LN. CHANDLER = = sa Favaveat Sratoranetiber = \) Lamppicza 4 GOVelves ehamnetleng | elon] Soleo a Fumds or Sau’ : Surplus sketon> $e Bekeest SUPIR URhab bite FUSED SI ! i Ro, Teecyctensh,| ater, Dineigle GecryTritncnel Rawvice & | onit oo one davher me eranlio! / pa ee umethert by whieh eae ae 1" (GS) 9 ssancint irenuepiation -\e pete a ampostance, Em FINANCIAL INTERMEDIATION Sehene FI “The institutions in the financial markets such as commercial ban! process of financial intermedia ‘Ves Var ori feaT capital inv. fh a ondd- and quity shares) Wt was estimated Dyet ; en G tcrmgdnes pena toe Gr tahhance growthPbyipooling funds heiall bnd geattoresavets ME § jent manner by using their informational advantage fas fund fo finance productive activi | eye ie) 7 2S ota ta1-4-) f] expansion of the finaic ayon'st denoted by the ratio of financial assets, of all kinds to. Sr arcemTics prowih, (tra certain extent, gre_h of savings is facilitated accompanies growth (10 a certain enter Grit oh Son acl eng PF naACAT instrMESTS ARE EXP : lo ensuFy ther most efficient translonsmyposyor han in developed countt Fimancial servicesycontributed Fomrin the late eighties. REFERENCES On wear ank finda, Repoton Copa! Account Convert Jane 1957. Oy mma sH a R eT pankof nia, Report on Currency and Fiance 1.1, 199495: Fc eyntartoytrd $e 6s ( room apaat net oc PIROED. Sp at ae vp RAY eer on Gate eons Natoma | EA Vay Rah? oy, Panonesad past One : NP | ioe OO Sydn autem For GI an sA FINANCIAL INT RMEDIATION The institutions in the financial markets such as commercial banks and non-bank intermediaries undertake the important process of financial intermediation whereby the funds or savings of the surplus sectors are channelled to deficit sectors. The financial institutions channel the funds of surplus economic units to those wanting to spend on real capital investment, Funds are transferred through the creation of financial liabilities such as bonds and equity shares. It was estimated by the Prime Directory that in 1996-97 there were 20,158 financial intermediaries. Financial intermediation can enhance growth by pooling funds of the small and scattered savers and allocating them for investment in an efficient manner by using their informational advantage in the loan market. They are principal mobilisers of surplus funds to finance productive activity and to the extent that they promote capital accumulation, they promote growth. - Financial institutions provide three transformation services. Firstly, liability, asset and size transformation consisting of mobilisation of funds and their allocation (provision of large loans on the basis of numerous small deposits). Secondly, maturity transformation by offering the savers the relatively short-term claim or liquid deposit they prefer and providing borrowers long-term loans which are better matched to the cash flows generated by their investment. Finally, risk transformation by transforming and reducing the risk involved in direct lending by acquiring more diversified portfolios than individual savers can: The expansion of the financial network or an increase in financial intermediation as denoted by the ratio of financial assets of all kinds to gross national product accompanies growth. To a certain extent, gre /th of savings is facilitated by the increase in the range of financial instruments and expansion f markets. The ability of the financial intermediaries to ensure the most efficient transformation of mobilised funds into real capital has not, however, received the attention it deserves. Institutional mechanisms to ensure end use of funds have not been efficient in their functioning, leaving the investor unprotected. Efficient financial intermediation involves reduction of the transaction cost of transferring funds from original savers to financial investors. The total cost of intermediation is influenced by financial layering which makes the individual institution's costs additive in the total cost of intermediating between savers and ultimate borrowers. The aggregate cost of financial intermediation from the original saver to ultimate investor is much higher in developing countries than in developed countries. Financial services contributed 6 per cent of GNP (1995) as compared to 3.7 per cent before liberalisation in the late eighties. Theories of endogenous growth have established firm linkages between financial intermediation and economic growth. * REFERENCES Reserve Bank of India, Report on Capital Account Convertibility, June 1997. Reserve Bank of India, Report on Currency and Finance, Vol. I, 1994-95. Reserve Bank of India, Annual Report, 1996-97.Ln. ALMECHANISM FORTHE EXCHANGE TRADING OF FINANCIAL Chawolle PRODUCTS UNBER A Rae WER PRO RART eI PANTS ant WNTHE FINBIAL MARKETS ARE BORROWE; 7 —~ SECURITIES ) AND LENDERS (BUYERS OF LOR\TIE Repamee INTERMEDIARIES , FINANCIAL MARKETS COMPRISE SF TWO — (Zeer DISTINGT TYPES OF MARKETS ((A)MONEYMARKETIG) CAPITAL MARE 7K RebERRSD RH Poh NaN tet fox shotigin J aatamsae Gun. blame a Capital Marketa ye qd matt wherein eres cougars gpa reee> markt fr lononn csi. ceifiats of depogt, comercial pes. andwasury bills eth tem egy sod 22 SL ee SuSE ft mosey wa ‘ = Geb isments ne oR Ranawersl mnvitels regan WS por Ali kribenat WU Law aemk | See ee sway Geeta Cee Saal eet \ aL SYSTEM, THEY ARF TMPORTANT COMPONENT OF THE FIT + Secondany— imaret for ting utetanding tsues ~ | Aron downer IP ofcapital market isto + mighlise long-term saving to finance long-term invesuments ode ape Te Re of ego qaseguly- to eniwpenes + a ‘roader ownership of productive assets; = {ppoude haus a mech esti " + + Tver the gots of uansacuenig aid infOmnations and" "PH Erne ‘pppoe eticiency of capital allocaig tung cgmptitv pricing witb Money Market and Capital Market. ate Ses ¢ A “Thee song nk between the méngy makes he ait makgt "8 er } + Ofte, finsiclal institutions actively inthe capital Maik ae lio inidiged in fa 5 eee ee . 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