The economic growth of any nation depends on the expansion of the business division. The healthy developed economic organism helps the business to accomplish development by making funds obtainable to them. Financial institutions give industrial, technical support and managerial services to organizations. They provide both owned capital and loan capital for long and medium-term requirements and supplement the usual financial agencies like commercial banks.
Advantages and Disadvantages of Financial Institutions
The Advantages of raising funds through financial institutions are as follows:
Here, finance is accessible even during periods of depression, when no other foundation of finance is accessible in the market. New companies which may find it hard to elevate finance from the public can get it from these institutions.
(i) As these institutions carry out a systematic investigation before conceding support to an apprehension, relationship with them helps to increase the credit-worthiness of a company.
(ii) Besides providing funds, many of these institutions endow with financial, administrative and industrial guidance and consultancy to business firms. Assistance is obtainable when recourse to usual sources is impossible or unbeneficial.
(iii) Financial institutions provide long-term finance, which is not provided by commercial banks;
(iv) The rate of interest and repayment measures is convenient and economical. Facilities for repayment in simple installments are made obtainable to the deserving concerns.
(v) For long-term business funds requirements, financial institutions are preferable as they provide long-term finance, which is not provided by commercial banks. Modernization and development plans can be financed without much strain on the financial organization of the company.
(vi) Besides providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firms;
(vii) Obtaining a loan from financial institutions increases the goodwill of the borrowing company in the capital market. Consequently, such a company can raise funds easily from other sources as well;
(viii) As repayment of loan can be made in easy installments, it does not prove to be much of a burden on the business;
(ix) Loans and guarantees in foreign currency and deferred payment facilities are obtainable for the import of required technology and equipment.
(x) Along with finance, a company can obtain specialist guidance and direction for the successful planning and management of projects.
(xi) The funds are made available even during periods of depression when other sources of finance are not available.
The major Disadvantages of raising funds from financial institutions are as given below:
Restriction on dividend payment imposed on the powers of the borrowing company by the financial institutions. The concern requiring finance from public financial institutions has to submit itself to a thorough investigation that involves a number of formalities and documents.
(i) As these institutions come under government criteria, they follow rigid rules for granting loans. Too many formalities make the procedure time-consuming. Many deserving concerns may fail to get assistance for want of security and other conditions lay down by these institutions.
(ii) Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.
(iii) Sometimes, these institutions place restrictions on the autonomy of management. They lay down a convertibility clause in loan agreements. In some cases, they insist on the appointment of their nominees to the Board of Directors of the borrowing company.
(iv) Financial institutions follow rigid criteria for grant of loans. Too many formalities make the procedure time consuming and expensive;
(v) Certain restrictions such as restriction on dividend payment are imposed on the powers of the borrowing company by the financial institutions;
(vi) Financial institutions may have their nominees on the Board of Directors of the borrowing company thereby restricting the powers of the company.
(vii) Many deserving concerns may fail to get assistance for want of security and other conditions laid down by these institutions.