Indian Financial System – Components and Functions

Indian Financial System – An Overview

Indian Financial System : A Financial system means the structure that is available in an economy to mobilize the capital from various surplus sectors to the economy and allocate & distribute the same to the various needy sectors. The transformation of Savings into investment & Consumption is facilitated by the active role played by Financial System. The services that are provided to a person by the various Financial Institutions like 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
  • Helps in mobilizing and allocating one’s savings
  • It facilitates the expansion of financial institutions and markets
  • Plays a key role in capital formation
  • It helps forms a link between the investor and the one saving
  • It is also concerned with the Provision of funds

Segments of Indian Financial System

Money Market Debt Market Capital Market Forex Market
Call/ Notice Market

Treasury Bills

Term Money

Certificate of deposit

 Commercial Paper

 Repo Transaction

Commercial bills

Govt Securities

Cent Govt

State Govt


 FI Bonds

PSU Bonds

 Corporate Bonds





Mutual Funds

Instruments in foreign



 Forward Contracts




 Also read- Cash Reserve Ratio, Statutory Liquidity Ratio and difference between them

Components of Indian Financial System

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

  • Financial Institutions
  • Financial Assets
  • Financial Services
  • Financial Markets
  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 which small loans.

The best example of a Financial Institution is 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.

Also read- Money Market Instruments – Meaning, Objectives, Types, and features

  1. Financial Assets

The products which are traded in the Financial Markets are called the 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 dematerialized 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.


Also Read-   What is Commercial Bank – Definition, Types, Functions

  1. 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.


Also read- Primary Dealers (PDs): Definition, Type and functions of PDs

  1. 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:

  1. Corporate Securities Market
  2. Government Securities Market
  3. 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 Organizations by various banks and Financial & Non-Financial Institutions is called Credit Market


Also Read-NBFC: What is Non-Banking Financial Companies

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