The Indian Financial System is one of the most important aspects of the economic development of our country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties.
This is an important topic with respect to the variousGovernment examsconducted in the country, and aspirants must carefully consider going through this article and prepare themselves accordingly.
In this article, you shall know about what the Indian Financial system is, its components and how it helps in the economic growth of a country. Also, get someSample Questions on the Indian Financial System further below in this article.
Indian Financial System PDF Notes:-Download PDF Here
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Components of Indian Financial System
Indian Financial System – An Overview
The services that are provided to a person by the various Financial Institutions including banks, insurance companies, pensions, funds, etc. constitute the financial system.
Given below are the features of the Indian Financial system:
- It plays a vital role in the economic development of the country as it encourages both savings and investment
- It helps in mobilising and allocating one’s savings
- It facilitates the expansion of financial institutions and markets
- Plays a key role in capital formation
- It helps form a link between the investor and the one saving
- It is also concerned with the Provision of funds
Other Related links:
|Types of Banks in India||Functions of Banks||Types of Bank Accounts|
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The financial system of a country mainly aims at managing and governing the mechanism of production, distribution, exchange and holding of financial assets or instruments of all kinds.
Further below in this article, we shall discuss the various components of the financial system in India.
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Components of Indian Financial System
There are four main components of the Indian Financial System. This includes:
- Financial Institutions
- Financial Assets
- Financial Services
- Financial Markets
Let’s discuss each component of the system in detail.
1. Financial Institutions
The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised either directly or indirectly via the Financial Markets.
The main functions of the Financial Institutions are as follows:
- A short term liability can be converted into a long term investment
- It helps in conversion of a risky investment into a risk-free investment
- Also acts as a medium of convenience denomination, which means, it can match a small deposit with large loans and a large deposit with small loans
The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.
The financial institutions can further be divided into two types:
- Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need
- Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers.
Further, Financial Institutions can be classified into three categories:
- Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
- Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB, PNB, etc.
- Non Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD, SIBDI, etc.
2. Financial Assets
The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other.
Some important Financial Assets have been discussed briefly below:
- Call Money – When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction.
- Notice Money – When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction.
- Term Money – When the maturity period of a deposit is beyond 14 days, it is called term money.
- Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government.
- Certificate of Deposits – It is a dematerialised form (Electronically generated) for funds deposited in the bank for a specific period of time.
- Commercial Paper – It is an unsecured short-term debt instrument issued by corporations.
3. Financial Services
Services provided by Asset Management and Liability Management Companies. They help to get the required funds and also make sure that they are efficiently invested.
The financial services in India include:
- Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc.
- Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services
- Investment Services – It mostly includes asset management
- Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services
The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing.
4. Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market.
The financial market can be further divided into four types:
- Capital Market – Designed to finance the long term investment, the Capital market deals with transactions which are taking place in the market for over a year. The capital market can further be divided into three types:
(a)Corporate Securities Market
(b)Government Securities Market
(c)Long Term Loan Market
- Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly liquid instruments. The money market can further be divided into two types:
(a) Organised Money Market
(b) Unorganised Money Market
- Foreign exchange Market – One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate.
- Credit Market – A market where short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions is called Credit Market
Aspirants for various Government exams can check the syllabus for respective exams at the links mentioned below:
|UPSC Syllabus||Bank Exam Syllabus||SSC Syllabus|
|RRB Syllabus||LIC Syllabus||UPSC CAPF Syllabus|
Sample Questions on Indian Financial System
Given below are a few sample questions for the candidates to have an idea about the type of questions asked in the Government exams on the topic: Indian Financial System:
Q 1. Which of these is a type of Capital Market?
- Corporate Securities Market
- Government Securities Market
- Long Term Loan Market
- All of the Above
- None of the Above
Answer: (4) All of the Above
Q 2. Which of these is not a type of Financial Assets?
- Call Money
- Notice Money
- Treasury Bill
- Commercial Paper
Answer: (1) Cheque
Q 3. Which of these is not a fundamental objective of Indian Financial System?
