Financial System

Submitted By:

Nitin Singh(PGP/21/215)

Ashish Aryabarty(PGP/21/076)

There are two types of financial systems: Bank-based and Market based financial system. When we
talk about India, It functions in both form of the financial system but majorly it is bank based. The
financial system of India comes under the jurisdiction of the Ministry of Finance which in turn
governs the banking system through RBI and the market is governed by SEBI.

All countries are classified as having either a market based or bank-based financial system. The
conglomerate index of countries is based on Demigruc- Kunt and Levine (2001) research, is providing
an analysis of the size of the market, activity, and efficiency. Specifically, they measure the ratios of
banking sector development (size, activity, efficiency), relative to stock market development (size,
activity, efficiency).

They have classified countries with larger ratios of financial sector development, as a bank-based
system, and countries in which the conglomerate ratio of banking sector development is below the
mean are classified as market-based. This classification presents a number of complications. Because
some of these countries are identified as bank-based systems, even if their banking system is poorly
developed compared to other countries.

Historically, countries which are rich tend to be market-oriented like the US and thus any instability
in the market gives rise to a major economic downturn like the financial crisis.