INDIAN FINANCIAL

SYSTEM

Made by :- Arun Mehra

(BUEST)
Indian financial system
A financial system is a system that allows
the exchange of funds
between lenders, investors, and borrowers.
Financial systems operate at national,
global, and firm-specific levels. They consist
of complex, closely related
services, markets, and institutions intended
to provide an efficient and regular linkage
between investors and depositors.
Structure of Indian financial
system
 A financial system is a system that allows the
exchange of funds between lenders, investors,
and borrowers. Financial systems operate at
national, global, and firm-specific levels. They
consist of complex, closely related
services, markets, and institutions intended to
provide an efficient and regular linkage between
investors and depositors.

Financial institutions
There are two types of financial institutions

1. Banking institutions
2. Non banking institutions

Types of financial institutions

 Banking institutions

There are basically four types of banking

institutions

1. Commercials banks
2. Co-operative banks
3. Regional rural banks
4. Foreign banks
 Commercial banks accept deposits and provide security
and convenience to their customers. Part of the original
purpose of banks was to offer customers safe keeping
for their money.

 Commercial banks also make loans that individuals and

businesses use to buy goods or expand business
operations, which in turn leads to more deposited funds
that make their way to banks. If banks can lend money
at a higher interest rate than they have to pay for funds
and operating costs, they make money.

Commercial banks
 Commercial banks are of two types
1. Private banks
2. Public banks

Private banks :- The term private

banking refers to a customized line of banking & financial
services offered to private individual banking clients that
earn high levels of income and/ or owning sizable
investment assets, such as 'High Net Worth Individuals'
(HNWIs).

Public banks :- Public Sector Banks (PSBs)

are banks where a majority stake (i.e. more than 50%) is
held by a government. The shares of these banks are
listed on stock exchanges. There are a total of 22PSBs in
India.
 Cooperative banks

Cooperative banks are owned by their customers

and follow the cooperative principle of one person,
one vote. Co-operative banks are often regulated
under both banking and cooperative legislation.
They provide services such as savings and loans
to non-members as well as to members, and
some participate in the wholesale markets for
bonds, money and even equities.
 Regional rural banks
 Regional Rural Banks (RRBs) are scheduled commercial
banks (Government banks) operating at regional level in
different States of India. They have been created with a view
to serve primarily the rural areas of India with basic banking
and financial services. However, RRBs may have branches
set up for urban operations and their area of operation may
include urban areas too.
 The area of operation of RRBs is limited to the area as
notified by Government of India covering one or more districts
in the State. RRBs also perform a variety of different
functions. RRBs perform various functions in following heads:
• Providing banking facilities to rural and semi-urban areas.
• Carrying out government operations like disbursement of
wages of MGNREGA workers, distribution of pensions etc.
• Providing Para-Banking facilities like locker facilities, debit
and credit cards.
• Small financial banks.
 Foreign banks

A foreign bank is a bank that is obligated to

follow the regulations of both the home and
host countries. Because the foreign ranch
banks loan limits are based on the parent
bank’s capital, foreign banks can provide more
loans than subsidiary banks.
for example, suppose the SBI opens a
foreign branch bank in America. The branch
would be legally obligated to follow both Indian
and American banking regulations.
 facilitate financial services like investment and
risk pooling, and market brokering. They
generally do not have full banking licenses or
are not supervised by a bank regulation agency.
Non-bank financial institutions include:
• Finance and loan companies
• Insurance companies
• Mutual funds
• Commodity traders

Non banking institutions

 The financial market is a broad term describing
any marketplace where trading of securities
including equities, bonds, currencies and
derivatives occur. Some financial markets are
small with little activity, while some financial
markets like the New York Stock
Exchange (NYSE) trade trillions of dollars of
securities daily.

Financial markets
 Types of financial markets

There are two types of financial markets

1. Unorganized market
2. organized market
 1.Unorganized sector
 In the case of Indian Banking System, indigenous bankers are
included in the unorganized sector

 Indigenous bankers include those individuals and banks who

accept deposits or depend on credit to run their business

 They deal with short-term credit instruments namely undies for

the purpose of providing financial help for goods and services

 The rate of interest charged by them fluctuates directly with the

need and time period of the borrowers and may sometimes be as
high as 300 percent

 They are the major sources of funds for small borrowers on

account of simple documentation and funds are made available to
the borrowers at any time during a day.
2.Organized market
 The institutions which are controlled by the
central bank of the country namely RBI, SEBI,
IRDA are called as institutional or organized.

