INDIAN FINANCIAL SYSTEM
AND
ROLE OF FINANCIAL
INSTITUTIONS
PRESENTED BY :
SIDDHARTHA GUPTA
PRIYANSH KESARWANI
VIJAY SINGH

INTRODUCTION
The economic development of a nation is reflected by the
progress of the various economic units, broadly classified
into corporate sector, government and household
sector. While performing their activities these units will
be placed in a surplus/deficit/balanced budgetary
situations.
There are areas or people with surplus funds and there are
those with a deficit. A financial system or financial sector
functions as an intermediary and facilitates the flow of
funds from the areas of surplus to the areas of deficit. A
Financial System is a composition of various institutions,
markets, regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
The word "system", in the term "financial system", implies
a set of complex and closely connected or interlined
institutions, agents, practices, markets, transactions,
claims, and liabilities in the economy. Indian financial
system consists of financial market, financial instruments

CIRCULAR FLOW IN AN
ECONOMY

The Financial System of any country refers to a system that provides
smooth and efficient relationship between the borrowers and the lenders.
This system aims at establishing effective medium for generating funds from
various sources. A financial system may be defined as a set of institutions,
instruments and markets which fosters savings and channels them to their
most efficient use. The main function of this financial system is to assemble
wide spread savings from household individuals and industrial firms.
Also, it helps to gather other productive investments in a country. This system
helps in fastening the process of capital formation. Further accelerates process
of economic prosperity of any nation. Financial System includes various
aspects such as financial markets, financial institutions, banking firms,
financial services, financial intermediaries, financial assets and instruments,
etc. All these are closely related and work in combination with each other.
Financial System through their huge network of elements helps to serve
needs of different individuals, institutions and companies.

Dan O’Brien
(Economics editor of Irish Times
newspaper)-
The function of financial system is to
channel money from people who have it
but want to save it to people who don’t
have it but want to spend it.
According to ROBINSON (British
Economist), the primary function of a
financial system is “ to provide link
between savings and investment for
creation of wealth and to permit portfolio
adjustment in the composition of existing
wealth.”

FINANCE

FEATURES OF INDIAN FINANCIAL
SYSTEM
• It plays a vital role in economic
development of a country.
• It encourages both savings and
investment.
• It links savers and investors.
• It helps in capital formation.
• It helps in allocation of risk.
• It facilitates expansion of capital
markets.
• It aids in financial deepening and
financial broadening.

FUNCTIONS OF INDIAN
FINANCIAL SYSTEM
• It bridges the gap between savings
and investments through efficient
mobilization and allocation of surplus
funds.
• It helps a business in capital
formation.
• It helps in minimizing risk and
allocating risk efficiently.
• It helps to liquidate tied up funds.
• It facilitates financial transactions
through provision of various financial
instruments.
• It facilitates trading of financial
assets/instruments by developing
and regulating financial markets.

IMPORTANCE OF INDIAN
FINANCIAL SYSTEM
• It accelerates the rate and volume of savings through
provision of various financial instruments and efficient
mobilization of savings.
• It aids in increasing the national output of the country
by providing funds to corporate customers to expand
their respective business.
• It protects the interests of investors and ensures
smooth financial transactions through regulatory
bodies such as RBI, SEBI etc.
• It helps in economic development and raising the
standard of living of people.
• It helps to promote the development of weaker section
of the society through rural development banks and co
operative societies.

• It helps corporate customers
to make better financial
decisions by providing
effective financial as well as
advisory services.
• It aids in financial deepening
and broadening.

FinancialStructureAndInstitution

DIAGRAMMATIC REPRESENTATIONOF INDIAN
FINANCIALSYSTEM

The formal financial system comprises financial
institutions, financial markets, financial instruments
an d financialservices

FINANCIALINSTITUTIONS
Financial institutions are the participants in a financial
market. They are business organizations dealing in financial
resources. They collect resources by accepting deposits from
individuals and institutions and lend them to trade,
industry andothers. Theybuy andsellfinancialinstruments.

Financialinstitutionsclassifiedas:-
a) Regulatory and financial institutions :
 The two major Regulatory and Promotional Institutions in
India are Reserve Bank of India (RBI) and Securities Exchange
Board of India(SEBI).
 Both RBI and SEBI administer, legislate, supervise, monitor,
control and discipline the entire financialsystem.
 RBI is the apex of all financial institutions in financial
institutions are under the control ofRBI.
 Thefinancial markets are under the control ofSEBI.

