Indian Financial System consists of complex network of financial institutions, regulators, financial instruments and services. In general financial system plays a crucial role in the functioning of the economy as it allows transfer of resources from savers to investors. It mobilises and usefully allocates scarce resources of a country. The financial system transfers the financial resources from savers to investors in two ways:
The Indian financial system can be classified into the formal financial system and the informal financial system
The formal financial system comprises of network of banks, other financial and investment institutions and a range of financial instruments
The formal financial system comprises of four major components:
These are institutions that mobilise savings and facilitate the transfer of funds from surplus units to deficit units. These are institutions serving as a link between savers and investors. These institutions can be further classified into:
Financial Markets refers to the place or mechanism where financial assets are sold and purchased. It facilitates trading in financial assets. The financial markets are classified as money market and capital market
Financial Instrument is a contract between two parties. The contract gives rise to a financial asset of one party and a financial liability of another party. Some of the examples of financial instruments are equity shares, preference shares debentures, bonds, etc.
Financial services are services that ensure the smooth flow of financial activities in the economy. These are an important component of the financial system. They cater to the needs of financial institutions, financial markets and financial instruments which are geared to serve individual and institutional investors. It includes banking, insurance, stock broking and investment services as well as a wide range of other business and professional services.
The informal financial system comprises of moneylenders, indigenous bankers, lending pawn brokers, landlords, traders etc
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