Category: Financial Market and Institutions

U1 L6 FMI

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L6

Phase of financial sector reforms.[1]

The first phase, also known as first generation reform. Financial sector reforms start its works in the early 1990s, by which the Indian economy has achieved high growth in an environment of macro-economic and financial stability. The period has been marked by broad based economic reform that has touched every segment of the economy. These reforms were designated essentially to promote greater efficiency the economy through promotion of greater. In this phase the health of financial sector has recorded very significant improvement.

The main objective of the financial sector reforms in India was to create an efficient, productive and profitable financial services industry. Narasimham committee view that in this phase that the objective of financial sector reforms in India should not focus on correcting the present financial weakness but should strive to eliminate the roots of the cause of the present challenges faced by the Indian market economy.

Second Generation reforms.

Second generation reforms or the second phase of the reforms commenced in the mid-1990s and laid greater emphasis on the strengthening the financial system on the introduction of the structural improvements .Narasimham committee II was to look into the extent of the effectiveness of the implementation of reforms suggested by Narasimham committee I and was entrusted with the responsibility to lay down a course of future reforms for the growth and integration of the banking sector with international standard.

Principles of financial sector reforms.

1. Development of financial institution.

2. Development of efficient, competitive and stable financial sector

3. Mutually reinforcing measures that would serve as enabling reforms which would not in any way disrupt the confidence in the system.

4. Development of the financial infrastructure in terms of technology, changing real framework, setting up of a supervision body laying down of audit standards.

5. Initiatives to nurture integrate and develop money, forex, debt market.

6. Introduction of complementary reforms across monetary, fiscal and external sector.

7. Introduction of various measures by cautious and gradual phasing this giving time to various agents to carry out necessary norms.

Approaches of financial sector reforms.

Financial sector reforms can be divided into four approaches.

1. Banking sector reforms.

2. Debt Market reforms.

3. Forex market reforms.

4. Reforms in other segment.

Banking sector reforms

Despite the general approach of the financial sector reforms process, many of regulatory and supervisory norms were started out first for commercial banks and thereafter were expanded to other financial intermediaries. It consists of a two -fold process. Firstly, the process involved recapitalization of banks from government resources to bring them at par appropriate capitalization standards. On a second level, an approach was adopted replacing privatization. The main idea was to increase the competition in the banking system. The main aim of banking sector reforms was to promote a diversified, efficient and competitive financial system with ultimate goal of improving the allocate efficiency of resources through operational flexibility, improved financial viability and institutional strengthening. There are many reforms taken for enhancing the effectiveness of banking system like prudential norms, supervisory measures, technology related measures.

1. Introduction and phased implementation of international best practices.

2. Norms for risk -weighted capital adequacy requirements, accounting, income recognition.

3. Measures to strengthen risk management through recognition of different components of risk, norms on connected lending, risk concentration.

4. Granting of operational autonomy to public sector banks, transparency norms for entry of Indian private sector, foreign and joint -venture investment in the financial sector in the form of FDI (foreign direct investment).

5. Establishment of board for financial supervision as the apex supervisory authority for banks, financial institution and NBFC (non-banking financial companies).

Debt Market reforms.

Major reforms have been carried out in the government securities debt market. Functioning of Government securities debt market was really initiated in the 1990s.The system had to essentially move from a strategy of pre-emption of resources from banks at administrated interest rates and through monetization of a SLR (statutory liquidity ratio). The high SLR reserve requirement lead to the creation of a captive market for government securities which were issued at low administrated interest rate.

Major reforms in the debt market are:

1. Administrated interest rates on government were replaced by an auction system for price discovery.

2. Primary dealers were introduced as market makers in the government securities market

3. Repo was introduced as a tool of short -term liquidity adjustments.

4. Foreign institutional investors were allowed to invest in government securities in certain limit.

5. 91-day treasury bills were introduced for managing liquidity.

Forex Market Reforms

The forex market exchange market in India had been characterized by heavy control since the 1950s along with increasing trade control designed to foster import substitution. Both current and capital accounts were shut and forex was made available through a complex licensing system undertaken by the RBI.

The reforms were taken in forex market are:

1. Evolution of exchange rate regime from a single -currency to fixed exchange rate system to fixing the value of rupee against a basket of currencies.

2. Replacement of the earlier FERA act 1973, by the market Friendly FEMA act 1999.

3. Development of rupee -foreign currency swap market.

4. Permission to various participants in the foreign exchange market including exporters, FIIS (foreign institutional investors).

