Difference # Financial Intermediaries:
Financial intermediaries generally include commercial banks, cooperative credit societies, building societies, insurance companies, etc. They act as half-way houses between the primary lenders and the final borrowers. They accept deposits from the public and pay deposit rates to it.
The financial intermediaries obtain funds from the public and lend these funds to investors. The difference between the lending and the borrowing rates are the profits of the financial intermediaries. The financial intermediaries can also buy bonds and stocks with the acquired funds.
As the economy grows and the financial system develops, financial institutions (or financial intermediaries) emerge to perform the function of transferring funds from savers to the investors. This process of transferring saving funds to business investments is known as financial intermediation.
The process of financial intermediation operates through a varieties of financial assets (or credit instruments), such as time deposits, bills of exchange, bonds, mortgages, etc. These financial assets are traded by different financial institutions in many different financial markets. If the primary savers decide to lend to the financial borrowers directly (i.e., decide to eliminate financial intermediaries), then dis-intermediation will occur. Financial intermediaries perform the function of transferring funds from savers to investors.
ADVERTISEMENTS:
The transfer of funds from savers to investors can occur in two ways:
(a) Savers can lend funds to the investors directly. This is called direct financing. Businesses can sell stocks or bonds directly to the public in primary markets. The public can increase the liquidity of these financial assets by reselling them in secondary markets.
A market in which newly issued credit instruments are bought and sold is called primary market and a market in which previously issued credit instruments are bought and sold is secondary market.
(b) When the funds are transferred from savers to investors through financial intermediaries, it is called indirect financing. The liabilities of financial intermediaries are called indirect debt. For example, commercial banks accept demand deposits and saving deposits; thrift institutions accept time deposits; insurance companies accept premium payments. In turn, the financial intermediaries purchase assets, i.e., relend the funds.
Difference # Non – Bank Financial Intermediaries (NBFIs):
ADVERTISEMENTS:
Financial intermediaries are generally classified into two broad groups- (a) banks, and (b) non-bank financial intermediaries (NBFIs). Non-bank financial intermediaries are thus a heterogeneous group of financial institutions other than commercial banks.
NBFIs include such institutions as life insurance companies, mutual savings banks, pension funds, building societies, etc. NBFIs have made considerable progress after World War I.
Their growth has been much faster than that of commercial banks. The main reason for this is that, in comparison to commercial banks, NBFIs pay higher interest rates to the depositors and charge lower interest rates from the borrowers.
Thus, in a way, the NBFIs compete with the commercial banks for public savings and as sources of loanable funds.