CHAPTER IV

FINANCIAL INTERMEDIARIES IN INDIA

" The principal function of financial intermediaries is to purchase primary securities
from ultimate borrowers and to issue indirect debt for the portfolios of ultimate lenders
................AH financial intermediaries create financial assets."
- John Gurley and Edward Shaw
Money in a Theory of Finance, 1960.
Basic Concepts and Terminology
Generally, the term financial intermediary or financial institution refers to those
institutions that are engaged in bringing together the ultimate borrowers (users) and
ultimate lenders (providers) of finance. The financial intermediaries /institutions can be
categorised as: first, those who borrow for themselves in order to lend to others. In
other words, they create claims on others. These institutions include commercial and
co-operative banks, term lending institutions or depository institutions, or development
banks, investment institutions, such as insurance companies and unit trusts etc;
second, those institutions which bring together the borrowers and lenders, buyers and
sellers of securities without entering into a transaction as principals. In other words,
these are non-banking financial intermediaries/institutions which create claims that do
not form part of the money stock. The act of transferring savings or financial resources
from 'surplus' units to deficit' units by a financial intermediary is called financial
intermediation. The financial intermediaries charge a fee, which is called the
intermediation cost.
As it is recognised that different balance sheet variables have varied
implications for current economic behaviour, it is important to distinguish between
financial assets and tangible assets. A financial or intangible asset includes money,
bonds and equities, which represent a legal claim on some future benefit or income. It
is interchangeably also referred to as financial instrument or securities. A financial
asset can be classified into debt instrument or equity. The price of a financial asset is
equal to the present value of its expected cash flow. The degree of certainty of the
expected cash flow can be determined based on the characteristics of the issuer. The
principal and services of financial assets are predominantly generalised claims
against current production and are usually fixed in nominal money units tied to future
contingency or represent pro-rata shares in returns of enterprises. Financial assets
are primarily held as an attractive income-earning store of purchasing power.

On the other hand, tangible assets are material things, which are unique in both form and use. Their annual return in the form of productive or
consumable services are in kind and must be sold to convert into another form of wealth or income. Essentially, tangible assets are primarily held for the
physical services that they directly yield, such as machines, houses and consumer durable goods.

Forms of Financial intermediation

Financial intermediaries undertake various forms of intermediation. Denomination intermediation takes place when intermediaries pool in small savings
from individuals and provide large loans mainly to corporation and governments. Defauit-risk intermediation occurs when financial intermediaries provide
loans to risky borrowers and simultaneously issue relatively safe and liquid securities to attract loanable funds from savers. Maturity intermediation occurs
when financial intermediaries borrow short-term funds from savers and make
2 longterm loans to borrowers. Maturity intermediation is most often undertaken by
many financial intermediaries. Information Intermediation takes place when financial intermediaries substitute their skills in the market place for that of the
savers who most often do not have the time to stay abreast of market conditions or have access to relevant information and market opportunities. Risk pooling
and achieving economies of scale in their operations are the other important considerations in intermediation. Financial diversification, stability in earnings and
cash flow besides, enhancing safety of funds and spreading risks are the major advantages of investing in assets having different risk-return combinations.
Similarly, lower operating costs per unit and lower cost of financial services are achieved through increasing the size.

Moore (1968) distinguishes between monetary and non-monetary financial intermediation. Monetary and non-monetary financial intermediaries exist due
to the differential between the lending rate they are able to charge borrowers and the borrowing rate that they must pay to the lenders. Under monetary
control/regulations, while the assets and liabilities of the monetary intermediaries are subject to additional restraint in the form requirements, the non-monetary
intermediaries are not subject to such reserve requirements. However, the non monetary intermediaries are subject to regulation in terms of composition of their
assets and liabilities.

Types of Financial Intermediaries

In terms of types of financial markets, financial intermediaries can be classified into Money market intermediaries and Capital market intermediaries.
Since money market is concerned with supply and demand for investible funds, it is essentially, a short-term market where funds are lent and borrowed. Money
market intermediaries comprise commercial banks and other agencies, such as indigenous bankers, discount houses and other financial institutions which
supply short-term capital requirements to different sectors of the economy and the central bank of the country which acts as the apex institution of the money
market. As the capital market is concerned with medium and large financial needs of business and other undertakings, Capital market intermediaries provide
medium and long-term loans to these borrowers.

Depending upon the purposes of analysts, policy makers and researchers financial intermediaries can be classified into Depository intermediaries like
banks and Contractual intermediaries like insurance companies. While Depositories intermediaries accept deposits from the public and are the principal
repository of savings in the economy, the contractual intermediaries can not accept deposits from the public. While the timing, the amount parked with and
withdrawals in a depository intermediary is flexible and easy, in the case of contractual intermediaries, it is usually specified as per the contract or agreement
between the saver and the institution.

Functions of Financial Intermediaries

The main functions of financial intermediaries are to mobilise savings from the surplus economic unit and transfer them as productive investments to the
deficit economic unit and serve as an efficient conduit for payments. Gurley and Shaw (1960) point out that the principal function of financial intermediaries is
to purchase primary securities from ultimate borrowers and to issue indirect debt for the portfolios of ultimate lenders".

According to Gurley and Shaw, financial intermediaries have an important function in providing a market mechanism for the transference of claims on real
resources from savers to the more efficient investors. The more perfect the financial market, the more nearly is the optimum allocation of investment. Financial
transactions and financial instruments have two distinct types of effect on economic behaviour corresponding to flow and stock relationships. The first is the
Intermediation Effect', which is as a result of properties of the financial assets which tangible assets do not possess. Indirect exchange through the
intermediation of financial instruments is technically a more efficient means of want satisfaction than direct exchange. Intermediation of money, which is
generally accepted as a means of payment, permits purchase and sale of commodities decomposed into two acts, which are special in time. Consequently, the
use of money eliminates the difficulties experienced in exchange in a barter system. In addition to the effects of financial transactions in facilitating enlarging
and intermediating the flow of economic exchange, financial instruments play a fundamental role in production, integration and ownership of wealth, the creation
of economic activity. These stock implications of financial assets termed as 3'Asset Transmutation Effect follow likewise, from observation that financial goods
possesses characteristics which tangible goods do not, so that the indirect ownership of real wealth through the holding of financial assets is a technically more
efficient means of want satisfaction than the direct ownership of tangible assets (Gurley and Shaw, 1960).