5. Foreign exchange earners permitted to maintain foreign currency account.

Reforms in other segments of the financial sector.

Measures aimed at establishing prudential regulation, supervision, competition and efficiency enhancing measures have also been introduced for non-bank financial intermediaries (NBFs). Development finance institution, NBFs ,urban cooperative banks, specialized term lending institution and primary dealers all of these have been brought under the regulation of the board for financial supervision.

For increasing transparency, market efficiency, integration of national markets and prevention of unfair trade practices regarding trading regulate and develop capital market was introduced. Another important reform is establishment of SEBI act 1992 as a regulator for equity markets. Mutual funds have been permitted to open offshore funds for the purpose of investing in equities. The Indian corporate sector has been allowed to tap international capital markets through ADRs (American depository receipt), GDRs (Global depository receipt), FCCBs (foreign currency convertible bonds), and NRIs (non-resident Indians) have been allowed to invest in Indian companies.

India has taken dramatic strides in recent tears to advance financial sector reforms. But in a fast -evolving market place, reforms are by necessity a continues process. It is important to note that financial sector reforms by themselves cannot guarantee good economic performance. That depends upon a number of other factors, including especially the maintains of as a favourable macro -economic environment and the pursuit of much needed economic reforms in other parts of the real economy. It concludes that finance and growth are interlinked; with increasing developments all around the world, the Indian banking and financial system has to develop in a manner that stimulates growth and competition. Most of the changes or amendments are recommends in the legislative framework by both of the Narasimham committees (I & II) have been carried out although much still needs to be done. India has undergone more than decade of financial sector reforms which has led to substantial transformation and liberalization of the entire financial sector.

Further reading:

Financial Sector Reforms in India Since 1991

[1] http://www.ijbm.co.in/downloads/vol3-issue1/6.pdf

U1 L5 FMI

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L5

Financial system and economic development.[1]

Financial institutions and markets are together called the financial system. This financial system is the backbone of the national economy. This is because the efficiency with which the financial system works plays a very important role in the economic development of a nation. The role of the financial system may not be apparent since we assume its existence to be a given. However, when we do start paying attention to the financial system, it is easy to see why it plays a foundational role in the economic development of a country.

1. Interest Rates Stabilization:

The financial system ensures that all the organizations and institutions which it is composed of, behave as one unified system. Generally, healthy competition is promoted between the members of the system. This means that members have to compete with each other by lowering their costs. As a result, the benefits of lower interest rates are passed on to the consumers. It is the existence of the financial system, which ensures that interest rates remain stable across the country. The banking system led by a central bank makes this possible. In the absence of a financial system, each region would have its own interest rate based on the availability of capital. However, with the financial system in place, interest rates remain the same across the entire country. As a result, businessmen and entrepreneurs throughout the country are on an equal footing.

2. Aids Trade and Commerce:

Credit risk has always been the main factor that inhibits trade and commerce. If a seller is not sure about whether they will get paid for the goods which they sold, then they will not sell more goods till the earlier payment has been received. This reduces inventory turnaround and leads to a decline in trade and commerce. Financial systems ensure quick and timely payment. With the advent of advanced technology, it is now possible to remit money to any part of the world within a few seconds. Hence, financial markets and institutions aid in trade and commerce and even improve the gross domestic product of a country.

3. Aids International Trade:

The risks inherent in trade and commerce get multiplied several times when it comes to international trade. This is because firstly, the seller and buyer, are in different legal jurisdictions. Hence, the enforceability of contracts is reduced. Secondly, the quantity of goods involved in import and export transactions is extremely large. Hence, the outstanding amounts also become large, and this ends up increasing the overall risk in the transaction.

Financial systems play a very important role in the international trade process. This is because importers and exporters generally use banks as an intermediary in the process. The importer deposits money with the bank in the form of a letter of credit. This letter of credit is then paid to the exporter by the bank when goods are received. As a result, neither party has to rely on each other. Instead, both of them can rely on the bank, which has a higher credit rating and therefore aids in the reduction of risk. Similarly, countries have created special boards for export credit and promotion. These boards provide important services like insurance and payment guarantees in international trade. It would be fair to say that in the absence of financial markets and systems; international trade would be negatively impacted.

4. Aids in Attracting Capital:

Stable financial markets raise investor confidence. As a result, investors from domestic as well as international markets start investing in the capital markets. As a result, more capital becomes available to domestic companies. They can then use this capital to increase economies of scale, which makes them more competitive in the international market. If these financial institutions and markets were not present, foreign investors would find it very difficult to locate investment opportunities and follow through with them.

