Hi friends, in today’s article we are going to know about Non bank financial intermediaries and also know the difference between bank and non bank financial intermediaries. So let’s discuss in details.
What is Non Bank Financial Intermediaries?
Non-bank
financial intermediaries (NFIs) are a diverse group of
financial institutions other than commercial and credit union banks, including a variety of financial institutions that directly or indirectly raise
funds from the public in order
to lend top-class customers.
Difference between Bank and Non bank financial intermediaries
• Reduce
Hoarding – By bringing together retail lenders (or savers)
and final borrowers, NBFIS is reducing cash hoarding under the "mattress," as they say.
• 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.
• 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.
• Help t the
State and Local Government – NBFIs help the state and local bodies financially
by purchasing their bonds.
• Help the
Central Government – Similarly, they buy and sell central government Securities
and thus they help the central government.
• 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.
• Provide
Liquidity – NBFIs provide liquidity when they convert an asset into cash casily
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.
• Help in
Lowering Interest Rate – Competition among NBFIs leads to the lowering of
interest rates. NBFls prefer to keep their saving with NBFIs rather than in
cash. The NBFIs, in turn, invest them in primary securities. Consequently,
prices of sceurities are bid up and interest rates fall.
• Brokers of
Loanable Funds – NBFIs play an important role as brokers of tomuable 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.
• 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.
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.
Conclusion
So friends, this was the concept of Non bank financial intermediaries. Hope you get the full details about it and hope you like this article.
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