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Structure of Indian Financial System

The document defines the Indian financial system as the set of interrelated activities, markets, institutions, instruments and services that influence savings, investment, capital formation and growth. It includes two main parts - finance and the system. Finance refers to the sources that provide funds for activities, while the system implies a complex set of closely connected institutions, agents, practices, markets and transactions. The financial system allows the exchange of funds between lenders, investors and borrowers through money and credit at the national, global and firm levels. It serves as an alternative to barter and includes elements like banks, markets, instruments and services that allocate funds between economic sectors.

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Anamik verma
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929 views

Structure of Indian Financial System

The document defines the Indian financial system as the set of interrelated activities, markets, institutions, instruments and services that influence savings, investment, capital formation and growth. It includes two main parts - finance and the system. Finance refers to the sources that provide funds for activities, while the system implies a complex set of closely connected institutions, agents, practices, markets and transactions. The financial system allows the exchange of funds between lenders, investors and borrowers through money and credit at the national, global and firm levels. It serves as an alternative to barter and includes elements like banks, markets, instruments and services that allocate funds between economic sectors.

Uploaded by

Anamik verma
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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UNIT-1

INDIAN FINANCIAL SYSTEM


 The term financial system is a set of inter-related
activities/services working together to achieve
some pre-determined purpose or goal.
 It includes different markets, the institutions,
instruments and services which influence the
generation of savings, investment, capital
formation and growth.
 It can be categorised in two parts:
1. Finance, and
2. System

Dr. Mayank Malviya


1. The term "finance" in our simple understanding it
is perceived as equivalent to 'Money'.
 But finance exactly is not money, it is the source of
providing funds for a particular activity.
 Thus finance does not mean the money with the
Government, but it refers to sources of raising
revenue for the activities and functions of a
Government.
2. The word "system", in the term "financial system",
implies a set of complex and closely connected or
interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy.
 The financial system is concerned about money,
credit and finance-the three terms are intimately
related yet are somewhat different from each other

Dr. Mayank Malviya


 It is a system that allows the exchange of funds
between lenders, investors, and borrowers.
 It operates at national, global, and firm-specific
levels.
 Money and credit are used as media of exchange in
this system.
 It serve as a medium of known value for
which goods and services can be exchanged as an
alternative to barter system.
A modern financial system may
include banks (operated by the government or private
sector), financial markets, financial instruments
and financial services.
 It allows funds to be allocated, invested, or moved
between economic sectors.
Dr. Mayank Malviya
Dr. Mayank Malviya
Financial Assets/Financial Instruments:
 It is a tradable asset which can be in terms of cash,
agreement, evidence of an ownership in an entity; or
a contractual right which has the right to deliver cash
or any kind of asset.
 The types of financial instrument or assets used
worldwide are as follows:
a. Deposits:
 Deposit in a layman’s term, means to save or to keep
safely.
 Deposits can be made either with banking or non-
banking firm.
Dr. Mayank Malviya
b. Stock:
 Stocks represents the ownership of the issuing
company.
 It is a form of corporate equity ownership where
in the total stock of the company is divided into
shares.
c. Debts:
 Unlike the stocks, financial assets which are in
the form of debts create an obligation on the
borrower of the fund to repay the amount
borrowed.
 Example- Debentures, bonds, etc.

Dr. Mayank Malviya


Financial Markets:
 It is a market that allows people to involve themselves in
the buying and selling of financial securities i.e. shares,
debentures and bonds at prices that reflect the market’s
effectiveness.
 Following are the types of financial market:
a. Capital Market:
 Market where business enterprises or government
entities raise fund for long term using the weapon of
securities or debts.
 It includes the Stock market (equities) and Bond Market
(debt) for fund raising.

Dr. Mayank Malviya


b. Money Market:
 Deals with the assets involved in short-
term borrowing and lending with original
maturities ranging from a period of one
year or even lesser time frames.
 Example- Treasury bills, Certificate of
deposits, Commercial papers, etc.

Dr. Mayank Malviya


c. Foreign Exchange (FOREX) Market:
 It is a global, worldwide decentralized financial
market meant only for the trading of currencies.
 It is the largest market in the world and includes
all of the currencies in the world.
d. Credit Market:
 It is a market through which companies and
Government issue debts to investors.
 It is also called as bond or debt market.
 Example- Bills of exchange, promissory notes,
cheques, drafts, etc.

Dr. Mayank Malviya


Financial Intermediaries:
 Institutions that borrow funds from people who have
saved and make loans to other people.
 Example- broker agencies, banks, mutual funds,
pension funds, etc.
 It facilitates the channeling of funds between savers
and loan takers indirectly.
Role of Financial System:
1. Saving
2. Investment
3. National Growth
4. Entrepreneurship Growth
Dr. Mayank Malviya
Difference between saving and investment:
 Saving means keeping aside a part of
income.
 Example: Emergency fund keeping in
saving account or in home.
 Investment means putting the saved
money in various products to earn return
and growth of money.
 Example: Retirement plan
Dr. Mayank Malviya
Dr. Mayank Malviya
Functions of the Financial System:
1. Link between savers and investors.
2. Allocation of risk.
3. Price-related information available.
4. Minimizes unequal situations.
5. Reduce cost of transaction and
borrowing.
6. Financial expansion and development.

Dr. Mayank Malviya


Functions of the Financial Markets:
1. Creation and allocation of credit and
liquidity.
2. Utilization of savings.
3. Balanced economic growth.
4. Provide financial convenience.

Dr. Mayank Malviya

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