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Financial System

The economic development of any country depends upon the existence of a well organized financial system. FS plays a very crucial role in the functioning of the economy because it allows transfer of resources from savers to investors(S2I).

FS is a broader term which brings under its fold the financial markets and financial institutions which support the system. The word system in the term FS implies a set of closely connected practices & transactions in the economy. Finance is the study of money related to its circulation, regulation & administration. The major assets traded in the FS are money or monetary assets. So, the responsibility of FS is to mobilize the savings in the form of money and invest them in to productive venture.

Thus FS provide the intermediation between savers and investors and promotes faster economic development.

FS = FI + FM + FI + FS
The FS consists of Financial Institutions, Financial Markets, Financial Instruments & Financial Services.

Functions of the FS
Mobilization of saving

Promotion of liquidity

Structure of Financial System

Financial Institutions Financial Markets

Financial Instruments
Financial Services

Financial Institutions
FI are the intermediaries who act as mobilizers and depositories of savings and as providers of credit/finance. FI is a mixture of Banking financial institutions(BFI) & Non Banking financial institutions(NBFI). BFI = CB + CB + CB + RRB BFI includes Central Bank, Commercial Banks, Co Operative Banks, Regional Rural Banks. NBFI = LIC + UTI + IDBI + NABARD NBFI includes Life Insurance Corporation, Unit Trust of India, Industrial Development Bank of India, National Agriculture Bank for Rural Development.

Financial Markets
FM is a Place/mechanism where funds/savings are transferred from surplus units to deficit units. These markets can be broadly classified into Capital & Money Market. FM = CM + MM CM deals with those financial assets which have maturity period of more than one year whereas MM deals with short term financial assets which have maturity period of less than one year.

Financial Markets
Another classification could be Primary & Secondary Markets. PM deals in new issue of securities whereas SM deals with securities which are already issued and available in the market. FM = PM + SM PM mobilize the savings directly by issuing the new securities. SM mobilizing the savings indirectly by providing liquidity to the securities.

Financial Instruments
The commodities that are traded in a financial market are financial assets/securities/instruments. FI = CMI + MMI + FA CMI: Capital Market Instruments: 1. Equity Shares 2. Preference Shares 3. Debentures/Bonds 4. Zero Coupon Bonds 5. Deep Discount Bonds 6. Secured Premium Notes

Financial Instruments
MMI: Money Market Instruments: 1. Commercial Bills 2. Commercial Papers 3. Certificate of Deposits FA: Financial Assets: 1. Gold/Silver 2. Real Estate 3. Buildings 4. Insurance Policies, 5. NSS, NSC & FDs 6. PF, PPF, RPF, URPF

Financial Services
FS include the services offered by both types of Cos.: Asset Management Cos. and Liquidity Management Cos. FS = AMC + LMC AMC includes the leasing Cos., Mutual Funds, Merchant Bankers, Issue/Portfolio Management. LMC comprises the Bill discounting and Acceptance Houses. This sector provides specialized services such as credit rating, venture capital financing, lease financing, factoring, credit cards, housing finance, book building etc. These services are regulated by SEBI, RBI, IRDA, Govt. of India, DBI(Dept. of Banking & Insurance).

Weaknesses of Indian FS
1. Lack of Co-ordination between Financial Institutions 2. Monopolistic Market Structures 3. Dominance of Development Banks in Industrial Financing 4. Imprudent Financial Practices 5. Inactive Capital Market