COURSE: MANAGEMENT OF BANKS

COURSE CODE: BMT6133

SEMESTER: Tri Semester’2020-2021
ASSIGNMENT 1
SUBMITTED TO
Dr MUHAMMED SHAFI M K
ASSOCIATE PROFESSOR
VIT BUSINESS SCHOOL

Name: KRISHNA VENI K

Registration No: 19MBA1004
Course: MBA
 FINANCIAL INTERMEDIARIES IN INDIA

INTRODUCTION:

Financial Intermediaries are entities that facilitates financial transaction between two parties,
such as intermediary could be firm/institution like:

 The institutions that channel funds from savers to users are called financial
intermediaries.
 Institutions that channel funds between surplus and deficit agents are called financial
intermediaries.
 Financial intermediaries serve as a middleman between saver and borrower.

EXAMPLES:

1. Commercial banks
2. Regional rural banks (RRB)
3. Cooperative banks/ societies
4. Development banks and All India finance institutions (IDBI, NABARD, SIDBI, NHB
etc.)
5. Pension/provident funds (NPS, EPFO etc.)
6. Mutual funds (UTI and private sector mutual funds)
7. Insurance companies (LIC, GIC etc.)
8. Non-banking financial companies (NBFC like Manappuram gold loans, Muthoot
finance etc).

Bank: Such intermediaries are authorised to accept deposits, to provide loans and to provide
many other financial services to the public. We have a significant role to play in the
economic development of a nation and are thus faced with strong regulations.

Mutual Funds: They help pool the savings of individual investors on financial markets. The
fund manager manages the mutual fund and allocates the funds to different investment goods.
Financial advisors: These intermediaries may or may not provide a financial product, but
advise investors to help them achieve their financial objectives. Such advisors are generally
given special training.

Credit Union: It is also a form of bank, but works to serve its members, not the public. They
may or may not be used for business purposes.

Insurance/Pension Funds:
• A lot of people take out insurance and pay "premium" Yet not all of them die at the same
time.

• Similarly, a lot of people spend money in pension / provider schemes, but not all retires at
the same time.

• There is also a lot of idle capital that insurance / pension / provided business will invest in
government securities, corporate shares, bonds, etc.

• They also take the assistance of experts and invest some money in risky areas, some money
in safe areas.

That’s the second advantage of financial intermediaries: they ensure safety of your
investment. To put this in refined words: “financial intermediaries invest in diversified
portfolios and hence suffer less risk compared to an individual investor.”

• In addition, financial intermediaries are regulated by regulators (RBI, SEBI, IRDA, etc.) so
that small investors cannot escape and run away.
• And financial intermediaries give you a fair return on investment, and their profit margin is
also acceptable. It's not about offering your 2 percent return on your investment and lending
it to a businessman for 48 percent.

From Borrower’s Side:

If you’re a businessman, how does a financial intermediary help you?

1. Easy availability: because you can easily find their office, take the application form.
2. Reasonable cost of borrowing:
a. Debt: if you borrow from a money lender, he’ll charge very high interest rate,
compared to a bank.
b. Equity:  if mutual fund has invested in your shares, all you have to do is pay
reasonable amount of dividend on the shares (if your company makes profit).
3. You Can take long term loans worth crores of rupees.

So far, we know how financial intermediaries help the lenders/investors/households and the
borrowers/loan-takers/businessmen.

POSITIVE IMPACT ON WHOLE ECONOMY:

 Financial intermediaries are helping to distribute capital in the economy. When

money remains idle (e.g. under your bed pillow or as gold in your locker) so it's not
good for the economy. Money needs to keep changing hands. If you look at this from
a different angle: if nobody buys skin whitening creams, then who's going to feed the
families of the chemists who work there and the businessman who supplies raw
materials to the factory?
 Foster the habit of saving.
a. Individuals can use the saved money in hard times / emergency and gain income in
between.
b. A poor businessman is going to get loans quickly. When businessmen can get loans
easily at a reasonable cost, they’ll start new business, expand existing business, hire
more employees, increase production of goods / services = India’s GDP increases, IIP
increases. When people are making more money, they spend more money. A family
goes to restaurant, poor waiter makes money. Family hires maid, gardener, driver.
Family buys new car, mobile or bike- it breaks down, the repairman makes money.
That’s how money trickles down from rich people to poor people.

FUNCTIONS OF FINANCIAL INTERMEDIARIES:

A financial intermediary performs the following functions:
 As said before, the biggest function of these intermediaries is to convert savings into
investments.
 Intermediaries like commercial banks provide storage facilities for cash and
other liquid assets, like precious metals.
 Giving short and long term loans is a primary function of the financial intermediaries.
These intermediaries accept deposits from the entities with surplus cash and then loan them to
entities in need of funds. Intermediaries give the loan at interest, part of which is given to the
depositors, while the balance is retained as profits.
 Another major function of these intermediaries is to assist clients to grow their money
via investment. Intermediaries like mutual funds and investment banks use their experience to
offer investment products to help their clients maximize returns and reduce risks.

ADVANTAGES OF FINANCIAL INTERMEDIARIES:

 They help in lowering the risk of an individual with surplus cash by spreading
the risk via lending to several people. Also, they thoroughly screen the borrower, thus,
lowering the default risk.
 They help in saving time and cost. Since these intermediaries deal with a large
number of customers, they enjoy economies of scale.
 Since they offer a large number of services, it helps them customize services for their
client. For instance, banks can customize the loans for small and long-term borrowers or as
per their specific needs. Similarly, insurance companies customize plans for all age groups.
 They accumulate and process information, thus lowering the problem of asymmetric
information.

If India wants a better GDP growth rate then:

1. Financial intermediaries should be able to do their business easily. e.g. banks should
have better facilities to recover bad loans there comes SARFAESI Act amendment.
2. Regulators (RBI, SEBI) should have more powers to supervise the Financial
intermediaries there comes the amendments in their respective acts/ rules.
3. Businessman should be able to raise money not from Indian financial intermediaries
but also from abroad, wherever they can get finance at a cheaper rate there comes ADR,
GDR.
4. People (particularly in rural areas) should be made aware of the benefits of these
financial intermediaries there comes the topic of financial literacy.
5. People should be able to get help from financial intermediaries easily. There comes
the topics of financial inclusion, banking correspondence agents, ultra- small branches,
New pension schemes etc.

A POTENTIAL ISSUE WITH INTERMEDIARIES:

It may not be possible for a financial intermediary to spread the risk. We can channel
depositor funds to schemes that make more profits for them(intermediaries). And, because of
bad management, they may spend capital in schemes that might may not be so appealing
now.

Such issues with intermediaries are, however, avoidable. Moreover, after the 2008 crisis,
financial intermediaries are faced with increased regulations to ensure that they do not exceed
their limits.

CONCLUSION:

From the above points, it is clear that financial intermediaries play a very important role in
the economic development of the country. They play even bigger role in the developing
countries, including helping the government to eliminate poverty and implement other social
programs.

However, given the complexity of the financial system and the importance of intermediaries
in affecting the lives of the public, they are heavily regulated. Several past financial crises,
like the sub-prime crisis, have shown that loose or uneven regulations could put the economy
at risk.