According to Tobin and Brainard (1963) the essential function of any financial intermediary is to meet the portfolio choices of borrowers who wish to
expand their holdings of real assets and lenders who wish to hold part or all of their net worth in assets of stable money value with negligible risk of default They
observe, "The assets of financial intermediaries are obligations of the borrowers - promissory notes, bonds, mortgages. The liabilities of financial intermediaries
are the assets of the lenders - bank deposits, savings and loan shares, insurance policies, pension rights." According to them, financial intermediaries are
distinct from each other in terms of providing differentiated products to both lenders and borrowers. Furthermore, they point out that "each intermediary has its
speciality" or uniqueness in terms of credit offered. Besides, there is product differentiation within intermediaries, as between institutions arising out of locational,
advertising and other monopolistic advantages. From the lenders point of view, the obligations of various financial intermediaries are close but not perfect
substitutes. Besides, the financial intermediaries 'assume liabilities, which are of smaller default risk and greater predictability of value than their assets.
Accordingly, the reasons that the intermediation of financial institutions can perform these asset-liability transformations are: administrative economy; expertise
in negotiating, accounting, appraising and collecting; reduction of lending risk per unit of money with respect to loan default and deposit withdrawal; guarantees
of liabilities of institutions which assure solvency and liquidity of the institutions.

In the unregulated banking models of Black (1970) and Fama (1980), competitive financial intermediaries perform two major functions; viz., manage
portfolios for depositors and provide accounting systems for exchanging claims against depositor's wealth. Fama (1980) shows that competitive financial
intermediaries, like banks, provide a diversified portfolio against which depositors hold claim. The competitive intermediary charges marginal cost for the
provision of transactions and portfolio management services. The returns on deposits are equal to those in other portfolios with the same level of risks. As
deposits have no opportunity costs, it does not imply that the bifurcation of total wealth into deposits and non-deposit claims are indeterminate. Besides, an
indeterminate supply of deposits does not imply an indeterminate price level as the price level of goods depends upon its demand and supply conditions in the
market and also of other goods.
Another important function of financial intermediaries is brokerage and the economic rationale for the emergence of financial intermediaries is their
ability to lower information production costs. Niehans (1980) observes
Similarly, financial intermediaries may be brokers, middlemen or dealers in assets, bringing borrowers and lenders together at lower costs
than if the parties had to get together directly. The basis of their existence, from this point of view, - is the cost of evaluating credit risks. In a
competitive system - the interest they receive - simply reflects their own marginal transactions costs. As dealers, financial intermediaries do
not transform the claims they help in exchange. Their assets and liabilities relate to funds of the same type; in particular, they have the same

liquidity or "moneyness". An impressive example of a highly developed intermediary system in which the brokerage function predominates is
the Eurodollar market.

The economic function of financial intermediaries can be generalised as follows (Rangarajan, 1997):

(ii)

(i)
liability-asset transformation (i.e., accepting deposits as a liability and converting them into assets such as loans);
size-transformation (i.e., providing large loans on the basis of numerous small
(iii)

maturity transformation (i.e., offering savers alternate forms of deposits accepting to their liquidity preferences while providing borrowers with loans
of desired maturities), and

(iv)

risk transformation (i.e., distributing risks through diversification, which substantially reduces risks for savers, which would prevail while lending
4
directly in the absence of financial intermediation).

The process of financial intermediation supports increasing capital accumulation through the institutionalisation of savings and investment and, as such,
fosters economic growth. The gains to the real sector of the economy, therefore, depend on how efficiently the financial sector performs this basic function of
financial intermediation. In the process of transforming savings to investment, financial intermediaries perform an important function of absorbing liquidity
through changes in spread between lending and borrowing rates for banks and commissions, fees etc., for brokers and dealers. According to Pagano (1993),
this absorption of liquidity is limited by taxation, reserve requirements and other restrictive and regulatory trading practices that influence the proportion of
savings diverted to investments and also the social marginal productivity of capital. Lastly, another important function of financial intermediaries according to
Pagano (1993) is their ability to allocate funds to projects with highest marginal of product which is increased by collection of information and inducing
individuals in risky projects by offering risk-sharing.
Financial Intermediaries in India
As explained in the previous chapter, owing to the heterogeneous needs of the various segments of the economy, a variety of financial intermediaries
have emerged in India. For the purposes of compilation of total assets, a wide range of institutions have been included, such as Reserve Bank of India, banking
system, public financial institutions, Mutual Funds, non-banking financial companies etc. The data are compiled from various published sources and from the
balance sheets of the respective institutions. In the case of certain institutions, gaps in the data have been filled in by extrapolation based on trends. Similarly,
the data on investments and credit /loans was not available on a continuous time-series basis. For instance, in the case of Unit Trust of India, loans were
provided only since 1985 as a matter of policy. Since 1993-94, their magnitude has declined, again as a matter of policy. Mutual funds being investmentoriented institutions do not provide credit/loans. While extrapolating the data for one or two years for many institutions, the above specific factors have also been
taken into account so that the estimates are nearer to accuracy. One of the problems encountered while consolidating the balance sheets of various financial
institutions was that there are differences in the closure date of books of accounts. Some of the institutions closed during June while others closed in December.
However, since 1989, with rationalisation of accounting practices, it became mandatory for all financial institutions to close their books of accounts in March, to
coincide with the financial year. Further, these are outstanding amounts at a particular date during a year and hence relate to stock variables. Besides, these
data reflects book values held on market value basis. The total
assets represent both intangible and tangible assets of financial institutions. Generally, it has been observed that the tangible assets account for about 2 per
cent to 5 per cent of the total assets. The data also is not exclusive of inter- institutional flows since as per the flow of funds accounting, one institution's asset
is another institution's liabilities.

For the purpose of this study, financial intermediaries in India are grouped into four categories, viz., (i) Banking Intermediaries; (ii) Financial Institutions
(FIs) including development Banks or term-lending or development financial institutions at the national and state levels, investment institutions, specialised
institutions and other institutions; (iii) Mutual Funds (MFs); and (iv) Non-bank Financial and Investment Companies (NBFICs). It is also to be noted that the

assets of Primary Dealers (PDs) (1995), Satellite Dealers (SDs) (1996) in Government securities market, regulatory institutions like, Securities Exchange
Board of India (SEBI) (1992), custodial services institutions Stock Holding Corporation of India Ltd., 1987) and Depository institutions (National Securities
Depository Ltd., 1996) have been excluded from the analysis as these institutions are either market- making or regulatory or custodial/depository institutions.

