The document discusses the key components and functions of India's financial system. It notes that the financial system links savers and investors to facilitate wealth creation and economic development. The main constituents of the financial system include banks, non-banking financial institutions, money markets, capital markets, primary markets, and secondary markets. It then outlines the roles of important regulatory bodies like RBI, SEBI, and IRDA. The RBI acts as the central bank and regulates monetary policy, banking system, payment systems, and financial markets. SEBI regulates securities markets and aims to protect investors.

1. Neelakshi saini
Assistant Professor (MBA )

2.  The financial system of a country is an important tool
for economic development of the country as it helps
in the creation of wealth by linking savings with
investments. It facilitates the flow of funds from the
households (savers) to business firms (investors) to
aid in wealth creation and development of both the
parties. The institutional arrangements include all
condition and mechanism governing the production,
distribution, exchange and holding of financial assets
or instruments of all kinds. There are four main
constituents of the financial system as follows:

3. • The financial system deals with the financial
transactions and the exchange of money between
savers,investors, lenders and borrowers.
• Financial systems are made of different intricate and
complex models that link financial institutions and
markets to provide financial services for various
stakeholders operating in the financial system like
depositors, lenders, borrowers, government and
others.

9. • Thefinancial systemis concerned about money, credit,
andfinance
• Money refers to the current medium of exchange or
means of payment.
• Credit or loan is asum of money to be returned
normally with interest; it refers to adebt of
economicunit.
• Finance is monetary resources comprising debt and
ownership funds of the State, company or person.

10. • It provides payment system for the exchangeof goods and services in
the economy.
• It provides the mechanism to pull the funds in terms of household
savings for corporate investments.
• It provides the financial capital for longterm capital formation
for the government and businessorganizations.
• It facilitates the investors and other market participants to liquidate
their investment alternatives like stocks and bondsetc.
• It provides the avenues for managing the risks faced by the
market participants.
• It takes care of both shortterm and longterm needs of the
market participants.
• It supplies the required financial capital to government for
public expenditure on the social welfare activity, infrastructure
developmentetc.

11. • It provides the price information which helps to coordinate the
decentralized decision making process in the varioussectors.
• It helps in reduction of the asymmetric information and moral
hazard problems which in turn facilitates in reducing the
transaction costs
• It creates different investment opportunities for the investors to
maximize their return.
• It helps in efficient allocation of financial resources.
• It plays a significant role for economic growth as it helps to
create the demand and supply of the funds through which the
interest rates are determined in various markets. Changes in
interest rates affect the money supply, inflation rate and also
the possibility of the foreign investments.

13. • Banking and NonBanking
• Banksprovide transactions services
• Create deposits or credit
• Subject to legal reserverequirements
• Canadvance credit by creating claims againstthemselves
• other institutions can lend only out of resources put at
their disposal by thesavers
• Examples of nonbanking financial institutions are Life
Insurance Corporation (LIC), Mutual Fund Institutions
(MFIs), and other NonBanking Financial Companies
(NBFCs).
• According to Sayers banks are "creators" of credit, and non
banking institutions are "purveyors" ofcredit

14. • Money and Capital Markets
• This conventional distinction is based on the differences in
the period of maturity of financial assets issued in these
markets
• While the money markets deal in the shortterm claims
(with a period of maturity of one year or less), the capital
markets does so in the longterm (maturity period above 1
year) claims
• Primary and Secondary Markets
• Primary markets deal in the new financial claims or new
securities
• Secondary markets deal in securities already issued or
existing or outstanding

15.  RBI
 SEBI
 IRDA
 COMMERICAL BANKS
 COOPERATIVE BANKS
 NBFCS
 INSURANCE COMPANIES
 MUTUAL FUNDS
 STOCK EXCHANGES
 DEPOSITORIES

16. • The RBI, as the central bank of the country, is the centre of the Indian
financial and monetary system.
• It started functioning from April 1, 1935 on the terms of the Reserve
Bank of India Act, 1934
• The Governor and all the Deputy Governors of the Bank are
appointed by the central government
• The Bank is managed by a Central Board of Directors, four Local
Boards of Directors, and a committee of the Central Board of
Directors
• The final control of the Bank vests in the Central Board which
comprises
the Governor, four Deputy Gover-nors, and fifteen Directors
nominated by the central government.
• At present RBI has 26 departments, 28 regional offices

