The process of capital formation consists of the following steps :
(1) Creation of Savings : It is the first step in the process of capital formation. It is savings which are transformed into capital. If there is no saving, there cannot be any capital formation, even if all other conditions are favourable for capital formation. Savings are done by households and it depends on their income and willingness to save.
(2) Mobilization of Savings : If savings are kept in the form of idle cash at home, they will not lead to capital formation. In this case, the rate of investment in the country will be low, even though the rate of saving is high. The savings must be mobilized from the savers. In a modern society, financial and other institutions as well as the capital markets perform this function. People may keep their savings in the banks or other financial institutions. They can also buy shares or bonds issued by companies.
(3) Investment of Mobilized Savings : Even mobilization of savings is not sufficient for a high rate of capital formation. The mobilized savings must be actually used by producers for the purpose of investment. For instance, the money kept by the people in the banks must be lent out by the banks to the producers who can use the money, for ex., installing new machines in their factories.