What is a financial system?
* A financial system is the orderly mechanism and structure in an economy to mobilize the monetary resources from various surplus sectors and allocate the same to the needy sectors. * A financial system transforms “savings” into “investments” and consumption”. * “Financial intermediaries” like banks, financial institutions, mutual funds etc. undertake the task of this transformation. * Organized Sector – Nationalized Banks, Cooperative Banks, DFIs, Private/Foreign Banks, Insurance/Investment companies * Unorganized Sector - Money Lenders, Indigenous Bankers, Pawn Brokers, Traders STRUCTURE OF INDIAN FINANCIAL SYSTEM
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Q1. Discuss the structure of Indian Financial system?
INDIAN FINANCIAL SYSTEM
The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System;
The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below; FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money MarketThe money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe. Credit MarketCredit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.
Constituents of a Financial System
Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds...