The role and importance of non-bank financial intermediaries is clear from the various functions performed by these institutions. Major functions of the NBFIs are as follows:
1. Financial Intermediation:
The most important function of the non-bank financial intermediaries is the transfer of funds from the savers to the investors.
Financial intermediation is economical and less expensive to both small businesses and small savers,
(a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high transaction costs,
(b) It also benefits the small savers by pooling their funds and diversifying their investments.
2. Economic Basis of Financial Intermediation:
Handling of funds by financial intermediaries is more economical and more efficient than that by the individual wealth owners because of the fact that financial intermediation is based on
(a) the law of large numbers, and
(b) economies of scale in portfolio management.
(i) Law of Large Numbers:
Financial intermediaries operate on the basis of the statistical law of large numbers. According to this law not all the creditors will withdraw their funds from these institutions. Moreover, if some creditors are withdrawing cash, some others may be depositing cash. Again, the financial intermediaries also receive regular interest payments on loans or investments made by them. All these factors enable the financial intermediaries to keep in cash only a small fraction of the funds provided by the creditors and lend or invest the rest.
(ii) Economies of Scale:
Large size of the asset portfolios enables the financial intermediaries to reap various economies of scale in portfolio management. The main economies are:
(a) reduction of risk through portfolio diversification:
(b)employment of efficient and professional managers; and
(c) low administrative cost of large loans and
(d) low costs of establishment, information and transactions.
3. Inducement to Save:
Non-bank financial intermediaries play an important role in promoting savings in the country. Savers need stores of value to hold their savings in. These institutions provide a wide range of financial assets as store of value and make available expert financial services to the savers. As stores of value, the financial assets have certain special advantages over the tangible assets (such as, physical capital, inventories of goods, etc.). They are easily storable, more liquid, more easily divisible, and less risky. In fact, saving- income ratio is positively related to both financial institutions and financial assets; financial progress . induces larger savings out of the same level of real income.
4. Mobilisation of Saving:
Mobilisation of savings takes place when the savers hold savings in the form of currency, bank deposits, post office savings deposits, life insurance policies, bills, bond's equity shares, etc. NBFI provides highly efficient mechanism for mobilising savings. There are two types of NBFTs involved in the mobilisation of savings;
(a) Depository Intermediaries, such as savings and loan associations, credit unions, mutual saving banks etc. These institutions mobilise small savings and provide high liquidity of funds.
(b) Contractual Intermediaries, such as life insurance companies, public provident funds, pension funds, etc. These institutions enter into contract with savers and provide them various types of benefits over the long periods.
5. Investment of Funds:
The main objective of NBFIs is to earn profits by investing the mobilised savings. For this purpose, these institutions follow different investment policies. For example, savings and loan associations, mutual saving banks invest in mortgages, while insurance companies invest in bonds and securities.