Who came first: Saver or Borrower (Version 0.1)

Volume 1:

In the financial market, we basically have 2 parties of the transactions. Lender / Savers and Borrowers. Savers do saving for their future where Borrowers needs money to finance their current events. These events can be in terms of short term or long term requirement.

Short term can be,

• Buying food,
• Clothes,
• Home appliances,
• Personal celebrations like Marriage, Honeymoon etc.
• Home improvement

Long term can be,

• Buying a property like House, plot, commercial or residential
• Buying equipment’s like Manufacturing machines etc.

Savers save their money and get some sort of benefits for saving these funds we call it as Interest/ Profit. Whereas when borrower takes the money, he also needs to give the money (Principal) back and with more money which compensate the usage of principal funds for the duration, which we call as Interest. If these Savers and Borrowers deal with each other, before the deal there should be a trust factor that needs to build among them. As during this kind of one to one transaction, problem has started mostly from the Borrower side, where he refused to make re-payment of Principal + Interest on time and the trust has been broken.

Savers/ Lenders postpone their utilization of Money for the future and Borrower will utilize these servies/ products Now, with borrowed money. So in present Lender has Given Up the Money (P) and Borrower has Taken Up the Money (P). In future, Borrower needs to Give Up the Money (P) and Lender should Recover or Take Up the Money (P +I).

  

Event	Lender	Borrower
Present	Given Up the Money (P)	Taken Up the Money (P)
Future	Recover/ Taken Up the Money (P + I)	Give Up the Money (P + I)

Where there is small gap between the Lending the money and taking the money back, Liquidity arises. When there a big gap between the Lending the money and taking the money back, Liquidity problem becomes solvency problem. Liquidity problem are short term in nature and Solvency problems are long term in nature.

To build the trust, new parties has been started getting involved in these transactions. Who fill the gap of Trust between the Savers/ Lenders and Borrowers? These entities are Financial Institutions like Bank or NBFCs. When the new parties are getting involved in such type of transactions, it believed that the market conditions should get improved from both fronts i.e. Savings and Borrowings.

This Financial will set Interest rate from both sides of the transaction and difference of the interest applied from Saving and Borrowing side, profit will be booked for Financial Institutions. These are called SPEAD.

The process was going smoothly for all the 3 parties, Lending, Borrowing and Mediator. Note that, here Savers/Lender did not know to whom their funds are lying. Means whether their funds has been given to borrower or money has been kept in Banking lockers for provisioning. In this case savers/ lenders only need to contact with his or her Financial Institution.

In similar ways, the Borrower when take the money, it is the Financial Institution who lend the money to Borrower. Here in this case borrower did not know who’s money he is using. Borrower needs to repay the Principal + Interest to the FI on scheduled time and frequency.

The problem has not solved yet. The problem of getting Principal + Interest from Borrower. Trust factor has been increased due to availability of huge corpus of the Savers/ Lenders with FI and making this Money available as finance to the forward customers i.e. Borrowers. Borrowers again breaking these trust and not returning the money to FI, which intern the money of the Savers/ Lenders. One point needs to make is that, the Savers/ Lenders can be Inside or Outside customers to FI. Inside could be the Investors who put their money, to run the FI. Outside Savers/ Lenders could be individual customer or corporate customers.

As single individual can be a Saver/Lender or Borrower. For example a salaried employee saves funds in PF and can have home loan. Based on the saving behavior, FI and Government has come up with different types of saving products which give Interest/ profit differently. In similar way, from the borrower side, different product has come up to suite the needs of the parties.

To create money in the system, usually there are collateral which give support to the money created in the system. These collateral can be of the Real or Financial and that can be of the followings,

• Gold
• Silver
• Oil
• Plot or Lands
• Treasury Bills/ Notes / Bonds
• Cash Management Bills
• Currency Reserves (Again backed by world reserve currency like USD, EUR, GBO etc.)

Based on these collateral, new money gets circulated in the system, and FI believe that they will support the Economy.