Page 7 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes (d) to discount or lend;
(e) to exercise fiduciary or trust powers;
(f) to issue circulating notes.
3. Performance of agency services and custody of cash reserves: Different constituents of the
financial system act as the agents for their clients. They buy and sell shares and bonds,
receive and pay utility bills, premiums, dividends, rents and interest for their clients.
4. Management of national reserves of international currency: Various parts of financial
system help the economy in particular and polity in general to manage international
reserve.
5. Credit control: Financial system controls credit by serving the dual purpose of:

(a) increasing sales revenue by extending credit to customers who are deemed a good
credit risk, and
(b) minimizing risk of loss from bad debts by restricting or denying credit to customers
who are not a good credit risk.
6. Ensure stability of the economy: Financial system performs the function of administering
national, fiscal, and monetary policy to ensure the stability of the economy.
7. Supply and deployment of funds for productive use: Financial markets permit the transfer
of funds (purchasing power) from one agent to another for either investment or
consumption purposes.
8. Maintaining liquidity: Financial markets provide the holders of financial assets with a
chance to resell or liquidate these assets.

9. Price determination: Financial markets provide vehicles by which prices are set both for
newly issued financial assets and for the existing stock of financial assets.
10. Information aggregation and coordination: Financial markets act as collectors and
aggregators of information about financial asset values and the flow of funds from lenders
to borrowers.
11. Risk sharing: Financial markets allow a transfer of risk from those who undertake
investments to those who provide funds for those investments.

12. Improve efficiency: Financial markets reduce transaction costs and information costs.
13. Ensure long term growth to itself: Long-term growth of financial markets is ensured
through:

(a) Giving autonomy to Financial Institutions to become efficient under competition
(b) Education of investors
(c) Consolidation through mergers
(d) Facilitating entry of new institutions to add depth the market
(e) Minimizing regulatory measures and market segmentation.

2 LOVELY PROFESSIONAL UNIVERSITY