Indian Financial System – Gkduniya
Indian Financial System: Indian financial system is one of the most important aspects for the economic development of our country. This system manages the flow of money between the people of the country and those who can invest it wisely (investors/businessmen) for the betterment of both the parties.
Components of the Indian Financial System
There are four components of the Indian financial system.
- Institutions Financial
- Assets Financial
- Services Financial
- Markets Financial
1. Institutions Financial : Financial institutions act as intermediaries between the investor and the borrower. Investor’s savings are mobilized directly or indirectly through financial markets.
The main functions of financial institutions are as follows:
- The facility also acts as a medium of denomination, meaning, it can match a small deposit with a large loan and a large deposit with a small loan.
- The best example of a financial institution is a bank. Those who have surplus funds save in their accounts, and those in dire need of money take loans. The bank acts as an mid between the two.
- It helps in converting risky investments into risk free investments
Financial institutions are further divided into two types
- Banking Institutions or Depository Institutions – This includes banks and other credit unions that collect money from the public against interest on deposits and lend that money to needy people
- Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They may not ask for monetary deposits, but sell financial products to their customers.
In addition, financial institutions are classified into three different categories.
- Regulators – Institutions that regulate the financial markets such as RBI, IRDA, SEBI, etc.
- Intermediate – Commercial banks that provide loans and other financial assistance such as SBI, BOB, PNB, etc.
- Non-intermediate – Institutions that provide financial assistance to corporate clients. This includes NABARD, SIDBI etc.
2. ( Assets Financial ) Assets Financial : The products which are traded in the financial markets are called financial assets. Based on the different needs and requirements of the loan seeker, the securities in the market also differ from each other.
Brief description on some important financial assets
- Certificate of Deposit – This is a dematerialized form (electronically generated) for money deposited in a bank for a specific period.
- Notice Money – When a loan is given for more than one day and less than 14 days, it is called notice money. No collateral securities are required for such transactions.
- Fixed Currency – When the maturity period of a deposit is more than 14 days, it is called Fixed Currency.
- Call money – When a loan is given for one day and repaid on another day, it is called call money. No collateral securities are required for such transactions.
- Treasury Bills – Also known as T-bills, these are government bonds or debt securities that have a maturity of less than one year. Buying T-bills means lending money to the government.
3. Services Financial : Services provided by asset management and liability management companies. They help in getting the required funds and also ensure that they are invested efficiently.
Financial services in India include:
- Investment Services – This mostly includes asset management
- Insurance Services – Services like issuance of insurance, selling policies, undertaking insurance and brokerage etc. are all a part of insurance services.
- Forex Services – Exchange of currency, forex, etc. are a part of forex services
- Banking Services – Any small or major service provided by banks like lending, depositing money, issuing debit/credit cards, opening accounts etc.
- The main purpose of financial services is to assist a person in selling, borrowing or buying securities, allowing payment and settlement, and lending and investing.
4. (Financial Markets) Markets Financial : The market where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called financial market.
Financial markets are divided into four types:
- Capital Markets – Designed to finance long-term investments, capital market deals with transactions that take place in the market for more than a year. Capital market is also divided into three types
- corporate securities market
- government securities market
- long term credit market
2. Money Market – Mostly dominated by government, banks and other large institutions, the market type is authorized only for short term investments. It is a wholesale debt market that operates on low-risk and highly liquid instruments. The money market is further divided into two types
- organized money market
- unorganized money market
3. Forex Market – One of the most developed markets across the globe, the Forex market deals with multi-currency related requirements. The transfer of money in this market takes place on the basis of foreign exchange rate.
4. Credit Market – The market where short-term and long-term loans are given to individuals or organizations by various banks and financial and non-financial institutions.
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