5. Aids Infrastructure Development:

Financial markets play a vital role in infrastructure development, as well. This is because the private sector may face great difficulties in raising large amounts of funds for projects with a high gestation period. It is the financial markets that provide the liquidity required by investors. Investors can sell their securities and cash out whenever they want. It is not important for the same investor to hold on to the security for the entire tenure of the loan. Key sectors like power generation, oil, and gas, transport, telecommunication, and railways receive a lot of funding at concessional rates thanks to the financial markets.

Financial markets also allow governments to raise large sums of money. This enables them to continue deficit spending. In the absence of financial markets, governments would not be able to continue deficit spending, which is important to fund infrastructure projects in the short run.

6. Help in Employment Creation:

The financial system provides capital to entrepreneurs who want to start a business. When these businesses come into existence, they, directly and indirectly, require the services of a wide variety of personnel. As a result, a lot of employment is generated in the economy. The financial services sector provides a lot of employment. Many of these jobs are high paying white-collar positions that are capable of bringing the employed person into the middle class.

To sum it up, financial systems are like the foundation of a building. This is because the financial system is fundamental, and the economy cannot stand without it. However, until everything is working fine, no-one notices the financial system just like the foundation.

Financial Sector Reforms.[2]

India’s financial system comprising its banks, equity market, and bond marketing, financial institutions is crucial determinant of the country’s economic growth. Financial sector reforms in India introduced as a part of the structural adjustment and economic reforms programmed in the early 1990s have had a profound impact on the functioning of the financial institution especially banks. A special committee appointed on the financial system to look into all aspects of the financial system and make comprehensive recommendations for reforms in banking, forex market, debt market and other sector reforms.

Meaning of financial sector.

Financial sector is a category of stocks containing firms that provide financial services to commercial and retail customers. This sector includes banks, investment funds, insurance companies and real estate. A large proportion of this sector generate revenue from mortgages and loans. Financial sector is that segment of a national economy which encompasses the flow of capital.

Introduction to Financial Sector Reforms.

Financial sector is the backbone of every economy and it play a crucial role in the mobilization and allocation of resources. The constituents of the financial sector are banks financial institutions, financial instruments and markets which mobilize the resources from surplus sector and channelize the same to the different needy sectors in the economy. Financial sector reforms have long been regarded as an important part of agenda for policy reforms in developing countries. This was because they were expected to increase the efficiency of resource mobilization and allocation in real economy which in turn was expected to generate higher rate of growth.

Financial sector reforms mean to improve the allocative efficiency of resources and ensure financial stability and maintain confidence in the financial system by enhancing its soundness and efficiency. Reforms of the financial sector was recognized from the very beginning, as an integral part of the economic reforms initiated in 1991.The economic reform process covered two serious crises involving the BOP (balance of payment) crisis and facing the problem of banking system. With increasing globalization in Indian economy, the reform process witnessed a significant move toward adoption of international best practices in several areas like banking supervision and corporate governance.

Objective of Financial sector reforms.

1. The main objective of the financial sector reforms is to allocate the resources efficiently, increasing the return on investment and accelerated the growth of real sector in the economy.

2. Create an efficient, competitive and stable that could contribute measure to stimulate growth.

3. Relaxation the external constraints in the operation of banking sector, restructuring,

recapitalization in the competitive element in the market through the entry of new banks.

4. Increased transparency in the banking system through the introduction of prudential norms and increase the role of the market forces due to the deregulated interest rates.

5. Remove financial repression and provide operational and functional autonomy to institutions.

6. Promote the maintenance of financial stability even in the face of domestic and external shocks.

[1] https://www.managementstudyguide.com/financial-systems-and-economic-development.htm

[2] http://www.ijbm.co.in/downloads/vol3-issue1/6.pdf

U1 L4 FMI

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L4

Elements of the financial system and economic development.

Elements of a Financial System.[1]

The six elements of a financial system are lenders and borrowers, financial intermediaries, financial instruments, financial markets, money creation and price discovery. These financial-system components keep money flowing between people and businesses in an organized manner. Here’s what each is and how it functions.

  1. Lenders and Borrowers.

Lenders loan money to borrowers. Although people can be lenders on a private basis, lenders in a financial system are typically financial institutions. Mortgage lenders, banks and credit unions are some of the most common types of lenders. Credit cards are also forms of loans, making credit card companies a type of lender.

