The Indian Financial System The economic development of any country depends upon the existence of well organized financial system. The responsibility of the financial system is to mobilize the saving in the form of money and monetary assets and invest them to productive ventures. The efficient functioning of the financial system facilitates the free of flow of funds to more productive activities and thus promotes investment. The financial system provides the intermediation between savers and investors and promotes faster economic development. The financial system of the financial sector of any country consists of a 1) Specialized financial institutions 2) Organized and unorganized financial markets 3) Financial instruments and services which facilitates transfer of funds. ROLE OF THE INDIAN FINANCIAL SYSTEM The Indian financial system performs many wide varieties of functions; some important functions of Indian financial system can be briefly summarized below. Foster’s industrial development: The Indian financial system has fostered industrial development of a country by supplying venture for capital to entrepreneur’s skiing to exploit highly technological ideas. Indian financial system has also developed many development banks like as IDBI, IFCI, ICICT, SFC. To faster industrial development. Expert knowledge and professional guidance : Various financial institutions existing within the Indian financial system provide professional knowledge and expertise to citizens to choose their investment portfolio.It plays the role of catalyst: A financial system plays a positive and catalyst role by providing finance or credit through creation of credit in anticipation of saving.Allocation of resources to different investment channels : Besides encouraging investment, a financial system effectively allocates resources to different investment channels; as per the priority.Lower risk and diversification of funds:
In India an average saver issue to invest their surplus income because of their lack of adequate knowledge about complicated investment system lower the risk. It is also provides diversified opportunities of an investors. Role as a promoter: As such financial system plays the role of a promoter to foster the economic growth in the country. As a promoter of the financial system undertake comprehensive growth potential surveys of the existing industrial structure of the various parts of the country supply of finance of the various projects, identify venture which can be established in different region in near future.Financial innovation of Indian financial system: Indian financial system since 1990’s has undergone drastic changes. Indian financial system has been diversified moved towards maturity and many few innovations have taken place. This has been due to government policy of liberalization, delicensing and globalization of Indian economy. Some of the important development and innovations that have taken place in the Indian financial system can be briefly summarized below: 1) Development in the new issue market: There has been a sharp increase in the new issue market during the last decade. Three important development with respect to the new issue market as follows: i) Capital issue (control) Act repealed. ii) Office the controller of capital issues abolished. iii) Introduction of free pricing of public issues. iv) Commercial banks have also been permitted to raise equity share capital from capital market. 2) Expansion and Development of stock market in India: The Indian stock market has shown considerable progress and development. Many institutions have entered in the area of stock market. These include foreign institutional investors, foreign funds and private mutual funds, pension’s funds, new technology and the securities and exchange board of India. More institutions are entering into the Indian market.
3) Development of credit rating agencies:Many credit rating agencies have been developed to rate companies as well asfixed interestBearing securities coming to capital market. Some important credit ratingagencies are as follows: i) CRISIL promoted in 1987 by ICICI and UTI. ii) IFCI and a number of other financial institutions set up investment information and ICRA in 1991. iii) CARE and Research Limited was developed by IDBI a long with CANARA BANK & UTI4) Development of stock Holding Corporation of India:I t is a depository institution. It was set up jointly by public financialinstitution to promote funds to clearing house safe custody and transfer ofsecurities. Its objective is to introduce a book entry system for the transfer ofshares and avoid the volume of paper work involved and thus reduce delaysin transfers.5) Development of SEBI:Securities and Exchange board of India was constituted by the government ofIndia in 1988 for promoting orderly and healthy development of securitiesmarket and for providing adequate investors protection. SEBI was givenstatutory power effective form march 31 st 1992 to regulate the operations ofstock markets and their players.6) NSE:It is another development of Indian financial system. NSE was incorporated in1992 by the financial institutions and banks with IDBI as nodal agency. TheNSE has two segments:1) One dealing with wholesale debt instruments2) The other dealing with capital market instruments.7) Development of mutual funds:
