The Indian financial system can be briefly classified into formal financial system and the informal financial system. The formal financial system comprises of Ministry of Finance, RBI, SEBI and other regulatory bodies. The informal financial system consists of individual money lenders, group of persons operating as funds or associations, partnership firm consisting of local brokers, pawn brokers, and non-banking financial intermediaries such as finance, investment and chit fund companies.
The formal financial systems comprises financial institutions, financial markets, financial instruments and fmancial services. These components of Indian financial system may be briefly discussed as below.
1. Financial institutions:
Financial institutions are the participants in a financial Market. They are business organizations dealing in financial resources. They collect resources by accepting deposits from individuals and institutions and lend them to trade, industry and others. They buy and sell financial instruments. They generate financial instruments as well. They deal in financial assets. They accept deposits, grant loans and invest in securities.
Further, financial institutions may be classified into three categories;
a) Regulatory and promotional institutions
b) Banking institutions
c) Non-banking institutions
a) Regulatory and promotional institutions:
Financial institutions, financial markets, financial instruments and financial services are all regulated by regulators like Ministry of Finance, the Company Law Board, RBI, SEBI, lRDA, Dept. of Economic Affairs, Department of Company Affairs etc. The two major Regulatory and Promotional Institutions in India are Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBl). Both RBI and SEBl administer, legislate, supervise, monitor, control and discipline the entire financial system.
b) Banking Institutions:
Banking institutions mobilise the savings of the people. They provide a mechanism for the smooth exchange of goods and services. They extend credit while lending money. They not only supply credit but also create credit. There are three basic categories of banking institutions. They are commercial banks, co-bperative banks and developmental banks.
c) Non-Banking Institutions:
The non- banking financial institutions also mobilize financial resources directly or indirectly from the people. They lend the financial resources mobilized. They lend funds but do not create credit. Companies like LIC, GIC, UTI, Development Financial institutions Organisation of Pension and Provident etc.
2. Financial Markets:
Financial markets are another part of financia system. The financial markets enhances the efficiency of capital formation. It facilitates the flow of savings into investment. Financial markets bridge one set of financial intermediaries with another set of players. Financial markets are the backbone of the economy. This is because they provide monetary support for the growth of th economy.
Financial market deals in financial securities (or financial instruments) and financial services. Financial markets are the arrangements that provide facilities for buying and selling of financial claims and services. These are the markets in which money as well monetary claims and services.
In short, financial markets are markets that deal in financial assets and credit instruments.
3. Financial instruments (Securities):
Financnal instruments can alse be Classifed into primary instruments and secondary instruments. Primary instruments are Instruments that are directly issued by the ultimate investors to the ultimate savers. For example, shares and debentures directly issued to the public. Secondary instruments are issued by the financial intermediaries to the ultimate savers. For example, UTI and mutual funds issue securities in the form of units to the public.
4. Financial Services:
The financial institutions and financial markets help the financial system through financial instruments. The Financial Service include all activities connected with the transformation of savings into investment. Important financial services include lease financing, hire purchase, installment payment system, merchant banking, factoring for forfeiting etc.
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