Assignment 1

Name – Harsh Jadhav

Roll no. – PGP/25/275

There are two ways to organise a financial system.

1. According to a bank account
2. According to the Market System According to a Bank:
This financial paradigm mainly relies on banks to divert savings to productive purposes. The
German and Japanese economies rely largely on banks to mobilise deposits, allocate funds,
supervise the investment decisions of company managers, and provide risk management
instruments. Since borrowers must personally contact lenders, the system is more
relationship-based. This occurs frequently in practically every emerging market. In countries
such as India, where the government is directly involved in industrial development, bank-
based methods are more effective. In order to preserve vital resources for socially beneficial
applications, a number of emerging nations, like India, are hesitant to fully delegate credit to
market forces. All eligible Indian residents have access to a standard set of credit policies
and programmes, such as the Prime Minister's Awas Yojana and educational loans. There
are multiple layers of influence in the banking industry. First and foremost are bank lending
requirements and quotas; second and third are refinancing programmes; fourth is low-
interest loans; fifth is credit guarantees, and sixth are loans from development finance
organisations. These measures have had a substantial impact on India's economic
development and growth.

System Relying on the Market

In market-based financial systems such as the United Kingdom or the United States, it is the
responsibility of the securities markets, not banks, to transfer societal funds to businesses,
exercise corporate governance, and provide risk management. Indirectly and directly,
through mutual funds, pensions, and insurance, atomic home savers contribute to the
market system. One of the primary goals of the system is to achieve a state of apathy.
Through financial markets, savings are channelled directly to businesses and governments.
Short-term securities, such as commercial papers, may be traded on the equity, bond, and
money markets. The existence of other markets, such as foreign exchange and derivatives
such as futures, swaps, and options, facilitates calls.
Financial systems in higher-income nations tend to be more market-based than those in
lower-income nations.
As nations grow richer, banks and stock markets expand and become more active. In
contrast, banks in affluent nations are becoming less active and productive. Thus, market-
based economic systems are becoming increasingly prevalent. Countries with a long history
of common law, robust protections for shareholder rights, and stringent rules for accounting
and auditing tend to have more market-based economies.
As nations become more rich, financial institutions such as banks and stock markets flourish
and become more active. Conversely, banks in higher-income nations become less active
and effective. Thus, market-based economic systems are becoming increasingly prevalent.
There is little doubt that societies with a common law tradition, comprehensive protections
for shareholder rights, solid accounting standards, low levels of corruption, and no explicit
deposit insurance are more market-based.

Conclusion

The social, economic, cultural, and legal conditions of India require a balanced system (or a
combination of bank and market-based techniques). India still requires a bank-based
system, but as its economy grows, it must adapt to a market-based structure.
Financial intermediaries and market-based institutions will be of assistance as India
progresses toward a more balanced and healthier economy. As competition and the
availability of a larger and deeper pool of capital increase, fund users enjoy greater flexibility
and improved service. A balanced system serves as a safety net during economic downturns
by providing a variety of financial resources. If the banking system is struggling, capital
markets may provide an alternative source of funding. When the liquidity of the capital
market is low, banks may be depended upon to intervene.
How effectively monetary authorities can provide credit to economically deprived places will
be one of the most crucial challenges. Frequently, the Reserve Bank of India (RBI) conveys
its policy stance through the use of interest rates. Monetary policy signals must be
translated into changes in bank lending rates for this channel to function.