Financial System & Financial Institutions

A brief Introduction

What is a Financial System?
• It is an orderly mechanism and structure available in an economy to mobilise the monetary resources or capital from various surplus sectors of the economy and allocating the same into various deficient sectors. • The group of different entities that are engaged in the task of garnering the monetary resources into a number of needy avenues in the economy will constitute the financial system.

What are Financial Institutions?
An institution (public or private) that collects funds (from the public or other institutions) and invests them in financial assets. They are organisations which facilitate mobilisation of monetary resources.



Evolution of Financial System
• The path of growth of the financial system in any developing economy can grossly be classified into three different phases:
• Active State Intervention: It is mainly with a view to build up institutional infrastructure so that the economy will be in a position to catch up with the developed countries. This phase is marked with a fast growth of financial systems creating a number of pitfalls and aberrations. • Partial Liberalisation: The complications in the system becomes a gross problem to handle, so simplification and rationalisation of the system becomes the main focus. • Total Liberalisation: Where maximum autonomy is provided for to the functionaries in the system so that they can emerge as global players.

Role of Financial Institutions
• The growth and development of an economy is a reflection of the growth and development of its financial system.
Fin Institutions




Fin Assets

• With effective mobilisation and productive deployment of funds the economy can ensure a faster growth, because this efficacy will reduce transaction cost and increase productivity of capital. • Thus more efficient a financial system the stronger is the economy.



Role of Financial Institutions
• • • • • • • • • • Role as a Financial intermediary financial Intermediary Role as a catalytic agent Role as a creator of money Role as a promoter Role as a counselor

1) Role as a Financial Intermediary
• FIs provide the means and mechanism of transferring command over resources from those who have an excess of income over expenditure to those who can make use of the same with a view to adding to the volume of productive capital.
Intermediates and acts as a link between the two segments of Investors and Spenders

• They pool the savings of myriads of people with typical characteristics of safety, liquidity and profitability (return.) – [Diversification of Risk and expert investment knowledge] • Besides acting as conduits of aggregation and then disaggregation of savings it also helps in a balanced allocation of funds among different industries and different sectors.



Role as a Catalytic Agent
• Financial Institutions play the role of a catalytic agent to bring about economic and social changes through dynamism and innovativeness in their operation. • Infrastructure development • Agricultural, Industrial and Entrepreneurship development. • All round development through induction of special assistance schemes for weaker and isolated sections of the society

Role as Creator of Money
• Through acceptance of public deposits and lending money against it for funding transactions they create further deposits.

Through Entrepreneurship and Project Financing.


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