Indian Financial System

Financial system plays a vital role in the economic development of a country. The financial system intermediates the flow of funds from the savers to the investors.
A financial system is a complex, well-integrated set of sub-systems of financial regulators, Institutions, Instruments, Markets and Services which facilitates the transfer and allocation of the funds efficiently and effectively.
The Indian financial system is broadly divided into two systems . They are

• Formal Financial system (Organized)
• Informal Financial system (Unorganized)

Informal Financial system (Unorganized)
Ex :- Money lenders, relatives, landlords, saving clubs etc..

Advantages

• Low transaction cost
• Minimum default risk
• Transparency of the procedure

Disadvantages

• Interest rates are high
• unregulated

Formal Financial system (Organized)

It has four components or segments ans they are as follows

1. Financial Institutions
2. Financial Markets
3. Financial Instruments
   
4. Financial services

All the above four components are regulators by specific regulators
ex :- Capital Market - SEBI
Money market - RBI
Now we will grow through quickly about all the four components

Structure of Indian Financial System

1. Financial Institutions
   

These are the intermediaries that mobilise the savings and facilitates the allocation of the funds to the investors in an efficient and effective manner.

They are further classified into

• Banking Institutions
• Non-Banking Institutions
• Mutual Funds
• Insurance and housing Finance companies.

2. Financial Markets

These are mechanism enabling participants to deal in financial claims.

Types of Financial Markets

1. Money Markets :- short term debt instruments
2. Capital Markets :- Long term equity and debt instruments

Segments of Financial Markets

1. Primary Markets:- A market for new/fresh/initial issues
2. Secondary Markets :- A market for trading of the outstanding issues
   

3. Financial Instruments

This is a claim against a person or an institution for payment, at a future date, of a sum of money and/or a periodic payment in the form of interest or dividend.
This are marketable and tradeable in the primary and secondary market.

ex:- Bonds, debentures etc..

4. Financial services

The services linked with

• borrowing and funding
• lending and investing
• buying and selling securities
  
• making and enabling
  
• payments and settlements and
  
• managing risk exposures in financial markets.

ex:- Credit Rating, Leasing, Hire Purchase etc...

Functions of financial Systems

• Mobilise and allocate savings
• Monitor corporate performance
• Provide payment and settlements system
• optimum utilization of risk-bearing and reduction
• Disseminate price-related information
• Portfolio adjustment facility
• Lower the cost of transaction
• Process of financial deepening and broadening