Financial Knowledge

Introduction:

Financial literacy or financial knowledge refers to the basic understanding or knowledge of financial markets with the help of which one can effectively and efficiently consume or invest their funds to gain profits from various sources. Having basic finance knowledge helps a person manage their relationship with money throughout his lifetime. It is very important to have financial knowledge since it is the most basic way to start being financially independent and understanding how to manage your funds independently without anybody’s help. If you start gathering financial knowledge early in your life, you will also learn the art of saving and understand its importance well in time.

What is financial literacy?

To be financially literate means to know how to manage your money. Paying your bills well before time, borrowing, and saving money responsibly forms a part of this. Financial literacy is a skill that you learn personally, which will be beneficial to you throughout your life. It becomes so daunting with the coming in and going out of money regularly, with the responsibility of making the correct financial decisions about the main things you purchase and investments that you make, with the due dates and finance charges, and whatnot! 

Having basic finance knowledge is a must in this era.

Now being aware of this, let’s get into the financial system of our own country and get to know how money flows here.

Indian Financial System:

One of the most important aspects of the economic development of India is its Financial System. The basic function of the system is to manage the whole process of how the funds flow between the public (household savings) of the nation and the ones who have the deep financial knowledge and who may invest it judiciously for the profitability of both the parties. These people are investors or big businessmen.

Components:

Four major components comprise the Indian Financial System-

1. Financial Institutions

The basic function of any financial institution is to act as an intermediary and link the investors and borrowers. These institutions mobilise the people’s savings and further distribute them in profitable activities, promising a better rate of return. Not only this, but the financial institutions also provide many other services to entities who want to raise or invest funds in the market or elsewhere. 

Financial institutions can be classified into banking institutions and Non-Banking Financial Institutions.

• BANKING INSTITUTIONS

The Indian Banking Institutions are classified into the Organised and Unorganised sectors.

• ORGANISED SECTOR
• Commercial Banks
• Cooperative Banks
• Regional Rural Banks (RRBs)
• Foreign Banks
• UNORGANISED SECTOR
•    Indigenous Bankers
•    Money Lenders
• NON-BANKING FINANCIAL INSTITUTIONS

These institutions are divided into the following groups- 

• ORGANISED NON-BANKING FINANCIAL INSTITUTIONS
• Development Finance Institutions (IIBI, ICICI, IDBI, IFCI, IRDC)
• Investment Institutions (LIC, GIC, LTT, and Mutual Funds)
• UNORGANISED NON-BANKING FINANCIAL INSTITUTIONS
• Hire-purchase consumer finance companies
• Leasing Companies
• Housing Finance Companies
• Factoring Companies
• Credit Rating Agencies
• Merchant Banking Companies

Financial Market

The financial system works only because of the presence of financial markets. These are the institutional set-ups that deal in different types of assets related to finance (or credit instruments) such as bills, bank deposits, cheques, currency, bonds, etc. 

Functions of Financial Markets are as follows-

1. Helps to create and allocate credit and liquidity
2. Helps in the mobilisation of savings by serving as intermediaries
3. Helps to build a balanced economic growth
4. Provides financial convenience to the public
5. Helps various business houses by catering to their credit needs

3. Financial Instruments / Assets / Securities

These are the documents that represent financial claims on assets. It represents an asset to one entity and liability or equity to another. Examples: Bill of exchange, Promissory Note, Treasury Bill, etc. These are classified into- Primary or Direct Securities and Secondary or Indirect Securities. 

PRIMARY SECURITIES

The securities which are directly delivered by the end investors to the end savers are called primary securities. An example of Primary securities is shares and debentures delivered directly to the public.

SECONDARY SECURITIES

The securities which are not delivered directly by the end investors to the end savers but rather include an intermediary (known as financial intermediaries) doing the job are called secondary securities. These are further classified on the basis of duration into Short-term, Medium-term, and Long-term securities.

Financial Services

The whole working of the financial system depends upon the efficient financial services it has. Financial services include anything and everything that provides money related value to users or consumers. This can either be any activity, benefit, or satisfaction.

Kinds of Financial Services:

1. Asset-based / Fund based services

• Equipment Leasing / Lease Financing
• Hire Purchase and Consumer credit 
• Venture capital
• Insurance services
• Factoring

1. Fee-based / Advisory services 

• Merchant Banking
• Credit Rating
• Stock-Broking

Features of the Indian Financial System:

1. It plays a vital role in the economic development of the country.
2. It encourages the public to both save and invest.
3. Savers and investors who have knowledge of financial markets can be easily linked because of the financial system.
4. It helps in capital formation.
5. Due to the financial system, it becomes very easy to identify risks beforehand.
6. Helps in the expansion of financial markets.

Conclusion:

It is rightly said that “half knowledge is more dangerous than no knowledge.” The same goes for knowledge of financial markets. We have seen a live example during the Covid-19 pandemic. People were not only affected physically and mentally but financially also. Millions of lives were in danger, and many people faced huge financial crises. They did not have any idea what their future would look like. Everything had become so unpredictable. Many people are still struggling to earn a living and go back to normal in their lives. This pandemic has very well explained to us that having financial knowledge and saving money for the right time is a must.