INDIAN FINANCIAL SYSTEM

The Indian financial system is a collection of institutions and

markets that facilitate the exchange of assets and risks between
savers and investors. It's a vital part of the country's economy,
supporting growth and helping to direct funds to productive
activities.
“Financial system allocates savings efficiently in an economy to
ultimate users either for investment in real assets or for
consumption”. - Van Horne.

STRUCTURE OF INDIAN FINANCIAL SYSTEM

A financial system (within the scope of finance) 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.
Money, credit, and finance are used as media of exchange
in financial systems. They serve as a medium of known value for
which goods and services can be exchanged as an alternative
to bartering.
A modern financial system may include banks (operated by
the government or private sector), financial markets, financial
instruments, and financial services.
 o Organized sector: This sector includes banks, financial
institutions, NBFCs, insurance companies, etc. This
organized sector is also regulated. Official bodies like the
Reserve Bank of India or the Securities and Exchange
Board monitor their activities.

o Unorganized sector: This sector is not regulated. The

moneylenders, chit funds, or other institutions outside
regulations are present. They provide money to people
without bank accounts or sufficient collateral securities.

Financial system consists of four components:

• Financial Market
• Financial Institution
• Financial Instruments and
• Financial Services.
I) Financial Market:

It is a system through which funds are transferred from

surplus sector to the deficit sector. On the basis of the duration
of financial Assets and nature of product money market can be
classified into three types:

a) Money Market:

It is the institutional arrangement of borrowing and lending

into 2 sectors i.e. organised sector headed by RBI and
unorganized sector no way related with RBI. Further depending
upon the type of instrument used, money market is divided into
various sub market

b) Capital Market:

It deals with long term lending’s and borrowings. It is a

market for long term instruments such as shares, debentures
and bonds. It also deals with term loans. This market is also
dividend into 2 types:-

➢ Primary or New Issue Market

➢ Secondary Market of Stock exchange.

c) Foreign Exchange market:

It deals with foreign exchange. It is a market where the

exchanging of currencies will takes places.

It is the market where currencies of different country are

purchased and sold. Depending on the exchange rate that is
applicable, the transfer of funds takes place in this market. This
is one of the most developed and integrated market across the
globe.
d) Credit Market:

Credit market is a place where banks, FIs and NBFCs

purvey short, medium and long-term loans to corporate and
individuals.

II) Financial Institution: - It is classified into the following

categories and they are as follows:

a. Banking Institution:- It includes commercial banks, private

bank and foreign banks are operating in India. There are 27
Commercial Banks of Public Sector further, we have
Development Banks (ICICI, IDBI), Agriculture Bank (RRB,
Cooperative Banks, NABARD).

b. Non-Banking Institution: - These are established to mobilise

saving different modes. These institutions do not offer banking
services such as accepting deposit and Lending Loans. For
example: LIC, UTI, GIC.

Financial institutions are financial intermediaries. They

intermediate between savers and investors. They lend money.
They also mobilise savings.

III) Financial Instruments:

It includes through these instruments financial Institution

mobilise saving. These are of two types namely

a) Long Term : Shares, Debenture, Mutual Funds, Term Loans.

b) Short Term: Call Loan (money market), Promissory Notes,

Bills of exchange etc
IV) Financial Services:
a) Banking service: Banking service provided by Commercial
banks and Development banks. Accepting Deposits and
lending loans.
b) Non-Banking Services: These services are provided by
Non-Banking Companies such as LIC and GIC. They accept
saving in different modes and mobiles to various channels of
investments.
c) Other Services: In modern days banks are providing
various new services such as ATM, Credit Cards, Debit Cards,
Electronic Transfer of Funds(ETF),Internet Banking, E-
Banking, off shore Banking.

Financial regulatory bodies

Financial regulatory bodies established by the Indian
government have a specific and impactful role. These entities
oversee the country's various financial sectors and ensure these
sectors operate within the framework of defined laws and
regulations.

Reserve Bank of India (RBI):

• RBI, India's central banking institution, plays a critical role

in the country's financial landscape. It regulates commercial
and cooperative banks, as well as non-banking financial
companies.
• The RBI's responsibilities go beyond just overseeing banks.
It also handles currency management, sets monetary
policy, and works to keep the economy stable.
• It aims to balance economic growth with price stability,
regulate money supply, and set key interest rates.
Securities and Exchange Board of India (SEBI):

• SEBI stands at the forefront of regulating India's security

and capital markets, with its oversight extending to activities
related to stock exchanges, brokers, portfolio managers,
and mutual funds.
• SEBI implements rules and regulations to ensure
transparency and fairness in market transactions, thus
boosting investor confidence.
• It's instrumental in supervising corporate mergers and
acquisitions while protecting shareholder interests.
• Additionally, SEBI plays a crucial role in financial literacy
and investor education, empowering individuals to make
informed investment decisions.

Insurance Regulatory and Development Authority (IRDA):

• IRDA governs and regulates the insurance industry in India.

Its primary objective is to protect policyholder interests and
ensure the growth of the insurance sector in a stable
manner.
• IRDA's responsibilities encompass the licensing of insurers,
regulation of their operations, and protection of policyholder
interests.
• IRDA sets and enforces standards for insurance contracts,
claims processing, and settlement, aiming to build a
trustworthy and efficient insurance market.
Pension Funds Regulatory and Development Authority
(PFRDA):

• The Pension Funds Regulatory and Development Authority

looks after the pension sector in India.
• Its primary responsibility is to oversee the National Pension
System (NPS), a key scheme offering pension opportunities
to Indian citizens, including unorganized sector workers.
• PFRDA administers the licensing and regulation of pension
fund managers, ensuring their compliance with investment
guidelines and safeguarding subscriber interests.

Ministry of Corporate Affairs (MCA):

• MCA is at the forefront of corporate regulation in India. It

handles the enforcement of critical laws such as the
Companies Act and the Limited Liability Partnership Act.
• The essence of MCA's work lies in ensuring companies
and LLPs operate under a framework of transparency and
accountability.
• An integral part of its function is overseeing the Registrar of
Companies (RoC), the body responsible for corporate
administration.