A review of the operations of these institutions in terms of their trends in assets, Sources and Uses of Funds, and trends in Income and Expenditures
are separately presented below.
Trends in Growth of Total Assets of Financial Institutions
The total assets of financial institutions including Reserve Bank of India in terms of stock (nominal face value) increased by over 433 times from Rs.
3,095 crore in 1950 to Rs. 13,40,539 crore in 1997 representing an annual average compound growth rate of 13.8 per cent. It implies doubling of assets every
5
seven and quarter years approximately. In order to keep in line with the trends in the financial development and changes in the financial structure, the analysis is
broken down to sub-periods, viz., (a) between 1950 to 1969 to coincide with the beginning of the planning for economic growth and pre-nationalisation of the
major scheduled commercial banks in India; (b) Between 1970 to 1986 to coincide with the postnationalisation and consolidation of the banking system; and (c)
between 1987 to 1997 which represents the period of liberalization, diversification and reforms.

As per the periodisation, in terms of level and average growth, the total assets including RBI (Goldsmith, 1983) grew from Rs.3,095 in 1950 to Rs.14,928
crore in 1969 at a lower rate at an annual average compound growth of 8.6 per cent as compared with the average rate of growth for the whole period. During
the period II (1970-86), it increased from Rs.16,637 crore to Rs.2,42,830 crore at the peak rate at 18.2 per cent while during period III (1987-97), it grew from
Rs.2,78,970 crore to Rs. 13,40,539 crore at 17.0 per cent which was higher the average rate of growth for the whole period (Table IV. 1 and IV.2). Thus, it can
be observed that the annual average compound growth of total assets of all financial institutions including
Reserve Bank of India during the period I (1950-69) more than doubled in the period II (1970-86) and marginally declined to 17.0 per cent in the period III
(1987-97),

For the purposes of analysis, following Goldsmith (1958), the central bank assets were deducted from the total assets to arrive at total assets
excluding Reserve Bank of India. Such a distinction has a considerable significance in the Indian context, since Reserve Bank of India's assets duplicates
those of the commercial banks and All Financial Institutions (AFIs).

The total assets of all financial intermediaries excluding Reserve Bank of India in terms of stock (nominal face value) increased by 748 times from Rs.
1,483 crore in 1950 to Rs. 11,09,520 crore in 1997 representing an annual average compound growth of 15.1 per cent. As per the periodisation, in terms of
level and average growth, the total assets grew from Rs.1,483 in 1950 to Rs.10,251 crore in 1969 at an annual average compound growth of 10.7 per cent
as compared which ras marginally higher than the growth rate when the Reserve Bank was included. During the period II (1970-86), it increased from
Rs.11,654 crore to Rs.1,88,530 crore at the peak rate at 19.0 per cent while during period 111 (1987-97), it grew from Rs.2,16,528 crore at 17.8 per cent
which was higher the average rate of growth for the whole period (Table IV.2).

It can be observed that annual average rate of growth of total assets excluding Reserve Bank of India assets exhibited a similar trend as in the case of
total assets including Reserve Bank of India thereby reflecting the higher growth rate of assets of banks and non-banks as compared with those of Reserve
Bank of India.

Share of Main Types of Financial Institutions in Total Assets

The assets of banking system increased from Rs.1,136 crore in 1949-50 to Rs.6,04,397 crore in 1996-97 at an annual average compound rate of 14.3
per cent, that of Reserve Bank of India increased from Rs. 1,612 crore to Rs.2,31,019 crore at an annual average compound rate of 11.1 per cent, Nationallevel term lending financial intermediaries from Rs.11.0 crore to Rs.1,38,572 crore at the rate of 22.2 per cent, Investment Institutions from Rs. 250 crore to
Rs.2,70,459 (14.9 per cent) and Small savings from Rs.86 crore to Rs.1,06,111 crore at the rate of 10.8 per cent during the same period. Of the Small savings,
the Post Office Saving Deposit rose at the rate of 10.3 per cent and that of Provident and Pension Funds grew at 18.1 per cent per annum (Table 2). It is
observed that during the initial stages of development, the share of Reserve Bank of India assets in the total which was as high as 52 per cent, drastically
declined by one third to 17 per cent.

The share of banking system in the total assets including Reserve Bank of India, topped at 88.8 per cent (with Reserve Bank having 52.1 per cent share
6
and banks with 36.7 per cent) in 1950. This was followed by investment institutions (8.1 per cent), small savings (2.8 per cent) and financial Institutions (0.3 per
cent) indicating a high level of monetisation of the economy. During 1968-69, although the share of banking system declined to 68.6 per cent due to a steep fall
in the
share of Reserve Bank of India assets from 52.1 per cent in 1950 to 31.3 per cent in the same period. The Small savings became more attractive with its
share reaching
12.7 per cent as compared with the share of investment institutions at 12.3 per cent during the same period. There was also a perceptible increase in
the share of National and State-level financial institutions (5.3 per cent) and Non-bank financial companies (1.1 percent).

In the period II, the share of banking system in the total assets including Reserve Bank of India, continued to top at 68.5 per cent in 1970 followed by
investment institutions (12.5 per cent), small savings (12.2 per cent) and national and State level financial Institutions (5.4 per cent). During 1985-86,
although the share of banking system increased to 71.0 per cent and the share of Reserve Bank of India assets continued to remain constant at 22.4 per
cent in the same period. The Small savings became less attractive with its share reaching 9.2 per cent along with the share of investment institutions at 8.1
per cent during the same period. There was an increase in the share of national and state-level financial institutions (9.1 per cent and 1.9 per cent) and nonbank financial companies (0.4 per cent). The same trend continued in 1986-87 and during 1996-97, the share of banks topped with 45.1 per cent while that
of the Resen/e Bank further declined to 17.2 per cent. The specialised institutions came into being only in the early nineties and their share increased to 1.0
per cent in 1996-97. Since its commencement of business in late 1987, the share of mutual funds rose to 0.9 per cent in 1996-97.
It can be seen from Table IV. 1 that there is a significant change in the asset distribution with the exclusion of Reserve Bank of India assets in the
total. The share of banking system in the total assets excluding Reserve Bank of India, topped with 76.6 per cent in 1950 followed by investment institutions
(16.9 per cent), small savings (5.8 per cent) and term-lending Institutions (0.7 per cent). In the end of period I, the Small savings became more attractive with
its share reaching a peak of
18.6 per cent in 1969 as compared with the share of investment institutions at 17.9 per cent during the same period. There was also a perceptible
increase in the share of national and state-level financial institutions (5.3 per cent) and Non-bank financial companies (1.1 per cent). The trend
reversed in the case of banking system with its share rising from 55.1 per cent in 1969-70 to 62.6 per cent in 1985-86 and thereafter gradually
declined to 54- 5 per cent in 1996-97. The share of term-lending financial institutions and State-level institutions substantially increased from 7.7
per cent in 1969-70 to 14.5 per cent in 1996-97. The share of investment institutions declined gradually from a high of 17.8 per cent in 1970 to a
low of 10.4 per cent in 1985-86 but picked up since then to reach 15.4 per cent in 1996-97. There was no change with regard to asset distribution
in the case of other institutions. The Specialised institutions came into being only in the early 'nineties and their share stood at 1.3 per cent in
1996-97. The share of Non-banking financial companies showed marginal increase from 1.4 per cent in 1969-70 to 2.9 per cent in 1996-97 and
that of small savings showed gradual decline from 17.4 per cent to 9.6 per cent during the same period. Since its commencement of business in
late 1987 the share of mutual funds stood at 1.1 per cent in 1996-97.

