Financial markets serve as a link between savers and borrowers. This link chain is served through direct and indirect finance.
Direct finance happens when savers are in direct contact with the borrowers for the lending process. In contrast, indirect finance involves a middleman or an intermediary that stands as a third party between the two.
|133 NJ-70, Medford|
|NJ 08055, United States|
|Phone: +1 609-953-4780|
Many financial institutions like columbia bank Medford act as financial intermediaries in accepting deposits and lending to borrowers. In the middle, banks earn profit by the difference in the rate it pays to savers and the rate at which they lend loans.
Banks as financial intermediaries perform various functions in indirect financing of funds between two entities.
Borrow short and lend long
The first function performed by banks is matching up the savers’ needs with borrowers’ needs. Banks are readily available to bridge the gap between a saver who wants to invest for a longer period and a borrower with short term borrowing needs. Therefore, they actively borrow from savers as they invest at short redeemable notice.
This can lead to illiquidity if the depositors come asking for their money on a 15-year loan forwarded. Bank solves this problem by creating a diversified set of depositors to cause this liquidity problem by any depositor.
The pooling of small deposits
Another function performed by the bank is to pool small investments to make relatively large loans available for borrowers.
Since banks act as a middleman, both the investor and borrower are not at risk of running into a default. It is also difficult for large depositors to diversify their pool of funds into safe and secured borrowing. Here, banks help by diversifying their portfolio.
Reduces transaction costs
They also economize the transaction cost involved in direct financings, such as time and legal costs associated with the contractual loan. Another one follows in checking the creditworthiness of a borrower in which banks save up the cost.
So, if there is a healthy relationship between the savers, borrowers and the investors, there will be an effective financial marketing.