The economic development of any country depends upon the existence of a well organized financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in turn promote the well being and standard of living of the people of a country. Thus, the ‘financial system’ is a broader term which brings under its fold the financial markets and the financial institutions which support the system. The major assets traded in the financial system are money and monetary assets. The responsibility of the financial system is to mobilize the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the free flow of funds to more productive activities and thus promotes investment. Thus, the financial system provides the intermediation between savers and investors and promotes faster economic development.
Financial institutions in countries like India are classified into banking and non-banking financial intermediaries wherein the commercial banks are considered as general or non-specialized financial institutions and the non-banking financial intermediaries like investment banks, insurance companies, term lending financial institutions and development banks are known as specialized financial institutions.
Country like India also has dichotomy in the financial market. This dichotomy can be explained in terms of the existence of organized and unorganized financial markets. While all of the above will constitute the organized sector of the financial market, the unorganized financial market in India consists of traditional bankers like the Gujarati shroffs, Multani or Shikarpuri shroffs, Chettiars and Marwari Kayas. The Gujarati shroffs operate in Bombay, Calcutta and the industrial trading centers of Gujarat. The Marwari shroffs operate in Calcutta, Bombay, Assam and other parts of north-east india. The multani or Shikarpuri shroffs are mainly found in Bombay and madras and the chettiars operate in south India. Amongst these traditional bankers, the gujarati shroffs carry out the largest volume of unorganized banking business in India. Non-banking financial companies like chit funds and nidhis also operate in large numbers in India. The third segment of the unorganized financial market in India consists of the money lenders. These unorganized segments are so called because they are neither registered as companies nor being controlled by the reserve Bank of India. [pic]
DEFINITION OF FINANCIAL SYSTEM:
According to Dr.Prasanna Chandra, “The financial system consists of a variety of financial intermediaries, markets and instruments that are related to each other. It provides the principal means by which savings are transformed into investments.”
Dr. L.M. Bhole defines financial system as “The financial system of any country consists of specialized and non-specialized financial institutions, of organized and unorganized financial markets, of financial instruments and services which facilitate transfer funds. Procedures and practices adopted in the markets and financial interrelationships are also parts of the system.” [pic]
FUNCTIONS OF FINANCIAL SYSTEM:
The financial system performs the following functions that are interrelated and are essential for the development process of a modern economy. An integrated picture of the financial system is depicted in Fig.4.1. ❖ Payment system
❖ Mobilization and allocation of funds
❖ Risk management
❖ Price information for decentralized decision making
❖ Dealing with incentive problem
1) PAYMENT SYSTEM:
The commercial banking system, alternatively known as depository financial intermediaries constitutes the payment system in the financial market. The credit and debit card companies play a supplementary role. With large...