The trends in growth of assets of all financial institutions coincides with the fact that during the period I, foundations were laid with the establishment of
new institutions, such as Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India, Life Insurance Corporation, Industrial
Development Bank of India, Unit Trust of India. While these institutions along with the banking institutions grew in the period II, in the last period, further growth
and qualitative changes were brought in through liberalisation, diversification and reforms measures were undertaken in the context of foreign exchange crisis,
accumulation of large non performing assets by banks and it was during this period structural adjustment programme was initiated.

It is also observed that a similar pattern of growth prevailed for the banks and the non-banks (which includes financial institutions, non-banking financial
and investment companies and mutual fund institutions). The overall growth rate for non banks and banks were higher than that of all financial institutions;
although non- bci.iks grew at a faster rate than banks in all the periods under
7 reference except in the sub-period II (Table IV. 1). This reflects the spectacular
growth in the banking system since their nationalisation. It may be noted that the average growth rates for state-level institutions (SLIs) decelerated as
compared with that of the term lending institutions (TLIs) and mutual funds institutions (MFs). This shows that the banking system dominated the financial
system and higher rate of growth have been achieved on account of post-nationalisation of the major commercial banks, various Kberalisation policy measures
and reforms undertaken since 1969.
It is also observed from Table IV.3 that the rate of growth of assets of all financial institutions excluding Reserve Bank of India has been higher than the
rate of growth in total assets including Reserve Bank of India and Gross Domestic Product at current market prices and Gross National Product during all the
subperiods.

The time series data on total assets are affected substantially by the fluctuations in the exchange rate. These fluctuations are generally eliminated by
deflating all the values by the Wholesale Price Index (WPI) or by Gross Domestic Product or Gross National Product deflators. Using Wholesale Price Index
deflator, the compounded rate of growth of assets of all financial institutions including Reserve Bank of India is lower at 9.9 per cent during 1951-97 reflecting
the upward movement in prices during the most part of the period in the last 47 years; with the exclusion of Reserve Bank of India it was 10.9 per cent. Using
the Gross Domestic Product deflator, the compounded rate of growth of total assets of all financial institutions including Reserve Bank of India worked out to 9.5
per cent and 10.5 per cent after excluding Reserve Bank of India assets. If the total assets of all financial institutions including Reserve Bank of India are
reduced to a per head basis, the annual rate of increase worked out to 7.8 per cent per annum and 8.8 per cent per annum on excluding Reserve Bank of India
assets.
Share of Assets in Gross Domestic Product
The share of assets of all financial institutions in the Gross Domestic Product are generally used as one of the indicators of financial development.
However, according to Goldsmith (1958), the total assets of financial intermediaries cannot be meaningfully compared with national wealth as intermediaries'
assets are gross and unconsolidated, influenced by layering in the economy; while national wealth is a net, consolidated notion that eliminates all creditor-debtor
and holder-issuer relationships among domestic units. Besides, a consistent valuation basis for all balance sheet items is necessary. A comparison presupposes
construction of a national balance sheet on a consolidated basis, which is beyond the scope of this study. It assumed that the valuation of the balance sheets of
all the financial institutions in India are consistent. Using the balance sheet identity that total Assets equals total Liabilities, the total assets including Reserve
Bank of India to Gross Domestic Product (old) at current market prices increased substantially from 35.1 per cent in 1950 to 95.2 per cent in 1996-97 (Table
IV.3). Recently, the Government of India has revised the Gross Domestic Product series with the year 1993-94 as the base year. Using the linking factor of
1.0874, the new Gross Domestic Product series was calculated. The ratio of total assets to new Gross Domestic Product which worked out to 32.2 per cent in
1950 increased to 96.5 per cent in 1997. With the exclusion of Reserve Bank of India assets, the ratio increased from a low of 15.4 per cent in 1950 to 79.9
percent. In terms of flow, the total assets increased from Rs.154 crore or 1.7 per cent of old Gross Domestic
Product and 1.6 per cent of new Gross Domestic Product to Rs.1,65,286 or 14.6 per cent and 13.4 per cent of old and new Gross Domestic Product series,
respectively.

Trends in the Growth of Financial Assets

Financial assets of financial institutions have been arrived at by deducting the tangible assets from the total. This exercise was done separately for each
institution and was later aggregated. As per the historical trends, it was observed that the share of tangible assets to total assets was in the range of 0.25 per
cent to 2 per cent. In the case of certain institutions, it increased even to 5 to 10 per cent, which could be on account of increased computerisation and
modernisation activities undertaken in the early 'nineties.

The total financial assets of all financial intermediaries (including Reserve Bank of India) in terms of stock (nominal face value) increased by 429 times
from Rs.3,058 crore in 1950 to Rs. 13,13,344 crore in 1997 representing an annual average compound growth of 13.8 per cent.
8
As per the periodisation, in terms of level and average growth, the financial assets grew to Rs.14,845 crore in 1969 at a lower rate at an annual average
compound growth of 8.7 per cent as compared with the average rate of growth for the whole period. During the period II (1970-86), it increased from Rs.16,544
crore to Rs.2,39,970 crore at the peak rate at 18.2 per cent while during period III (1987 97), it grew from Rs.2,76,200 crore to Rs.13,13,344 crore at 16.9 per
cent which
was higher the average rate of growth for the whole period (Table IV.4 and IV.5). Thus, it can be observed that the annual average compound growth of total
financial assets of aii financial institutions including Reserve Bank of India during the period I (1950-69) more than doubled in the period II (1970-86) and
marginally declined to 17.0 per cent in the period III (1987-97).

