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IFS - Module 1 - Part 1

The document provides an overview of the Indian financial system. It discusses the objectives and significance of the financial system, and describes its structure. The structure includes informal and formal financial systems. The formal system has regulatory bodies, financial institutions, financial markets, and financial services/instruments. It then explains some of these components in more detail, including the roles of various financial institutions and markets, as well as global regulatory bodies like the World Bank, IMF, and WTO.

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Dhrumi Patel
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59 views18 pages

IFS - Module 1 - Part 1

The document provides an overview of the Indian financial system. It discusses the objectives and significance of the financial system, and describes its structure. The structure includes informal and formal financial systems. The formal system has regulatory bodies, financial institutions, financial markets, and financial services/instruments. It then explains some of these components in more detail, including the roles of various financial institutions and markets, as well as global regulatory bodies like the World Bank, IMF, and WTO.

Uploaded by

Dhrumi Patel
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Financial System:

An Overview
Module 1
• Introduction to Indian Financial System: Objectives,
Significance & Functions of Financial System
• Structure of Indian Financial System: Regulatory Bodies,
Financial institutions, Financial Markets & Financial Services
• World Regulators
Introduction to Indian Financial System
• Meaning of Financial System
• ‘Finance’ is a monetary wealth of a state, an institution, or a person.
• ‘System’ implies a set of complex and inter-related factors organized in a particular
form.

• It is a complex, well-integrated set of sub systems of financial institutions,


markets, instruments, and services which facilitates the transfer and
allocation of funds, efficiently and effectively.
Objectives of Indian Financial System
• To accelerate the growth of economic development
• To encourage rapid industrialization
• To act as a medium to various economic factors such as industry, agricultural
sector, government, etc.
• To provide necessary financial support to industry
• To finance housing and small-scale to industry
• To accelerate development of backward and rural areas, infrastructure, and
livelihood
• To control the interest rate
• To safeguard the financial environment
Significance of Indian Financial System
• Link between depositors and savers
• Encourages savings and investments
• Facilitates expansion of financial markets
• Promotes banking sector/financial institutions
• Efficient operation of payment mechanism
• Allocation of financial resources
• Influences the pace of economic development
Structure of Indian Financial System

Informal Formal
Financial Financial
System System

5
Informal Financial System
Informal finance sector consists of those, often unrecorded, money lending and borrowing
activities that take place outside official/organised financial institutions. These financial
transactions may take place between relatives, friends, local money lenders, etc. Most of the
informal financial transactions do not have any standard rule and they are not recorded
with legal stamp and signature. But, in spite of not conducting any legal formalities, these
transactions are legal. They can only be referred as unregulated and unstandardized.

Advantages
• Low transaction costs
• Minimum default risk
• Transparency of procedures
Disadvantages
• Wide range of interest rates
• Higher rates of interest
• Unregulated
6
Formal Financial System
The formal financial system is a regulated market where any kind of
money lending and borrowing activity is done under the set of various
norms and rules. These rules are set by various Regulatory bodies and are
approved by Ministry of Finance and Government. This sector includes
financial institutions like: banks, investment funds, insurance companies and
real estate companies.
Components
• Financial Institution
• Financial Markets
• Financial Instruments
• Financial Services
7
Financial Institutions
Financial Institutions are responsible for financial transactions. It is a medium
between those who have access money to invest and those who needs money. These
institutions also work as a medium to save money in present period in order to reap
future benefits. Following are various types of financial institutions:
• Banking institutions
• Non-banking financial institutions (NBFC – not having license to be called as bank
but performing bank like services)
• Other Financial Institutions
• Development Institutions (EXIM, NABARD, IDBI, Etc)
• Mutual Fund Institutions
• Insurance Companies
• Broking Firms/ Wealth Management Companies
• Etc.
9
Financial Institutions

Lenders   Borrowers

Financial Institutions
Financial Markets
Financial Markets are platforms to set up various financial institutions and
help borrowers (buyers) and lenders (sellers) meet. Here, various
instruments (Ex: treasury bills, equity shares, bonds, etc.) are sold for
money. They are sold in physical markets in financial institutions or in
online market (referred as Exchanges).
• Types
• Money Market
• Capital Market
• Segments
• Primary Market
• Secondary Market
11
Functions of Financial System
• Controlling Function
• Controlling function is exerted by various regulatory bodies.
• Promotional Function
• The financial services are promoted by institutions and
regulatory bodies in order to make people aware and help
people make good use of financial services in order to
secure future by earning returns on their investments.

12
Regulatory Bodies of India
(Explained in detail in later chapters)

Reserve Bank of India (RBI)

Security Exchange Board of India (SEBI)

Insurance Regulatory & Development Association (IRDA)

Department of Economic Affairs

Ministry of Corporate Affairs/ Department of Company Affairs

13
Global Regulators
• World Bank

• International Monetary Fund (IMF)

• World Trade Organization (WTO)


World Bank
• With 189 member countries, staff from more than 170 countries, and offices
in over 130 locations, the World Bank Group is a unique global partnership:
five institutions working for sustainable solutions that reduce poverty and
build shared prosperity in developing countries.
• The World Bank Group has set two goals for the world to achieve by 2030:
• End extreme poverty by decreasing the percentage of people living on less than
$1.90 a day to no more than 3%
• Promote shared prosperity by fostering the income growth of the bottom 40% for
every country
• Head: Kristalina Georgieva
• Head Office: Washington, US
International Monetary Fund (IMF)
• The IMF promotes itself as “an organization of 188 countries, working
to foster global monetary cooperation, secure financial stability,
facilitate international trade, promote high employment and
sustainable economic growth, and reduce poverty around the world.” It
was created in 1944, in the wake of the Great Depression, as part of
the Bretton Woods Agreement.
• Head: Christine Lagarde
• Head Office: Washington, US
World Trade Organization (WTO)

• The World Trade Organization (WTO) claims to be “the only global


international organization dealing with the rules of trade between nations.”
The WTO’s efforts center on developing trade agreements between nations
to encourage cross-border commerce. This includes setting up the
agreements, interpreting the agreements, and facilitating dispute settlement.
• Officially founded in 1995, the WTO traces its roots back to Bretton Woods
where the General Agreement on Trade and Tariffs (GATT) was crafted in
an effort to encourage and support trade between nations.
• The WTO headquarters is located in Geneva, Switzerland. Like the IMF and
the World Bank, the WTO is funded by its members.
Thank You!

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