Indian financial system, short report

Brihan Maharashtra College of Commerce,
Pune.
M. Com. Part I – Semester III (2018-19)
SUBJECT- BUSINESS FINANCE
RESEARCH REPORT
On the topic
INDIAN FINANCIAL SYSTEM
In the partial fulfillment of Business Finance Activity
BY
(SURVE SAURABH SURESH)
(Class – M. Com. Semester III, Div. – A
Roll no -252 )

ACKNOLEGEMENT
Before we get into thick of things, I would like to add a few
words of appreciation for the people who have been a part of this
report right from its inception. The writing of this report has been one
of the significant academic challenges I have faced and without the
support ,patience, and guidance of the people involved, this task
would not have been completed. It is to them I owe my deepest
gratitude. It gives me Immense pleasure in presenting this project
report on " INDIAN FINANCIAL SYSTEM"". It has been my
privilege to have a team of report guide who have assisted me from
the commencement of this report .I hereby take this opportunity to
add a special note of thanks for Dr.J.R.LANJEKAR, who undertook
to act as my mentor despite her many other academic and professional
commitments. Her wisdom, knowledge, and commitment to the
highest standards inspired and motivated me .Without her insight,
support, and energy, this project would not have kick-started and
neither would have reached fruitfulness. The report is dedicated to all
those people, who helped me while doing this research report.

OBJECTIVE:
One of the most important areas of economic reform lies in the
financial system .The main purpose of doing this research was to
know about indian financial system and its functioning. This helps to
know in details about financial system and and its structure.
It also helps in understanding different types of financial
system. Because my study depends upon which types of financial
system available in India and their schemes .
Objective
 To give a brief idea about the Indian financial system
 To give an idea of the types of financial system available.
 To discuss about the market trends of financial system
 To study some of the financial system instrument.
 Explore the recent developments in the financial system in India.

INDEX
Sr
no.
Topic Page no
1. Introduction of Indian Financial System 01
2. Structure of Indian Financial System 04
3. Financial Institution 05
4. Financial market 08
5. Financial instrument 10
6. Financial services 11
Conclusion 12
References 13

Introduction of Indian financial
system
During the last decade, the Indian economy has shown a great
transformation from a closed, controlled, slow economy growing to a
more open, more liberalised and also one of the fast growing
economy among the developing nations. Since economic reforms in
1991, Indian economy has accelerated growth, developed primary
market, new financial instruments and a well functioning and
developing secondary market for the economic development of the
country. The structural change in Indian economy enhance the
involvement of genuine investors, Foreign Institutional Investors
(FII), Foreign Direct Investment (FDI) and Financial Intermediaries
such as Public Financial Institutions, Non-Banking Financial
Companies (NBFCs), Commercial Banks, housing Banks etc.
Economic growth and development of any country depends
upon a well-knit financial system. Financial system comprises a set of
sub-systems of financial institutions financial markets, financial
instruments and services which help in the formation of capital. Thus
a financial system provides a mechanism by which savings are
transformed into investments and it can be said that financial system
play an significant role in economic growth of the country by
mobilizing surplus funds and utilizing them effectively for productive
purpose.
1

The financial system is characterized by the presence of
integrated, organized and regulated financial markets, and institutions
that meet the short term and long term financial needs of both the
household and corporate sector. Both financial markets and financial
institutions play an important role in the financial system by rendering
various financial services to the community. They operate in close
combination with each other.
A financial system is a system that allows the exchange of funds
between lenders, investors, and borrowers. Financial
systems operate at national, global, and firm-specific levels.
They consist of complex, closely related services, markets, and
institutions intended to provide an efficient and regular linkage
between investors and depositors.
Functions of Indian financial system :
The financial system of a country performs various valuable
functions for the economic growth and development of the country.
The main functions of a financial system are discussed as follows:
i).Function of collection and distribution of savings: A financial
system performs a vital role in capital formation. It serves a link
between saver and investor to mobilise savings and channelize them
into productive activities for the transformation of savings into
investments.
ii) Function of Liquidity: The important function of a financial
system is to provide the money or near money assets for the
production of goods and services. Near money assets are those assets
which can be easily converted into cash.
iii) Payment and Settlement function: Payment and settlement
system ensure the safely and timely movements of funds. Generally
banks perform this type of functions in a financial system.
2

