Indian Financial System

UNIT - 1

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Prof. Bandita S Nikam
 Financial System
 A financial system is defined as a set of institutions,
instruments and markets that foster savings and channels
them to their most efficient use.
 An institutional framework existing in a country to enable
financial transactions
 The Indian Financial System is one of the most important
aspects of the economic development of our country. This
system manages the flow of funds between the people
(household savings) of the country and the ones who may
invest it wisely (investors/businessmen) for the betterment of
both the parties.

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Features of the Indian Financial System
 It plays a vital role in the economic development of the
country as it encourages both savings and investment
 It helps in mobilizing and allocating one’s savings
 It facilitates the expansion of financial institutions and
markets
 Plays a key role in capital formation
 It helps form a link between the investor and the one saving
 It is also concerned with the Provision of funds

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 The four main components of
the Indian Financial System Regulatio
n is
are: another
aspect of
the
financial
system
(RBI,
SEBI,
IRDA,
Financial Financial Financial Financial FMC)
Institutions Assets Services Markets

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 Financial Institutions
The Financial Institutions act as a mediator
between the investor and the borrower. The
investor’s savings are mobilized either
directly or indirectly via the Financial
Markets.
The main functions of the Financial
Institutions are as follows:
 A short term liability can be converted
into a long term investment
 It helps in conversion of a risky
investment into a risk-free investment
 Also acts as a medium of convenience
denomination, which means, it can match
a small deposit with large loans and a
large deposit with small loans

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The financial institutions can further be divided into two types:
 Banking Institutions or Depository Institutions – This includes banks
and other credit unions which collect money from the public against
interest provided on the deposits made and lend that money to the ones in
need
 Non-Banking Institutions or Non-Depository Institutions – Insurance,
mutual funds and brokerage companies fall under this category. They
cannot ask for monetary deposits but sell financial products to their
customers.
Further, Financial Institutions can be classified into three categories:
 Regulatory – Institutes that regulate the financial markets like RBI,
IRDA, SEBI, etc.
 Intermediates – Commercial banks which provide loans and other
financial assistance such as SBI, BOB, PNB, etc.
 Non Intermediates – Institutions that provide financial aid to corporate
customers. It includes NABARD, SIBDI, etc.

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Roles Performed by Financial Institution

Regulation of
Banking Services Insurance Services
Monetary Supply

Capital Formation Investment Advice Brokerage services

Financing the Small

Pension Fund
Trust Fund Services and Medium Scale
Services
Enterprises

Act as A Government
Agent for Economic
Growth

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 Financial Assets
The products which are traded in the Financial Markets are called Financial Assets.
Based on the different requirements and needs of the credit seeker, the securities in the
market also differ from each other.
 Call Money – When a loan is granted for one day and is repaid on the second day,
it is called call money. No collateral securities are required for this kind of
transaction.
 Notice Money – When a loan is granted for more than a day and for less than 14
days, it is called notice money. No collateral securities are required for this kind of
transaction.
 Term Money – When the maturity period of a deposit is beyond 14 days, it is
called term money.
 Treasury Bills – Also known as T-Bills, these are Government bonds or debt
securities with maturity of less than a year. Buying a T-Bill means lending money
to the Government.
 Certificate of Deposits – It is a dematerialized form (Electronically generated) for
funds deposited in the bank for a specific period of time.
 Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.
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 Financial Services
The financial services in India
The main aim
include: of the
financial
services is to
Insurance assist a
Banking Services – person with
Services – Services like Foreign selling,
Any small or issuing of Exchange borrowing or
big service insurance, Services – purchasing
provided by selling Investment Exchange of securities,
banks like policies, Services – It currency, allowing
granting a insurance mostly foreign payments and
loan, undertaking includes asset exchange, etc. settlements
depositing and management are a part of and lending
money, issuing brokerages, the Foreign and
debit/credit etc. are all a exchange investing.
cards, opening part of the services
accounts, etc. Insurance
services

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 Financial Markets
 The marketplace where buyers and sellers
interact with each other and participate in the
trading of money, bonds, shares and other
assets is called a financial market.

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 Mobilization of
Savings and
Facilitation of Channelizing
Price Discovery the Savings into
the most
Productive Uses

Providing Reduction of the

liquidity to cost of
financial assets transaction

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Capital Market – Designed to finance the long term
investment, the Capital market deals with • Corporate Securities Market
transactions which are taking place in the market for • Government Securities Market
over a year. The capital market can further be • Long Term Loan Market
divided into three types: (Primary & Secondary
also)

Money Market – Mostly dominated by Government,

Banks and other Large Institutions, the type of market is • Organized Money Market
authorized for small-term investments only. It is a • Unorganized Money Market
wholesale debt market which works on low-risk and
highly liquid instruments. The money market can further
be divided into two types:

Foreign exchange Market – One of the most

developed markets across the world, the Foreign
exchange market, deals with the requirements
related to multi-currency. The transfer of funds in
this market takes place based on the foreign
currency rate.

Credit Market – A market where short-term and

long-term loans are granted to individuals or
Organizations by various banks and Financial
and Non-Financial Institutions is called Credit
Market
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 Indigenous banking system is the system of banking that involves
private firms or individuals who act as banks by providing financial
services such as loans and accepting deposits.
 A moneylender is a person or group who typically offers small
personal loans at high rates of interest. The high interest rates
charged by them is justified in many cases by the risk involved.
 A trader is an individual who engages in the buying and selling
of financial assets in any financial market, either for themselves or
on behalf of another person or institution. The main difference
between a trader and an investor is the duration for which the
person holds the asset. Investors tend to have a longer-term time
horizon, while traders tend to hold assets for shorter periods of time
to capitalize on short-term trends.

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 Landlords typically use leases when they rent out their assets.
A lease is a legally binding contract that outlines the terms
under which one party agrees to rent property from another. It
guarantees the lessee or tenant the use of an asset and
guarantees that the lessor (the property owner or landlord) is
entitled to regular payments for a specified period in
exchange.
 Chitfund: A savings-cum-loan scheme in which a number of
contributors come together to invest a fixed sum every month.
The money is collected from the chit group and is put up for
auction every month. The investor who bids the lowest for the
total sum will win the lot. A commission has to be paid to the
Chit Fund Company. The surplus is distributed to all other
investors. The winner of the bid cannot bid the next month.

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https://www.angelone.in/knowledge-center/online-share-trading

https://www.youtube.com/watch?v=o9tnTnGf494
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Functions of Financial Systems in India

Saving Allocation of Liquidity Payment

Function Funds Function Function

Information Transferring
Risk Function Policy Function
Function Function

Finances
Reformatory Middlemen Capital
Government
Function Function Formation
Needs

Economic Other
Development Functions
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Role of Financial System in Economic Development

Facilitates production and exchange

Promotes savings
Promotes capital formation
Promotes productivity of capital
Increases efficiency in allocation of resources.
Increases supply of entrepreneurial skill
Trade Development

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Role of Financial System in Economic Development

Employment Generation
Financial infrastructure development
Balanced growth
Attracting foreign capital
Balanced regional development
Venture capital
Fiscal discipline and control of economy

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 Thank you

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