The total financial assets of all financial intermediaries excluding Reserve Bank of India in terms of stock (nominal face value) increased by 748 times
from Rs.1,450 crore in 1950 to Rs. 10,84,635 crore in 1997 representing an annual average compound growth of 15.1 per cent. As per the periodisation, in
terms of level and average growth, the total assets grew from Rs.1,450 in 1950 to Rs.10,179 crore in 1969 at an annual average compound growth of 10.8
per cent as compared which was marginally higher than the growth rate when the Reserve Bank was included. During the period II (1970-86), it increased
from Rs. 11,572 crore to Rs. 1,85,958 crore at the peak rate at 19.0 per cent while during period III (1987-97), it grew from Rs.2,14,094 crore to Rs.
10,84,635 crore at 17.6 per cent which was higher the average rate of growth for the whole period (Table IV.4 and IV.5).

It can be observed that annual compound average rate of growth of total financial assets excluding Reserve Bank of India assets exhibited a similar
trend as in the case of total assets including Reserve Bank of India thereby reflecting the higher growth rate of assets of banks and non-banks as compared
with those of Reserve Bank of India.
Share of Main Types of Financial institutions in Total Financial Assets
The assets of banking system increased from Rs.1,106 crore in 1949-50 to Rs.5,98,353 crore in 1996-97 at an annual average compound rate of 14.3
per cent, and that of Reserve Bank of India increased from Rs.1,608 crore to Rs.2,28,709 crore at an annual average compound rate of 11.1 per cent, Nationallevel term lending financial intermediaries from Rs.11.0 crore to Rs.1,28,729 crore at the rate of 22.1 per cent, Investment Institutions from Rs. 248 crore to
Rs.1,68,539 (14.9 per cent) and Small savings from Rs.86 crore to Rs.1,06,111 crore at the rate of 16.4 per cent during the same period. Of the Small savings,
the Post Office Saving Deposit rose at the rate of 10.3 per cent and that of Provident and Pension Funds grew at 18.1 per cent per annum (Table IV.5). It is
observed that during the initial stages of development, the share of Reserve Bank of India assets in the total which was as high as 53 per cent, drastically
declined by one third to 17.4 per cent.

The share of banking system in the total financial assets including Reserve Bank of India, topped with Reserve Bank having 52.6 per cent share and
banks with 36.2 per cent in 1950. This was followed by investment institutions (8.1 per cent), small savings (2.8 per cent) and term-lending financial Institutions
(0.3 per cent). During 1968-69, although the share of banking system declined to 68.7 per cent due to a steep fall in the share of Reserve Bank of India assets
from 52.6 per cent in 1950 to 31.4 percent in the same period. The Small savings became more attractive with its share reaching 12.8 per cent as compared

with the share of investment institutions at 12.2 per cent during the same period. There was also a perceptible increase in the share of National and State-level
financial institutions (5.2 per cent) and Non-bank financial companies (1.5 per cent).

In the period II, the share of banking system in the total assets including Reserve Bank of India, continued to top at 68.6 per cent in 1970 followed by
investment institutions (12.4 per cent), small savings (12.3 per cent) and term lending financial Institutions (3.9 per cent). During 1985-86, although the share of
banking system increased to 71.2 per cent and the share of Reserve Bank of India assets continued to remain constant at 22.5 per cent in the same period as in
the case of total assets of financial institutions. The Small savings became less attractive with its share reaching 9.3 per cent along with the share of investment
institutions at 8.0 per cent during the same period. There was an increase in the share of national and state-level financial institutions (8.9 per cent and 1.8 per
cent) and non-bank financial companies (0.5 per cent). The same trend continued in 1986-87 and during 1996-97, the share of banks topped with 45.6 per cent
9
while that of the Reserve Bank further declined to 17.4 per cent. The specialised institutions share was at 1.0 per cent in 1996-97and that of mutual funds at 0.9
per cent With the exclusion of the Reserve Bank of India, a similar trend was observed as in the case of total assets.
Share of Financial Assets in Gross Domestic Product
The total financial assets including Reserve Bank of India to Gross Domestic Product (old) at current market prices increased substantially from 34.6 per
cent in
1950to 41.0 percent in 1969-70 and to 94.3 per cent in 1986-87 and further to
102.8per cent in 1996-97 (Table IV.6).

Asset Profiles of Financial Institutions

a)

Banking System
Banking intermediaries include scheduled commercial banks, State cooperative banks maintaining accounts with Reserve Bank of India, Non-scheduled
commercial banks and urban cooperative banks. Based on balance sheet items, the assets of banking intermediaries have been compiled and it includes cash
on hand and balances with Reserve Bank, investments, bank credit, loan over dues and other assets with the banking system.

The asset profile of the banking system differs from those of other financial institutions due to statutory stipulations. Besides, their asset profiles depend
upon deposit liabilities which is largely volatile. It may be seen from Table 7, during 1949 50, bank credit accounted for 50.5 per cent of the total bank assets
followed by investments (34.7 per cent), cash on hand and balances with Reserve Bank of India (9.1 per cent) and other assets with the banking system (5.6
per cent). It is observed that during the end of pre-nationalisation era in 1969, the share of credit increased steadily to 71.6 per cent and reached a peak of 72.6
per cent in 1970. In the postnationalisation period, it decelerated to 56.6 per cent in 1986. However, due to the sluggishness in industrial demand and lack of
demand due to other structural rigidities in the economy, it further declined to 52.3 per cent in 1997.

As a larger proportion of bank's investments were in the form of low yielding Government securities, the share of investments in total bank assets
declined almost by one-third to 19.7 per cent in 1970. In pursuance of the Chakravarty Committee Report recommendations, the yield on Government
securities was increased during the mid-eighties and subsequently with the adoption of auction system in the Government securities market, the coupon rates
were linked to the market interest rates. The share of bank's investments picked up substantially from 27.9 per cent in 1981 to 33.9 percent in 1997 thereby
indicating that investments in Government securities and treasury bills were more attractive. Besides, this also marks the post financial reform period,
wherein the statutory reserve requirements were reduced and auction system was introduced for Government securities.

Due to easy liquidity conditions and lower reserve requirements, the share of cash on hand and balances with Reserve Bank of India too declined to
2.1 per cent. With the beginning of the liberalisation phase and rationalisation of the interest rate structure in the early eighties and reforms in the financial

sector during the 'nineties, the share of cash on hand and balances with Reserve Bank of India increased substantially to 11.5 per cent and declined to 9.4
per cent in the same period. Consequently, the share of other assets decreased by over 50 per cent to 2.1 per
cent and it increased to 4.5 per cent and marginally declined to 4.3 per cent during the same period (Table IV.7).

b)

All India Financial Institutions (AFls)

All India Financial Institutions (AFls) include Industrial Development Bank of India, Industrial Credit and Investment Corporation of India (in private sector),
Industrial Finance Corporation of India, National Housing Bank, Export Import Bank of India, Tourism Finance Corporation of India and the Small Industries
Development Bank of India, Life Insurance Corporation of India, General Insurance Corporation of India and the Unit Trust of India, State financial corporations,
and State industrial development corporations. Based on balance sheet items,
10 the assets of all India financial institutions have been compiled and they are
slightly different from those of banks. These include cash on hand and balances with banks, Investments, loans and advances, and other assets.

