Pros and cons of investing through indirect intermediaries
Let us first consider a direct market transaction. Assume that Mahindra & Mahindra is issuing non-convertible debentures and that we buy such instruments. In such a transaction, funds are directly flowing from the ultimate investor to the ultimate borrower, which is the company.
On the other hand, let us take a situation where we open a savings account with ICICI Bank. The bank will pool the funds deposited by many investors like us and give loans to corporate houses like Mahindra and Mahindra. In this case as well, it is our money that is flowing to the ultimate borrower.
However, it is taking an indirect route in the sense that it is first flowing from us to the commercial bank and from the bank to the ultimate borrowers. Quite obviously, insurance companies and mutual funds are also intermediaries in the indirect market, like commercial banks.
Commercial banks and other indirect market intermediaries perform many vital roles. First, they facilitate denomination transformation and maturity transformation. Let us assume that Mahindra and Mahindra wants to raise R500 million. A typical retail investor may not be in a position to even invest R5 million.
However, a lender like ICICI Bank can. It will raise deposits from hundreds of borrowers who will deposit sums ranging
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