Financial Institutions: Definition And What To Look For - October 3rd, 2024

Financial institutions serve as the backbone of an economy. They comprise both banking financial entities and non-banking financial institutions and serve in fulfilling the financial or monetary objectives and operations of the people, the government, and companies.

A financial institution (FI), often referred to as a banking institution, is a business or company that provides financial services as an intermediary for various types of financial or monetary transactions.

The most prominent examples of financial institutions are insurance companies, commercial banks, investment banks, credit unions, central banks, mortgage companies, and others. Let us understand these in detail.

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Financial Institutions: Key Takeaways

A financial institution is a business entity engaged in financial or monetary transactions such as loans, investments, deposits, and exchanges.
There are banking financial institutions and non-banking financial institutions with eight major types. They facilitate various kinds of financial transactions from loans to investments.
Financial institutions are instrumental in regulating the economy and maintaining effective financial operations.

Understanding Financial Institutions

A financial institution or FI is a business entity, company, or institution engaged in financial transactions. These transactions include loans, deposits, currency exchanges, and investments.

Financial institutions are intermediaries between those seeking funds and others wanting to deposit. They facilitate home loans and other financial loans to their clients in monetary need and help their customers buy, sell or resell stock for monetary gains. Central financial institutions maintain the financial status of a country while commercial financial institutions indulge in making financial profits by providing financial services.

A financial institution is quintessential in accessing money for those who need it via loans, stocks, mortgages, etc. In one way or the other, financial institutions serve people by fulfilling their financial needs and are instrumental in a healthy economy.

Types of Financial Institutions with Examples

There are various ways in which financial institutions can be classified. Based on ownership, financial institutions are categorised into two types:

However, there are three categories of financial institutions in the broad sense in which the varied financial institutions can fit. They are as follows:

Depository Financial Institutions such as credit unions, mortgage brokers, etc.
Contractual Financial Institutions like insurance companies and pension funds.
Investment Financial Institutions such as investment banks.

In today’s financial marketplace, financial institutions play an effective role in providing all kinds of financial services. There is a range of financial institutions that varies from credit unions and investment banks to mortgage lenders and brokerage firms.

Each financial institution fulfills a specific need. Let us learn about each of them and their purpose. Here are the examples of financial institutions or FIs:

Central Banks

Central banks are the primary financial institution of a government. They protect and look after the financial system of the country.

Commercial and Retail Banks

Commercial banks handle everyday financial transactions like deposits and loans.

Investment Banks

Investment banks provide long-term finance to companies and businesses. They serve as intermediaries between securities issuers like bonds, stocks, etc. and investors.

Stock Brokers and Brokerage Firms

Stock brokers are intermediaries between buyers and sellers in the stock market. They work for financial entities called brokerage firms and help their customers buy or sell a stock in exchange for a commission or fee.

Credit Unions

Credit Unions are the same as banks as they offer similar services like business financing, etc. However, they are owned by a non-profit cooperative and not commercial corporations.

Savings and Loan Associations

Savings and Loan Associations are also referred to as S&Ls and Thrifts. They use the deposited savings to create refinance loans, mortgages and other home loans for clients.

Insurance Companies

Insurance companies are often termed as the largest financial institutional investors. They collect capital from people in exchange for their insurance policies.

Mortgage Companies

Mortgage companies deal in home loans. They provide home loans to their clients for a new home or help refinance an existing loan.

What to Look for in a Financial Institution When Making a Choice?

Choosing the right financial institution is a vital step in securing one’s finances and utilizing it in the best way possible. Here are five crucial things one must look for when choosing a financial institution for a financial service:

1. Account Types and Financial Services Offered

There are several financial services offered by financial institutions. It is quintessential to choose the one that aligns best with your financial objectives.

Consider savings accounts, checking accounts, specialty accounts, and other financial services such as investment and loan services that are provided by a financial institution.

2. Financial Charges, Commission and Fees

Financial institutions have numerous charges that can add up to a lot over time. Pay attention to the maintenance fee charges, overdraft fee charges and transaction fees to make your decision.

3. Interest Rates

Financial health is heavily affected by the interest rates on deposits, loans or savings accounts. Look for high interest rates in savings accounts and low interest rates on credit cards and loans.

Also, see if there are any promotional rates that some financial institutions provide for a limited time and make good use of them.

4. Accessibility and Convenience

Consider the ease of access to your money and account by looking into the branch locations of the financial institution, its online and mobile banking systems and customer service.

5. Financial Security and Reputation

The reputation and financial security of a financial institution are crucial in deciding in favor or against it. Look if the financial institution is registered and insured under the government administrative corporation.

Further, research customer ratings and look into client complaints, find out about the financial health of the financial institution via its performance trend and take adequate security measures.

Financial Institutions in India

The financial institutions of India can be prominently classified into three categories. These are as follows:

All India Financial Institutions (AIFIs)

Based on their activities and functions, the all-India financial institutions are further divided into four parts. These are:

All India Development Banks: All India development banks incorporate IDBI (1964), SIDBI (1990), IFCI (1948), and IDFC (1997).
Specialized Financial Institutions: Among these are the ICICI ventures or TDICI (1988), TFCI (1989), IVCF or RCTC (1988) and Exim Bank (1982).
Investment Institutions: UTI (1964), LIC (1956), and GIC & subsidiaries (1972) are the major investment institutions in India.
Refinance Institutions: Major refinance institutions are NHB (1980) and NABARD (1982).

State Level Financial Institutions (SFIs)

The crucial state-level financial institutions in India include the SFCs and the SIDCs.

Other Financial Institutions (OFIs)

Some other financial institutions that do not come within the all-India or state category of financial institutions in India are kept under this category. This type of financial institution includes the ECGC (1957) and DICGC (1962).

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Financial Institution FAQs

Q1. What are financial institutions?

Ans: Financial institutions are those banking or non-banking entities that act as intermediaries to provide monetary services such as deposits, investments, loans, and currency exchange.

Q2. Are financial institutions safe?

Ans: Yes. If not for an economic catastrophe, generally all financial institutions are safe. The safest of them all are banks and credit unions where one can easily deposit money or take loans from.