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Financial intermediaries have emerged as a useful tool for the efficient market system as they help channelize savings into investment. However, they can also be a cause of concern, as the sub-prime crisis shows. Often, there is a need to regulate the activities of these intermediaries. Bank : These intermediaries are licensed to accept deposits, give loans and offer many other financial services to the public.
They play a major role in the economic stability of a country, and thus, face heavy regulations. A fund manager oversees a mutual fund and allocates the funds to different investment products. These advisors usually undergo special training.
Credit Union : It is also a type of bank, but works to serve its members and not public. They may or may not operate for profit purposes. Other financial intermediaries are pension funds, insurance companies, investment banks and more. Let us consider a simple example that will help us understand these advantages better. So, you contact a middleman, who in turn is in contact with those with surplus money.
It is possible that a financial intermediary may not spread risk. Or, due to poor management, they may invest money in schemes, which may not be so attractive now. Such issue or issues with the intermediaries, however, are avoidable.
Reading the above points, it is clear that financial intermediaries play a very important role in the economic development of the country. They play even bigger role in the developing countries, including helping the government to eliminate poverty and implement other social programs. Initially through Lead Bank Scheme, banks were developing employment opportunities at the district level.
School St. At the November Seoul Summit, the G20 Leaders asked the FSB to develop policy recommendations to strengthen the oversight and regulation of non-bank financial intermediation previously called shadow banking. Levine and N. These are called usury laws. Real GDP. Such an intermediary or a middleman could be a firm or an institution.
Later on, Service Area Approach was adopted in by which certain specific areas were allotted to the banks for launching different economic programmes for the development of such areas. Under this scheme, financial intermediaries were financing socially and economically depressed people by providing loans to them for various economic activities. One third of the loan will be a subsidy and the remaining two-thirds of the loan will carry a lower rate of interest under the interest subsidy scheme of RBI.
In this way, various economic programmes aimed at improving rural economic conditions were undertaken. As a part of improving dwelling houses, financial intermediaries are providing housing loans. This has enabled many fixed income group people to avail the housing loan.
Normally, to a borrower under this facility, a bank provides 3-year aggregate net income as a maximum amount or the cost of the house, whichever is less. As per RBI guidelines, commercial banks have to provide certain percentage of their lending to priority sector which consists of agriculture and its allied activities, such as poultry, dairy, etc, cottage industries, small scale industries, small industry and business.
In order to prevent regional disparities, financial intermediaries have been advancing loans to industries which are started in backward areas. Government has given certain concessions in the form of tax benefits to such industries and banks provide cheap loans so that the backward areas could attract more industries.
Computers are being used by financial intermediaries for most of their activities now and they are able to link their branches through a network. This has resulted in quicker transfer of funds between centres and this has helped customers in realizing their cheques in a speedy manner. The customer can also make use of Home banking facility by linking their computer system with the bank and instructions can be provided for transfer of funds.
This facility, if developed throughout the country, will not only help in the movement of funds but also reduce the disparity in the interest rate.
Financial Intermediaries play major role in Economic Development through Self- employment programme, housing finance, Backward area Development. PDF | Preface: This volume contains papers first presented at a conference, "In Data Veritas: Institutions and Growth in Economic History," held in honor of Lance .