iv) Risk Management function: An efficient financial system
reduces the risk involved in mobilising savings and allocating credit
for the efficient transformation of savings into investment. It
encourages the investors for optimum utilisation of funds.
v) Information Availability functions: An efficient financial system
provides necessary information to the operators or players of the
market such as individuals, investors, business houses etc.
vi) Cost Reduction function: The financial system helps in creation
of a financial structure that lowers the cost of borrowings and cost of
transactions.
viii) Other Functions: The financial system also performs some
other functions. Such as: promote the process of capital formation,
introducing innovative financial instruments, provide necessary
services related to finance, offers portfolio adjustment facilities etc.
Importance of Indian financial system :
1. It acerbates the rate and volume of savings through provision of
various financial instruments and efficient mobilization of savings.
2. It protect the interest of investors and ensures smooth financial
transactions through regulatory bodies such as RBI,SEBI etc.
3. It helps economic development and raising the standard of living of
people.
4. It aids in financial deepening and financial broadening.
3

Structure of Indian financial
system
Components of Indian Financial system:
The following are the four main components of Indian Financial
system
A. Financial institutions
B. Financial Markets
C. Financial Instruments/Assets/Securities
D. Financial Services.
4

A.Financial institutions:
A financial system is a system that allows the exchange of funds
between lenders, investors, and borrowers. Financial systems operate
at national, global, and firm-specific levels. They consist of complex,
closely related services, markets, and institutions intended to provide
an efficient and regular linkage between investors and depositors.
Types of financial institutions :
There are two types of financial institutions.
1. Banking institutions
2. Non- banking institutions.
1. Banking institutions :
There are basically four types of banking institutions
(I) . Commercials banks
( II) . Co-operative banks
(III). Regional rural banks
(IV). Foreign banks
(I)Commercial banks :
Commercial banks accept deposits and provide security and
convenience to their customers. Part of the original purpose of banks
was to offer customers safe keeping for their money.
Commercial banks also make loans that individuals and
businesses use to buy goods or expand business operations, which in
turn leads to more deposited funds
that make their way to banks. If banks can lend money at
a higher interest rate than they have to pay for funds and operating
costs, they make money.
Commercial banks are of two types
(a). Private banks
(b). Public banks
5

(a)Private banks :-
The term private banking refers to a customized line of banking
& financial services offered to private individual banking clients that
earn high levels of income and/ or owning sizable investment assets,
such as 'High Net Worth Individuals' (HNWIs).
(b)Public banks :-
Public Sector Banks (PSBs) are banks where a majority stake
(i.e. more than 50%) is held by a government. The shares of these
banks are listed on stock exchanges. There are a total of 22PSBs in
India.
(II)Cooperative banks:
Cooperative banks are owned by their customers and follow the
cooperative principle of one person, one vote. Co-operative banks are
often regulated under both banking and cooperative legislation. They
provide services such as savings and loans to non-members as well as
to members, and some participate in the wholesale markets for bonds,
money and even equities.
(III) Regional rural banks :
Regional Rural Banks (RRBs) are scheduled commercial banks
(Government banks) operating at regional level in different States of
India. They have been created with a view to serve primarily the rural
areas of India with basic banking and financial services. However,
RRBs may have branches set up for urban operations and their area of
operation may include urban areas too.
The area of operation of RRBs is limited to the area as notified
by Government of India covering one or more districts in the State.
6

RRBs perform various functions in following heads:
• Providing banking facilities to rural and semi-urban areas.
• Carrying out government operations like disbursement of wages
of MGNREGA workers, distribution of pensions etc.
• Providing Para-Banking facilities like locker facilities, debit and
credit cards.
• Small financial banks.
(IV).Foreign banks :
A foreign bank is a bank that is obligated to follow the
regulations of both the home and host countries. Because the foreign
ranch banks loan limits are based on the parent bank’s capital, foreign
banks can provide more loans than subsidiary banks.
2.Non banking institutions :
facilitate financial services like investment and risk pooling,
and market brokering. They generally do not have full banking
licenses or are not supervised by a bank regulation agency.
• Finance and loan companies
• Insurance companies
• Mutual funds
• Commodity traders
7