During 1950, in the absence of many institutions, Industrial Finance Corporation of India and a few State financial corporations, at the state-level,
dominated the institutional finance. Their asset portfolio comprised loans and advances (48.8 per cent), investments (40.1 per cent), cash and balances with the
Reserve Bank (4.4 per cent) and other assets (6.7 per cent). Similar to banks, during 1961, with the commencement of institutions, such as Industrial Credit and
investment Corporation of India and Life Insurance Corporation of India, due to statutory stipulations, investments share topped at 63.3 per cent, loans and
advances accounted for 14.1 per cent followed by cash on hand and balances with banks (7.3 per cent) and other assets (15.2 per cent). With liberalisation
measures, and pick up in demand for industrial credit, the share of loans and advances in the asset profile of all India term-lending institutions, increased
steadily from 30.3 per cent in 1971 to 55.4 per cent in 1986. However, with the sluggishness in demand it declined to 43.4 per cent in 1997. As the investments
were in low yielding Government securities, its share declined to 31.9 per cent in 1986 and consequent to financial reforms, the proportion of investments went
up to 42.2 per cent in 1997. Due to easy liquidity conditions and reforms in the money market, the share of cash on hand and balances with banks declined by
more than half to 7.4 per cent in 1961 and it increased to 12.0 per cent in 1981 and further to 15.5 per cent in 1991 which also marked a period of higher interest
rates. The share of other assets declined to
7.8 per cent in 1981 and fluctuated to reach 4.4 per cent in 1997 (Table IV.8).

c)

Mutual Funds
Mutual Funds institutions in India came into being only since late 1987 with the introduction of liberalisation measures in trade and industry. Mutual funds
are essentially involved with pooling of savings of the investors and invest them as per the objectives of the scheme. The profits are shared amongst the
investors after meeting managerial costs. Therefore, the asset profile of mutual funds are different from those of other financial institutions. The data are not
available in a consolidated form. Therefore, the balance sheet data for each institutions have been aggregated to arrive the total for the industry.
Thus, over 90 per cent of the assets are held in the form of investments. For the purpose of data analysis, UTI is excluded as it is treated as an
investment institution which has been established under the special Act of Parliament. The total assets held by mutual funds institutions sponsored by banks
and other public and private financial institutions increased substantially from Rs.548 crore in 1988 to a peak level of Rs. 13,090 crore in 1995 when the
industry was in good shape. Due to adverse market conditions, the total assets decreased to Rs. 12,236 crore in 1997. Of which, investments increased from
Rs. 520 crore to Rs.11,963 crore in 1995 and declined to Rs. 11,292 crore in 1997. The annual compound rate of growth in the total assets of mutual funds
institutions during the period 1988-97 at 41.2 per cent was higher than that of investments at 40.8 per cent during the same period. Since these are investmentoriented institutions, they do not provide loans and advances.

d)

Non-banking Financial and Investment Companies

The non-banking financial and investment companies commenced their operations in India in 1958. The data on these companies are annually published
by the Reserve Bank in its bulletin. The share of investments in the total assets of non banking financial and investment companies topped with 47.4 per cent in
1958 and after reaching a high of 49.2 per cent in 1966 gradually declined to 21.7 per cent in 1986. It has shown a reversal in the trend with a marginal
decrease to 13.6 per cent in 1991 and it increased to 23.7 per cent in 1997. The loans and advances form a major proportion of receivables for non-banking
financial and investment companies in their combined balance sheets. The share of loans and advances showed a steady rise from 25.8 per cent in 1958 and
reached a peak of 49.6 per cent in 1981. It declined to 43.1 per cent in 1986 and recovered at 54.1 per cent in 1991 but decelerated to 44.5per cent in 1997.
The share of cash and bank balances although showed fluctuations, declined from 13.1 per cent in 1958 to 2.3 percent in 1997 (Table IV.9).

Sources and Uses of Funds

11

Over the years, the sources and uses of funds have been generally classified into two major groups, viz. , Internal and External. They also differ for
various institutions.

(a)

Banking System
For the banking system, the sources mainly comprise, aggregate deposits, borrowings and others which include capital and reserves. Uses comprise
cash and balances with Reserve Bank of India, investments, bank credit, assets with the banking system and other assets. Sources and Uses for the banking
system has been compiled from the abridged balance sheet data published in the Report of Currency and Finance by Reserve Bank of India.

It is evident from table IV. 10 that as the banking system performs the function of accepting deposits for lending, in the sources of funds, aggregate
deposits occupies a predominant position. Of the total'sources, the share of aggregate deposits went up significantly from 55.8 per cent in 1950 to over 200 per
cent in 1991. Other sources which include capital and reserves had a negative proportion for most part of the decade since the mid 'seventies indicating the
need for capitalisation by Government. Borrowings also showed substantial increase over the years which reflects that internal sources were not enough to
meet the funds requirements.

Of the total uses, bank credit occupies a major proportion of the total with its share at over 100 per cent in 1950. The share of investments was negative
at 27.9 per cent. Over the years the share of bank credit has declined by one half to 50.1 per cent in 1981 and that of investments have increased to 31.6 per
cent. Cash plus balances with Reserve Bank of India showed a higher proportion of 8.0 per cent in 1951 and it declined to a negative of 6.6 per cent in 1997.
Assets with the banking system showed fluctuations (Table IV. 10).

(b)

All India Financial Institutions (AFIs)

Sources of funds of financial institutions fall primarily into two broad categories viz., internal and external. Internal sources of funds relate to increase in
capital and reserves, sale/redemption of past investments, repayments of past borrowings, dividend and interests on investments. External sources, on the
other hand, arise primarily from fresh borrowings (both Rupee and foreign currency) from the market, borrowings by way of bonds and debentures, etc.
Under Uses of funds, Internal funds comprise of fresh disbursements and investment in shares" debentures etc., such as, new loans and advances
investments etc. The external Uses of funds constitute repayment of past borrowings which include redemption of bonds/debentures issued in the past
repayment of Rupee and foreign currency loans etc.