- To give time value to money
- Offer Services that reduce risk of loss
- Issuing Bank Notes
- Provide a payment System
- All of the above
Answer: (3) Issuing Bank Notes
Q 4. When a loan is granted for only one day, it is called _________?
- Notice Money
- Immediate Bill
- Treasury Bill
- Call Money
- Commercial Bill
Answer: (4) Call Money
Questions for descriptive answers can also be asked from this topic.
Indian Financial System PDF Notes:-Download PDF Here
The various Financial Institutions help balance the economic growth of the country and mobilise the flow of debit and credit in the country. With the help of rural development, the overall financial system of the country can be improved.
Candidates who are looking forward to applying for the upcoming Government exams can visit BYJU’S for more information.
Frequently Asked Question – Financial System in India
Q.1. What is the use of the financial system?
Ans. The Financial System of an economy provides a way to exchange funds between the lenders and the borrowers. The efficient allocation of economic resources is achieved by a financial system.
Q.2. What is the Financial System?
Ans. The Financial System isa set of institutions, markets or instruments that promotes savings by channelising them to the most efficient use.
Q.3. What are the important functions of a financial system?
Ans. Capital accumulation, Production and Growth are what a financial system helps in. Thus, functions of the financial system are encouraging saving, mobilising savings and allocation of the funds to alternative uses.
Q.4. What are the objectives of a financial system?
Ans. Facilitating payments, a link between the lender and borrower, help in capital formation, ensuring the safety of investment and economy growth are a few objectives of a financial system.
Q 5. Indian Financial System is divided into how many categories?
Ans. Broadly there are two categories of Indian Financial System, i.e. Indian Money market and Indian capital Market:
- Indian Money Market – in which short term funds are lent and borrowed.
- Indian Capital Market – where medium and long term exchanges happen.
What is the brief overview of Indian financial system? ›
The financial system enables lenders and borrowers to exchange funds. India has a financial system that is controlled by independent regulators in the sectors of insurance, banking, capital markets and various services sectors.What are the main components of a financial system? ›
The main financial system components include financial institutions, financial services, financial markets, and financial instruments. Financial institutions. Financial institutions play a significant role in bringing together lenders and borrowers.What is an overview of financial system? ›
A financial system is the set of global, regional, or firm-specific institutions and practices used to facilitate the exchange of funds. Financial systems can be organized using market principles, central planning, or a hybrid of both.What is financial system and its components and functions? ›
A financial system is an economic arrangement wherein financial institutions facilitate the transfer of funds and assets between borrowers, lenders, and investors. Its goal is to efficiently distribute economic resources to promote economic growth and generate a return on investment (ROI) for market participants.What are the main components of Indian financial system? ›
The financial system is composed of the products and services provided by financial institutions, which includes banks, insurance companies, pension funds, organized exchanges, and the many other companies that serve to facilitate economic transactions.What are the types of Indian financial system? ›
- Professional Advisory.
- Wealth Management.
- Mutual Funds.
- Stock Market.
- Treasury/Debt Instruments.
- Tax/Audit Consulting.
It supplies the necessary financial inputs for the production of goods and services, in turn, promotes the well-being and standard of living of people in the country.What are the 6 components of the financial system? ›
1.1Six Parts of the Financial System. The financial system can be broken down into six main parts: money, financial instruments, financial markets, financial institutions, regulatory agencies, and central banks. We will talk about each of these parts in turn.What are the objectives of Indian financial system? ›
Objectives of the financial system
To give money the time value as it deserves. To reduce risks and compensate for the same through offering products and services. To enable the most efficient economic resource allocation. To maintain market stability in the economic sector.
Financial statements provide a snapshot of a corporation's financial health, giving insight into its performance, operations, and cash flow. Financial statements are essential since they provide information about a company's revenue, expenses, profitability, and debt.
What are the 5 components of financial statements? ›
- Income statement. Arguably the most important. ...
- Cash flow statement. ...
- Balance sheet. ...
