2. Flow of Contents
Introduction of Financial System
Meaning and Definition of Financial
System
Role and Function
Components
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3. Introduction to Financial System
It is an financial system is a mechanism that works for investors and people
who want finance.
Interaction of various intermediaries, market instruments, policy makers and
various regulations to aid the flow of saving from savers to investors and
checking various abuses faced in the proper functioning of the system.
Financial System
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4. Meaning and Definition
Meaning of Financial System: The word "system", in the term "financial
system", implies a set of complex and closely connected or interlinked
institutions, agents, practices, markets, transactions, claims, and liabilities in the
economy.
The financial system is concerned about money, credit and finance. These three
parts are very closely interrelated with each other and depend on each other.
Definition: A financial system may be defined as a set of institutions,
instruments and markets which promotes savings and channels them to their
most efficient use. It consists of individuals (savers), intermediaries, markets and
users of savings (investors).
According to Prasanna Chandra: “financial system consists of a variety of
institutions, markets and instruments related in a systematic manner and provide
the principal means by which savings are transformed into investments”.
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5. Functions of Financial System
The financial system of a country performs certain valuable functions for the
economic growth of that country.
1. Saving function
2. Liquidity function
3. Payment function
4. Risk function
5. Information function
6. Transfer function
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6. Role and Importance of Financial System in Economic
Development
1. It links the savers and investors.
2. It helps to monitor corporate performance.
3. It provides a mechanism for the transfer of resources across geographical
boundaries.
4. It offers portfolio adjustment facilities (provided by financial markets and financial
intermediaries).
5. It helps in lowering the transaction costs and increase returns. This will motivate
people to save more.
6. It promotes the process of capital formation.
7. It helps in promoting the process of financial deepening and broadening.
8. It provides a mechanism for managing uncertainty and controlling risk.
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7. Structure of Indian Financial System
Financial structure refers to shape, components
and their order in the financial system.
The Indian financial system can be broadly
classified into formal (organised) financial system
and the informal (unorganised) financial system.
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8. Particular Definition Institutions Principal Clients
FORMAL
Specialized Non
bank financial
institutions
Formal system of
finance is licensed by
the Central bank.
Commercial and
Development Banks.
Rural Banks,
Post Bank,
Savings and Loan
Companies,.
Large Businesses Government
Large Rural Enterprises, Salaried
Workers, Small And Medium
Enterprises.
INFORMAL Informal system of
finance is not
licensed by the
Central bank.
Chit Fund,
Indigenous Banker,
Pawn Broker,
Nidhis and
Moneylenders.
The principal clients who do
informal finance are either self-
employed or poor people.
Difference between Formal and Informal System
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