Indian Financial system

INDIAN FINANCIAL SYSTEM

Introduction: Economic growth and development of any country depends upon the existence of a well organized financial system. Financial system comprises a set of sub-systems of financial institutions, financial markets, financial instruments and services which help in the formation of capital. Thus a financial system provides a mechanism by which savings are transformed into investments. Thus it can be said that financial system plays a significant role in economic growth of the country by mobilizing surplus funds and utilizing them effectively for productive purpose.

Financial System;

Financial institutions Financial Markets Financial Instruments Financial Services

The word "system", in the term "financial system", implies a set of complex and closely connected financial market, financial instruments and financial institutions and financial services. Role/ Functions of Financial System: Provision of liquidity

The major function of financial system is the provision of money and monetary assets for the production of goods and services. In financial language, the money and monetary assets are referred to as liquidity. The term liquidity refers to cash and other assets which can be converted into cash readily without loss.

Mobilisation of savings

Another important activity of the financial system is to mobilize savings and channels them into productive activities. The financial system should offer appropriate incentives to attract savings and make available to the productive ventures.

Components/ Constituents of Indian Financial system: The following are the four main components of Indian Financial system 1. Financial institutions 2. Financial Markets 3. Financial Instruments/Assets/Securities 4. Financial Services. Financial institutions: Financial institutions are the intermediaries who facilitates smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities. They provide whole range of services to the entities who want to raise funds from the markets. Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers. Were these financial institutions may be of Banking or Non-Banking institutions.

Banking institutions

a. Organised sector:- the organized banking sector consists of commercial banks, cooperative banks and the regional rural banks. They are under the control of RBI. The RBI as the apex institution organizes, supervises, regulates and develops the monetary system and financial system of our country.

b. Un orgnised sector:- The unorganized banking sector are the indigenous bankers, money lenders etc. They are under the direct control of RBI.

Non banking Institutions

a. Development finance institutions: Development banks provide medium and long term finance to the corporate and industrial sector. Example IDBI, ICICI, IFCI, NABARD.

b. Investment Institutions. It includes those financial institutions which mobilize savings of public at large through various schemes and invest these funds in corporate and government securities.

Financial Markets: Finance is a prerequisite for modern business and financial institutions play a vital role in economic system. It's through financial markets the financial system of an economy works. The main functions of financial markets are: 1. to facilitate creation and allocation of credit and liquidity; 2. to serve as intermediaries for mobilization of savings; 3. to assist process of balanced economic growth; 4. to provide financial convenience

Financial market is divided into money market and capital market.

a. Money market:- is a market which deals short term securities which matures within a year. It is a collective name given to various firms and institutions that deals in the various grades of near money.

b. Capital market:- is a market which deals long term securities . It is an institutional arrangements for facilitating the borrowing and lending of long term funds.

Financial Instruments

Another important constituent of financial system is financial instruments. It will be a claim against a person or an institution, for the payment of the some of the money at a specified future date. It includes money market securities like certificate of deposit, commercial paper, commercial bill, treasury bills etc..and capital market securities like equity shares, preference shares, debenture etc...

Financial Services: Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries. The term financial services can be defined as "activities, benefits and satisfaction connected with mobilization and allocation of savings. example mutual funds, factoring, venture capital, options etc..