- Note to Financial Statements. ...
- Statement of change in equity.
The five key functions of a financial system are: (i) producing information ex ante about possible investments and allocate capital; (ii) monitoring investments and exerting corporate governance after providing finance; (iii) facilitating the trading, diversification, and management of risk; (iv) mobilizing and pooling ...What are the three financial system components? ›
Financial system functions include accumulating savings and lending funds. 36. Three financial system components are the U.S. Treasury, financial institutions, and financial markets.What is financial system answer? ›
A financial system is a collection of institutions which allow the exchange of funds, such as banks, insurance companies, and stock exchanges. The financial system exists in the corporate, national, and global level.What are the four major components of an effective financial system? ›
Financial systems are multidimensional. Four characteristics are of particular interest for benchmarking financial systems: financial depth, access, efficiency, and stability. These characteristics need to be measured for financial institutions and markets.Who controls Indian financial system? ›
The primary financial regulator bodies in India include the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), Small Industries Development Bank of India (SIDBI), Ministry of Corporate Affairs, etc.Who regulates financial system in India? ›
Financial Regulatory Bodies in India - RBI, SEBI, IRDAI & PFRDA.What is the strength of Indian financial system? ›
It helps in capital formation. It helps in allocation of risk. It facilitates expansion of financial markets. It aids in Financial Deepening and Broadening.What is the conclusion for Indian financial system? ›
Conclusion. Indian Financial System accelerates the rate and volume of savings through the provision of various financial instruments and efficient mobilization of savings. It aids in increasing the national output of the country by providing funds to corporate customers to expand their respective business.What are the recent developments in Indian financial system? ›
Interest Rate Deregulation. Liquidity Adjustment Facility. Money Market Mutual Fund (MMMFs) Electronic Transactions.
What are the 7 components of a financial plan? ›
- Budgeting and taxes.
- Managing liquidity, or ready access to cash.
- Financing large purchases.
- Managing your risk.
- Investing your money.
- Planning for retirement and the transfer of your wealth.
- Communication and record keeping.
LIMITATIONS OR WEAKNESSES OF INDIAN FINANCIAL SYSTEM
Lack of coordination between different financial institutions 2. Monopolistic market structures 3. Dominance of development banks in industrial financing 4. Inactive and erratic capital market 5.
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.What is the most important financial statement? ›
Types of Financial Statements: Income Statement. Typically considered the most important of the financial statements, an income statement shows how much money a company made and spent over a specific period of time.What are the different types of financial? ›
There are 3 types of finance: personal finance, public finance, and business finance.What are the four 4 basic financial statements? ›
But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.What are the six 6 basic financial statements? ›
These include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others, rather than singly, for a comprehensive picture of company financial health.What are the five most important key elements of a well functioning financial system? ›
- Complete markets. The instruments needed to solve investment and risk management problems are available to trade.
- Liquidity. ...
- Operational efficiency. ...
- Informational (or external) efficiency.
As a finance system provides you with accurate and complete information about your business in one place, it makes it easier for you to forecast future cash flows. This helps staff to better manage working capital and optimise daily, monthly and yearly cash flow.What is an example of a financial system? ›
A country's financial system includes banks and nonbank lenders, insurers, securities markets, and investment funds.
What is the basic structure of Indian banking system? ›
The structure of the banking system of India can be broadly divided into scheduled banks, non-scheduled banks and development banks. Banks that are included in the second schedule of the Reserve Bank of India Act, 1934 are considered to be scheduled banks.What are the importance of financial institutions in India? ›
Financial institutions help small and medium-scale enterprises set up themselves in their initial business days. They provide long-term as well as short-term funds to these companies. The long-term fund helps them form capital, and short-term funds fulfill their day-to-day working capital needs.What are the functions of Indian banking system? ›
- Acceptance of deposits from the public.
- Provide demand withdrawal facility.
- Lending facility.
- Transfer of funds.
- Issue of drafts.
- Provide customers with locker facilities.
- Dealing with foreign exchange.