Download Role of financial institutions

ROLE OF FINANCIAL INSTITUTIONS
role of financial
institutions
role as a financial
intermediary
role as a catalytic
agent
role as a creator
of money
role as a
promoter
role as a
counsellor
1. Role as a financial intermediary: financial institutions play the role of a financial intermediary by
providing the means and mechanism of transferring command over resources from those who
have an excess of income over expenditure to those who can make use of the same with view of
adding to the volume of productive capital. They provide a convenient and effective link
between savings and investment.
In an underdeveloped economy, the role of these institutions as mobilisers of savings becomes more
pronounced in view of the fact that there are large number of savers, each with small amount of
savings. These savers are generally reluctant to invest their surplus income because of their lack of
adequate knowledge about complicated investment affairs. Oreover their resources are small. So they
are exposed to great risk which constrain them from investing their savings.
Financial institutions take care of these problems. The investment policies of these institutions centre on
dversification of investments in terms of securities, units, industries etc. thus, the total investment
portfolio of the institution will probably have a lower risk element than if thousands of individuals
invested their limited funds in one or few business firms.
2. Role as a catalytic agent: financial institutions play the role of catalytic agent bring about
economic and social change in a country through dynamism and innovativeness in their
operations. Sensing well established fact that development of physical and social infrastructure
is essential pre-requisite for rapid economic advancement and burgeoning funds required to
execute infrastructural projects, financial institutions extend support to the government to
finance the projects of national importance. Infact rate of growth of an economy depends upon
the speed with which financial institutions respond to the infrastructural demand of the
country.
Besides, financial institutions can catalyse the social change which is imperative for all-around
economic growth of a developing country. Through introduction of special assistance schemes
for weaker and helpless sections and relatively isolated segments of society, financial instituions
play a crucial role in vanishing poverty and improving the standard of living of the people.
3. Role as a creator of money: financial institutions apart from playing the role of intermediary and
catalyst agent, create money and thus act as a catalyst in the process of money supplier.
Through acceptance of public deposits and lending money against it for funding transactons
they create further depoits.
4. Role as a promoter: entrepreneurship is one of the important sinews of economic growth of a
country. One of the serious bottlenecks in an underdeveloped country is dearth of
entrepreneurship. So to accelerate the pace of growth of such country, it is imperative to assess
growth potentialities of various regions of the country in the light of natural resources, and
infrastructural facilities, identify specific project ideas, evaluate these ideas so as to determine
their feasibility in financial and non financial terms. The above task requires considerable skill,
knowledge and experience and substantial amount of finance which is beyond the means and
competence of entrepreneurs in underdeveloped countries.
As such, financial institutions play the role of a promoter to foster the economic growth in the country.
As a promoter, these institutions undertake comprehensive growth potential surveys of the existing
industrial structure of the various parts of the country, analyze the demand and supply position of the
various projects, and identify industrial ventures which can be established in the different regions in the
near future.
In order to ensue that these projects are implemented properly, financial institutions take the
responsibility of identifying individuals with entrepreneurial traits and motivate them to an
entrepreneurial career by providing training facilities and dispensing financial, technical and managerial
support so that the latter may set up the industries.
5. Role as a counselor: financial institutions also play significant role, though indirectly in
accelerating the pace of growth, by advising the corporate enterprises on when to exit a
business and how to better manage their portfolio.