Explain Basic Functions Of Financial System In India?

1 Answers

Anonymous Profile
Anonymous answered
Financial System in India  India has a financial system that is regulated by independent regulators in the sectors of banking, competition, insurance, capital markets, and different services sectors. In finance, the financial system is the system that allows the transfer of money between savers and borrowers. It comprises a set of complex and closely interconnected financial institutions, services, markets, instruments, practices, and transactions.
Structure of Financial System in India
Financial structure refers to the mix of financial institutions, instruments and markets that channel savings and other funds to businesses and other borrowers. In a bank-based system, banks play the major role in channeling funds to businesses. In a market-based system, capital markets ? Including the stock and bond markets ? Are the more important source of funds.
Components of Financial System in India
The financial system consists four components. These are financial markets, financial services, financial instruments and financial institutions.
Financial Institution: - Financial Institution can be classified as banking and non banking institutions. Banking Institutions are creators and purveyors of credit while non banking financial institutions are purveyors of credit.
Financial Markets: - Financial Markets can be classified as primary and secondary markets. A Primary Market deals with new issues and secondary markets is meant for trading in existing securities.
Financial Instruments: - A financial instrument is a claim against an institution or a person for payment at a future date of a sum of money in the form of dividend.
Financial Services: - Financial services are those , which help with borrowing and funding, buying and selling securities, lending and investing, making and enabling payments and settlements and managing risk exposures in financial markets.
Functions performed by financial system are:
•Saving function: Public saving find their way into the hands of those in production through the financial system. Financial claims are issued in the money and capital markets which promise future income flows. The funds with the producers result in production of goods and services thereby increasing society living standards.
•Liquidity function: The financial markets provide the investor with the opportunity to liquidate investments like stocks bonds debentures whenever they need the fund.
•Payment function: The financial system offers a very convenient mode for payment of goods and services. Cheque system, credit card system etc are the easiest methods of payments. The cost and time of transactions are drastically reduced.
•Risk function: The financial markets provide protection against life, health and income risks. These are accomplished through the sale of life and health insurance and property insurance policies. The financial markets provide immense opportunities for the investor to hedge himself against or reduce the possible risks involved in various investments.
• Policy function: The government intervenes in the financial system to influence macroeconomic variables like interest rates or inflation so if country needs more money government would cut rate of interest through various financial instruments and if inflation is high and too much money is there in the system then government would increase rate of interest.

Answer Question