The following points highlight the top seventeen roles of Non-Bank Financial Intermediaries (NBFIs). Some of the roles are: 1. Reduce Hoarding 2. Help the Household Sector 3. Help the Business Sector 4. Help the State and Local Government 5. Help the Central Government 6. Lenders and NBFIs both Earn 7. Provide Liquidity 8. Help in Lowering Interest Rate and Others.
Role # 1. Reduce Hoarding:
By bringing the ultimate lenders (or savers) and ultimate borrowers together, NBFIs reduce hoarding of cash by the people under the “mattress”, as is commonly said.
Role # 2. Help the Household Sector:
The household sector relies on NBFIs for making profitable use of its surplus funds and also to provide consumer credit loans, mortgage loans, etc. Thus they promote saving and investment habits among the ordinary people.
Role # 3. Help the Business Sector:
NBFIs also help the nonfinancial business sector by financing it through loans, mortgages, purchase of bonds, shares, etc. Thus they facilitate investment in plant, equipment and inventories.
Role # 4. Help the State and Local Government:
NBFIs help the state and local bodies financially by purchasing their bonds.
Role # 5. Help the Central Government:
Similarly, they buy and sell central government securities and thus they help the central government.
Role # 6. Lenders and NBFIs both Earn:
When savers deposit their funds with NBFIs, they earn interest. When NBFIs lend to ultimate borrowers, they earn profits. In fact, the reward of intermediation arises from the difference between the rate of return on primary securities held by NBFIs and the interest or dividend rate they pay on their indirect debt.
Role # 7. Provide Liquidity:
NBFIs provide liquidity when they convert an asset into cash easily and quickly without loss of value in terms of money. When NBFIs issue claims against themselves and supply funds they, especially banks, always try to maintain their liquidity. This they do by following two rules: first, they make short-term loans and finance them by issuing claims against themselves for longer periods; and second, they diversify loans among different types of borrowers.
Role # 8. Help in Lowering Interest Rate:
Competition among NBFIs leads to the lowering of interest rates. NBFIs prefer to keep their saving with NBFIs rather than in cash. The NBFIs, in turn, invest them in primary securities. Consequently, prices of securities are bid up and interest rates fall. Moreover, when people keep their cash holdings with NBFIs which are safe and liquid, the demand for money falls thereby lowering interest rates.
Role # 9. Low Interest Rates Benefit both Savers and Investors:
When interest rates decline, both savers and investors benefit. First, the real costs of lending to borrowers are reduced. These, in turn, tend to reduce costs and prices of goods and services. With reduction in interest rates, the return on time deposits is also’ reduced which induces savers to deposit their funds with NBFIs even though the latter pay lower interest rates.
Still the savers benefit because NBFIs provide greater safety, convenience and other related services to them thereby increasing the savers’ real return and income.
Role # 10. Brokers of Loanable Funds:
NBFIs play an important role as brokers of loanable funds. They act as intermediaries between the ultimate saver and the ultimate investor. They sell indirect securities to savers and purchase primary securities from investors. Indirect securities are the short-term liabilities of financial intermediaries.
On the other hand, primary securities are their earning assets but they are the debts of the borrowers. Thus NBFIs act as brokers of loanable funds by changing debt into credit.
Role # 11. Reduce Risks:
When the non-bank financial intermediaries convert debt into credit, they reduce the risk to the ultimate lender. First, they create liabilities on themselves by selling indirect securities to the lenders. Then they buy primary securities from borrowers of funds.
So by acting as intermediaries between the lenders and borrowers of funds, NBFIs take the risk on themselves and reduce it on the ultimate lenders. Moreover, by holding varied types of financial assets, they decrease their own risks. Low returns on some assets can be offset by high returns on others.
Mobilising Savings. NBFIs raise funds in the capital market and supply credit to investors. Expert financial services provided by them have been attracting larger share of public savings. Such services include easy liquidity, safety of principal, and ready divisibility of savings into direct securities of different values.
They have been able to mobilise more funds due to the development of two types of non-bank financial intermediaries. The first are the depository intermediaries which include savings and loan associations, credit unions, and mutual savings banks.
There is high liquidity of savings in such institutions which attract small savers. Moreover, they issue fixed price assets whose value does not change like the market price of other types of assets. The second are the contractual intermediaries which enter into contract with savers and provide them various types of benefits over the long run. Such institutions are pension funds, life insurance companies and public provident funds. These two types of financial intermediaries in particular help in mobilising public savings.
Role # 12. Investment of Funds:
NBFIs exist because they want to earn profit by investing the mobilised savings. Different financial intermediaries follow different investment policies. For instance, savings and loan associations and mutual savings banks invest in mortgages, and insurance companies invest in bonds and securities. Thus intermediaries mobilise public savings, invest them and thereby help in capital formation and economic growth.
Role # 13. Create New Assets and Liabilities:
Gardner Ackley has shown that in intermediating between ultimate lenders and direct investors, NBFIs add greatly to the stock of financial assets available to savers and for every extra asset, they also create an equal new financial liability. But intermediation does not affect total net worth. He concludes that although intermediation does not increase total wealth or income, it can be assumed that it increases welfare.
Role # 14. Economies of Scale:
NBFIs reap a number of economies of specialisation and scale in mobilising savings and making investments. It would be costly and cumbersome for individual savers to lend their funds to individual borrowers. NBFIs make larger transactions with ultimate lenders and borrowers.
They specialise in trading large financial assets and thus have lower costs in buying and selling securities. They employ expert Staff and efficient machinery and equipment, thereby increasing productivity in the transfer of funds.
Role # 15. Bring Stability in the Capital Market:
NBFIs deal in a variety of assets and liabilities which are mostly traded in the capital market. If there were no NBFIs, there would be frequent changes in the demand and supply of financial assets and their relative yields, thereby bringing instability in the capital market. As NBFIs function within a legal framework and set rules, they provide stability to the capital market and benefit savers and firms through diversified financial services.
Role # 16. Benefit to the Economy:
NBFIs are of immense help in the working of financial markets, in executing monetary and credit policies of the central bank and hence in promoting the growth of an economy. By transferring funds from surplus to deficit units. NBFIs create large financial assets and liabilities.
They provide the economy with money supply and with near money assets. Thus they help in the working of financial markets. Since the financial markets govern the working of the economy, the monetary and credit policies of the central bank are changed in such a manner from time to time that the financial markets function smoothly in the country.
In fact, the growth of the economy is dependent upon the proper functioning of the financial system which, in turn, depends to a large extent upon the NBFIs.
Role # 17. Help in the Growth Process of Economy:
NBFIs help in the growth process of the economy. They intermediate between ultimate lenders who are savers and ultimate borrowers who are investors. By performing this function, they discourage hoarding by the people, mobilise their savings and lend them to investors.
Thus NBFIs encourage saving and investment which are essential for promoting economic growth. Goldsmith’s study has shown that the growth of NBFIs has been responsible for the economic growth of developed countries in a significant way.
We may conclude that NBFIs provide liquidity and safety to financial assets and help in transferring funds from ultimate lenders to ultimate borrowers for productive purposes. They increase capital formation and consequently lead to economic growth.
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