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Find out which type of financial system your country has. According to you,
which system is good for your country?
The financial system of a country is a vital tool of its economic development. It creates a flow
of savings between household and business to improve the wealth of both parties. The primary
function of financial system according to Robinson is “to provide a link between savings and
investment for creation of wealth and to permit portfolio adjustment in the composition of
existing wealth”.
The financial system of a country is concerned with,
 Mobilization of savings
 Allocation of savings
 Facilitating transactions
 Providing funds
 Developing financial markets
 Formulate and implement a legal financial framework
 Provide financial and advisory services
According to the market structure such as ‘stability of environment’ ‘influence of market
mechanisms’ etc., the financial system of any country can be divided as bank oriented financial
system and capital-market oriented financial system. The bank oriented financial system can
again divide into bank oriented with government participation and bank oriented without
government participation. Bank oriented with government participation is a redundant model
which is completely against the economic development of a country.
India’s financial system is kind of a mixture of both bank oriented and market oriented. It is
debatable and can be portray as both. Current structure of Indian financial system is as follows,
Private Bank

Comercial Banks

Public Bank
Co-Operative
Banks
Banking
Institutions
Financial Regional Rural
Institutions Banks
Non-banking
Institutions
Foreign Banks

Unorganised Secondary Market

Financial System Financial Markets Capital Market

Organised Primary Market

Financial Assets /
Money Market
Instruments

Fund based Leasing, Hire Purchace, Consumer Credit, Bill

Services Discounting, Factoring, Insurance etc.
Financial Services
Issue Management, Merchant Banking, Credit
Fee based services
Rating, Debate Restructuring, Stock Broking etc
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Even though India’s financial system is kind of a mixture of both bank oriented and market
oriented system, the influence of banking system and regulations from government are quite
large as compared to other similar economies. Almost all the capital market policies are either
formed or at least guided by either the bank or the government. On another hand, since the
equity capital share of existing companies in the economy is hundreds of trillion it may appear
that the market is important than banking. But on a closer look, even though policy makers are
driven by capital market, almost all other components are tightly controlled by government
policies, which explains the slow and unsustainable GDP growth and the following
shortcomings of current financial system,
1. The formal financial system is a failure in absorbing half of the household savings in
India. They are either going to the informal institutions or ending up in dead
investments like land or gold.
2. The formal financial institutions are forced to allocate most of the available funds to
less productive areas like agriculture, government companies, unorganised MSMEs etc.
due to government regulations. Much more productive private companies are receiving
much lesser than that of less productive sectors.
3. The cost of capital in India is higher as well as the benefit of investment is lesser
compared to similar economies because of the failure of financial institutions in
mobilizing capital as well as allocating funds.
Here comes the importance of a comprehensive capital-market oriented financial system which
will not only help in a sustainable rapid growth of GDP but also help in spreading its benefits
broadly. It can fix the above-mentioned shortcomings of current economy and improve it
beyond expectations. A research conducted by McKinsey Global Institute (MGI) states that
these reforms can add $47 billion to Indian economy each year, which will increase the GDP
to around 9.4% per year. It will also increase the household income by 30%, results in less
poverty.
So, the current mixed financial system is an appropriate one in Indian scenario, given that the
market will have an upper hand and the government regulations should be brought down to a
minimal level.