A borrower is any person or entity that takes out a loan. A homebuyer often finances the purchase of their home through a mortgage loan, making them a borrower. Businesses also take out loans from financial institutions. The processes of lending and borrowing help keep money flowing through a financial system because they allow people and entities to make purchases that they could not afford otherwise.

One characteristic of a good financial system is regulation surrounding lending. Loans have interest rates and other additional fees that require a borrower to pay back more than the original amount, called the principal, that they borrowed. If borrowers get loans without understanding the full cost, they may not be able to pay the money back. Financial institutions could run out of money if a large number of borrowers were unable to pay back their loans. That’s why there are regulations surrounding criteria for getting loans and the amount of interest and other fees a lender can charge a borrower. These regulations protect both the borrower and lender, and they keep money moving throughout the financial system.

  • Financial Intermediaries.

Financial intermediaries act in between two financial institutions to make the entire financial system more stable. Think of a financial intermediary as a “middle man.” Financial intermediaries rarely own the money they hold. Rather, these businesses and organizations move funds from one part of the financial system to the next.

Financial intermediaries balance out financial systems because they move money from areas that have too much to areas that don’t have enough. Banks are one example of a financial intermediary. Suppose a business needs a $1 million loan. The bank can offer that loan by combining the funds of 10,000 people who have $100 deposited in their bank accounts. Those 10,000 people won’t be missing their $100 because the bank has more money, from other depositors, available.

  • Financial Instruments.

A financial instrument is a contract for trading a financial asset. Financial instruments are an important part of a financial system because they allow wealth to keep moving throughout the system. Checks, bonds, certificates of deposit, stock trades and stock options contracts are all examples of financial instruments.

  • Financial Markets.

A financial market is any marketplace, physical or virtual, where financial instruments can be traded between people and financial institutions. The stock market is a financial market. Other examples of financial markets include the real estate market, the bonds market, the commodities market and the foreign exchanges market.

  • Money Creation.

Financial systems rely on money circulating throughout them. A government may introduce new money to the market by printing it. In the United States, the Federal Reserve makes decisions regarding the creation of money. Sometimes, money is given to banks virtually rather than being physically printed.

Different financial systems may have different forms of money creation, but there must be an adequate amount of money circulating to keep the system going. In regards to cryptocurrency, money creation happens when a new type of currency is created. In terms of the stock market, money creation happens when a company makes more shares available for the public to purchase.

  • Price Discovery.

Price discovery is the process of setting a price for goods, services or even financial instruments. Price discovery is based on a variety of factors, such as supply and demand. If more people want something, its price rises. If there’s a limited supply of a certain good, its price rises. Items that are unwanted or plentiful often have cheaper prices.

Although it may not always seem this way to consumers, price discovery is a collaborative effort between buyers and sellers. Sellers must price their goods in order to make a profit, and buyers must be willing to pay that price.

[1] https://www.reference.com/business-finance/elements-financial-system-35ea4c59d37616b6

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L3

Objectives of Financial System.[1]

The objectives of the financial system are to lower transaction costs, reduce risk, and provide liquidity.

These are the three main problems that are faced by borrowers and lenders, which the financial system aims to regulate.

Transaction costs.

Lowering the transaction cost is one of the main objectives of the financial system.

Definition: Transaction cost is the cost that is associated with carrying out a financial transaction.

Example: An example of a transaction cost would be when a bank spends money and resources on a credit check for a business seeking a loan extension.

The objective of the financial system is to ensure that these transaction costs are reduced.

Example: For example, the financial system sets up credit scores that different financial institutions accept. That way, banks do not need to spend a massive amount of resources and time checking a borrower’s ability to pay, as it is reflected in the borrower’s credit score.

Similarly, when a corporation wants to raise public money and use it to expand, borrowing money from each individual would be very costly. Think about the time and resources spent preparing a deal between the corporate and all investors who want to invest. Instead, the financial system enables the corporate to raise money by either borrowing from the bank or issuing bonds.

Reducing financial risk.

Reducing financial risk is another objective of the financial system.

Definition: Financial risk is the future outcome associated with economic loss or benefit.

The future outcome of financial transactions in the financial system is not always certain. The uncertainty of the future, which includes the possibility of both losses and profits, gives rise to an issue known as financial risk, which is simply referred to as risk.

Example: For instance, you might buy shares in a company for your future retirement plans. However, you didn’t know that the company you invested in didn’t disclose all the financial information. At some point, the company files for bankruptcy which causes you to lose your life savings.

