Question

Explain role of depository and non depository institutions for contributing in growth of financial institutions? discuss

Answer 1

Depository institutions are commonly known as banks.

i. Depository institutions takes money as deposits from depositors to lend out to borrowers and help in running the economy and developing financial institutions by revolving credit.

ii. Depository institutions provide safekeeping services of money and maintains liquidity and helps financial institutions to grow and serve the economy.

iii. Depository institutionsprovide a payment system and thus encourages the growth of financial institutions.

iv. Depository institutions provides creedit to the sectors of the economy and help in growing the sectors of the economy.

v. Depository institutions encourages inveastment (in bonds and securities) to boost the economy.

vi. Depository institutions controls liquidity by adjusting policy rates (repo, reverse repo, bank rate etc.).

vii. Depository institutions can issue cheques that enables depositors to demand and withdraw money at their will.

Non depository institutions are financial intermediaries that cannot accept deposits but do pool the payments in the form of premiums or contributions. Nnondepository institutions are called the shadow banking system.

Nondepository institutions include insurance companies, pension funds, securities firms, government-sponsored enterprises, and non banking finance companies (NBFCs).

i. Nondepository institutions form an important part of the economy by pooling payments of many people and then either investing it or by providing credit to others.

ii. Unorganised sector of the economy, to a large extent is served by non-depository institutions.

iii. Nondepository institutions provide other types of financial services other than payment and interest. Insurance and hedging are such other types of financial services that provides cover against financial risk.

iv. Nondepository institutions cannot issue cheques, but they can provide institutional support for the buying and selling of securities, i.e., brokerage services.

v. Investment companies, such as mutual funds, provide expertise and economies of scale that small individual investors would not be able to afford otherwise.