Exploring the Components of the Indian Financial System

The financial system of India is regarded as one of the imperative frameworks triumphant the structure of the Indian Economy. Banks, markets, tools, and services make up the financial system. They help fund investments and manage money well. The system works within a legal framework set up by groups like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Federal Ministry of Finance.

Through the connection of those who denied money to savers, the system enables growth in the economy, back the expansion process of businesses, and also promotes the stability of the money system. In this article, we’ll explore the components of Indian financial system. Let’s get started.

Overview of the Indian Financial System

The Indian financial structure is a web of other interrelated financial instruments, institutions, markets, and services. It is intended for the proper resource mobilisation, economic growth and proper financial institution. The system helps to channelise the money from savers to borrowers and, in turn, investors for the procurement of industries, infrastructures and consumer goods. The financial structure gives impetus for savings and investments and for economic growth through policy undertakings as well as authorised institutions and funds.

Also Read: Indian Financial System: A Detailed Guide

Financial Institutions

Banks and other similar organisations are essentially middlemen who help move cash from the savers to the users. These institutions can be classified into:

Banking Institutions

• Commercial Banks: These are the SBI, Bank of India and other new public sector banks, nationalised banks, HDFC BANK, ICICI BANK and other private banks, and some International banks that collect deposits and give loans to people and different organisations.
• Regional Rural Banks (RRBs): Specialised in the promotion of agricultural and rural credit in the rural economy.
• Cooperative Banks: These are social-based organisations offering small credit facilities to needy borrowers, mainly in the rural and nearest urban centres.

Non-Banking Financial Companies (NBFCs)

NBFCs offer different facilities like credit, financing, leasing, hire-purchase, and others. Even though they are not allowed to accept deposits like the actual banks, they increase the financial inclusion of underserved populations.

Insurance Companies

The government has set up other bodies like the Life Insurance Corporation of India (LIC) and the General Insurance Corporation, which offer insurance across all types, including life insurance, health insurance and property insurance.

Financial Markets

The term ‘financial markets‘ refers to the area where buyers and sellers trade financial securities. They thus constitute indeed a very large and crucial segment of financial markets in respect of price, liquidity and risk. The key types of financial markets include:

Money Market

A temporary place where instruments such as Treasury bills, commercial paper or certificates of deposits are traded. It provides for the availability of money in the economy and offers an avenue through which governments and institutions can undertake short-term financing.

Capital Market

It is used for the exchange of long-term financial products like stocks, bonds, debentures, etc. It is divided into:

• Primary Market: Where new securities that are, for instance, under the initial public offer are floated.
• Secondary Market: The markets where existing securities, as we have seen, are traded, for instance, the NSE and the BSE markets.

Forex Market

A place for the trading of these currencies. They play an important role in easing international business by helping to decide exchange rates.

Derivatives Market

This market offers what is known as ‘derivatives’ including futures, options and swaps through which businesses and investors can minimise different types of risks.

Financial Services

The facilitation and operation of the financial system are made possible through financial services. They include-

Banking Services

These services include extension of loans, acceptance of deposits, credit facilities and fund transfer to individuals, firms and others.

Investment Services

Such services include portfolio management, mutual funds, and advisory services for people and corporations struggling to manage their investments well.

Insurance and Risk Management

It is a method through which insurance shields people and businesses from specific financial hazards via health, life and property insurance.

Credit Rating Agencies

Financial operations that involve factors such as credit analysis carried out by agencies in the global market, like CRISIL and ICRA, are checked.

Financial Assets

The commodities which are being exchanged in the financial markets are known as Financial Assets. Following are some of the important financial assets:-

Call Money

If a loan is extended for one day and repaid the next day, it will be referred to as call money. This kind of transaction has no need for collateral securities.

Notice Money

If a loan is advanced for a period exceeding a day and not exceeding 14 days it is termed as notice money. In this kind of transaction, no collateral securities are needed.

Term Money

If the period of deposit tenure is more than 14 days, then it is termed as term money.

Treasury Bills

These are options or contracts with a maturity date of less than a year, whereby a debtor is the government. Purchasing a T-Bill means you are lending money to the Government.

Certificate of Deposits

It is an electronic version representing the amount of money deposited with the bank for a definite period of time.

Commercial Paper

Commercial paper is another unsecured short-term obligation of a business firm.

Role and Significance of the Indian Financial System

The financial system plays several key roles, such as:

Resource Allocation

It makes the allocation of these resources to productive sectors of the economy such as infrastructure, education and health support industrialisation.

Economic Growth

On its part, the financial system facilitates the mobilisation of savings and propulsion of investment aimed at supporting industrialisation, the provision of basic infrastructure, and the Jobs front.

Financial Inclusion

By offering its services in regions where these people have not been served fully by formal financial institutions such as RRBs and microfinance companies the financial system offsets this vice.

Stability and Liquidity

Such agencies, such as the RBI, plan the flow of money and consequently guard against the instabilities of the financial front.

Risk Management

Some of the services are insurance, derivatives, and credit rating, which guard people or companies against various risks.

Obstacles Hindering the Indian Financial System

Despite its importance, the Indian financial system faces several hindrances, such as:

Financial Inclusion

Thus, progress has been achieved, yet a significant part of the rural and deprived population has limited to no access to financial institutions.

Regulatory Oversight

The regulation of new financial technologies, be it financial innovation or fintech, is quite a lengthy process, and the positive/negative aspect of this is still debatable.

Technological Disruptions

Fintech and digital payments have been proven as the threat related to cybersecurity and legal frameworks should be put in place for customers.

Non-Performing Assets (NPAs)

NPA has remained endemic in the banking sector thus reducing the ability to disburse credit, hence a direct observation on the availability of funds in our economy.

Global Integration

Higher integration of the global financial systems means greater susceptibility to adverse movements in the international economy.

Recent Developments in the Indian Financial System

Digital Payments

The launch of payment systems such as the unified payment interface (UPI) and the availability of applications like Paytm and PhonePe have drastically altered payment systems.

Fintech Growth

Currently, there is a new generation of financial technologies including, robo-advisory services, P2P lending and its applications, blockchain and other services that are emerging to transform ways of delivering financial services.

Green Finance

Sustainability has become the new norm in funding, with more funds being channelled to Green Bond and Clean Energy.

Financial Literacy

Across the country, there are efforts to conduct awareness programmes on the need to save, invest and manage credit.

Conclusion

The blog provides a comprehensive insight into the structure of the Indian financial system, which is a growing and changing entity imbibing both the national and the international financial environments. However, with the various challenges that are likely to affect the system in the future, such as financial inclusion, imbalance of regulation and other technological disruptions, the system has the capacity to facilitate economic growth, financial stability and even development if the efficiency of the measures is put in place. The Indian financial system is vast, and so is learning about it. So, enrol in the Integrated Program in Finance and Financial Technologies offered by Hero Vired in collaboration with MIT Open Learning and get a professional certificate.