RISKS ASSOCIATED WITH NBFC’S NON BANKING FINANCIAL INSTITUTION
NON BANKING FINANCIAL INSTITUTION A Non Banking Financial Institution/ Non Banking Financial Intermediary has differ ent definitions in different countries: •Any institution which is not a bank but is involved in finance •Financial institutions not taking demand deposits
NON BANKING FINANCIAL INSTITUTION • Financial institutions not taking any Deposits • NBFIs are different types of financial institutions that provide the followi ng types of services 1.Payments 2.Liquidity / credit
NON BANKING FINANCIAL INSTITUTION 3.Divisibility: break up large denominat ion and aggregate small denomination 4. Store of value 5.Information: processing and assessin g risks
NON BANKING FINANCIAL INSTITUTION 6.Risk pooling: lower the risks of investors Many NBFI provide services that are also p rovided by banks, hence the distinction between banks and NBFI has become blurr ed. 7.Many NBFI belong to supervised conglomerates
CONTRICUTION BY BANKS AND NBFC’S Contributions by NBFIs and Banks Financial institutions, including banks and nonbanks, provide some or all of the following core financial services. These services are often provided in c ombinations:
CONTRICUTION BY BANKS AND NBFC’S 1. Some financial institutions provide payment s services – by issuing claims that have the capacity to be used in settling transactions. 2.To serve as an effective means of payments, acclaim must have a highly stable and reliable value, be widely accepted in exchange and must be linked to the arrangements for ultima te settlement of value.
CONTRICUTION BY BANKS AND NBFC’S 3. Liquidity is the ease with which an asset’s full market value can be realiz ed once adecision to sell has been ma de. Financial institutions enhance liqu idity through specialization and scale.
CONTRICUTION BY BANKS AND NBFC’S 4.Divisibility is the extent to which an asset can be traded in small denominations. Financial institu tions break up large denomination (lu mpy) claims and aggregate small denomination cla ims to meet divisibility preferences of the community.
CONTRICUTION BY BANKS AND NBFC’S 5. Store of value is the extent to whic h an asset provides a reliable store of purchasing power over time – this is fundamental to satisfying savings preferences.
CONTRICUTION BY BANKS AND NBFC’S 6. Information is costly to access and process. Providing economies of scal e in processing and assessing risks is an important r ole of financial institutions. 7. Risk pooling is the extent to which an asset spreads the default risk of t he underlying promises by pooling.
CONTRICUTION BY BANKS AND NBFC’S 8.By pooling assets, financial instituti ons have much more scope to risk pool than do individuals 9.Banks provide an attractive bundle of most of the core financial services in their deposit