b)Bankinginstitutions:-
• Bankinginstitutionsmobilizethesavingsof thepeople.
• Theyprovideamechanismforthesmooth exchangeof
goods andservices.
• Basiccategoriesofbankinginstitutionsare commercial
banks,co-operativebanks, developmentalbanks

c)Non bankingfinancialinstitutions:-
• Nonbankingfinancialinstitutionsalsomobilizefinancial
resourcesdirectlyorindirectlyfromthepeople.
• Theylendfundsbutnotcreatecredit
• CompanieslikeLIC,GIC,UTI,DevelopmentFinancial
Institutions,OrganisationoFundsetc.fallinthiscategory.
• Nonbankingfinancialinstitutionscanbecategorizedas
investmentcompanies,housing companies,leasing
companies,hirepurchasecompanies,specializedfinancial
institutions(EXIMBanketc.)investmentinstitutions,state
levelinstitutionsetc

FINANCIALMARKETS

FINANCIALMARKETS
Financial market deals in financial securities (or financial
instruments) and financial services. Financial markets are the centers
or arrangements that provide facilities for buying and selling of
financial claimsandservices.Theseare the markets in which moneyas
well asmonetary claims is traded in. Financial markets exist wherever
financial transactions take place. Financial transactions include issue
of equity stock by a company, purchase of bonds in the secondary
market, deposit of money in abankaccount, transfer of fundsfrom a
current accountto asavingsaccountetc.

• Financial market can be classified in 2 on basis of maturity of claims
1. Money Market and
2. Capital Market
1. Money Market:
Amarket where short term funds are borrowed and lend is
called money market. It deals in short term monetary assets with a
maturity period of one year or less. Liquid funds aswell ashighly
liquid securities are traded in the money market.
Examplesof money market are Treasury billmarket, call money
market, commercial bill marketetc.
2. Capital Market:
Capital market is the market for long term funds. Thismarket
deals in the long term claims, securities and stocks with amaturity
period of more than one year.Thestock market, the government
bond market and derivatives market are examples ofcapital market.

• Financial market can be classified in 2 on basisofseasoning of
claim
1. Primary Market and
2. Secondary Market
1. Primary Market:
Primary markets are those markets which deal in the new
securities. Therefore, they are also known asnew issue markets.
Theseare markets where securities are issued for the first time. In
other words, these are the markets for the securities issued directly
by the companies.
2. Secondary Market:
Secondary markets are those markets which deal in existing
securities. Existing securities are those securities that have already
been issued and are already outstanding. Secondary marketconsists
of stockexchanges.

FinancialInstruments

FINANCIALINSTRUMENTS
•Financialinstruments arethe financial assets,securitiesand
claims.
•Theymaybeviewed asfinancial assetsandfinancial liabilities.
1. Financialassets:
represent claimsfor the paymentof asumof money
sometimein the future (repaymentof principal)and/or a
periodicpaymentin the form of interestor dividend.
2. Financialliabilities:
are the counterparts of financial assets. They represent
promise to pay some portion of prospective income and
wealth toothers.

FINANCIAL SERVICES

• Financial services refer to services provided by the finance
industry.
• Servicesthat arefinancialinnature.
• The finance industry encompasses a broad range of
organizationsthat dealwith the management of money.
• Among these organizations are banks, credit card
companies, insurance companies, consumer finance
companies, stock brokerages, investment funds and some
government sponsored enterprises.

TYPESOFFINANCIAL SERVICES
• Fund or asset based financialservices
• Feebased financial services

FundBasedServices
• The firm raises funds through debt, equity, deposits
and the bank invests the funds in securities or lends to
those who are in need ofcapital.
• The following are some of these fund-based services
suchas:
– Leasing and Hire Purchase
– Housing Finance
– Credit Cards
– Venture Capital
– Factoring
– Forfeiting
– Bill Discounting
– Insurance

FeeBasedServices
• The services wherein financial institutions
operate in specialized fields to earn a substantial
income in the form of fees or dividends or
brokerage on operations.
• The major fee based financial services are
as follows:
– IssueManagement
– CorporateAdvisory Services
– Credit Rating
– Mutual Funds
– AssetSecuritization
– Stock Broking Services

Financial Institutions
Of India

RBI (Reserve Bank of India)
• Established: The Reserve Bank of India was established
following the Reserve Bank of India Act of 1934. Though
privately owned initially, it was nationalised in 1949 and
since then fully owned by Government of India (GoI).
1 April 1935; 84 years ago
• Headquarter: Mumbai, Maharashtra, India.
Governor: Dr. Shaktikanta Das.
• First RBI governor- sir osborne smith
• First Indian RBI governor - sir C .d deshmukh
• Deputy governor
– 1 shri M.K jain
– 2 shri b p kahungi
– 3 dr. Viral v Acharya
– 4 shri n s Vishwanathan

