The Indian financial system consists of five main components: money, financial instruments, financial markets, financial institutions, and central banks. It helps facilitate production, capital accumulation, and economic growth by encouraging savings, mobilizing savings, and allocating savings among alternative uses. Key regulators include the Reserve Bank of India and independent authorities that oversee banking, insurance, capital markets, and other financial services. The financial system is also supported by various types of financial institutions like commercial banks, non-banking financial companies, microfinance institutions, and more that connect savers and borrowers.

1. Indian financial system
Introduction
The financial system enables lenders and borrowers to exchange funds. India has a financial
system that is controlled by independent regulators in the sectors of insurance, banking,
capital markets and various services sectors.
Functions
The financial system helps production, capital accumulation, and growth by
(i) encouraging savings
(ii) mobilising savings
iii) allocating them among alternative uses and users.
Five parts of financial system / Components
1. Money is used as a medium to buy goods & services. It also is a standard unit of measurement
and acts as a store of value. However, money may not be a good store of value since it loses
value with inflation.
2. Financial Instruments are formal obligations that entitle one party to receive payments or a
share of assets from another party. Examples of tradable financial instruments include loans,
stocks, bonds.
3. Financial Markets is a place or network where financial instruments can be sold quickly &
cheaply.
4. Financial Institutions are firms that connect borrowers and lenders, provide savers and
borrowers access to financial instruments & markets. There are two types of Financial
Markets – the primary market and the secondary market.
5. Central Banks are large financial institutions that handle government finances, they regulate
the supply of money, and they serve as banks to commercial banks.

2. Indian financial system

3. Indian financial system
Business of Banking

4. Indian financial system
Role of government in regulating banks
Bank regulation is a form of government regulation which subjects banks to
certain requirements, restrictions and guidelines, designed to create market
transparency between banking institutions and the individuals
and corporations with whom they conduct business, among other things.
General principles
• Licensing and supervision
• Minimum requirements
• Market discipline
Instruments and requirements
• Capital requirement
• Reserve requirement
• Corporate governance
• Credit rating requirement
• reporting and disclosure requirements
• Large exposures restrictions
• Activity and affiliation restrictions

5. Indian financial system
Role of RBI in regulating banks
The central bank of the country is the Reserve Bank of India (RBI).
• It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission
The Bank was constituted for the need of following:
• To regulate the issue of banknotes.
• To maintain reserves with a view to securing monetary stability and,
• To operate the credit and currency system of the country to its advantage.
Instruments
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Refinance facilities

6. Role of RBI in regulating banks

7. Role of RBI in regulating banks

8. Indian financial system
Role and Functions of Bank

9. Regulatory Provisions/Enactments Governing
Banks
The banking system in India is regulated by the Reserve Bank of India (RBI), through
the provisions of the Banking Regulation Act, 1949.
• Exposure limits
 Lending to a single borrower is limited to 15% of the bank’s capital funds, which
may be extended to 20% in the case of infrastructure projects.
 For group borrowers, lending is limited to 30% of the bank’s capital funds, with an
option to extend it to 40% for infrastructure projects.
 The lending limits can be extended by a further 5% with the approval of the bank's
board of directors.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)
 Banks in India are required to keep a minimum of 4% of their net demand and
time liabilities (NDTL) in the form of cash with the RBI.
 a minimum of 22% and a maximum of 40% of NDTL, which is known as the
SLR, needs to be maintained in the form of gold, cash or certain approved
securities.

10. Regulatory Provisions/Enactments Governing Banks
• Provisioning
Non-performing assets (NPA) are classified under 3 categories: substandard,
doubtful and loss
• Priority sector lending
The priority sector broadly consists of micro and small enterprises, and initiatives
related to agriculture, education, housing and lending to low-earning or less
privileged groups (classified as "weaker sections"). The lending target of 40%
• New bank license norms
The new guidelines state that the groups applying for a license should have a successful
track record of at least 10 years and the bank should be operated through a non-
operative financial holding company
• Wilful defaulters
A wilful default takes place when a loan isn’t repaid even though resources are
available, or if the money lent is used for purposes other than the designated
purpose, or if a property secured for a loan is sold off without the bank's knowledge
or approval.
• The Bottom Line
The way a country regulates its financial and banking sectors is in some senses a
snapshot of its priorities, its goals, and the type of financial landscape.

