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In respect of nominal GDP, India seems to be the world’s fifth-largest economy. In addition to finance, investment as well as stock marketplaces, insurance, obligations, demands, operations, and assets, India is a democracy with autonomous financial foundations. The Indian financial system facilitates secure business and bank transactions. The system coordinates the flow of cash from the nation’s population (domestic savings) to those who can intelligently spend it (shareholders) for the mutual benefit of all involved. Several questions such as “What is financial system”, “What are the functions of the financial system”, “what are the parts of the financial system”, etc will be discussed in this section for a better understanding of the Indian financial system.
The financial system
A financial network is a method of financial entities that collaborate to trade and move wealth from one location to others, such as insurance firms, stock markets, and financial firms. Shareholders obtain funds and a profit on their assets throughout the financial sector. It could be viewed on a corporate, regional, or international level, making it easier to transfer payments from one business to another.
Parts of the financial system
There are five segments of the “financial system” that include money, finance market, financial instrument, banking institution, “central bank”. Money is a form of exchange that allows people to purchase and sell products and services. This also serves as a fundamental measurement device and a measure of wealth. A financial market is indeed a location or system where financial products could be bought and traded promptly and at a low price. Financial institutions interconnect borrowers and lenders, as well as provide investors and lenders with exposure to banking products and marketplaces. The main market and the secondary marketplace are the two kinds of financial markets that exist. Financial Instruments are legal contracts that allow one party to accept funds or a portion of the resources of another. Borrowings, stocks, and bonds are instances of tradable financial products. Central banks are significant financial entities that manage government budgets, control the monetary base, and act as corporate bankers.
Functions of the financial system
Through stimulating savings, mobilising funds, and distributing them among various purposes and users, the financial sector aids output, wealth generation, and development. Each of these duties is critical, and a financial system’s effectiveness is determined by how efficiently it fulfils each of them. The Indian financial system states saving by offering a diverse variety of financial commodities as repositories of wealth assisted through services of a wide range of financial marketplaces and middlemen. The seamless, effective, and socially inclusive distribution of credit is another fundamental function of the financial system.
Features of the Indian financial system
In India, there are two categories of finance institutions: “banking and non-banking institutions”. In the Indian financial system, this institution has been categorised into three parts. One is regulatory that includes SEBI, RBI, IRDA, etc, second is intermediaries that include commercial banks such as SBI, PNB, UBI, etc, and third is non-intermediaries that include NABARD, IDBI, etc. Moreover, the “Indian financial system” represents integral importance in the economic development of this nation and encourages both savings and specialty. The main features of this financial system are it helps in capital investment and allocating of risks. In addition to that expansion of financial markets has been done by this system.
Recent changes in the Indian financial system
India’s financial system has evolved from a physical to a virtual one. With innovative technological solutions, this has effectively overcome the hurdles posed by India’s different individuals. Banks are already branching out into the country’s rural centre. In addition, the government of India’s efforts to assist SMEs as well as MSMEs in dealing with the pandemic issue has influenced banks to engage in populations and regions that had previously been neglected. For instance, in the quarter ending in June 2020, 33 fintech investment contracts totalling $647.5 million were completed in India. According to 2020 research, India accounts for around 1.7 percent of the global insurance industry. The government recently declared new financial services policy changes, including the formation of “Development Finance Institution (DFI)” for structural purposes, the incorporation of a “Bad Bank” to tackle the issues of persistent “non-performing assets (NPAs)”, as well as the transfer of “public sector banks (PSBs)” into private for reliving the government’s capital-raising burden.
Conclusion
From the preceding discussion, we have developed sufficient knowledge regarding the Indian financial system and its functions. This system is categorised into three parts such as regulatory, intermediaries, and non-intermediaries. India’s financial system has evolved from a physical to a virtual one. With innovative technological solutions, this has effectively overcome the hurdles posed by India’s different individuals and developed itself among the world’s rapidly-growing economies.
