Money has to be circulated in the economy because if it is not then it will lead to hoarding of money which will lead economic stagnation. To avoid this kind of situation it is essential that the money flows from one part to the other. To make this process easy there are financial intermediaries.
Their duty to circulate money from a surplus generating firm to a deficit ruined organization. Thus the money is circulated and profits can be earned.
Types of Financial Intermediaries
There are many types of financial intermediaries. They are:
- Banks at the apex
- Money Lenders
- Mutual Funds
- Insurance Companies
- Chit Funds
- Pension Funds
- Financial Brokers
They help in providing direct contact between the lenders and the buyers. They play an important role in making productive use of the finances.
Advantages of Financial Intermediaries
There are several advantages of the financial intermediaries. They are:
- They help in providing money to the needy companies
- They protect companies from market failure and thus has cost advantage
- Financial intermediaries reduces the cost at which the money is given
- They also provide economies of scale and thus production process cannot be hampered
- Money that is provided is flexible in nature
- Money Cycle of the Intermediaries
The way in which the financial intermediaries work is very simple. If we take the example of a Bank then the bank has various types of account in which the customers open their account and lend money to the bank. In the similar pattern, the bank lends money to the companies who require money for expansion etc. This money is provided in form of loans and overdrafts.
The bank gets interests on these overdrafts which are also their profits. In this way, the bank is taking money from the individuals who has surplus money and then gives it to the institutions who require funds.
Even the government actively participates in developing Financial Intermediaries. The government has set up many financial and Non-Banking Financial Institutions (NBFI) for providing financial aid to the developing companies.
It includes leasing companies, Investment companies, and Loan Companies.
Thus the work of Financial Institutions is very important to set up any company and it is useful even at the household level. In the household level, the loans that an individual gets is also provided by some or the other financial institution.
Financial Intermediaries Homework Help