Many mutual funds have been developed. Many term lending financialinstitutions like IFCI, ICICI, IDBI have entered into the field of mutual funds.Thus, besides UTI there are several financial institutions including LIC andGIC to mobilize house hold saving.8) Development of merchant banking:Indian financial system has seen the development of much merchant bankingservice. In this services are includes professional advice and services toentrepreneurs in formulating and implementing projects and helping them inraising capital from the markets and availing of financial assistance fromvarious financial intermediaries.9) Investors services of India Limited (ISIL):It is another innovation that has been taken place in the Indian financialsystem. ISIL was set up by IDBI with a view to providing registrar andtransfer services on par with international standards and under takingcustodian services.10) Development of private and foreign banks:With the Indian financial system many private banks and foreign banks havefound their way. In last few years many private banks like HDFC Bank, GlobalTrust Bank etc.. Have been established. Many new braches for foreign bankshave been opened.11) Entry of foreign Institutional Investors:Foreign institutional investors were allowed to invest in Indian capitalmarket in September 1992 but they started investing in India only in January1993 and became active since August 1993. As on October 1 st 1994 234foreign institutional investors were registered with the SEBI FINANCIAL INSTITUTIONSThe financial institutions are business organizations that act as mobilizes anddepositories of saving and credit or finance. They also provide variousfinancial services to the commodity. The financial institutions which cater to
the notions of savers of high liquidity and safety along with profitability.Financial institutions which raise resources from saver.Financial institutions may be categorized in two groups: A) BANKING INSTITUTIONS B) NON-BANKING INSTITUTIONS1) BANKING INSTITUTIONS: Banking institutions are participated in the BANKING ACTIVITIES. Generally banks are providing finance to the public, industries and collect the money from the public. Its main object is to rising of the funds through the investors.Ex: RBI, SBI, COMMERICAL BANKS AND CO-OPRATATIVE BANKS.2) NON-BANKING INSTITUTIONS: NON-BANKING INSTITUTIONS are part of the financial institutions. But they are not direct participated to the banking activities. (Providing the finance, accepting the deposits).EX: LIC, UTI, IDBI. II) Financial markets: Financial markets are the centers or arrangements that provide facilities for buying and selling of financial claims and services. The corporations, financial institutions and government trade in financial products. Financial markets are an important component of financial system. Financial markets have as their participant’s financial institutions, dealers, brokers, agent’s borrowers, lenders etc…, Financial markets have been classifies into many ways. Some important types of financial markets as follows. I) UN-ORGANIZED MARKET 2) ORGANIZED MARKET 1) UN-ORGANIZED: The unorganized segment is also is also called the UNORGNISED MARKET. It is largely made-up indigenous bankers and moneylenders. It is unorganized because the activities of its parts are not systematically co-ordinate by the RBI or any other authorities. The un- organized money markets flexible terms and attractive rate of interest to deposits and high rates of interest to borrowers. EX: UN-REGULATED ORGANISATIONS, INDIGENOUS BANKES, MONEY LENDERS, CHIT FUND ORGNISATIONS ETC..,
a. ORGANIZED MARKET: It comprises the RBI and banks. It is called organized because its parts aresystematically co-ordinate by the RBI. Besides, commercial banks thatdominated the organized money markets. There are co-operated banks.Organized markets can be classifies into two ways: 1) CAPITAL MARKETS2) MONEY MARKETS.PRIMARY MARKET PRIMARY MARKET is a market for new issues or new financial claims.Hence, it is also called New ISSUED MARKET. The primary market dealswith those securities which are issued to the public for the first time. In theprimary market, borrowers exchange new financial securities for longperiod funds. Thus, primary market facilitates capital formation.SECONDARY MARKET: Secondary market is market for secondary sale of securities. In other,words securities which have already passed through the new issue marketare traded in these markets. Generally such securities are quoted forbuying and selling securities. This market consists for all stock exchangesrecognized by the government of India.Capital markets: The capital market is a market. Capital market for financial assets whichhave long or indefinite maturity. Generally, it deals with long termsecurities which have a maturity period of above one year.Money market: Money market is market for dealing with financial assets and securitieswhich have a maturity period of up to one year. In other, words it is amarket for purely short term funds. The money market can be subdividedinto four ways:a) Call money market b) commercial bill market c) Treasury billmarket d) short-term loan market.III) Financial instrument
Financial instruments refer to those documents which represents financialclaims on asset. As discussed earlier, financial assets refers to a claim to therepayment for a certain sum of money at the end of a specified periodtogether with interest or divided. EX: shares, debentures, bonds, securities.Financial instruments can also be called financial securities. Financialsecurities can be classified into 2 types: 1) Primary or direct securities 2 ) secondary securities. IV FINANCIAL SERVICES Financial services can also called “FINANCIAL INSTRUMENTATION”.Financial intermediation is a process by which funds are mobilized from alarge number of savers and make them of it’s and particularly to corporatecustomers. TYPES OF FINANCIAL SERVICES: 1) MERCHANT BANKING 2) LEASING 3) VENTURE CAPITAL 4) MUTUALFUNDS etc...