The financial system of a country is an important tool for economic development of the country,, as it helps in creation of wealth by linking savings with investments. The Indian Financial System is one of the most important aspects of the economic development of our country.
Like any other country, the financial system of India comprises of financial markets, financial intermediaries, and financial instruments.
FUNCTIONS OF INDIAN FINANCIAL SYSTEM
- It acts as an intermediary between depositors and investors.
- It helps to maintain the economic stability in the country and the markets.
- It helps a business in capital formation.
- It facilitates financial transactions through provision of various financial instruments.
- It facilitates the expansion of financial institutions and markets
COMPONENTS OF FINANCIAL SYSTEM OF INDIA
There are 4 main components of Indian financial system which are discussed below –
- FINANCIAL INSTITUTIONS –
These are intermediaries of financial markets which facilitate financial transactions between individuals and financial customers. These are of 2 types-
- Banking 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 – These are firms and companies that deal in brokerage, insurance, and mutual funds to collect money deposits. & can also sell financial products.
- FINANCIAL MARKETS –
The markets where trade and exchange of bonds, shares, money, investments, and assets take place between buyers and purchasers are called financial markets. These are of 4 types-
- Capital Markets- These markets deal in long terms securities, i.e. securities that have a maturity period of more than one year.
- Money Markets- These markets deal with short-term debt instruments that have a maturity period of less than one year.
- Foreign Exchange Market – The Foreign exchange market, deals with the requirements related to multi-currency where the transfer of funds takes place based on the foreign currency rate.
- Credit Market –In this market short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions.
- FINANCIAL ASSETS –
Financial assets include cash deposits, checks, loans, commercial paper, call money and all other financial instruments which are traded in a financial market. These are listed below-
- Call Money – Without any assurance, this is a loan lent for just a day which is repaid the next day.
- Notice Money:Without any assurance, this is a loan rent for more than a day but less than a duration of 14 days.
- Term Money:When the duration of the maturity of a particular amount deposited is more than 14 days.
- 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 dematerialised 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.
- FINANCIAL SERVICES-
Financial services are concerned with provision of financial instruments and advisory services to individuals & businesses related to banking, leasing, investment, insurance & foreign exchange services etc.
Thus, in simple words the Indian Financial System refers to all institutions, structures, and services that provide pecuniary facilities to the public & also promote savings by channelising them to the most efficient use.