Finance Company and Functions of Finance Company in Financial Intermediaries
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Financial Intermediaries
A financial intermediary or intermediator is a financial institution.
It may be a bank, building society, insurance company, investment bank or pension fund.
A financial intermediary offers a service to help an individual or firm to save or borrow money.
A financial intermediary helps to satisfy different needs of lenders and borrowers.
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
For example, if you need $/₹/Rs 5,00,000 to borrow, you should try to find out an individual who wants to lend this amount
But, this will be very time consuming and you will find it very difficult.
Therefore, rather than look for individuals to borrow a sum, it is more efficient to go to a finance company (a financial intermediary) to borrow money.
Finance Company raises funds from its shareholders.
Financial company also takes loan from commercial bank.
It lends out to those individuals who need it.
Finance company takes security deposit to provide loan.
It charges more service charge and interest on loan than banks.
Role and function of financial institutions in financial market
The main functions of the financial institutions are as follows:
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a. |
Financial institutions accumulate the savings from several small investors and invest the same in the security. |
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b. |
They offer margin lending opportunity to the prospective customers to purchase new securities from the market. |
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c. |
They bring funds suppliers and fund borrowers together in single platform. |
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d. |
They play vital role in transferring fund from one entity to another entity through financial market. |
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e. |
Financial institutions like commercial bank, development bank and some finance company accept deposit from savers. |
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f. |
Allocating saving in to investment. |
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g. |
Providing financial services. |
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h. |
Ensuring satisfaction, return and minimizing the risk of loss. |
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i. |
Helping business raising funds. |
Financial Intermediaries
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Depository institutions |
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Non-depository institutions |
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Commercial banks |
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Insurance companies |
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Development banks |
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Pension fund |
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Finance companies |
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Mutual fund |
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Saving and loan cooperatives |
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Finance Company
It is the lower level financial institution than development bank.
Generally, finance company does not take deposit from public like banks.
But, some special finance companies take deposit from public.
The main work of finance company is to provide personal loan and some business loan.
The interest on loan of finance company is higher than banks.
Central bank (NRB) has graded ‘C’ for finance company.
There 22 finance companies on mid July 2020.
Some finance companies of Nepal are given:
Finance companies offer different type of banking services.
Such as loans and credit facilities, private education funding, retirement planning, trading in money market, underwriting shares etc.
These institutions also provide wealth management such as managing portfolios of shares, discounting services etc. Finance company supports investments in property.
It also prepares feasibility study, market or industry studies for companies.
Keep in mind (KIM)
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Nepal Finance Company Ltd (NEFINSCO) is the first finance company of private sector in Nepal. |
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It was established in 2049 B.S; till then NEFINSCO has been known as the most developed finance company in Nepal. |
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It was providing its products among its clients. |
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It has launched hire purchase system first time in Nepal. |
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It became very popular in the market. |
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It introduced deposit system with various kinds of account. |
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Later, other finance companies adopted its products. |
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Account: Class 11 |
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Adjustment In Final Account |
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Capital and Revenue |
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Single Entry System |
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Non-Profit Organization (Non-Trading Concern) |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Functions of Finance Company
Some finance companies lend to consumers, while others make loans to businesses or finance the sales of manufacturers’ products to customers.
Finance companies that engaged in commercial credit activities provide loans after taking security.
Finance companies obtain funds for lending through their own borrowing or from parent corporations.
The main functions of finance are given below:
Personal loans
People who are unable to obtain loans or financing from banks may qualify at a finance company.
The types of available consumer loans include second mortgages, loans for purchasing automobiles, home improvement.
All loans are secured by tangible personal assets.
Loans from finance companies are more costly than bank loans, but sometimes finance companies are more co-operative.
Asset-based loans
Commercial finance companies provide loan by pledging assets.
Customers of finance company are usually individual customers and growing businesses.
Customers must have assets to pledge as collateral.
Such assets include accounts receivable, inventory, equipment and other fixed assets. In case of default, the lender takes possession of the assets.
Factoring/hypothetical
Factoring is a more expensive variation on asset-based lending.
In this case, a small fast-growing manufacturer may not have sufficient credit and is selling to multiple customers.
The manufacturer sells its accounts receivable to the lender in return for approximately 80% of the value of the receivables.
The manufacturer receives the rest of the funds upon collection, less the lender’s fees.
Installment loans
Merchant or vendor who offers installment payment plans while selling large appliances, vehicles, electronics goods etc, contracts from finance companies.
Customer pays down payment, which is 20% to 50% of value of asset.
Remaining amount is paid in installments.
These installments may be monthly or quarterly.
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Share (Accounting for Share) |
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Share in Nepali |
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Debentures |
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Final Account: Class 12 |
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Final Account in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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