NABARD ( National Bank for
Agriculture and Rural Development )
• Established: NABARD was established on 12th July 1982 on the recommendation
of CRAFICARD committee which is also known as the SivaRaman Committee.
• Headquarter: Mumbai, Maharashtra.
• Chairman: Harsh Kumar Bhanwala.
• Biggest Rural Development Bank
• AIM To uplift Rural India & rural non-farm sector.
• NABARD acts as regulator for co-operative banks &RRB's (Regional Rural Banks).
• Primary Function:
1. NABARD is the apex organisation related to financing in the agricultural sector.
2. It looks after matters concerned with policy, planning and operations in rural
areas in India.
3. Rural Infrastructure Development Fund (RIDF) is operated by NABARD.
4. Provides refinance to lending institutions in rural areas.
5. Helps SHG (Self Help Group) & poor people in rural areas.
6. Runs programme for agricultural & rural development. Recommends about
licensing for RRBs, Co-operative banks to RBI.

SIDBI ( Small Industries Development
Bank of India )
• Established: Small Industries Development Bank of India (SIDBI in
short) was established on 2nd April 1990 under the Small Industries
Development Bank of India Act 1989 as a subsidiary of Industrial
Development Bank of India.
• Headquarter: Lucknow, Uttar Pradesh.
• Chairman: Dr. Kshatrapati Shivaji.
• Primary Function:
1. SIDBI refinances loan & advances provided by the existing lending
institution to small-scale units.
2. SIDBI is an independent financial institution which provides help
for the growth and development of micro, small and medium-
scale enterprises (MSME’s).
3. The second fund is a debt fund called SIDBI make in India loan for
enterprises (SMILE), which was announced in the Union budget
(2015) in February. The fund will provide short-term loans and
loans in the nature of quasi-equity of MSMEs to meet debt-to-
equity norms and pursue growth.

EXIM BANK ( Export Import Bank )
• Established: EXIM Bank was established on January 1, 1982 for the purpose of
financing, facilitating and promoting foreign trade of India.
• Headquarter: Mumbai, Maharashtra.
• Chairman: Yaduvendra Mathur.
It was established in 1982 under EXIM Bank of India Act 1981.
• The bank lays special emphasis on extension of Lines of Credit (LOCs) to overseas
entities, national govts., regional financial institution and Commercial Banks.
• The bank extends Buyers credit & suppliers credit to finance and promote
country's exports. To promote hi-tech exports from India, the bank has a lending
programme to finance Research & Development (R & D) activities of export-
oriented companies.
• The authorised capital of the EXIM bank is Rs. 200 crore & paid up capital is Rs.
100 crore, wholly subscribed by the central government.
• Primary Function:
• The Export-Import (EXIM) Bank of India is the principal financial institution in
India for coordinating the working of institutions engaged in financing export and
import trade.
• To tap domestic & foreign markets for resources. undertaking development &
financial activities in export sector (export & import).

SEBI ( Securities and Exchange Board
of India )
• Established: SEBI was first set up as a non-statutory body in April 1988, to
regulate the working of the stock exchange. Later it was made an
autonomous body on 12 April 1992 via SEBI Act 1992. 1st chairman of
SEBI is Dr S.A. Dave [12 April 1988-23 Aug 1990]
• Headquarter: Mumbai, Maharashtra.
• Chairman: Upendra Kumar Sinha.
• Objective: Protects the interest of investors and to promote the
development of stock exchange & regulate the activities of stock market.
As per the SEBI regulations, the level of risk will be depicted by the
colour code boxes for Mutual Funds:
Blue: Principal at low risk
• Yellow: Principal at medium risk
• Brown: Principal at high risk.
• This regulation came into effect on 1 July 2013 post which all the fund
houses have labelled their funds can be the basis of the risk levels.
• SEBI has launched a centralised web based system to redress complaints
by SCORES.
• Primary Function:
1. SEBI is the security market regulator in India.

IRDAI (Insurance Regulatory and
Development Authority of India)
• Established: IRDDAI was set up in the year 1999 by the Insurance
Regulatory and Development Authority Act, 1999, which was passed by
the Government of India.
• Headquarter: Hyderabad, Telengana.
• Chairman: T.S. Vijayan.
• It is an autonomous apex statutory body to control & develop insurance
agency in India. IRDA is a national agency of GOI.
• Passed by Government of India under IRDA Act 1999 on the
recommendation of Malhotra Committee.
• It was incorporated as statutory body in April 2000
• IRDA act 1999, amended in 2002 to incorporate some emerging
requirements
• Objective To protect the interest of policyholder, to regulate, promote &
ensure orderly growth of the insurance industry & for matters connected
there with or incidental there to.
• Primary Function:
1. The IRDAI is an autonomous, statutory agency tasked with regulating
and promoting the insurance and re-insurance industries in India.