17. • To maintain monetary stability so that the business and economic
life can deliver welfare gains of a properly functioning mixed
economy.
• To maintain financial stability and ensure sound financial
institutions so that monetary stabil-ity can be safely pursued and
economic units can conduct their business with confidence.
• To maintain stable payments system so that financial transactions
can be safely and effi-ciently executed.
• To promote the development of financial infrastructure of
markets and systems, and to enable it to operate efficiently i.e.,
to play a leading role in developing a sound financial system so
that it can discharge its regulatory function efficiently.
• To ensure that credit allocation by the financial system broadly
reflects the national eco-nomic priorities and societal concerns.
• To regulate the overall volume of money and credit in the
economy with a view to ensure a reasonable degree of price
stability.

18. • Note Issuing Authority
• The RBI has, since its inception, the sole right or
authority or monopoly of issuing currency notes other
than one rupee notes and coins, and coins of smaller
denominations.
• At present, the Bank issues notes in the following
denominations: Rs 5, 10, 20, 50, 100, 500 and 2000
• Government Banker
• The RBI is the banker to the Central and state
governments
• It provides to the governments all banking services
such as acceptance of deposits, withdrawal of funds
by cheques, making payments as well as receipts and
collection of payments on behalf of the government,
transfer of funds, and management of public debt

19. • Management of Public Debt
• The Reserve Bank manages the public debt and issues new loans on behalf
of
the Central and State Governments. It involves issue and retirement of rupee
loans, interest payment on the loan and operational matters about debt
certificates and their registration.
• Bankers' Bank
• The Bank controls the volume of reserves of commercial banks and thereby
determines the deposits/credit creating ability of the banks.
• The Reserve Bank opens current accounts of banks with itself, enabling these
banks to maintain cash reserves as well as to carry out inter-bank transactions
through these accounts.
• Inter-bank accounts can also be settled by transfer of money through
electronic fund transfer system, such as, the Real Time Gross Settlement
System (RTGS).
• The banks hold a part or all of their reserves with the RBI. Similarly, in times of
need, the banks borrow funds from the RBI.

20. • Supervising Authority
• Issues licences for the establishment of new banks
• Issues licences for the setting up of bank branches
• Prescribes minimum requirements regarding paid-up capital and reserves,
transfer to reserve fund, and maintenance of cash reserves and other liquid
assets
• Inspects the working of banks in India as well as abroad in respect of their
organisational set-up, branch expansion, mobilisation of deposits,
investments, and credit portfolio management, credit appraisal, region-
wise performance, profit planning, manpower planning and training
• Conducts investigations, from time to time, into complaints, irregularities,
and frauds in respect of banks
• Controls appointment, re-appointment, termination of appointment of the
Chairman and chief executive officers of private sector banks
• Approves or force amalgamations

21. • Formulating Prudential Norms
• RBI formulates various prudential norms to create and
maintain a stable, efficient, and well-functioning
financial system in India.
• Promoter of the Financial System
• RBI has been rendering 'developmental' or
'promotional' services which have strengthened the
country's banking and financial structure
• Helps in mobilising savings and directing credit flows
to desired channels
• Provides concessional loans to various priority sectors
• Establishes specific institutions like NABARD to
develop agricultural sector

22. • Regulation and Supervision of Payment System
• Takes steps towards integrating the payment system with the settlement
systems for government securities and foreign exchange
• To facilitate settlement of Government securities transactions, it created
the Negotiated Dealing System, a screen-based trading platform
• It created a Board for Regulation and Supervision of Payment and
Settlement Systems (BPSS) as a Committee of the Central Board. A new
department called the Department of Payment and Settlement Systems
(DPSS) was constituted to assist the BPSS in performing its functions
• Regulator of Money and Credit
• The function of formulating and conducting monetary policy is of
paramount importance for any Central Bank.

