Financial System
The set of institutions,instruments and markets that are characterised in savings and channelising the financial resources is called financial system.
The presence of effective financial system.The presence of effective financial system helps to meet the short term and long term financial requirement of both household and corporate sector.
In other words financial system refers to the activity relating to the provision of the services in terms of money and facilitated activity in the real system.Generally it plays a significant role in the economic growth of our country by mobilising the surplus funds and utilising them effectively for productive purposes.
A financial system is a complex to integrated set of sub system of financial institutions, market,instrument and service which facilitate the transfer and allocation of fund efficiently and effectively.
It provides a mechanism through which saving are transferred in to investment.Financial system helps in the capital formation of the country.The capital formation depends greatly on the efficiency of financial system of the country.
Financial system of developing countries continues co-existence and co-operation of the formal and informal financial sectors means financial dualism.
What is Formal Financial System?
Formal financial system organisation is an institutional and regulated system. It caters to the need of modern spear of the economy.
What is Informal Financial System?
Flexibility in operations, relationship, between creditors and debtors. In this Financial system the advantages are low transaction cost, minimum default risk, transparency of producer and weak services.
Role or Function of Financial System In India
1.It serves as a link between saver and investors.
2.It helps in mobilising utilising the scatter saver in a more efficient and efficient manner. It channels the flow of saving into productive investment.
3.It assists in selection of projects to be financial and also reviews the performance of such projects periodically.
4.It provides a payment mechanism for exchange of goods and services.
5.It provides a mechanism for the transfer of resources and across geographical boundaries.
6.It promotes the process of capital formation,It brings together the supply of savings and the demand for investable funds.
7.It provides a mechanism for managing and controlling the risk involving, mobilising, saving and allocating credit.
8.It has to lower the cost of transaction,increase return and reduce cost to motivate people to save.
9.It provides detailed information to the operators in the market such as individuals, business houses,Govt etc.
Components Of Indian Financial System
The components of Indian financial system is broadly divided into three types.They are:
A.Financial Instrument
B.Financial Market
C.Financial Institution or Intermediaries
D.Financial Services
What Is Financial Instrument?
The innovative financial product which is issued by a borrower to investors which serves as a claim against a person or institution for the payment of amount due is called financial instrument. It is otherwise known as financial assets or securities. Financial Instrument is further divided into two types,such as
a.Primary Securities
b.Secondary Securities
Primary Securities
The securities that are directly issued by the ultimate borrowers of funds to the ultimate savers or investors are called primary securities. It is otherwise known as direct securities that include equity share,preference share,debenture etc.
Secondary Securities
The securities that are not issued directly by ultimate borrowers but are issued by financial Intermediaries to ultimate savers are called secondary securities. It is also known as indirect securities. That includes-Insurance policy, Bond, deposit etc,unit of mutual fund.
What Is Financial Market?
Another most important component of the financial system is the financial market. Financial market is a place where financial transactions take place.Such financial markets are classified into two categories on the basis of short term and long term transactions.
Financial market are divided into two types. They are:
a.Money market
b.Capital market
Money market
It is a short term market.It is not a physical market. Transaction can be possible over through telephone,mail or lending or borrowing can be possible for a short period of time and the sell and purchase of the securities having one year with the payback. In india money market is Bombay money market. Newyork money market in new york and London money market in London.
Capital Market
Another type of financial market is capital market.Capital market is a market which deals in long term loans.It supply industries with a fixed in working capital and finance medium term and long term of the borrowing the central,state and local Govt. The capital market deals in ordinary stock or shares and debenture of corporation and bonds securities of Govt.
What Is Financial Institution or Intermediaries?
It is an important component of the financial system.It means these Institutions which collect savings from those who want to save and make available funds to the investor for their use.
It is classified into two categories.
1.Organised Financial Institution
2.Unorganised Financial Institution
Organised Financial Institution
It means which financial institution are controlled by the central bank of the country are called organised.
Mainly those are divided into two parts:
a.Banking Institution
b.Non-banking Institution
Banking Institution
Banks is an institution that accepts deposits and mobilises these savings and keeps the same under its custody. It lends money those who need it and also perform the agency function.
The banking institution is divided into two categories.
i.Commercial Bank
ii.Co-operative Bank
Non Banking Institution
It is another type of organised bank in india.Non banking institutions are those whose are not the bank and not regulated by Govt. of India.In other word it provides financial service but not licensed by the bank regulatory act.
Un-Organized Financial Institution
Un-organized financial institutions are those which provide banking facilities or financial services but are not regulated under the central government of India.
What Is Financial Services?
Efficiency of emerging financial system largely depends on the quality and variety of financial services provided by financial Intermediaries. Financial services is the organisation who rendered the service to industrial enterprises and the consumer market.
In financial services the main sector in bank are financial institutions like commercial bank, merchant bank etc. It will be classified into two categories:
i.Asset based/Fund based
ii.Fee based/Advisory based services
The services include finance,housing finance,insurance services and bill discounting etc.
These are the asset based services and the fee based services are portfolio management, corporate counselling , merger and credit rating etc.Â