FINANCIAL

INTERMEDIATION
Financial intermediation is the process of accepting funds
from one entity and lending these funds to another entity.

Financial intermediaries intermediate between the net

savers and net borrowers of funds in an economy.

Geetha Iyer
The Process of Financial
Intermediation
NET NET BORROWER
SAVER

SECONDARY MONEY
SECURITIES SE
MO PR CU
NE IM RIT
Y
A R IE
Y S

FINANCIAL
INTERMEDIARY

Geetha Iyer
Financial Institutions
RATIONALE FOR FINANCIAL
INTERMEDIATION

Reduction in Transaction Costs

Diversification benefits
Maturity and Liquidity Transformation

Geetha Iyer
Financial Institutions
IMPORTANCE OF FINANCIAL
INTERMEDIATION

Financial intermediaries are very important

compared to financial markets as providers of funds
to the net borrowers

Geetha Iyer
Financial Institutions
Select external sources of funds to industry

(in Rs. Crores) 2005-06 2006-07

Flow from Banks to Corporates
Bank Credit to Industry 127, 192 74, 981
Flow from Non-banks to Corporates
Capital issues 13, 781 23, 349
ADR/GDR Issues 7, 263 8, 019
External Commercial Borrowing (ECBs) 45, 078 48, 328
Issue of CPs -1, 517 10, 818
Source: RBI Bulletin, May 2007

Geetha Iyer
Financial Institutions
Percentage shares of instruments in annual savings of households

Geetha Iyer
Financial Institutions
CATEGORIES OF FINANCIAL
INSTITUTIONS

Depository institutions
Finance Companies
Contractual institutions
Mutual funds

Geetha Iyer
 Financial Institutions
REGULATION OF FINANCIAL INTERMEDIARIES

The central argument in favor of regulation of financial

services is that financial products and services are different
from other services .
Regulations can be designed to deal with moral hazard and
curb excessive risk taking by financial intermediaries.

Geetha Iyer