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Indian Financial System Overview

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Indian Financial System Overview

shape Introduction

  • Like any other country, the financial system of India comprises of financial markets, financial intermediaries, and financial instruments.

  • In simple words, finance is a term equivalent to money. However, this is only partially correct. Finance refers to the source which provides funds for any particular activity.

  • The economic development of India or any other nation is reflected by the progress of its various economic units; government, corporate, and household and their surplus, deficit, or balanced budget situations.

  • shape Working

  • Financial System thus acts as an intermediary that shall facilitate the flow of funds from the areas of surplus to that of deficits.

  • Therefore, an Indian financial system is a mixed composition of institutions, markets, regulations, law, practices, money managers, analysts, transactions, claims, and liabilities that exist within the economy.

  • The diagram below will give a clear idea of what the Indian financial system refers to:



    shape Structure

    The structure of Indian Financial System comprises of:


    1. Financial Institutions: These institutions act as intermediaries of financial markets that will facilitate financial transactions occurring between individuals and financial customers. There are two types of financial institutions:

    • Banking or depository institutions: These institutions are banks and credit unions that collect money from the public. In return, the public receives interest on money deposits. These can further be categorised as:

      • Regulatory institutions like SEBI, RBI, IRDA

      • Intermediaries that include commercial banks who provide short-term loans and other financial services.

      • Non-intermediaries that provide long-term loans to corporate customers like NABARD, IDBI.

    • Non-Banking or Non-depository institutions: These are firms and companies that deal in brokerage, insurance, and mutual funds to collect money deposits. They can also sell financial products.


    2. Financial markets: These marketplaces are used by buyers and sellers to trade assets like shares, bonds, currencies, and other financial instruments. They are of two types:

    • Capital Markets: These markets deal in long terms securities, i.e. securities that have a maturity period of more than one year.

    • Money Market: These markets deal with short-term debt instruments that have a maturity period of less than one year.


    3. Financial assets, instruments, and services: Financial assets include cash deposits, checks, loans, bank notes, letter of credit, and all other financial instruments that either specify a certain amount on a specific future date or pay a principal amount. Financial services are services that are concerned with the design and delivery of these financial instruments.


    shape Functions

    Each of the function performed by the Indian Financial System is unique and important. Conversely, the efficiency of the same is dependent on how well these functions are being performed.

    The primary functions of the Indian Financial System are:


    shape Importance

  • Provision of various financial instruments allows the mobilisation of savings in the Indian financial system. This helps to accelerate the rate and volume of savings.

  • Funds are provided to corporate customers so that they can expand their respective businesses. Further, this aids the increasing the national output of India.

  • The regulatory bodies like RBI, SEBI help to protect the interests of the investors. Thus, ensuring the smooth flow of financial transactions.

  • The financial system works in favour of economic development of the country. This will, in turn, raise the standard of living of Indians.

  • The rural development banks and the co-operative societies work to help to promote the development of a weaker section of society in India.

  • Adequate financial and advisory services provided by the Indian financial system helps the corporate customers to make better financial decisions.

  • Overall, the financial system has been formulated with the idea of financial deepening and broadening.


    shape Intermediary

    Intermediaries Involved:

    • The Indian financial system is equipped with proper channels to ensure that adequate information of the issue, issuer, and the security is passed on. These channels are referred to as financial intermediaries.

    • These financial intermediaries ensure that the financial assets reach the ultimate investor to garner their requisite amount.

    • Along with the development in the financial system, in India, financial intermediaries have also widened. It has now been conducted by various institutions but under the surveillance of the Reserve bank of India (RBI).


    However, the services offered by various institutions may differ. The table below will give a detail:

    Intermediaries Type of Market Example of institutions Role Performed
    Stock Exchanges Capital Market NSE, BSE, Calcutta Stock Exchange, Cochin stock exchange etc. Secondary markets to securities
    Investment Bankers Capital Market, Credit Market Commercial banks, cooperative banks Corporate advisory services, Issue of services
    Underwriters Capital Market, Money Market Development banks, NBFC Subscribe to unsubscribed portion of securities
    Registrars, Depositories, Custodians Capital Market Insurance companies, mutual fund companies, and so on. Issuance of securities to the investors on behalf of the company.
    Handle share transfer activity.
    Primary Dealers Satellite Dealers Money Market Registered entities, commercial banks and their subsidiaries which have the license to purchase and sell government securities like SBI. The market making in government securities.
    Forex Dealers Foreign Exchange Market Western Union Ensure exchange link currencies