Mobilization of Funds of Commercial Banks

27/09/2022 0 By indiafreenotes

Mobilization funding provides the capital needed to cover costs before work begins on a project or prior to invoicing. This can include such things as the transfer of both equipment and manpower, the installation of equipment at the project site, personnel lodging and allowance, insurance, and payroll.

Similar to purchase order financing, mobilization funding provides a financial cushion so you are able to keep your projects moving effectively and efficiently from invoice to invoice. This funding option allows contractors to take on larger projects, while giving peace of mind that there will be monetary coverage for materials and labor from start to finish.

  • Economy consists of huge number of enterprises and individuals, requirements of all of them differ. Some have surplus cash to save, while some other needs cash.
  • Some firms/individuals wants to make good there short term liquidity requirements, some wants money for long term capital investment.
  • So distinction can be made as to period for which one intends to lend or borrow. In this sense financial market is categorized into money market and capital markets. In Money market, period involved (for funds movement) is 1 year or less, while in capital markets period is generally more than 1 year.
  • As economy of the country grows, highly specialized institutions comes up which caters exclusively to capital needs and banks continues its money market business. These institutions are known as Capital Market intermediaries.
  • These are intermediaries like insurance companies, housing finance companies, pension funds, and investment funds etc. which mobilize savings and fund long term investments.
  • Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets that are traded (also called the price discovery process). These facilitate trade in financial assets by providing platform for coming together of buyers and sellers or Borrowers or Lenders.
  • Stock exchanges are ‘markets’ (or mandis) where prospective buyer and seller meets and item traded is Shares, debentures, bonds etc. In early days, there was physical interface between two parties; there were mediators in stock exchanges, which for a commission used to negotiate the deal.
  • In present times stock markets indicate health of an economy. They are primary means of mobilization of long term savings and investment and fixed capital formation. Further, when volume of trade in markets is significant, it leads to transparent price discovery.
  • There are other forms of savings under which small denominations of savings gets together to form significant investment figures. These are mainly Insurance, Provident fund and pension Savings (also called contractual savings). These have an important social security angle, but here focus is on resource mobilization through them.
  • These funds have long maturity (repayment) period so they are better placed to cater need of projects with long gestation periods like infrastructure.
  • Angel investors who invest in small start-ups or entrepreneurs are another important source of resource mobilization in an economy. Often, angel investors are among an entrepreneur’s family and friends. The capital angel investors provide may be a onetime investment to help the business propel or an ongoing injection of money to support and carry the company through its difficult early stages.
  • Insurance: Insurance is service in which individual economic risk is spread over large number of people. Any loss that can be quantified in money can be insured. For e.g. Life Insurance provides risk cover on life of a person. Life cannot be quantified in itself, but economic hardships on survivors of a deceased breadwinner can be undoubtedly quantified in money terms, so this way life insurance can be done.
  • Mutual Funds: Different shares in the market carry different kind and degree of risks. So an investors instead of putting all eggs in one basket, diversifies its portfolio. He attempts to minimize his risk and maximize return by investing in both debt and equity and further within equity, he picks up various sectors; infra, textile, IT, Cement, Housing, banking etc.
  • Venture Capital (VC) which is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both).
  • Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake, in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes that some of the firms they support will become successful. Thus VC are another important source of resource mobilization in an economy.