Indian Financial System: UGC NET Commerce Notes & Study Material

Indian Financial System is among the most vital dimensions of our country's economic progress. It directs the flow of money from the citizens (national savings) of the nation towards the people who can utilize it wisely (entrepreneurs/businessmen/investors) to benefit both of them. The organization of the financial system comprises different institutions such as banks, stock exchanges, and insurance companies that coordinate with each other to handle money and investments within an economy.

The UGC NET Exam covers how to explain the Indian financial system. One must cover an overview of the Indian financial system for their exam. 

In this article, the readers will be able to know about the following:

• Indian Financial System 
• What is the Structure of the Indian Financial System?
• Components of Indian Financial System 
• Indian Financial System Functions 

Indian Financial System 

The financial system of India is one which helps in managing the money inflow within the country. Banks, insurance companies, and the stock market make up the system, and each of these is important. The banks provide saving accounts, loans, and help businesses gain access to funds for growth. The insurance companies protect individuals and businesses from financial loss through insurance cover. The stock market allows people to sell and buy shares in companies, which allows companies to raise capital for expansion. There are other money institutions like mutual funds that help people invest their money. The Reserve Bank of India (RBI) is the central institution that controls the supply of money and keeps the system stable. The Indian financial system helps individuals save, invest, borrow, and protect their money.

What is the Structure of the Indian Financial System?

The Indian financial system structure consists of various segments that facilitate the management and circulation of money throughout the nation. The various segments include financial institutions, markets, instruments, and regulations, which together enable businesses and individuals. The organization of the Indian financial system can be categorized broadly into two segments: the organized sector and the unorganized sector. Organized sector comprises formal financial institutions like banks, insurance companies, NBFCs, mutual funds, stock exchanges, and pension funds.

Financial Institutions

Financial institutions in India refer to institutions that offer bank and finance services to individuals and businesses. Banks, such as the State Bank of India, provide services like savings accounts, loans, and remittance of money. Non-Banking Financial Companies (NBFCs) also give loans and financial services but are not banks. 

Financial Markets

Financial markets in India are where businesses and individuals can sell and purchase financial products such as stocks and bonds. The stock market, for example, the Bombay Stock Exchange (BSE), provides a means by which companies can raise funds by issuing shares. Individuals can purchase these shares and become owners of companies. The money market is another sector in which short-term investments and loans are created. The bond market is where investors can purchase debt from businesses or the government in return for periodic interest payments. These markets cause the economy to expand by matching businesses with investors.

Financial Instruments

Financial instruments are products or tools utilized within the financial system for raising money or investing. Examples include stocks, bonds, and mutual funds. A stock is an ownership in a company, and a bond is a loan to companies or governments that they borrow and return with an interest rate. Mutual funds collect money from large numbers of investors to invest in a variety of stocks and bonds. These tools enable individuals to invest their capital in various manners. They also assist companies in accessing the funds they require to expand and generate employment.

Regulatory Bodies

Regulatory bodies are entities that create regulations to make the financial system function properly and equitably. In India, managing money and inflation is the responsibility of the Reserve Bank of India (RBI). The Securities and Exchange Board of India (SEBI) creates regulations for the stock market in order to safeguard investors. The Insurance Regulatory and Development Authority of India (IRDAI) makes sure that insurance companies are fair. These organizations keep the financial system secure by ensuring that everyone is in line with the rules. Without them, the financial system may become unfair or unstable.

The Role of Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is the most significant institution in the Indian financial system. It regulates the money supply and prescribes guidelines for the functioning of banks. The RBI also controls inflation, which prevents prices from increasing too rapidly. It serves as the bank of the government to assist it in managing finances and debt. The RBI makes sure that the financial system is solid and citizens have faith in the banks. It also ensures that the economy develops in a well-balanced manner.

Components of Indian Financial System 

The Indian financial system has various components that function together to enable individuals to manage money, save, invest, and accumulate wealth. The components are financial institutions, markets, instruments, and regulators, all of which have a critical role in ensuring the system operates effectively.

Financial Institutions

Financial institutions are institutions that offer services such as saving, lending, and investing. Banks are the most prevalent type of institution, offering services such as savings accounts and loans. Insurance companies offer protection against risks such as accidents and health issues. Non-Banking Financial Companies (NBFCs) also offer loans but do not provide banking services.

Financial Markets

Financial markets are where individuals sell and purchase financial instruments such as stocks, bonds, and shares. The stock market, such as the Bombay Stock Exchange (BSE), enables companies to raise funds by issuing shares to the public. Money markets are involved in short-term lending to assist companies with their immediate requirements. These markets enable businesses and individuals to invest or raise funds to expand.

