Financial Institutions

What is Financial Institution? – GIC

Money is an inevitable part of life. We cannot expect our life without money. We transact through money in various forms like doing investments, taking loans, etc. But do we have to ever think about who is actually behind all such financial services? These are nothing but financial institutions. So, financial institution means a special kind of establishment that facilitates all the above given financial transactions. In this article, we will look at the financial institutions with special emphasis on General Insurance Corporation of India (GIC).

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Introduction to Financial Institution

Financial institutions facilitate financing, economic transactions, issue funds, offer insurance and hold deposits for individuals.

There are two main aspects of funds, one with the surplus funds and another one who lack funds. In order to bridge the gap between the two, the concept of these institutions has come into existence.

They act as an intermediary between the savers(people with surplus funds) and the borrowers(people who lack funds). They are extremely important for the economy.

Financial Institutions fuel or energizes the economy by issuing a credit which comes in the form of credit, and other forms.

By issuing credit, they help people or organizations to purchase goods and services and fulfill their needs. A financial institution is also called as the supplier of liquidity to the economy or the market through demand deposits and credit lines.

Financial Institution

Key Features of Financial Institutions

  1. Firstly, financial Institutions cannot take loans from the general public from deposits or other payable funds.
  2. Secondly, their major activity includes the work of lending (including personal credits, financing of commercial transactions, etc).
  3. Thirdly, they are major contributors to financial leasing.
  4. Financial Institutions provide a lot of payment services through both online as well as offline modes.
  5. They act as guarantee providers. Providing a guarantee is one of the best services used by businesses nowadays).
  6. Issuing of shares is an integral part of any business. Financial Institutions help companies to issue the shares by providing them underwriting and collection services.
  7. Lastly, their licensing framework is of 3 months or 90 days.

Learn more about Roles of  Financial Institution here in detail

General Insurance Corporation (GIC)

General Insurance Corporation is a financial institution of government. One of the special aspects of GIC is that it was the sole reinsurance company in India before the Indian market was open for foreign participants in 2016. After 2016 a lot of participants came from Germany, Switzerland, and France. Its existence comes under the General Insurance Business (Nationalization) Act (GIBNA) of 1972.

Facts and Characteristics of GIC

  1. Before the nationalization of General Insurance Corporation, there were around 100 companies in the market.
  2. At the time of nationalization of GIC, all the companies were merged into 4 subsidies of GIC altogether, viz: (a) National Insurance Company, (b) New India Assurance Company, (c) Oriental Fire and General Insurance Company, and (d) United India Fire and General Insurance Company.
  3. Its major services include providing insurance against some forms of risk like loss of physical assets, accidents and against personal sickness.
  4. Under the service of the GIC, the purchaser simply buys the service, not a financial asset.

Solved Question on Financial Institution

Question: What are the rules in GIC in the context of investment in shares and debentures?

Answer: Just like most of the companies, GIC too can invest in the shares and debentures of the corporate sector. But it is subject to a restriction that the investment should not exceed five percent of the subscribed capital of a single company. Moreover, the GIC participates in the underwriting of the new issues of shares and debentures.

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