (GIC) is a type of investment product offered by banks and financial institutions that guarantees the principal amount along with a fixed rate of interest. Secondly, GIC of India refers to the General Insurance Corporation of India, a major public sector reinsurance company.
2. What are the primary functions and importance of financial institutions in an economy?
Financial institutions are crucial for economic development. Their primary functions and importance include:
Mobilising Savings: They channel funds from savers to investors, facilitating capital formation.
Providing Credit: They offer loans for businesses, individuals, and governments, which fuels consumption and investment.
Facilitating Payments: They provide a secure and efficient mechanism for transactions through services like cheques, drafts, and digital payments.
Risk Management: Institutions like insurance companies help individuals and businesses manage financial risks.
Implementing Monetary Policy: Central banks use the banking system to control the money supply and influence interest rates.
3. How does a Guaranteed Investment Certificate (GIC) actually work?
A Guaranteed Investment Certificate works in a simple way. An investor deposits a lump sum of money with a financial institution, like a bank, for a predetermined period (known as the term). In return, the institution pays a fixed interest rate. At the end of the term, the investor receives their original principal amount back, plus the accumulated interest. It is considered a low-risk investment because both the principal and the interest are guaranteed.
4. What is the main difference between a Guaranteed Investment Certificate (GIC) and a Fixed Deposit (FD)?
While both are low-risk investments offered by banks, the key difference lies in their primary context and usage. Fixed Deposits (FDs) are a very common investment tool in India for earning fixed returns. Guaranteed Investment Certificates (GICs) are a similar product, but the term is predominantly used in Canada. A notable application of GICs is for international students proving their financial capacity for a Canadian student visa, a requirement not typically associated with FDs in India.
5. What are the major types of financial institutions a commerce student should know?
Financial institutions can be broadly categorised into two types:
Depository Institutions: These institutions accept and manage deposits and make loans. Examples include Commercial Banks (like SBI, HDFC) and Credit Unions.
Non-Depository Institutions: These act as intermediaries but do not accept deposits. Examples include Insurance Companies (like LIC, GIC of India), Mutual Funds, and Brokerage Firms.
6. Why is a GIC often a mandatory requirement for international students, and how does this demonstrate the role of banks?
A GIC is mandatory for students applying for a visa to countries like Canada under specific programmes (e.g., Student Direct Stream) to prove they have sufficient funds to cover their living expenses for the first year. The student deposits a large sum (e.g., over CAD $20,000) into a GIC with a designated bank. The bank then disburses these funds in monthly instalments to the student upon their arrival. This process demonstrates the bank's role as a trusted third party, assuring the foreign government of the student's financial stability while protecting the student's funds.
7. How do institutions like the General Insurance Corporation (GIC of India) contribute to the country's economic stability?
The GIC of India plays a vital role in economic stability by acting as the country's national reinsurer. Reinsurance is essentially 'insurance for insurance companies'. By taking on a portion of the risk from direct insurers, GIC of India helps them manage large claims from major catastrophes like floods or earthquakes. This ensures that insurance companies remain financially solvent, can continue to pay claims to policyholders, and prevents the collapse of the insurance market, which is crucial for a stable economy.