To prevent such situations, the financial system ensures that each company discloses all information about its financial health. This reduces risks and provides a more sound financial system.

Another way the financial system reduces risk is by enabling individuals to diversify their portfolio of investments.

Definition: Diversification is an investment strategy that includes investing in several assets with uncorrelated risks.

Example: An example of diversification would be buying stocks and, at the same time, buying gold. Stocks decrease in value when there is an economic recession. On the other hand, gold increases in value when there is an economic recession. This way, one would mitigate the risk of financial loss.

Providing liquidity

Providing liquidity is perhaps one of the most important objectives of the financial system.

Definition: Liquidity is the ability of an asset to be converted into cash.

When an asset is liquid, it can be turned into cash quickly. On the other hand, when an asset is illiquid, it is harder to turn it into cash. The financial system ensures that investors are provided with liquidity.

Example: Imagine you put your savings with a bank that uses your savings to make a loan to an individual who wants to buy a house. However, you are unaware that the bank makes loans to individuals with a small likelihood of paying back the loan. As a result, the bank isn’t capable of delivering your savings back.

The financial system makes sure that banks always keep a certain amount of deposits in their reserve to provide liquidity to depositors.

Components of Financial System.

The main financial system components include financial institutions, financial services, financial markets, and financial instruments.

Financial institutions. Financial institutions play a significant role in bringing together lenders and borrowers. This is done by using various financial instruments and services, all of which contribute to an efficient financial system. The financial institution is one of the main components which ensure liquidity in the financial system through the development of credit and other liquid assets.

Financial services. Financial services include credit rating agencies, mutual funds, pension funds, venture capital, and other institutions that are part of the financial system. Financial services are an important component of the financial system due to their specific tasks.

Financial markets. A financial market is where both the creation of new financial assets and the trading of existing ones occur. Financial markets move funds from savers to borrowers much more efficiently and ensure that there is always liquidity.

Financial instruments. Financial instruments are another main component of the financial system. Financial instruments are papers that entitle the buyer to future income from the seller. That’s because there are different needs between investors and those looking for credit.

Functions of Financial System.

Financial system functions serve as an intermediary in allowing funds to be transferred from savers to borrowers. It is financial system functions that enable the surplus and deficit of funds to be allocated efficiently in the economy.

Example: It is a well-functioning financial system that enabled Elon Musk to raise the necessary funds to create EV vehicles and contribute to reducing carbon emissions. All the bonds, stocks, and credit that are an instrumental part of the financial system provided Elon with the necessary means to produce EVs.

Financial system function includes stimulating higher savings and higher investment by providing an efficient environment where funds can be channelled from savers to borrowers. Financial system ensures that there is incentive from savers to save via providing a return on their savings. Additionally, the financial system allows borrowers to access funds they can borrow for investment.

Investment is crucial to economic growth and development as it provides more output and lowers the unemployment rate. Therefore, a well-functioning financial system is crucial in attaining sustained economic development over the long term.

Importance of Financial System.

Financial system importance comes from its role in stimulating higher savings and investment expenditure, leading to higher economic growth. A well-functioning financial system is crucial in attaining sustained economic development over the long term. Additionally, it guarantees that expenditures on investments and savings are carried out effectively.

Financial systems contribute to the local and international economies’ overall economic and financial stability. They serve as the foundation upon which economic transactions may occur and upon which monetary policy can be based.

Due to financial regulations, economic and financial institutions between parties involved in the financial system are safe and secure. The financial system ensures that companies disclose all relevant information about their current financial situation, which helps investors make better decisions.

The financial systems also guarantee that monetary policies can successfully assist in managing and mitigating risk and avert various issues, such as an economic slowdown or a rise in fiscal expenses. This is becoming increasingly important as there are more financial technology businesses, more ways to connect, and stronger economic and commercial ties between countries. Financial systems help prevent problems by ensuring rules are followed across many industries and borders.

[1] https://www.studysmarter.co.uk/explanations/macroeconomics/financial-sector/financial-system/

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L2

Components of Indian Financial System.[1]

There are four main components of the Indian Financial System. This includes:

  • Financial Institutions.
  • Financial Assets.
  • Financial Services.
  • Financial Markets.

Let’s discuss each component of the system in detail.

1. Financial Institutions.

The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

  • A short-term liability can be converted into a long-term investment.
  • It helps in conversion of a risky investment into a risk-free investment.
  • Also acts as a medium of convenience denomination, which means, it can match a small deposit with large loans and a large deposit with small loans.