The data on sources and uses of funds for all India (term lending) financial institutions are available since 'seventies. An analysis of data reveals that while
external sources of funds constituted 54.2 per cent in 1971, external uses of funds constituted 64.9 per cent thereby indicating that over 50 per cent of the
external funds came from internal sources. However, during the subsequent years, the contribution from internal sources for external uses declined to 30.3 per

cent in 1975-76 and it increased to 58.9 per cent in 1986 thereby reflecting the pickup in industrial credit and increased industrial activity. It is to be noted that
the rationalisation of industrial licensing policy received a sharper focus since 1975. The trend got reversed since 1986 with the decline in the share of external
uses and the increase in the uses of internal funds. It also implies that lending to external purposes resulted in higher returns.

Of the total sources, external source constituted the major source of funds till 1980-81 and therefrom it declined gradually to 54.1 per cent in 1981 to 35.3
percent in 1995. Internal sources showed an increase from 55.2 per cent in 1991 to 64.7 percent in 1995 reflecting cheaper funds were available internally. It
may also be seen that on the Uses side, external uses constituted a major proportion of the total throughout the period ending 1995. Since the 'eighties' a higher
proportion of internal funds were used for external purposes (Table IV. 11).
12
(c)

Non-banking Financial and investment companies

The sources and uses of funds of non-banking financial and investment companies are slightly different from those of term lending financial institutions.
As the non-banking financial and investment companies are not allowed to borrow in foreign currency, their internal sources of funds compromise paid-up
capital, reserves and surplus and provisions. The External sources consists of new issues of paid-up capital, borrowings and others. Under Uses of funds,
Internal funds comprise investments and cash on hand and balances with banks. External uses of funds constitute receivables and others.

An analysis of data reveals that during their initial stages of inception, more than 100 per cent of their sources of funds were used for external purposes in
195758. During 1960-61, 13.5 per cent of their external sources of funds were used for internal purposes. The trend got reversed during 1965-66 and 1980-81
with 3.0 per cent and 8.2 per cent of external sources of funds were used for internal purposes, respectively. During 1970-71, 10.5 per cent of the internal
sources of funds were used for external purposes. Similarly, during 1975-76 and 1985-86 about 30 per cent and 4.0 per cent of internal sources of funds were
utilised for external purposes. During the nineties, the share of external sources of funds was larger
than the internal sources and surplus was there after meeting external uses for internal purposes (Table IV. 12).

Analysis of Income and Expenditure

(a)

Banks
The analysis of income and expenditure covers only scheduled commercial banks as the data for co-operative banks and non-scheduled commercial
banks are not readily available in published form. Only in the recent period data is published in the Report on Trend and Progress of Banking in India, 199899. It may been seen from the Table IV. 13 that the total income of scheduled commercial banks increased at a compound average rate of 17.5 per cent
during 1951 to 1997 while the expenditure grew at the rate of 18.3 per cent. The return on investments increased at a slower pace from 2.6 per cent in 1951
to 4.5 percent in 1980 and declined to

3.7 per cent in 1985. The return on loans steadily increased from 4.5 per cent in
1951 to 12.1 percent in 1985. The cost of deposits from a low of 0.9 per cent increased 6 times to 6.1 per cent during the same period. This reflects the
steady fall in profitability of the banking system. Prior to nationalization of banks in 1969, administered system of interest rates prevailed since
1964 with the Reserve Bank prescribing the ceiling rates on deposits and advances. Progress in banking business was also slow.

During the period 1951 to 1969, the State Bank and its associates representing the public sector accounted for about one-third of the banking industry.
Of the total 81 banks, about 23 were either liquidated, amalgamated or merged with other scheduled banks thereby reducing the total number of banks to 58.
The average population per bank branch, which was high at 1,32,700 in 1950 declined after nationalization to 64,000 in 1969. It further declined to 15,000 in
1986-87 being the early stage of liberalisation and reform period. After nationalisation, banks had to invest a major proportion in Government securities, and
consequently, the return on investments were low on account of low yields on Government securities. In the area of credit, their portfolio consisted of large

number of priority sector credit where the recovery was poor. However, during the 'nineties, the position improved substantially on account of banking and
financial sector reforms.

(b)

All India Financial Institutions

Data on income and expenditure of all financial institutions were not available in published form for the earlier years. During the period 1957-58 to 196566 data pertains only to Industrial Financial Corporation and State Financial Corporations. For the remaining period, the data have been consolidated for All
India Financial Institutions (AIFIs), which were published in the Report on Development Banking in India by IDBI. The total income of the financial institutions
witnessed a significant increase over the period 1995-96 to 1997-99 (Table IV.14).
The ratio of assets to income showed a significant increase from 4.613
to 9.1 in 1966 but declined to 5.9 in 1999. The return on investments doubled from
21.4 to
43.6 in 1961 and since then declined to 9.3 in 1998 and recovered to 10.5 in 1999. Return on loans showed a steady increase from 2.5 in 1958 to 7.9 in
1996 and
.

263

thereafter showed marginal decline. The cost of borrowings also showed a. substantial decline from as high as 333.5 in 1958 to 22.5 in 1966 and to 4.5 in 1999.
The cost of funds since 1996 showed a decline from 23.0 per cent to 8.0 per cent in 1999 reflective of interest rate rationalisation and reforms undertaken.

(c)

Non-banking Financial and investment companies

In the case of non-banking financial and investment companies, income from main operations accounted for around 85 per cent of total income except for
the years 1971, 1976, and 1995. The main income-generating activities in the order of importance were lease, hire purchase, merchant banking, bills
discounting and trade finance.

The main constituents of expenditure (before gross profits) in the order of importance have been finance expenses, administrative charges and
establishment charges. Interest payments accounted for the bulk of expenditure which increased from 16.2 per cent in 1958 to 44.6 percent in 1997. In terms of
quantum, it increased from Rs.0.89 crore in 1958 to Rs.2428 crore in 1997 at an annual average rate of 22 .0 per cent. This is indicative of improved financial
management and the impact of the rationalisation in the structure of interest rates. In 1995, there was an acceleration in interest payments which is reflective of
higher costs of resources (Table IV. 15).
The return on investments increased although showed fluctuations, increased from 10.1 per cent in 1958 to 11.9 percent in 1961 but decelerated to 8.7
per cent in 1981 and after oscillating increased to 13.7 in 1997. Return on loans showed a better picture with an increase from 22.3 per cent in 1958 to 33.8
percent in 1986 and thereafter showed deceleration. A similar trend was observed with regard to cost of funds.