Financial Instruments

Financial instruments are goods that assist individuals in saving, investing, or borrowing cash. Stocks enable individuals to purchase a fraction of a business, whereas bonds are loans extended to businesses or the government in exchange for interest. Mutual funds enable individuals to invest in a collection of stocks and bonds. The instruments assist individuals in earning money from their investments, while businesses acquire funds.

Regulatory Bodies

Regulatory agencies are groups that create regulations to maintain the financial system secure and equitable. The Reserve Bank of India (RBI) manages the money supply and maintains prices stable. The Securities and Exchange Board of India (SEBI) ensures that the stock market operates equitably for all. The Insurance Regulatory and Development Authority of India (IRDAI) monitors insurance firms to safeguard customers.

Indian Financial System Functions 

The Indian financial system facilitates the flow of funds within the country such that companies, individuals, and the government can save, invest, and borrow. The financial system assists in promoting economic stability and growth through the services to satisfy financial demands.

Mobilization of Savings

One of the Indian financial system's primary purposes is to enable individuals to save their funds. Post offices and banks enable individuals to save money and receive interest on it. Such savings can be used for future expenses such as purchasing a home, education, or business. By enabling individuals to save money, the financial system ensures that there will be sufficient funds for investment and lending.

Provision of Liquidity

Liquidity refers to how easily assets such as money or investments can be converted into cash. The Indian financial system facilitates people and enterprises in having access to cash at all times when needed. For instance, banks enable individuals to withdraw funds from their accounts or extend loans when required. This ensures businesses continue operating and individuals can buy their basic requirements.

Facilitating Investment

The financial system aids businesses in financing by providing methods for individuals to invest. Stock markets enable companies to issue shares, and mutual funds collect funds from numerous individuals and invest in other companies. This gives businesses access to funds required to expand and generate new jobs. Meanwhile, investors earn funds by benefiting from the company's success.

Risk Management

The Indian financial system facilitates the management of risks by the provision of products like insurance. Insurance protects people and businesses against unexpected losses such as accidents, natural disasters, or health problems. The system also provides derivatives that help companies reduce the risk of financial loss when prices vary. This function ensures that individuals and businesses become more secure financially.

Conclusion 

Indian Financial System is important to define the structure of Indian financial system for economic growth. Indian financial system is what makes everything from online payment to loan possible. Businesses are able to take loans for business. People meet their personal needs through bank loans. All these become achievable with a stable and inclusive financial system. The Indian financial system is a dynamic and complex ecosystem that has experienced tremendous changes in recent years. Despite the challenges, the system continues to improve, adopting technology, encouraging inclusion, and supporting the economic growth and development of India. The government policies and regulations are likely to determine the course of India's financial future.

Financial Markets is a vital topic for the UGC NET Philosophy examination. It would help if you learn similar topics with the Testbook App.

Major Takeaways for UGC NET Aspirants What is Financial Market: A financial market is a place where people buy and sell things like stocks, bonds, and money. It helps businesses and governments get the money they need.  Explanation of Financial Market: Financial markets are important because they help economies work smoothly by sharing money and resources. They make it easy for people to buy and sell things like stocks and bonds. Financial markets help investors earn money by providing products that give returns. Types of Financial Markets  Stock Market: The stock market is for companies. The companies issue shares to own parts of the business. Investors can buy them.  Bond Market: Companies or the government can issue bonds. These are often to raise more funds and finance projects. These bonds are to be repaid by the government or the company. Derivatives Market: Some traders or speculators can trade in futures or options for some underlying assets. These assets can be shares, bonds, currencies, etc. Forex Market: The Forex market is essential for the exchange and price determination of currencies. This market allows exchanging of currencies of different countries. Commodities Market: This market has underlying commodities like gold, oil, silver, wheat, etc. The traders work with the buy and sell positions. It is related to these commodities. Cryptocurrency Market: The cryptocurrency market includes digital assets. This is the digital currency in online exchanges. People can buy or sell the cryptocurrency. Importance of Financial Markets: Financial markets are very important for the economy to work well. They help businesses get money to grow and improve. When businesses get money, they can create new products and hire more workers. Examples of Financial Markets Stock Market: The stock market is where people buy and sell shares of companies. When you buy a share, you own a small part of a company. Bond Market: The bond market is where people buy and sell bonds, which are like loans to companies or governments. Money Market: The money market is where people and businesses buy and sell short-term loans. These loans are usually for less than one year.

Indian Financial System Previous Year Questions

1. Which of the following is not an approach to the structure of Indian Financial system?

Options. A. A brokerage can be either full service or discount.

1. The financial system is concerned about money, credit and finance, the three terms are intimately related yet are some what different from each other.
2. Housing finance simply refers to providing finance for venture capital.
3. Financial instruments may also be divided according to asset class, which depends on whether they are debt-based or equity based.

Choose the correct answer from the options given below:

Options A. A, C, and D only

1. B and C only
2. C only
3. A and C only