Non Bank Financial Intermediaries | Bank and Non bank financial intermediaries

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.

Non Bank Financial Intermediaries

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 HoardingBy 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.


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