23. • SEBI formed with all functional autonomy under the SEBI
Act, 1992
• The central Govt. is empowered to supersede the SEBI in
public interest or if on account of grave emergency
• The SEBI is a body of eight members comprising comprising
the chairman, three full time members, one part time member
and two officials of the ministries of the central government
dealing with finance and law, and one member from the RBI.
• All members, except the RBI member, are appointed by the
government

24. • Toprotect the interests of investors in securities and to promote the
development of, and to regulate the securities market.
• Toregulate the business in stock exchanges.
• Toregister and regulate the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to
an issue, merchant bankers, underwriters, portfolio managers,
investment advisers, etc.
• Toregister and regulate the working of the depositories, participants,
custodians of securities, foreign institutional investors, credit rating
agencies, etc.
• Toregister and regulate the working of venture capital funds and
collective investment schemes, including mutual funds.
• Topromote and regulate self-regulatory organisations.

25. • Three kinds of disciplines on the corporate:
• Self Discipline
• Market Discipline
• Regulatory Discipline
• Governance and Value Creation:
• The strength of stakeholder relationships
• Wealth created is evenly distributed across all
classes of stakeholders
• Management quality
• Stability of future wealth creation

26. • Ensuring timely disclosure of relevant information,
• Providing an efficient and effective market system,
• Demonstrating reliable and effective enforcement, and
• Enabling the highest standards of governance.

27. • Kumar Mangalam Birla Committee (2000)
• Introduction of Clause 49 of the Listing Agreement to be complied
with by all listed companies
• The board of a company should have an optimum combination of
executive and non-executive directors with not less than 50% of the
board comprising the non-executive directors.
• The disclosures should be made in the section on corporate
governance of the annual report
• N.R. Narayana Murthy Committee (2003)
• Persons should be eligible for the office of non-executive director so
long as the term of office did not exceed nine years (in three terms of
three years each, running continuously).
• The age limit for directors to retire should be decided by companies
themselves.
• All audit committee members shall be non-executive directors. They
should be financially literate and at least one member should have
accounting or related financial management expertise.
• Audit committee of listed companies shall review mandatorily the
information on financial statements, risk management practices, IPOs
etc.

28. Shri Uday Kotak Committee (2017)
• Issues Addressed
• Ensuring independence in spirit of Independent Directors and their
active participation in functioning of the company;
• Improving safeguards and disclosures pertaining to Related Party Transactions;
• Issues in accounting and auditing practices by listed companies;
• Improving effectiveness of Board Evaluation practices;
• Addressing issues faced by investors on voting and participation in
general meetings;
• Disclosure and transparency related issues;
• Any other matter, as the Committee deems fit pertaining to corporate governance
in India.
• The committee shall endeavour to submit the report within a period of four
months.

29. • Insurance Regulatory and Development Authority
(IRDA) is a statutory body set up for protecting the
interests of the policyholders and regulating,
promoting and ensuring orderly growth of the
insurance industry in India
• IRDA has been playing a pivotal role in the
insurance sector with a fundamental commitment
to discharge its mandate for orderly growth of
insurance sector. As on 31st March 2015 there are
24 life insurers (1 public sector and 23 private
sectors) and 29 non-life insurers (4 public insurers,
2 specialized insurers, 1 reinsurer and 22 private
insurers including 5 standalone health insurers)
operating in in India

30. • IRDA is a ten member body appointed by Government of India
consisting of the chairman, five whole time members, and four
part time members
• The Insurance Advisory Committee (IAC) advices IRDA in
framing the regulations for insurance companies.
• IAC consists of not more than 25 members excluding the ex-
officio members

31. • Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration
• Protection of the interests of the policyholders in matters concerning assigning of
policy, nomina-tion by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance
• Specifying the code of conduct for surveyors and loss assessors
• Promoting efficiency in the conduct of insurance business
• Promoting and regulating professional organisations connected with insurance and
reinsurance business
• Levying fees and other charges for carrying out the purposes of the Act
• Specifying the form and manner in which books of accounts shall be maintained and
statements of accounts shall be rendered by insurers and other insurance
intermediaries
• Regulating investment of funds by insurance companies
• Regulating maintenance of margin of solvency
• Adjudication of disputes between insurers and intermediaries or insurance intermediaries

