constituents or components of Indian financial system may be briefly discussed
I. Financial Institutions Financial
institutions are the participants in a financial market. They are business
organizations dealing in financial resources. They collect resources by
accepting deposits from individuals and institutions and lend them to trade,
industry and others. They buy and sell financial instruments. They generate
financial instruments as well. They deal in financial assets. They accept
deposits, grant loans and invest in securities. This means financial
institutions mobilize the savings of savers and give credit or finance to the
investors. They also provide various financial services to the community. They
deal in financial assets such as deposits, loans, securities and so on. On the
basis of the nature of activities, financial institutions may be classified as:
Regulatory and promotional institutions,
Banking institutions, and
Regulatory and Promotional Institutions: Financial institutions, financial
markets, financial instruments and financial services are all regulated by
regulators like Ministry of Finance, the Company Law Board, RBI, SEBI, IRDA,
Dept. of Economic Affairs, Department of Company Affairs etc. The two major
Regulatory and Promotional Institutions in India are Reserve Bank of India
(RBI) and Securities Exchange Board of India (SEBI). Both RBI and SEBI
administer, legislate, supervise, monitor, control and discipline the entire
financial system. RBI is the apex of all financial institutions in India. All
financial institutions are under the control of RBI. The financial markets are
under the control of SEBI. Both RBI and SEBI have laid down several policies,
procedures and guidelines. These policies, procedures and guidelines are
changed from time to time so as to set the financial system in the right
Banking Institutions: Banking institutions mobilize the savings of the people.
They provide a mechanism for the smooth exchange of goods and services. They
extend credit while lending money. They not only supply credit but also create
credit. There are three basic categories of banking institutions. They are
commercial banks, co-operative banks and developmental banks.
Non-banking Institutions: The non-banking financial institutions also mobilize
financial resources directly or indirectly from the people. They lend the
financial resources mobilized. They lend funds but do not create credit.
Companies like LIC, GIC, UTI, Development Financial Institutions, Organization
of Pension and Provident Funds etc. fall in this category. Non-banking
financial institutions can be categorized as investment companies, housing
companies, leasing companies, hire purchase companies, specialized financial
institutions (EXIM Bank etc.) investment institutions, state level institutions
etc. Financial institutions are financial intermediaries. They intermediate
between savers and investors. They lend money. They also mobilize savings.
Financial Markets: Financial markets are another part or component of financial
system. Efficient financial markets are essential for speedy economic
development. The vibrant financial market enhances the efficiency of capital
formation. It facilitates the flow of savings into investment. Financial
markets bridge one set of financial intermediaries with another set of players.
Financial markets are the backbone of the economy. This is because they provide
monetary support for the growth of the economy. The growth of the financial
markets is the barometer of the growth of a country’s economy. Financial market
deals in financial securities (or financial instruments) and financial
services. Financial markets are the centers or arrangements that provide
facilities for buying and selling of financial claims and services. These are
the markets in which money as well as monetary claims is traded in. Financial
markets exist wherever financial transactions take place. Financial transactions
include issue of equity stock by a company, purchase of bonds in the secondary
market, deposit of money in a bank account, transfer of funds from a current
account to a savings account etc. The participants in the financial markets are
corporations, financial institutions, individuals and the government. These
participants trade in financial products in these markets. They trade either
directly or through brokers and dealers. In short, financial markets are
markets that deal in financial assets and credit instruments.
of Financial Markets: The main functions of financial markets are outlined as
To facilitate creation and allocation of credit and liquidity.
To serve as intermediaries for mobilization of savings.
To help in the process of balanced economic growth.
To provide financial convenience.
To provide information and facilitate transactions at low cost.
To cater to the various credits needs of the business organizations.
Classification of Financial Markets:
There are different ways of classifying financial markets. There are mainly
five ways of classifying financial markets.
1. Classification on the basis of the type of
financial claim: On this basis, financial markets may be classified into debt
market and equity market. Debt market: This is the financial market for fixed
claims like debt instruments. Equity market: This is the financial market for
residual claims, i.e., equity instruments.
2. Classification on the basis of maturity of
claims: On this basis, financial markets may be classified into money market
and capital market. Money market: A market where short-term funds are borrowed
and lend is called money market. It deals in short term monetary assets with a
maturity period of one year or less. Liquid funds as well as highly liquid
securities are traded in the money market. Examples of money market are
Treasury bill market, call money market, commercial bill market etc. The main
participants in this market are banks, financial institutions and government.
In short, money market is a place where the demand for and supply of short term
funds are met. Capital market: Capital market is the market for long term funds.
This market deals in the long-term claims, securities and stocks with a
maturity period of more than one year. It is the market from where productive
capital is raised and made available for industrial purposes. The stock market,
the government bond market and derivatives market are examples of capital
market. In short, the capital market deals with long term debt and stock.