Financial Intermediaries are essential for a modern financial system, as they help connect individuals with surplus funds to those who require funds. These channels enable individuals to seamlessly make investments in Mutual Funds, stock market transactions, obtain Bank Loans, and purchase insurance.
This article will focus on Financial Intermediaries and will illustrate what they are, with a focus on Indian Intermediaries and Stock Market Intermediaries.
What Are Financial Intermediaries?
Financial Intermediaries are individuals or entities that serve as a conduit for the flow of funds between savers and borrowers.
To put this into simple terms, you save money → Financial Intermediary manages it → The money will be available to the appropriate user.
A financial system without Financial Intermediaries would be very inefficient and would be riskier.
Why Are Financial Intermediaries Important?
Financial Intermediaries are an essential part of an economy. They help money move through the system in safe and efficient ways.
Key Importance
- Mobilise savings.
- Provide credit and liquidity.
- Diversification of services.
- Trust and transparency.
- Economic growth support.
In a developing economy such as India, financial intermediaries in India play a major factor in development, job creation and inclusion in the financial system.
Financial Intermediaries Types
We will now review the different financial intermediaries in detail.
1. Banking Financial Intermediaries
Banks are viewed as the most trusted and reliable form of financial intermediaries.
Examples:
- Commercial Banks.
- Rural Cooperative Banks.
- Regional Rural Banks.
Bank Responsibilities:
- Receive deposits (fixed savings + fixed deposits).
- Provide loans (business and housing loans).
- Payment facilitation.
- Support credit creation.
In India, banks are supervised by the Reserve Bank of India (RBI), which maintains financial stability.
2. Non-Banking Financial Intermediaries (NBFCs)
NBFCs offer payment and other services similar to banks without actually being considered a bank.
Examples:
- Financing institutions.
- Companies that finance assets.
- Institutions that provide microfinance.
Role of NBFCs:
- Lend to the neglected parts of the economy.
- Facilitate the financing of MSMEs and microfinance companies.
- Encourage financial inclusion.
- NBFCs are under the jurisdiction of the RBI, as are banks, though the rules are different.
3. Insurance Companies as Financial Intermediaries
Insurance companies receive premiums and then invest in the financial markets.
Examples:
- Insurers of Life.
- Insurers of General.
- Insurers for Health.
Role:
- Protection against risk.
- Long-term savings and riskless investment.
- Capital formation via investments.
- Insurance intermediaries provide households with financial risk experts.
4. Institutions of Investment and Mutual Funds
Mutual funds aggregate the funds of several investors and invest them in varied types of financial assets.
Examples:
- Equity Mutual Funds.
- Mutual Funds with Fixed Income Securities.
- Funds that are a Combination of Multiple Asset Classes.
Role:
- Management of funds with a professional touch.
- Diversification of the investment portfolio.
- Creation of wealth for small investors.
Mutual funds in India are regulated by the Securities and Exchange Board of India, popularly called SEBI.
5. Intermediaries of Stock Markets
Stock market intermediaries are the companies that assist in the activity of buying and selling and the subsequent settlement of securities.
Key Stock Market Players:
- - Stock Brokers.
- - Sub-brokers.
- - Depository Participants (DPs).
- - Clearing Corporations.
- - Registrars and Transfer Agents (RTAs).
Responsibilities:
- - Trade execution.
- - Demat account services.
- - Clearing and settlement.
- - Investor protection.
Intermediaries are essential for the functioning of the stock market.
6. Pension and Provident Funds
These institutions are responsible for the management of long-term retirement saving instruments.
Examples:
- - Employee Provident Fund (EPF)
- - National Pension System (NPS)
Responsibilities:
- - Long-term capital formation
- - Retirement security
- - Stable investments in bonds and equities.
They are essential for a stable economy.
Financial Intermediaries in India: Regulation
In India, there are protections available for the investor and for maintaining trust, and these are built into the systems of regulation.
Regulators are:
- - Reserve Bank of India (RBI)– Banks and NBFCs.
- - Securities and Exchange Board of India (SEBI)– Capital markets.
- - Insurance Regulatory and Development Authority of India (IRDAI)– Insurance sector.
These regulations in place promote transparency and ethical conduct in the protection of the financial systems.
Functions of Financial Intermediaries in the Economy
1. Channelising Savings into Investments
They turn stagnant savings into beneficial investments.
2. Risk Management
They are involved in less financial risk through diversification and insurance.
3. Liquidity Creation
They provide instant access to cash when required.
4. Price Discovery
Stock market participants help establish fair prices of various assets.
5. Economic Growth
They assist in financing businesses, infrastructure, and employment.
Financial Intermediaries in Everyday Life
|
Activity |
Financial Intermediary |
|
Saving money |
Bank |
|
Stock trading |
Stock Broker |
|
Mutual fund investment |
AMC |
|
Insurance purchase |
Insurance Company |
|
Home loan |
Bank / NBFC |
|
Retirement planning |
Pension Fund |
Benefits of Financial Intermediaries
- Financial Professional Expertise.
- Reduced Transaction Costs.
- Regulation and Transparency.
- Diversified Risks.
- Variety of Financial Products.
Risks and Limitations
- Selling Incorrect Financial Products.
- Operational Hazards.
- Market Risks.
- Regulatory Risks.
- Regulations help to reduce these risks.
Financial Intermediaries in India: The Future
Financial Intermediaries in India have started rapidly evolving due to Digitisation, Fintech Innovations, and Increasing Awareness among Investors.
- Leading Changes.
- Digital and Online Brokerage Services.
- NBFCs and Digital Lending.
- Robo-Advisory Services.
- Banking and Fintech Collaborations.
- Intermediaries will become more transparent, Tech-centric and investor-focused.
Conclusion
From banks and insurance companies to stock market and mutual fund intermediaries, financial intermediaries are the pillars of the financial system. They support risk management, help the economy expand, and assist the system in getting money where it needs to go.
Investors can make judgments and traverse the financial system to suit their needs by being aware of the various kinds of financial intermediaries, the distinct roles they play, and real-world instances. Whether you are saving, investing, trading, or making retirement plans, financial intermediaries are always working behind the scenes for you.
DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.