32.  Insurance is a form of financial risk management tool in which
the
 insured transfers the risk of a potential financial loss to the
insurance
 company (insurer), which mitigates it in exchange for a monetary
compensation popularly known as insurance premium.
 • The pure premium is the present value of the expected cost of
an
 insurance claim.
 • Since there is a lag between payment of premiums and
payment of claims, there is generation of investible funds known
as insurance
 reserves.
 • Insurance policy is the contract between the insured (policy
holder) and the insurer (insurance company)

33.  Sum assured is the amount that is promised by the
insurance company in case of a claim either by
maturity or by loss to the insured subject matter.
 Surrender value is the amount that the insurer pays if
the insured discontinues the policy to the insurer.
 Life of the policy is the time period wherein the
insurance policy is in vogue.
 Moral hazard refers to the mala fide intensions of
either of the parties of the contract in fulfilling their
obligations with respect to their performance of the
contract.

34.  • Protection to Investors, means for accumulating
savings, channelize savings for Investment
 Broadly, insurance is offered either as life insurance
or general insurance.
 Life insurance covers insurance of life and covers
risks related to the death of
 a person for whom insurance is bought.
 General insurance encompasses all those kind of
insurance contracts that cover non-life subjects.
These include motor insurance, marine insurance,
property insurance, liability insurance, commercial or
business insurance,housing loan insurance
 • Health insurance is also a part of general
 .

35.  To provide life insurance protection to the
masses at reasonable cost.
 To mobilize people's savings through insurance-
linked savings schemes.
 To invest the funds to serve the best interests of
both the policy-holders and the nation.
 To act as trustees of the policy-holders and
protect their individual and collective interests.
 To involve all the people working in the
corporation to ensure efficient and courteous
service to the insured public.

36.  Principle of Utmost Good Faith
Both insurer and insured should enter into the contract in good faith. The
insured should voluntarily disclose all the facts related to the subject matter
of the contract. The insurer should also provide all the details regarding the
insurance contract.
 Principle of Insurable Interest
Insured must have the insurable interest on the subject matter i.e. the policy
holder should be able to establish a monetary relationship between him/her
and the subject matter of the insurance.
 Principle of Indemnity
Indemnity refers to the assurance given by one to put the person who buys
insurance, in the event of loss, in the same position that he/she occupied
immediately before the happening of the event for which indemnity is sought
for.
 Principle of Subrogation
This principle refers to the right of the insurer to stand in the place of insured
after the settlement of a claim and itgives the insurer right to recover from
an alternative


37. Principle of Warranties
 • Warranties are the conditions that are written by the insured in
the insurance contract that state the truth by affirming or
denying the existence of a particular state of facts.
 Principle of Cause Proxima
Proximate cause refers to the immediate cause that resulted in
the loss.
 Principle of Contribution
 Under this principle insured can’t make profit by making claim
for some loss more than once.
 Principle of Loss Minimization
This principle states that the insured must take all the necessary
steps to minimize the loss to insured properties

38.  Life policy is a claim to a future payment of
either a lump sum or a stream of income.
 There are only a few basic types of such policies,
viz. Term insurance, whole life insurance,
endowment policies, annuity contracts, indi-
vidual insurance, group insurance, pension plans,
children's plans, and equity-linked plans.
 • The life fund is built up out of the excess of
premiums and investment income over claims
and expenses on revenue and capital accounts.
The life fund is valued from time to time, the
valuation being based on the method of
discounting future income and expenditure back
to the present

39. The essence of general insurance is the collective
pooling of risks arising from fortuitous
occurrences.
 The general insurance companies do not collect
savings, yet they do accumulate pools of funds
from premium and investment income out
 of which they meet claims under their policies.
 Liabilities are normally short-term in nature
 Claims against them are unpredictable
 Assets are held in relatively liquid form

