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Exploring the Structure of the Indian Financial Market

Indian Financial System- An Overview

The Indian financial system consists of an intricate network of financial institutions, markets, instruments, and services that facilitate the passage of funds between savers and investors. It includes banks, non-banking financial companies (NBFCs), insurance firms, stock exchanges,  pension funds, mutual funds, and other financial services. The Indian Financial System is vital in mobilising savings, distributing capital, and fostering economic growth and development.

Our financial system is responsible for the following: 

  • Allocating and mobilising savings
  • Providing funds
  • Easing financial transactions
  • Developing financial markets
  • Providing a legal and financial framework 
  • Offering financial and advisory services

Structure of the Indian Financial System 

The different parts that make up the Indian financial system cooperate to enable the transfer of money between savers and investors. The organised and unorganised sectors comprise the bulk of the Indian financial system’s structure. 

  • Organised Sector: The official financial institutions that comprise the organised sector include banks, insurance firms, NBFCs, mutual funds, stock exchanges, and pension funds. The Reserve Bank of India (RBI) and additional regulatory organisations, including the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA), are in charge of overseeing these institutions.
  • Unorganised Sector: On the other side, the unorganised sector consists of unregulated businesses that serve the financial requirements of the unbanked and underserved segments of society, including moneylenders, chit funds, and other informal financial intermediaries.

The Components of the Indian Financial System

The components of Indian Financial System comprises four main components, namely:

(1) Financial Institutions 

Financial institutions function as intermediaries in the financial markets, enabling people and businesses to conduct financial transactions. It simply refers to an organization (profit or nonprofit) that receives money from people and invests it in financial assets like stocks, bonds, bank deposits, loans, and other securities.

Financial institutions can be of two types:

a) Banking Institutions:  Also known as depository institutions, these are banks and credit unions that take money from the general public in exchange for interest on money deposits and use that money to advance loans to financial clients.

b) Non-banking Institutions: Also known as non-depository institutions, they include brokerage houses, insurance businesses, and mutual fund companies that can provide financial products to customers but cannot accept deposits of money.

There are three divisions into which financial institutions can be placed:

a) Regulatory: This category comprises organisations like SEBI, RBI, IRDA, and others that control the financial markets and safeguard investors’ interests.

b) Intermediaries: Commercial banks like BI, PNB, and others offer private and business clients short-term loans and other financial services.

c) Non-intermediaries: Financial institutions that give long-term loans to corporate customers include NABARD, IDBI, and other non-intermediaries.

(2) Financial Markets 

It refers to any market where purchasers and sellers exchange assets such as stocks, bonds, currencies, and other financial instruments. The capital and money markets are two further divisions of a financial market. The money market deals with short-term debt instruments with maturities of less than a year, whereas the capital market deals with long-term securities with maturities of more than a year.

(3) Financial Assets/Instruments 

Financial assets include all instruments that give a claim against a person or financial institution to pay either a specific amount on a specific future date or to pay the principal amount along with interest. These include cash deposits, checks, loans, accounts receivable, letters of credit, bank notes, and other financial instruments.

(4) Financial Services

 Financial services are concerned with designing and delivering financial instruments and advisory services to individuals and enterprises within the realm of banking and related institutions, personal financial planning, leasing, investment, assets, insurance, etc. Financial services are also involved with the management and protection of financial assets.

The Features of the Indian Financial System

The Indian financial system exhibits several distinctive features contributing to its functioning and effectiveness. Here are some notable features of the Indian financial system:

1. Dual Structure: Indian finance is divided into organised and unorganised sectors. Stock markets, insurance companies, and banks are all organised. The unorganised sector consists of chit funds, local bankers, and moneylenders. This dual structure satisfies various financial needs, particularly in remote and rural areas where conventional institutions might not be accessible.

2. Financial Inclusion: People can access financial services thanks to the government and regulatory efforts. These initiatives include Jan Dhan Yojana, Pradhan Mantri Mudra Yojana, payment and small financing bank marketing. The objective is to offer the underbanked and underprivileged credit, insurance, and banking services.

3. Diverse Range of Financial Institutions: The Indian financial system includes a variety of financial institutions, such as mutual funds, pension funds, commercial banks, cooperative banks, NBFCs, and insurance firms. Due to this diversity, individuals and businesses have a wide range of possibilities for obtaining financial services and goods catering to their unique needs.

4. Regulatory Framework: The Indian financial system operates within a well-defined regulatory framework. Regulatory authorities such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA) ensure compliance with regulations, maintain market integrity, and promote financial stability.

5. Technological Advancements: The Indian financial system has advanced technologically recently. UPI and mobile wallets have simplified financial transactions. Dematerialization and online trading platforms have streamlined investing and trading. Technology has improved financial inclusion, efficiency, and transparency.

6. Integration with Global Financial Markets: The Indian financial system is increasingly integrated with global financial markets. The foreign exchange market facilitates currency exchange and trade financing, supporting international trade and investment.

The Takeaway-

The Indian Financial Market represents a dynamic and evolving ecosystem that serves as a catalyst for economic growth. Understanding its structure, participants, and regulatory framework is essential for investors, businesses, and policymakers. As India continues to pursue financial sector reforms, addressing challenges and promoting transparency will be critical to foster a robust and inclusive financial market that supports the nation’s aspirations for sustained economic development.

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