11. Committees on Banking
• A C Shah Committee: NBFC
• A Ghosh Committee: Final Accounts, Modalities Of Implementation Of New 20 Point
Programme, Frauds & Malpractices In Banks
• AbidHussain Committee: Development Of Capital Markets
• Adhyarjuna Committee: Changes In NI Act NEGOTIABLE INSTRUMENTS ACT, And
Stamp Act
• AK Bhuchar Committee: Coordination Between Term Lending Institutions And
Commercial Banks.
• B Eradi Committee: Insolvency And Wind Up Laws
• B Sivaraman Committee: Institutional Credit For Agricultural & Rural Development
• B Venkatappaiah Committee: All India Rural Credit Review
• BD Shah Committee: Stock Lending Scheme BD Thakar Committee: Job Criteria In
Bank Loans (Approach)
• Bhide Committee: Coordination Between Commercial Banks And SFC’s
• C Rao Committee: Agricultural Policy
• CE Kamath Committee: Multi Agency Approach In Agricultural

12. Committees on Banking
• Samal Committee: Rural Credit
• SC Choksi Committee: Direct Tax Law
• Shankar LalGauri Committee: Agricultural Marketing
• SK Kalia Committee: Role Of NGO And SHG In Credit, Institutional Credit To SSI
• Sodhani Committee: Foreign Exchange Markets In NRI Investment In India
• SS Kohli Committee: Rehabilitation Of Sick Industrial Units,Rationalization Of
Staff Strength In Banks,Willful Defaulters
• SS Nadkarni Committee: Trading In Public Sector Banks
• SS Tarapore Committee: Capital Account Convertibility
• SukhmoyChakravarty Committee: To Review The Working Of Monetary System.
• Tambe Committee: Term Loans To SSI
• Tandon Committee: Industrial Sickness, Follow Up Of Bank Credit
• Thakkar Committee: Credit Schemes To Self Employed
• Thingalaya Committee: Restructuring Of RRB

13. Committees on Banking
• Tiwari Committee: Rehabilitation Of Sick Industrial Undertakings.
• UK Sharma Committee: Lead Bank Scheme (Review)
• UshaThorat Panel: Financial Inclusion.
• Vaghul Committee: Mutual Fund Scheme
• Varshney Committee: Revised Methods For Loans (>2 Lakhs)
• Venketaiya Committee: Review Of Rural Financing System
• Vipin Malik Committee: Consolidated Accounting By Banks
• VT Dehejia Committee: To Study Credit Needs Of Industry And Trade Likely To
Be Inflated
• Vyas Committee: Rural Credit.
• Wanchoo Committee: Direct Taxes
• WS Saraf Committee: Technology Issues In Banking Industry.
• Y H Malegam Committee: Disclosure Norms For Public Issues
• YV Reddy Committee: Reforms In Small Savings.

14. Recent Developments In Indian Financial System
Aadhar Seeding
Aadhaar seeding is a process by which Aadhaar numbers of residents are included in
the service delivery database of service providers for enabling de - duplication of
database and Aadhaar based authentication during service delivery.
Benefits of Aadhaar Seeding in Bank Account
(i) Credit of various Govt. sponsored subsidy / benefit schemes such as Direct Benefit
Transfer DBT/ Direct Benefit Transfer of LPG DBTL/ Mahatma Gandhi National
Rural Employment Guarantee Act, MGNREGA directly in Bank accounts through
Aadhaar Payment Bridge System (APBS) thus preventing leakage / corruption.
(ii) Used as KYC (Know your customer) in account opening process. Accounts are
directly opened through e-KYC process available at Branch and BC network.
(iii) Banking Services / Transactions using Aadhaar Enabled Payment System (AEPS)
through BC network on the basis of biometric authentication of the customer from
UIDAI data base

15. SELF HELP GROUPS
Self Help Groups (SHGs) are small groups of poor people. The members of an SHG face
similar problems. They help each other, to solve their problems. SHGs promote small
savings among their members. The savings are kept with the bank. This is the common
fund in the name of the SHG. The SHG gives small loans to its members from its
common fund.
SHG is an informal group and registration under any Societies Act, State cooperative Act or
a partnership firm is not mandatory vide Circular RPCD.No. Plan BC.13/PL -09.22/90-
91 dated July 24th, 1991.
Formation of SHG
A reasonably educated and helpful local person has to initially help the poor people to
form groups. He or She tells them about the benefits of thrift and the advantages of
forming groups. This person is called an ‘animator’ or ‘facilitator’.
Any of the following persons can be a successful animator:
• Retired school teacher or a retired government servant, who is well known locally.
• A health worker/a field officer/staff of a development agency or department of the
State Government.
• Field officer or a staff member of a commercial bank/regional rural bank or a field
staff from the local co-operative bank or society