The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

  • Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need.
  • Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

  • Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
  • Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB, PNB, etc.
  • Non-Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD, SIBDI, etc.


2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other.

Some important Financial Assets have been discussed briefly below:

  • Call Money – When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction.
  • Notice Money – When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction.
  • Term Money – When the maturity period of a deposit is beyond 14 days, it is called term money.
  • Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government.
  • Certificate of Deposits – It is a dematerialised form (Electronically generated) for funds deposited in the bank for a specific period of time.
  • Commercial Paper – It is an unsecured short-term debt instrument issued by corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help to get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

  • Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc.
  • Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services.
  • Investment Services – It mostly includes asset management.
  • Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services.

The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing.

4. Financial Markets.

The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market.

The financial market can be further divided into four types:

Capital Market: Designed to finance the long-term investment, the Capital market deals with transactions which are taking place in the market for over a year. The capital market can further be divided into three types:

         a. Corporate Securities Market.

         b. Government Securities Market.

         c. Long Term Loan Market.

Money Market: Mostly dominated by Government, Banks and other Large Institutions, the type of market is authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly liquid instruments. The money market can further be divided into two types:

         a. Organised Money Market.

         b. Unorganised Money Market.

Foreign exchange Market: One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate.

Credit Market: A market where short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions is called Credit Market.

Further readings:

https://byjus.com/govt-exams/indian-financial-system/

[1] https://byjus.com/govt-exams/indian-financial-system/

U1 L1 FMI

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Financial Market and Institutions.

Unit 1: Introduction to financial system in India. 10 hours.

The structure of the financial system: Objectives, Functions and Importance, Elements of the financial system and economic development, Financial Sector Reforms: context, need and objectives; major reforms in the last decade; competition; deregulation; capital requirements; issues in financial reforms and restructuring; future agenda of reforms.

L1

Short story:[1]

When Elon Musk started Tesla, he needed financing to begin the production of EVs. Elon had to go to a bank and take a loan to do so. The bank’s loan was made possible because individuals like you decided to deposit money in the bank. The same money that the bank decided to loan to Elon to bring electric vehicles to life. Is it right to say that we helped Elon create Tesla? Or is it better to say that the financial system enabled Tesla to happen?

Meaning of Financial System.

The financial system’s meaning is based on the idea that sets of financial institutions make it possible for borrowers, lenders, and investors to exchange money with one another. The financial system provides borrowers with the funds necessary to finance initiatives, and it also provides investors with a return on their investments.

Definition: The financial system is a set of markets and financial institutions that enable funds to flow from lenders to borrowers.

Example: Examples of financial institutions and markets that are part of the financial system include commercial banks, stock exchanges, investment banks, insurance companies, etc.

The financial markets are comprised of several participants, including borrowers, lenders, and investors who arrange loans to make investments.

Definition: Financial markets are markets where borrowers and lenders meet and exchange funds.

Money is often exchanged between borrowers and lenders for the promise of a return on the investment at some point in the future.

Additionally, derivative instruments, contracts whose outcomes are decided according to the performance of an underlying asset, are traded on the financial markets.

The financial system enables investors, lenders, and borrowers to exchange these funds and have a return on their investment in a secure matter.

The financial system has a unique regulated framework that allows funds to flow across financial institutions. The government makes the regulation of the financial system, and other relevant parties involved.

Indian Financial System.[2]

The Indian Financial System is one of the most important aspects of the economic development of our country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties.

This is an important topic with respect to the various Government exams conducted in the country, and aspirants must carefully consider going through this article and prepare themselves accordingly.

In this article, you shall know about what the Indian Financial system is, its components and how it helps in the economic growth of a country. Also, get some Sample Questions on the Indian Financial System further below in this article.

Indian Financial System – An Overview.

The services that are provided to a person by the various Financial Institutions including banks, insurance companies, pensions, funds, etc. constitute the financial system.

Given below are the features of the Indian Financial system:

  • It plays a vital role in the economic development of the country as it encourages both savings and investment.
  • It helps in mobilising and allocating one’s savings.
  • It facilitates the expansion of financial institutions and markets.
  • Plays a key role in capital formation.
  • It helps form a link between the investor and the one saving.
  • It is also concerned with the Provision of funds.

The financial system of a country mainly aims at managing and governing the mechanism of production, distribution, exchange and holding of financial assets or instruments of all kinds.

[1] https://www.studysmarter.co.uk/explanations/macroeconomics/financial-sector/financial-system/

[2] https://byjus.com/govt-exams/indian-financial-system/