The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments. It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties.
The financial system of a country is concerned with:
Allocation and Mobilization of savings
Provision of funds
Facilitating the Financial Transactions
Developing financial markets
Provision of legal financial framework
Provision of financial and advisory services
According to Robinson, the primary function of a financial system is “to provide a link between savings and investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth”
A Financial System consists of various financial Institutions, Financial Markets, Financial Transactions, rules and regulations, liabilities and claims etc.
Features of Financial System:
It plays a vital role in economic development of a country
It encourages both savings and investment
It links savers and investors
It helps in capital formation
It helps in allocation of risk
It facilitates expansion of financial markets
It aids in Financial Deepening and Broadening
Structure of Indian Financial System/Components of Indian Financial System:
Indian Financial System
(1) Financial Institutions – Financial institutions are intermediaries of financial markets which facilitate financial transactions between individuals and financial customers.
It simply refers to an organization (set-up for profit or not for profit) that collects money from individuals and invests that money in financial assets such as stocks, bonds, bank deposits, loans etc.
There can be two types of financial institutions:
• Banking Institutions or Depository institutions – These are banks and credit unions that collect money from the public in return for interest on money deposits and use that money to advance loans to financial customers.
• Non- Banking Institutions or Non-Depository institutions – These are brokerage firms, insurance and mutual funds companies that cannot collect money deposits but can sell financial products to financial customers.
Financial Institutions may be classified into three categories:
• Regulatory – It includes institutions like SEBI, RBI, IRDA etc. which regulate the financial markets and protect the interests of investors.
• Intermediaries – It includes commercial banks such as SBI, PNB etc. that provide short term loans and other financial services to individuals and corporate customers.
• Non – Intermediaries – It includes financial institutions like NABARD, IDBI etc. that provide long-term loans to corporate customers.
