Question

What is the function of financial institutions?

Hint:

Mnemonic: \textbf{S-C-P-R-L-I} = Savings, Credit, Payments, Risk, Liquidity/price, Inclusion.

Answer 1

Step 1: Who are they?
Financial institutions include banks, NBFCs, insurance companies, mutual funds, stock exchanges, and development banks.
Step 2: Mobilization of savings.
They collect small savings (deposits, premiums, SIPs) and channel them into productive investments.
Step 3: Financial intermediation & credit allocation.
They lend to households, firms, and governments; assess risk and allocate credit to priority sectors (MSMEs, agriculture, infrastructure).
Step 4: Payments & settlement services.
They provide safe and efficient payment systems (UPI/NEFT/RTGS, cards), enabling day-to-day transactions and commerce.
Step 5: Risk management & insurance.
Through insurance/derivatives, they pool and transfer risk (life, health, crop, price risk), protecting incomes and investment.
Step 6: Liquidity & price discovery.
Markets run by FIs (money, bond, equity) create liquidity and help discover fair prices for financial assets.
Step 7: Financial inclusion & development.
They extend services to underserved groups (Jan-Dhan, SHG-Bank linkage), promoting inclusive growth.
Step 8: Conclusion.
Thus, financial institutions are the backbone of the economy, turning savings into investment, enabling payments, and managing risk.