 Organized sector is classified into two categories

namely – banking institutions and non banking
financial institutions

 The following institutions are under the purview

of organized sector – Small Industries
Development Bank of India, National Bank for
Agriculture and Rural Development, National
Housing Bank, Export-Import Bank of India etc.,
 Types of organized markets

1. Capital market
2. Money market

Capital market:- A capital market is a financial

market in which long-term debt (over a year)
or equity-backed securities are bought and
sold. Capital markets channel the wealth of savers
to those who can put it to long-term productive
use, such as companies or governments making
long term investments.
 Types of capital market
There are two types of capital market

1. Primary Market :- Otherwise called as New Issues

Market, it is the market for the trading of new
securities, for the first time. It embraces both initial
public offering and further public offering. In the
primary market, the mobilization of funds takes place
through prospectus, right issue and private placement
of securities.

2. Secondary Market :- can be described as the

market for old securities, in the sense that securities
which are previously issued in the primary market are
traded here. The trading takes place between investors,
that follows the original issue in the primary market. It
covers both stock exchange and over-the counter
market.
 Money market
Money market comes under the preview of
RBI. It can be defined as a market for short
term money and financial assets that are near
substitute for money.

Features:-1. money market deals with notice

money, term money, commercial bills etc.
2. The sub market has a close relationship and
free movement from one submarket to another
3. Money market is impersonal in character so
that competition is relatively pure.
 Financial instrument
Financial instruments are assets that can be
traded. They can also be seen as packages of
capital that may be traded. Most types of financial
instruments provide an efficient flow and transfer
of capital all throughout the world's investors.
These assets can be cash, a contractual right to
deliver or receive cash or another type of financial
instrument, or evidence of one's ownership of an
entity.
 Types of financial instrument
There are two types of financial instruments
1. Cash instrument
2. Derivative instrument

1. Cash instrument:-The values of cash

instruments are directly influenced and determined by the
markets. These can be securities that are easily transferable.
Cash instruments may also be deposits and loans agreed upon
by borrowers and lenders.

2. Derivative instrument:-The value and

characteristics of derivative instruments are based on the
vehicle’s underlying components, such as assets, interest rates
or indices. These can be over-the-counter (OTC) derivatives
or exchange-traded derivatives.
 Financial services

Financial services are the economic

services provided by the finance industry, which
encompasses a broad range of businesses that
manage money, including credit
unions, banks, credit
cards companies, insurances companies,
accountancy companies, consumer-
finance companies, stock brokerages, investment
funds, individual managers and
some government-sponsored enterprises.
 Types of financial services

There are two types of financial services

1. Fund based services

2. Fee based services
 Fund based services
It refers to service that are used to acquire assets or funds
for a customer. It consist of
1. Primary market activities
2. Secondary market activities
3. Foreign exchange activities
4. Specialized financial services

Important fund based services include:-

- Leasing
- Hire purchase
- Factoring
- Mutual funds
- Bill discounting
- Credit financing
- Housing finance
 Fee based services
When financial institutions operate in
specialized fields to earn income in form of
fee, commission, brokerage or dividends it
is called fee based service. They include –
- Issue management
- Portfolio management
- Corporate counseling
- Merchant banking
- Credit rating
- Stock broking
 Functions of Indian
financial system
1. It bridges the gap between savings and
investment through effective mobilization
and allocation of surplus funds.
2. It helps a business in capital formation.
3. It helps in minimizing risk and allocating
risk efficiently.
4. It facilitates of trading of financial assets
instrument by developing and evaluating
financial market.
 Importance of Indian
financial system

1. It accerlates the rate and volume of savings

through provision of various financial
instruments and efficient mobilization of
savings.
2. It protect the interest of investors and ensures
smooth financial transactions through
regulatory bodies such as RBI,SEBI etc.
3. It helps economic development and raising the
standard of living of people.
4. It aids in financial deepening and financial
broadening
Features of Indian financial
system

1. It plays a vital role in economic

development of a country.
2. It encourages both savings and
investments.
3. It links savers and investors.
4. It helps in allocation of risks.
5. It facilitates expansion of financial
markets