role of financial institutions to reduced transaction cost, Delhi university| money and Banking, GE

#ECONOMICFORUPSC #Vishnueconomicsschool #NTANETECONOMICS Download my app Vishnu ECONOMICS SCHOOL from play store or link is given below https://play.google.com/store/apps/de... TELEGRAM ;- https://t.me/Vishnueconomicsschool WHATSAPP https://chat.whatsapp.com/Dd4096hYSAL... APP https://play.google.com/store/apps/de... WEBSITE www.vishnueconomicsschool.in We cover 1. UPSC MAIN ECONOMICS OPTIONAL 2. NTA - NET ECONOMICS 3. INDIAN ECONOMIC SERVICES 4. RBI EXAM 5 NABARD EXAM 6. DSSSB PGT ECONOMICS 7 KVS/ NVS PGT ECONOMICS 8.PGT ECONOMICS FOR OTHER STATE 9 LECTURER UPHESB 10 IGNOU MA ECONOMICS 11 Delhi UNIVERSITY B.A, B.COM, ECO H, GE, ECO H 12 MDU UNIVERSITIES 13 MA ECO, M.COM, ECO H, BBE, BBA, MBA, 14 . CBES BORAD FOR 11 AND 12 15 NIOS FOR CLASS 12 16. ICSE CLASS 12 17 XI , XII FOR DIFFERENT STATE BOARD Transaction costs can be defined as the costs of transferring resources between markets or between participants in the same market. In the finance field, transaction costs refer to the resources required to transfer (lend) one unit (e.g. dollar, peso) of currency from a saver to a borrower, and recover that unit of currency at a later date plus some agreed interest charge. Interest and other charges represent the returns to the lender as compensation for the cost of mobilizing the funds, allocating them to borrowers, and recovering them through loan repayments. Unlike transactions in other markets, financial transactions always involve some risk because the contract is not completed until some future date when the loan is repaid. Credit rationing and loan collateral and collateral substitutes represent ways for the lender to reduce risks. Transaction costs for financial transactions are often high in developing countries. In some cases, the total borrowing costs for small rural loans are so high, in spite of subsidized interest rates, that borrowers prefer loans from informal rather than formal sources (Ahmed; Ladman). Furthermore the high transaction costs of financial institutions often exceed the spread authorized between cost of funds and maximum lending rates. Because of this situation, attention has increasingly been placed on measuring the magnitude of these costs and on ways to reduce them in order to expand lending to priority clients and to improve the viability of financial institutions. The purpose of this paper is to present a simple conceptual framework for transaction costs of financial transactions, to summarize some recent empirical evidence on transaction costs, and to suggest ways to reduce these costs. The next section presents the conceptual framework and the empirical estimates. The following section discusses ways to reduce high transaction costs. The final section offers some suggestions about contributions that donors can make to help developing nations to improve financial intermediation. FINANCIAL INTERMEDIATION COSTS IN DEVELOPING COUNTRIES The Concept of Transaction Costs Financial transactions entail non-financial costs for all participants in the market, i.e., depositors, borrowers, and financial intermediaries. The level and distribution of these costs among the participants are affected by changes in technology, by changes in consumer preferences, by financial regulations, and by the internal efficiencies of financial institutions. A framework in which to conceptualize these costs is presented in Figure 1. "d" represents the deposit interest rate paid by the financial intermediary to the depositor. "i" represents the lending rate charged to borrowers. Depositors incur search and information costs to select a depository institution, and to perform account transactions (deposits, withdrawals). These costs correspond to "cs" in Figure 1. Therefore the net return received by depositors per unit of deposits is "d-c5". At the other end, borrowers also bear explicit and implicit costs of negotiating, obtaining and repaying loans. Non-financial transaction costs incurred by financial intermediaries may be classified into costs of mobilizing deposits (em), and costs of lending (G). The former correspond to resources (labor, capital, materials) utilized in handling deposit accounts, documentation, record-keeping, and issuing statements. Costs of lending refer to costs associated with loan processing, disbursement, monitoring, and recovery. Gathering information about potential borrowers, assessment of collateral and documentation are among these lending costs. The interest rate charged on loans represents the income earned by the financial intermediary to cover interest paid on deposits, costs of mobilizing funds, costs of lending, and a net surplus (N) or profits which may be positive or negative. In addition to the explicit resource costs of lending, financial intermediaries in developing countries often experience high risk costs, i.e. the implicit costs and explicit losses associated with loan default.