Indian Financial System

“If you don't have a functioning financial system the world economy won't be revived. All the major economies have their responsibility to assist at a pace which is required to clean up the balance sheet of the banking system and to ensure that credit flows are resumed”. (Manmohan Singh)

The Indian Financial System is a true representative of Indian economic activities. Economic activities consist of production, consumption and distribution of scarce resources. A financial system comprises various financial institutions, markets, instruments, services and regulatory bodies that help in the flow of funds from the area of surplus to the areas of deficit. The Indian Financial system encourages expansion of the financial market which in turn helps in capital formation and promotes saving and investment. It not only aids in financial deepening and broadening but also allocates risk. The Indian Financial system is increasing the national output of the country by helping corporate customers to expand their business. It is also promoting weaker sections of society by introducing financial inclusion plans in rural areas. In short, we can say that the Indian financial system is strengthening the economic development and standard of people of India. Elements of Indian Financial System are:

Financial Institutions and Intermediaries: Financial institutions can be divided into Banking and Nonbanking institutions. Banking Institutions can be further divided into Commercial Banks, Regional rural banks, Cooperative banks, foreign banks, NBFC, small payment banks, Paytm banks

• A commercial bank :is a financial institution where people deposit their money and receive a loan or other basic financial products. It is a bank for common people. Examples are SBI,ICICI,IDFC etc.
• Regional rural banks: are the banks that are situated in rural areas in different states of India. Examples are Andhra Pradesh Gramin Bank, Kerala Gramin bank etc.
• Cooperative banks: are financial institutions owned by their customers or members. Examples are Saraswat Cooperative Bank, Bharat Cooperative Bank etc.
• Foreign banks: are banks having headquarters in different countries and branches in India. Examples are Deutsche Bank, Citi Bank etc.
• Small payments banks: These are the banks set up to introduce financial inclusion in the economy. The objective is to provide short term loans to disadvantaged sectors of the economy. Examples are Au Finance Bank, Bandhan Bank etc.
• Payment banks: are categorized as scheduled banks, conceptualized by the Reserve Bank of India. The main objective of payment banks is to broaden the reach of people by providing a technology enabled environment. Examples are Paytm payment bank, Airtel Payment bank etc.
• Non-banking Financial Institutions: includes developmental financial institutions, NBFC (non-banking financial companies), insurance and stock exchange. Examples are Citi Finance, LIC etc.

Financial Markets: Financial markets can be classified into organized markets and unorganized markets. We can segregate organized markets into two- capital markets and money markets. Unorganized markets are moneylenders and private financers in various areas.

Capital market is long term assets bought in by professional brokers, individual investors and financial institutions. The capital market can be further bifurcated into primary market and secondary market. The primary market is used to create long term instruments through which corporations can raise loans from the capital market. Whereas the secondary market provides liquidity and marketability to these instruments.

The money market is the flow of cash between the government, banks and financial institutions for a term of one day to one year.

Financial Instruments: Financial instruments are proof of financial transactions between two parties involved in a financial transaction. Financial instruments can be divided into money market and capital market instruments.

The money market is a market for short term financial assets which include instruments like treasury bills, Commercial paper, certificate of deposits (CD), repurchase agreements, Gilt-edged securities, money market mutual funds etc.

A capital market is a market for long term financial assets which include instruments like equity share capital, preference capital and debentures. Equity shareholders are the main investors of the company .They are the main supplier of the capital. They are first to contribute to the capital and last to receive any dividend. They are the voters of the company who elect the management of the company. Preference shareholders enjoy preference over equity shareholders in the form of dividends and assets in the event of liquidation. Preference shares can be of three different types: Cumulative or non-cumulative preference shares; redeemable or perpetual preference shares; Convertible or non-convertible preference shares. A debenture is a legal contract whereby the company promises to pay its owner a specified rate of interest for a fixed period with a promise to repay the principal at the time of maturity. Debentures can be classified as Non-convertible debentures, fully convertible debentures, partly convertible debentures and secured premium notes.

The Indian Financial Sector is experiencing tremendous growth. There is also Integration of the financial market with high technology absorption. Although E banking and E solutions have a risk of cyber misuse, still high technology financial systems are a demand of the nation. Digital finance through mobile payments,online wallets and UPI are some of the results of the internet revolution in Finance. Incorporation of artificial intelligence,Machine learning,and analytics have made it possible to predict behavior and determine the credit worthiness of an individual. Also this has increased growing concern and rise in cyber crime.2020 was the year of adaptability, forcing financial institutions to scramble and digitize their customer-facing processes to survive. 2021 is going to see a renewed focus on digital and lead to the emergence of connected banking. The time is ripe to accelerate digital and leverage technology to stay relevant, competitive, and future ready.