A Brief Note On Components Of The Indian Financial System (2024)

A country’s economic system is divided into two segments: those with surplus funds and those with deficit money. Individuals who are short on cash will need to make arrangements with persons who have extra cash and are willing to invest it in order to earn a profit. As a result, the financial institutions and financial markets establish connections between lenders and borrowers, allowing money to move from surplus to deficit funds. The financial sector plays a critical role in a country’s economic growth, particularly in emerging countries like India. India’s financial system supports the mobilisation of cash for the country’s and its citizens’ economic growth and development.

Definition of Financial System

The financial system of a country is a system that manages the finances of a country through its components.

Components of the Indian Financial System

The four major components of the Indian Financial System are:

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets

Let us discuss these components in detail.

Financial Institutions

Financial Institutions serve as a go-between for the investor and the borrower. The Financial Markets are used to mobilise the investor’s funds, either directly or indirectly. A bank is the greatest illustration of a financial institution. People who have extra money put it in savings accounts, while others who are short on cash take out loans. The bank serves as a link between the two.

Financial institutions are further classified into two categories:

1. Banking Institutions or Depository Institutions- This category comprises banks and credit unions that accept money from the public in exchange for interest on deposits and then lend it to those in need.
2. Non-Banking Institutions or Non-Depository Institutions- Insurance, mutual funds, and brokerage firms are examples of non-banking institutions or non-depository institutions. They are unable to request monetary deposits, but they can market financial goods to their clients.

Financial Assets

Financial Assets are the items that are exchanged in the Financial Markets. The securities in the market differ from one another based on the distinct criteria and demands of the loan applicant.

The following are some major financial assets that have been briefly discussed:

1. Call Money- It is a term used to describe a loan that is given for one day and then repaid the next day. This type of transaction does not necessitate the use of collateral security.
2. Notice Money- It is a term used to describe a loan that is provided for more than a day but less than 14 days. This type of transaction does not necessitate the use of collateral security.
3. Term Money- Term money refers to a deposit that has a maturity time longer than 14 days.
4. Treasury Bills, or T-Bills- These are short-term government bonds or debt instruments that mature in less than a year. Purchasing a T-Bill entails making a loan to the government.
5. Certificates of Deposits (CDs) – These are dematerialised (electronic) forms for cash placed in a bank for a certain length of time.
6. Commercial Paper is a type of unsecured short-term financial instrument issued by businesses.

Financial Services

Management of financial instruments (assets or securities) and liability management firms provide services to assist in obtaining the necessary finances as well as ensuring that they are invested effectively.

India’s financial services include:

1. Banking Services- Any little or large service given by banks, such as lending money, depositing money, providing debit/credit cards, opening accounts, and so on.
2. Insurance Services- Insurance services include services such as issuing insurance, selling policies, insurance undertakings, and brokerages, among others.
3. Investment Services- Asset management is a common example of investment services.
4. Foreign Exchange Services- Foreign exchange services include currency exchange, foreign exchange, and so on.

Financial Markets

A financial market is a marketplace where buyers and sellers engage and trade financial instruments (assets or securities) like money, bonds, stocks, and other assets.

There are four different types of financial markets:

1. Capital Market- The capital market, which is designed to finance long-term investments, deals with transactions that take place in the market for more than a year.
2. Money Market- This sort of market is only permitted for short-term investments and is dominated by the government, banks, and other large institutions. It’s a wholesale debt market that specialises in low-risk, high-liquid securities.
3. Foreign Exchange Market- The foreign exchange market, one of the most established marketplaces in the world, deals with multi-currency requirements. In this market, monies are transferred based on the foreign exchange rate.
4. Credit Market- A credit Market is a market where short-term and long-term loans are issued to individuals or organisations by various banks, financial institutions, and non-financial institutions.

Conclusion

Money is circulated via the financial system (Financial Institutions, Financial Assets, Financial Services and Financial Markets), which distributes it to people, companies, and organisations. A country’s financial system is not a single entity but rather a collection of organisations and companies that work together to keep the system running. The preceding article about the Indian financial system raises awareness of the Indian financial system. It aids in the preparation of competitive tests. This also encourages individuals to learn more about their country’s economic functioning, allowing them to make better-informed judgments about various investments. I hope you have grasped the significance of the Indian financial system in the country’s economic progress.