👉 Topic Financial Intermediaries:
A financial intermediary is an institution that acts as a bridge between savers and
borrowers. These intermediaries help transfer funds from people who have surplus money
(like households or investors) to those who need money (like businesses, government, or
individuals).
They do not use their own funds, but instead channel funds from one party to another,
ensuring efficient financial operations.
Meaning and Definition
Meaning:
A financial intermediary is a **middleman** in the financial system that facilitates the
**flow of funds** between lenders and borrowers.
Definition:
L. M. Bhole: “A financial intermediary is a financial institution that connects surplus and
deficit agents, usually collecting deposits from savers and lending the same to borrowers.”
## Features of Financial Intermediaries
* They do not produce goods or services directly.
* They help in fund movement, not fund creation.
* They reduce risk and information asymmetry.
* They work under strict regulatory control (e.g., RBI, SEBI, IRDAI).
##Types of Financial Intermediaries
Category | Examples
Banks SBI, ICICI, HDFC, PNB
Non-Banking Financial Companies (NBFCs) Bajaj Finance, Muthoot Finance
Mutual Funds SBI Mutual Fund, HDFC Mutual
Fund
Insurance Companies LIC, ICICI Prudential, HDFC
Life
Pension Funds EPFO (Employees’ Provident
Fund), NPS
Stock Brokers Zerodha, Angel One, ICICI
Securities
Development Financial Institutions NABARD, SIDBI, EXIM Bank
## Key Functions of Financial Intermediaries
1. Mobilization of Savings
They encourage people to save and offer safe instruments like fixed deposits, mutual funds,
insurance, etc.
Example: Banks offer recurring deposits and mutual funds offer SIPs to small investors.
2. Channelizing Funds to Productive Use
They collect funds from savers and lend or invest in sectors like industry, infrastructure,
agriculture, etc.
Example: LIC collects premiums and invests them in government securities or long-term
infrastructure projects.
3. Risk Management
They help reduce financial risk by:
* Diversifying portfolios (mutual funds)
* Providing insurance protection
* Conducting credit checks before lending
Example: Mutual funds invest in a mix of stocks and bonds to reduce risk.
4. Maturity Transformation
They convert short-term deposits into long-term loans. This allows savers to keep their
money liquid while borrowers get long-term credit.
Example: A bank takes your one-year FD and gives a 10-year loan to a business.
5. Providing Liquidity
They allow people to convert assets into cash easily (e.g., withdrawing money from ATMs,
selling mutual fund units or shares).
Example: An investor can sell shares on the stock exchange and get funds in 2 days.
6. Reduction in Transaction Costs
They save time and money by offering ready platforms for transactions (e.g., banks for
deposits, stockbrokers for investments).
Example: Instead of searching for a borrower, you deposit in a bank, and they lend for you.
7. Providing Financial Services and Advice
They offer financial planning, retirement advice, tax-saving investments, and wealth
management services.
Example: An investment advisor helps you invest in the right mutual funds based on your
goals.
8. Monitoring Borrowers
They assess creditworthiness, track repayments, and ensure that loans are used for the
intended purpose.
Example: Banks do background checks and monitor EMI payments of loan customers.
##Importance of Financial Intermediaries in Economic Development
Role Impact on Economy
Capital Formation Encourages savings and transforms them into
investments
Employment Generation Funds businesses that create jobs
Financial Inclusion Brings banking and finance to rural and poor
populations
Support to Government Schemes Implements policies like PMJDY, MUDRA Loans
Development of Infrastructure Provides long-term loans for roads, bridges, power
plants
Financial intermediaries are key facilitators of India’s economic growth. They
promote savings, investments, and efficient capital allocation, while offering security and
trust to savers and support to borrowers. By linking different participants in the financial
system, they ensure smooth functioning, stability, and inclusivity of the economy.