An Analysis of Factors Determining Investments and Credit

From the above analysis, it is evident that in the financial development process, India followed a multi agency system to foster economic growth. If
we look at the asset composition of all the institutions, it is evident that investments and credit are the two important financial assets in terms of their share in
the total and Gross Domestic Product. Therefore, we confine to these two indicators. Management of assets refers to allocation of available funds to various
purposes, be it for investments or for credit. While most decisions on asset allocations are based on future availability of funds, macroeconomic policy play a
significant role. The monetary policy primarily aim to control inflationary impacts and thereby control liquidity in the economy, the fiscal policy serves as a tool to
achieve the national objectives of growth, equity with social justice. The banking system, being a principal source of liquidity, meets their liquidity needs through
their deposit mobilisation. The financial institutions meet their needs by term lending operations, borrowing from the central bank, and to a limited extent through
public deposits. The mutual fund institutions, primarily being an investment institutions, pool savings from the public and invest them mostly in the primary

segment of the capital and money markets. The Non-Banking Investment and Finance Companies, too pool savings of the public and lend the same or invest
them for various activities. Thus, only commercial banks have the ability to create credit by several folds as compared with other institutions. If increase in credit
is matched by economic growth, then it does not pose any problems to the monetary authorities. Contrary-wise, it would lead to a rapid expansion in the
reserve money, which poses the problem of controlling the growth in the money supply and maintaining economic and financial stability. The Reserve Bank,
therefore controls the liquidity in the financial system through various methods such as the bank rate, cash reserve ratio, statutory liquidity ratio, repos etc.
Statutorily, banks and financial institutions are required to invest in Government and other approved securities. Banks are also required to lend a certain
proportion of their deposits to the priority sectors and the financial institutions are required to invest a certain proportion of their total resources in the socially
oriented purposes. Consequently, the bank's ability to create credit and financial institution's ability to invest funds for other purposes gets reduced, thereby the
liquidity in the financial system is regulated. Thus, in India, the availability of 14
funds for various purposes is more important than the cost of funds.

For the purpose of making a comparative analysis of various institutions and to empirically analyse the determinants of two key variables, viz.,
investments and credit ordinary least square technique was employed.
Based on the trends, economic relationships and earlier studies (Banking Commission, 1970), the study specifies the following factors for investment and
credit to find out their influence on them for different institutions. These include, Index of Industrial production (IIP), ratio of investment to total assets (RITA) for
the respective institutions, Call money rates (CALL), Index of Agricultural Production (IAP), Weighted Average yield on Government Securities (WTGS).
Additional variables such as, Cash Reserve Ratio (CRR), Weighted Average Lending Rates (WTLR) and Weighted Average Deposit Rates (WTDR), Statutory
Liquidity Ratio (SLR), ratio of credit to total assets (RCTA) for the respective institutions, and variable dividend rates on Industrial shares were also used.
The results of the determinants of Investment and credit are presented in Tables IV. 16, IV. 17 and IV. 18. The positive and statistically significant
determinants of Total credit of all financial institutions, credit of All India Financial Institutions, bank credit and non-bank credit include, Index of Industrial
Production and ratio of investment to total assets (except for credit of All India Financial Institutions). The Call money rates and Index of Agricultural Production
had a positive and significant influence on non-banks. Weighted Average yield on Government Securities was found to be negatively and significantly related to
Total credit of all financial institutions, credit of All India Financial Institutions, bank credit, and Index of Agricultural Production with Total credit of all financial
institutions and bank credit. Additional variables such as, Cash Reserve Ratio, Weighted Average Lending Rates and Weighted Average Deposit Rates was
found to be negatively and significantly related to bank credit. The factors that did not satisfy the theoretical expectations include, (i) ratio of investment to total
assets for Total credit of all financial institutions, bank credit and non-bank credit, (ii) Index of Agricultural Production for non-bank credit

In the case of investment, the positive and significant determinants are, (i) Index of Industrial Production for total financial institutions, All India Financial
Institutions and banks, (ii) ratio of credit to total assets and Weighted Average Lending Rates for non-banks, and (iii) Weighted Average yield on Government
Securities for Mutual Fund Institutions. The factors that negatively and significantly influenced were, (i) Weighted Average yield on Government Securities for
total financial institutions, All India Financial Institutions and banks, (ii) Weighted Average Lending Rates for total financial institutions, All India Financial
Institutions and Mutual Fund Institutions. Additionally, negative influence was noticed in respect of,
(i)

Call money rates, Statutory Liquidity Ratio, ratio of credit to total assets for banks;
(ii)

variable dividend rates on Industrial shares for non-banks and Mutual Fund Institutions; and (iii) Weighted Average Deposit Rates and Index of
Industrial Production for non-banks. Theoretical expectation was not satisfied in the case of, (i) Weighted Average yield on Government Securities for
total financial institutions, All India Financial Institutions and banks; (ii) variable dividend rates on Industrial shares for non-banks and Mutual Fund
Institutions; (iii) Call money rates for banks;

(iv)

Weighted Average Lending Rates, ratio of credit to total assets and Index of Industrial Production for non-banks. In order to identify the structural
breaks, the regression was run separately for total credit and total investments for the three

periods, Viz., (i) 1950-69, (ii) 1970-86 and (iii) 1987-97. The results were robust and coincided with economic theory.

Summary and Conclusion

This Chapter analyses the operations of different financial institutions in India. It shows that India has been following a multi agency system to cater to
the financial needs of different segments of the economy. It has been observed that the banking system dominated the financial system. However, in the later
years, with the transformation of the financial system into a more sophisticated modern one, the non-banks play an increasing role. It has also been observed
that given the same regulatory and macroeconomic environment, there are differences within the same group of institutions as well as among various other
institutions. Hence, comparative analysis of the operations of financial institution will provide rich insights into their workings and problems. In the light of this
experience, setting up of newer institutions in future would go a long way in helping these segments of society with better financial infrastructure, which would
enhance growth.

15
An analysis of the data shows that although India is endowed with a variety of financial institutions, each having a different purpose, these became
operational at different points of time thereby changing the financial structure. Secondly, the growth of different financial intermediaries have been uneven.
Given the same financial environment, the different types of institution have performed differently. An exercise was also done to study the factors affecting
investments and credit of
various institutions. The results showed that several factors had a positive as well as negative and significant influence on credit and investments of various
institution. The policy variables such as Cash Reserve Ratio and Statutory Lending Ratio had significant impact on the banking institutions. Interest rate
variables also influenced other institutions as well. These were as per theoretical expectations. The structural breaks on account of financial liberalisation,
deregulation and reforms were evident