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Indian Financial System: An Overview

The financial system comprises a mixture of intermediaries, markets and instruments that are related to one another. It provides a system by which savings are transformed into investments.



The Reserve Bank of India (RBI) being the central banking authority, exercise monetary control and supervises the banking institutions. Different institutions such as Commercial Banks, Non Banking Finance Companies, Mutual Funds Insurance Companies, Primary Dealers, brokers, depositories and Insurance Agents, also different markets such as the capital market and the money market are part of the financial system.

The three regulatory authorities viz., RBI, SEBI, (Securities and Exchange Board of India, IRDA(Insurance Regulatory Development Authority), are controlling and supervising the banking, capital market and insurance sectors respectively.

Objectives of Financial Sector Reforms in India:
India has had more than a decade of financial sector reforms during which there has been substantial transformation and liberalization of the whole Financial system.
Following are the objectives of the reforms -
1. Reforms Financial repression that  existed earlier
2. Create an efficient productive and           profitable Financial sector industry
3. Enable price discovery particularly by the market determination of interest rates that then helps in efficient allocation of resources
4. Provide operational and function autonomy to institutions
5. Prepare the Financial system for increasing international Competition
6. Open the external sector in a calibrated fashion


Some Financial Institutions


1.Securities Exchange Board of India (SEBI): It is regulatory authority of stock exchanges and protects investors from fraudulent dealings. It was established in April 1988 and awarded statutory status by Act of parliament in 1992. SEBI Head quarters located in Mumbai.

2.Insurance Regulatory & Development Authority (IRDA): It is apex body formed under Sec.4 of IRDA Act 1999 to protect the interests of the policyholders to regulate promote and ensure orderly growth of the insurance industry in India

3.Indian Banks Association (IBA): It is the official association of all the banks operating in India. It acts as a bridge between banks on one hand and government and staff unions on the other.

4.Financial Stability & Development Council: This is the apex financial regulator of our country. Headed by Finance Minister, it coordinates and regulates to four financial regulators of the country i.e. RBI, SEBI, IRDA and PFRDA to ensure that all of them operate and function in harmony to promote the growth and stability of Indian Economy.

5.Non Banking Financial Company (NBFC): These are companies which have functions similar to banking like accepting deposits and making loans. However they do not have license for banking, although they are regulated by RBI.

6.Deposit Insurance & Credit Guarantee Corporation (DI&CGC): It is a wholly owned subsidiary of RBI which provides an insurance cover of Rs.1lakh per depositor per bank in case of bank failure. It also provides guarantee of repayment amount in default of small loans given by banks.

7.Export Credit Guarantee Corporation of India (ECGC): ECGC is a Govt. body
which provides export credit insurance facilities to exporters and banks in India. It  encourages Indian exporters by giving them credit insurance covers.

8.Banking Codes and Standards Board of India: It is an industry watch dog set up by RBI to monitor and assess the compliance with codes and minimum standards of service to individual customers, as prescribed by the RBI.

Credit Information Report: A Credit Information Report is a factual record of a borrower’s credit payment history compiled from information received from different credit grantors. Its purpose is to help credit grantors make informed lending decisions quickly and objectively.

Credit Rating: Credit Rating is an assessment of the probability of default on payment of interest and principal on a debt instrument. In simple words, it ranks the company or country’s ability to meet their debt obligations.


Financial Markets:
A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Money Market- The money market is a wholesale debt market for low-risk, highlyliquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market:
The Capital Market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex Market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Financial Intermediaries

Stock Exchange: A Stock Exchange provides a platform for sale and purchase of securities on behalf of the investors. They also provide clearing house facilities for getting of payment and delivery of securities. Clearing houses guarantee all payments and deliveries. Securities include equities, debt and derivatives.

Depositories: Depositories – There are two Central Depository Securities Ltd.
(CDSL) and National Securities depositories Ltd. (NSDL) hold securities in demat form. Demat means conversion of physical securities into electronic form. The depositories transfer securities from sellers account to buyers account in electronic form up to instructions from the Stock Exchange Clearing House, supported by necessary documentation.

Financial Instruments


Equity and debt instruments:
Companies wishing to raise equity or debt through stock exchange have to approach a capital market regulator with the prescribed applications and a proforma prospectus for permission to raise equity and debt to get them listed on a stock exchange.

Mutual Funds:
A Mutual Fund is a form of collective investment that pools money from the investors and invests in stocks, Debt and other securities. It is a less risky investment option for an individual investor. Mutual funds require the regulators’ approval to start an Asset Management Company and each scheme has to be approved by the regulator before it is launched.

Call /Notice-Money Market
Call/Notice Money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

Treasury Bills: Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue

Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.
CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

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