(B).Financial market:
The financial market is a broad term describing any
marketplace where trading of securities including equities, bonds,
currencies and derivatives occur. Some financial markets are small
with little activity, while some financial markets like the New York
Stock Exchange (NYSE) trade trillions of dollars of securities daily.
Types of financial markets. There are two types of financial markets.
1. Unorganized market
2. organized market
1..Unorganized sector:
 In the case of Indian Banking System, indigenous
bankers are included in the unorganized sector
 Indigenous bankers include those individuals and banks who
accept deposits or depend on credit to run their business
 They deal with short-term credit instruments namely undies for
the purpose of providing financial help for goods and services
 The rate of interest charged by them fluctuates directly with the
need and time period of the borrowers and may sometimes be
as high as 300 percent
 They are the major sources of funds for small borrowers on
account of simple documentation and funds are made available
to the borrowers at any time during a day.
2.Organized market :
The institutions which are controlled by the central bank of the
country namely RBI, SEBI, IRDA are called as institutional or
organized.
Types of organized markets
1. Capital market
2. Money market
8

1. Capital market:- A capital market is a financial market in
which long-term debt (over a year) or equity-backed securities are
bought and sold. Capital markets channel the wealth of savers to those
who can put it to long-term productive use, such as companies or
governments making long term investments.
There are two types of capital market
(1). Primary Market :- Otherwise called as New Issue
Market, it is the market for the trading of new
securities, for the first time.
(2). Secondary Market :- can be described as the market for
old securities, in the sense that securities which are previously issued
in the primary market are traded here.
2. Money market:
Money market comes under the preview of RBI. It can be
defined as a market for short term money and financial assets that are
near substitute for money.
9

C. Financial instrument :
Financial instruments are assets that can be traded. They can
also be seen as packages of capital that may be traded. Most types of
financial instruments provide an efficient flow and transfer of capital
all throughout the world's investors. These assets can be cash, a
contractual right to deliver or receive cash or another type of
financial instrument, or evidence of one's ownership of an entity.
Types of financial instrument There are two types of financial
instruments
(1). Cash instrument
(2). Derivative instrume
1. Cash instrument:-The values of cash instruments are directly
influenced and determined by the markets. These can be securities
that are easily transferable. Cash instruments may also be deposits
and loans agreed upon by borrowers and lenders.
2. Derivative instrument:-The value and characteristics of
derivative instruments are based on the vehicle’s underlying
components, such as assets, interest rates or indices. These can be
over-the-counter (OTC) derivatives or exchange-traded derivatives.
10

D. Financial services:
Financial services are the economic services provided by the
finance industry, which encompasses a broad range of businesses that
manage money, including credit unions, banks, credit cards
companies, insurances companies, accountancy companies,
consumer- finance companies, stock brokerages, investment funds,
individual managers and some government-sponsored enterprises.
Types of financial services There are two types of financial
services
1. Fund based services
2. Fee based services
1.Fund based services :It refers to service that are used to acquire
assets or funds for a customer. It consist of
(1). Primary market activities
(2). Secondary market activities
(3). Foreign exchange activities
(4). Specialized financial services
2.Fee based services:
When financial institutions operate in specialized fields to earn
income in form of fee, commission, brokerage or dividends it is called
fee based service. They include
- Issue management
- Portfolio management
- Corporate counselling
- Merchant banking
- Credit rating
- Stock broking 11

Conclusion
One of the most important areas of economic reform lies in the
financial system .On one hand , finance is the ‘brain’ of the economy ,
and the skill of the financial system shapes the efficiency of
translation of gross capital formation into GDP growth. Economic
growth and development of a nation depends upon the efficiency of a
developed financial system. There are two different viewpoints
regarding the relationship between financial development and
economic growth. According to first view point, an efficient financial
system effectively mobilises the financial resources and after that
invest them in the best possible manner with the help of market
mechanism which leads to economic development. According to other
view point, economic development and financial development are
complimentary to each other. At present, the Indian financial sector
has been able to expand its outreach to remote and distant areas
through bank branches, ATMs, financial intermediaries and
branchless banking solutions. In order to make financial system more
effective and efficient, there is a need of effective management and
control among the different components of the Indian Financial
System. Also there is a need for proper governance and regulation for
the efficient working of the financial system. At last, it can be
concluded that a developed financial system leads the economic
growth and development of the country. Hence, there is a positive and
direct correlation between the growth in financial system and
economic development.
12

REFERENCE
BOOKS:
 Indian Financial System, Author-Jaydeb sarkhe/seikh
salim ,(publisher :McGraw Hill Education)
 Indian Financial System and Development, Author-
Vasant Desai, Publisher :Himalaya Publishing House
WEBSITE:
www.financialservices.gov.in
www.economicstimes.com
www.Scribd.com
SEARCH ENGINE:
www.google.com
www.yahoo.com
www.wikipedia.com
13

Indian financial system, short report

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