16. SELF HELP GROUPS
• A field level functionary of an NGO.
• An unemployed educated local person, having an inclination to help others.
• A member/participant in the Vikas Volunteer Vahini (VVV) Programme of NABARD.
Woman animators can play more effective role in organising women SHGs. The animator
cannot organise the groups all alone. He or she will need guidance, training, reading
material, etc. Usually, one of the following agencies help:
• A voluntary agency or Non Governmental Organization (NGO).
• The development department of the State Government.
• The local branch of a bank.
Functioning of SHGs
Size of the SHG
The ideal size of an SHG is 10 to 20 members.
The group need not be registered.

17. SELF HELP GROUPS
Membership
From one family, only one person can become a member of an SHG.
• The group normally consists of either only men or of only women. Mixed groups are
generally not preferred. Women’s groups are generally found to perform better.
• Members should have the same social and financial background.
Some Common factors for Membership in an SHG
– Women/men from very poor households.
– Those who depend on moneylenders even for daily necessities.
– Those with a per capita income not exceeding Rs. 250 per month.
– Those having dry land holding not exceeding 2.5 acres.
– Common living conditions for the Group Members
Meetings
• The group should meet regularly. Ideally, the meetings should be weekly or at least
monthly.
• Compulsory attendance: Full attendance in all the group meetings will make it easy for
the SHG to stabilise and start working to the satisfaction of all.
• Membership register, minutes register etc., are to be kept up to date by the group by
making the entries regularly.

18. SELF HELP GROUPS
Major Functions of an SHG
• Savings and Thrift:
– All SHG members regularly save a small amount. The amount may be small,
but savings have to be a regular and continuous habit with all the members.
– “Savings first — Credit later” should be the motto of every SHG member.
– SHG members take a step towards self-dependence when they start small
savings. They learn financial discipline through savings and internal lending.
• Internal lending:
– The SHG should use the savings amount for giving loans to members.
– The purpose, amount, rate of interest, schedule of repayment etc., are to be
decided by the group itself.
– Proper accounts to be kept by the SHG.
• Discussing problems: In every meeting, the SHG should be encouraged to discuss
and try to find solutions to the problems faced by the members of the group.
When the group tries to help its members, it becomes easier for them to face the
difficulties and come up with solutions.
• Taking bank loan: The SHG takes loan from the bank and gives it as loan to its
members.

19. Jan Yojana Accounts
Pradhan Mantri Jan Dhan Yojana (PMJDY), is financial inclusion program
of Government of India which is applicable to 20 to 65 years age group, that aims
to expand and make affordable access to financial services such as bank accounts,
remittances, credit, insurance and pensions.
Benefits
• Opening of no-frills accounts
• Relaxation on know-your-customer (KYC) norms
• Engaging business correspondents (BCs)
• Use of technology
• Direct Benefit Transfer

20. NBFC’S
A Non Banking Financial Company (NBFC) is a company registered under the
Companies Act, 2013 of India, engaged in the business of loans and advances,
acquisition of shares, stock, bonds, hire-purchase insurance business or chit-fund
business but does not include any institution whose principal business includes
agriculture, industrial activity or the sale, purchase or construction of immovable
property.
Types of NBFCs in India
• Asset Finance Company (AFC)
• Investment Company (IC)
• Loan Company (LC)
• Infrastructure Finance Company (IFC)
• Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
• Gold Loan NBFCs
• Residuary Non-Banking Companies (RNBCs)

21. Micro Finance Institutions
The Small Finance Bank (SFB)
It is a private financial institution intended to further the objective of financial
inclusion by primarily undertaking basic banking activities of acceptance of
deposits and lending to un-served and underserved sections including small
business units, small and marginal farmers, micro and small industries and
unorganised sector entities, but without any restriction in the area of operations,
unlike Regional Rural Banks or Local Area Banks.
Payments Bank
A payments bank is like any other bank, but operating on a smaller scale without
involving any credit risk. In simple words, it can carry out most banking operations
but can’t advance loans or issue credit cards. It can accept demand deposits (up to
Rs 1 lakh), offer remittance services, mobile payments/transfers/purchases and
other banking services like ATM/debit cards, net banking and third party fund
transfers.
The main objective of payments bank is to widen the spread of payment and financial
services to small business, low-income households, migrant labour workforce in
secured technology-driven environment.