40.  It is an institution whose current operations
consist in granting loans and receiving
deposits
 Types of commercial banks in India: (i) Public
Sector banks (ii)Private sector banks and (iii)
Foreign banks

41.  Offering liquidity and payment services
 Transformation of assets
 Management of risk
 Processing information and monitoring
borrowing

42.  Shifting from commodity money to fiat money
 Commodity Money: Medium of exchange is
commodity itself
 Fiat Money: A system in which medium of
exchange is intrinsically useless but its value is
guaranteed by some institution so generally
accepted as means of payment
 Bank and fiat money management
 Money change( exchange between currencies)
 Provision of payment services
 Payment services include management

43.  Convenience of Denomination
Fiat money is available in different
denominations .
 Quality Transformation
Bank deposits offer better risk‐return
characteristics than direct investments to
diversify portfolio. Banks have more
information than depositors for better
investment/
 Maturity Transformation
Short maturity deposits to long maturity loans

44.  Credit Risk:
Probability of default in lending activities
 Interest Rate Risk:
Change in the value of assets and liabilities of
banks due to change in interest rate
 Liquidity risk:
Not able to fulfil the requirements of
depositors

45. Loan commitments, guarantee etc
 Offer of derivative investments like swap
hedging contracts and underwriting
 Objectives of off balance sheet operations
 Increase in non‐interest income
 Decreasing leverage
 Tax relaxation

46.  A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial
goal. The money thus collected is then invested in
capital market instruments such as shares,
debentures and other securities.
 The income earned through these investments and
the capital appreciation realized are shared by its unit
holders in proportion to the number of units owned
by them.
 Thus a Mutual Fund is the most suitable investment
for the common man as it offers an opportunity to
invest in a diversified, professionally managed basket
of securities at a relatively low cost.

47.  • According to the SEBI, mutual funds are established in the form
of a trust to raise money through the sale of units to the public
under various schemes for investing in differentsecurities.
 • A mutual has (i) a sponsor, (ii) trustees, (iii) an asset
management company (AMC) and (iv) custodians.
 The sponsors set up the trust as promoters. The trustees hold
the property in trust for the benefit of the unit holders. They
monitor AMC’s performance and compliance with the SEBI
regulations.
 The AMC manages the funds. The custodian holds the securities
of the fund in its custody.
Example: SBI Mutual Fund; Sponsor: SBI, Trustee: SBI Mutual Fund
Trustee Company Private Limited; Asset Management Company:
SBI Funds Management Private Limited ('AMC') (A joint venture
between SBI and AMUNDI);
 Custodians: Bank of Nova Scotia / HDFC Bank / SBI-SG
 Global Securities Services Private Limited

48.  Entry Load: It is a sales charge that the investors pay
when they buy some units of a mutual fund scheme.
 Exit Load: It is the amount of money that the investor
needs to pay to the mutual fund companies when
intend to exit from a scheme. It is also called as
‘Repurchase’ or ‘Back-end’ Load.
 Sale Price: It is the price paid by investors at the time
of investing in a scheme. Or in other words, it is the
purchase price for investors and is also called as
‘Offer Price’.
 systematic investment plan Like recurring
deposits, it is an investment tool offered by mutual
funds which helps investors to make a regular
investment of small amount for a certain period
oftime.

49.  Systematic Encashment Plan: This plan
facilitates the investors to withdraw a
specified amount or units from the invested
fund at a pre-determined interval.
 Switch: It is a mechanism by virtue of which
investors can shift their investments from one
scheme to others within that fund.
 Monthly Income Plans: This is special type of
scheme where a part of fund is invested in
equity and another remaining in debt.
Investors who want a regular income stream
invest in these schemes.

50.  Professional Management
 Diversification
 Economies of Scale
 Spread of Risk
 Liquidity & Flexibility
 Simplicity
 Low transaction Costs
 Taxes Benefit
 Wide Choice of Schemes

51. •Bhole, L. M., and Mahakud, J. Financial
institutions and markets: structure, growth and
innovations, 6e. Tata McGraw-Hill Education,
2017.