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Chapter1 financial intermediary

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Chapter1 financial intermediary

  1. 1. FINANCIAL INTERMEDIATIONFinancial intermediation is the process of accepting funds from one entity and lending these funds to another entity.Financial intermediaries intermediate between the net savers and net borrowers of funds in an economy. Geetha Iyer
  2. 2. The Process of FinancialIntermediation NET NET BORROWER SAVER SECONDARY MONEY SECURITIES SE MO PR CU NE IM RIT Y AR I E Y S FINANCIAL INTERMEDIARY Geetha Iyer
  3. 3. Financial Institutions RATIONALE FOR FINANCIAL INTERMEDIATION  Reduction in Transaction Costs  Diversification benefits  Maturity and Liquidity Transformation Geetha Iyer
  4. 4. Financial Institutions IMPORTANCE OF FINANCIAL INTERMEDIATION  Financial intermediaries are very important compared to financial markets as providers of funds to the net borrowers Geetha Iyer
  5. 5. Financial Institutions Select external sources of funds to industry (in Rs. Crores) 2005-06 2006-07Flow from Banks to CorporatesBank Credit to Industry 127, 192 74, 981Flow from Non-banks to CorporatesCapital issues 13, 781 23, 349ADR/GDR Issues 7, 263 8, 019External Commercial Borrowing (ECBs) 45, 078 48, 328Issue of CPs -1, 517 10, 818Source: RBI Bulletin, May 2007 Geetha Iyer
  6. 6. Financial InstitutionsPercentage shares of instruments in annual savings of households 100% Shares & debent- 90% ures 80% Claims on Govern- ment 70% Provident and 60% pension fund 50% Non- banking Life insurance fund 40% deposits 30% Bank deposits 20% 10% 0% 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Geetha Iyer
  7. 7. Financial Institutions CATEGORIES OF FINANCIAL INSTITUTIONS  Depository institutions  Finance Companies  Contractual institutions  Mutual funds Geetha Iyer
  8. 8. Financial Institutions REGULATION OF FINANCIAL INTERMEDIARIES  The central argument in favor of regulation of financial services is that financial products and services are different from other services .  Regulations can be designed to deal with moral hazard and curb excessive risk taking by financial intermediaries. Geetha Iyer

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