INTRODUCTION TO

INDIAN
FINANCIAL
SYSTEM
BMSECAC
1. Introduction – Meaning of Financial System,
2. Features, Objectives, Components, Structure, Role of Financial
System in Economic Development -
3. SWOT of Indian Financial System.
4. Financial Regulators in India- A brief note on RBI, SEBI, IRDAI, and
PFRDAI
In The “financial system,” the word “system” refers to a collection of
complexly interconnected economic institutions, agents, practices,
markets, transactions, claims, and liabilities.

Money, credit, and finance are three ideas that are interconnected but
yet slightly different from one another that are addressed by the
financial system.

A financial system refers to a set of institutions, markets, instruments,

and services that facilitate the transfer of funds within an economy. It
includes everything from banks and stock markets to regulatory bodies
and financial instruments like bonds and stocks.
INDIAN FINANCIAL SYSTEM
An Indian financial system serves as an intermediary between investors and
savers. It makes it easier for money to move from areas of surplus to areas of
deficit. It is related to finances, credit, and money. These three components are
interdependent and have a close relationship with one another.

A financial system is a collection of organizations, tools, and markets that

encourage saving and direct money toward its most effective use. Individuals
(savers), intermediaries, markets, and savings consumers (investors) make up
this group.
 FEATURES

RISK EFFICIENT
PRICE
INTERMEDIATION LIQUIDITY ALLOCATION OF
MANAGEMENT DISCOVERY
RESOURCE
Acts as an Pr ovides Offer s to ols Helps in Ensures that
inte rmediary liq uidity to and s ervices determining the funds are
be tween savers financial for managing prices of alloc at ed to t heir
and borro wers . asset s, m aking financial risks. financial mo st pro ductive
it easier t o buy inst rum ents. uses.
and s ell them .
 Features of a Financial System
1. Intermediation
⚬ The financial system acts as an intermediary between savers and borrowers. It channels funds from individuals and
institutions with excess funds (savers) to those with a shortage of funds (borrowers). This process helps in efficient
allocation of resources across the economy.
2. Liquidity
⚬ Financial systems provide liquidity to assets, enabling them to be quickly bought or sold in the market without
significantly affecting their prices. This is crucial for the smooth functioning of financial markets and for meeting the
short-term cash requirements of individuals and businesses.
3. Risk Management
⚬ A key feature of financial systems is to provide mechanisms for managing and mitigating financial risks. This includes
various financial instruments and services such as insurance, derivatives, and diversification opportunities that help
individuals and businesses protect against uncertainties.
4. Price Discovery
⚬ Financial markets facilitate price discovery by allowing the interaction of buyers and sellers. The prices of financial
instruments like stocks and bonds are determined through market forces of demand and supply, reflecting the collective
assessment of their value by market participants.
5. Efficient Allocation of Resources
⚬ The financial system ensures that resources are allocated to their most productive uses. By providing funds to
businesses and entrepreneurs with viable projects, the financial system supports economic growth and development.
6. Information Asymmetry Reduction
⚬ Financial institutions and markets help in reducing information asymmetry by gathering, processing, and disseminating
financial information. This enables better decision-making by investors and other market participants.
7. Facilitation of Trade and Commerce
⚬ Financial systems support trade and commerce by providing payment systems, credit facilities, and risk management
solutions. This ensures that businesses can operate efficiently and expand their activities.
8. Economic Stability
⚬ By managing and mitigating systemic risks, the financial system contributes to economic stability. Central banks and
regulatory authorities play a crucial role in monitoring and stabilizing the financial system to prevent financial crises.
9. Innovation
⚬ Financial systems foster innovation by funding new technologies, business models, and projects. Access to capital and
financial services encourages entrepreneurs to develop innovative solutions that drive economic progress.
10. Financial Inclusion
⚬ A comprehensive financial system aims to include all sections of society by providing access to financial services. This
ensures that even the underserved and marginalized communities can participate in economic activities, contributing to
overall economic development.
 OBJECTIVES

MOBILIZATION OF SUPPORT REGULATION AND

SAVINGS ECONOMIC SUPERVISION
GROWTH
The pri mary obje cti ve P romoti ng economi c Ensuri ng a we ll -
of a f i nanci al system is growth is a reg ul ated a nd
to mobi li ze savi ng s f undament al objec ti ve supervised fi nanc ial
f rom i ndi viduals , of the f i nanci al sy stem. envi ronme nt i s a n
busi nesse s, a nd By provi di ng c redi t, i mportan t o bjecti ve.
governme nts. By l iqui di ty, and Regul ator y bodi es l ike
provi ding a vari ety of i nve stme nt central banks and
f inancial instrumen t s opportunit i e s, the securi ti es c ommi s si ons
and i nstituti on s (suc h f inancial system set a nd enf orce rules
as banks, bonds, and supports businesse s a nd and standards to
mutual f unds), the entrepre ne ur s in the ir mai ntai n the integri ty,
f inancial system gro wth endea vors, stabil ity, and
encourages peo pl e to l eading to job creatio n, transpare ncy of the
sav e money, w hi ch can i ncre ased produc ti on, f inancia l system,
then be channel ed i nto and ov eral l eco nomi c protecting the interests
producti ve investments . devel opme nt. of all stakehol de r s.
STRUCTURE
OF
 STRUCTURE OF A FINANCIAL SYSTEM
The financial system in India is a complex and well-organized structure
that includes various institutions, markets, instruments, and services. It can
be broadly classified into two main segments: the formal financial system
and the informal financial system.

FORMAL INFORMAL
FINANCIAL FINANCIAL
SYSTEM SYSTEM
I nc lu des r e g ul at e d C o mp r ise s u nr e g ul at e d
e n ti ti e s l ik e ba nk s , e n ti ti e s l ik e
s t oc k e x c ha ng es, an d m o ne y le n de rs a nd
in s u ra nce c o m p an ies. in f o rm al c r e d it g ro u ps.
 INFORMAL FINANCIAL SYSTEM
T he i nf or m a l f in an c ia l s ys te m c o ns is ts of un r eg ul at ed en ti tie s a nd
in s tit ut io n s th at ope r a te o u ts id e th e for m a l fi na nc ia l sy s te m . I t i nc lu d es :

MONEYLENDERS CHIT FUNDS TRADE CREDIT PAWN SHOPS

A t ype of r otat ing Inf orm al c re dit

Individuals or sm al l Bus ine sse s th at
savings and cr edit ext ende d by
businesse s that provide se cure d
association whe re supplier s to t he ir
provide loans at h igh - loans to indi vidual s,
m em be rs c ont ribute t o cust om er s, of te n
inte res t rates , of t en using per sonal
a com mon fund and bas ed on mutual
without for mal prope rty as
take turns re cei ving tr ust and long-t erm
docume ntat i on . collate ra
the lump sum r elationshi ps .
 COMPONENTS OF
FORMAL INDIAN FINANCIAL
SYSTEM
FINANCIAL FINANCIAL FINANCIAL FINANCIAL
INSTITUTIONS MARKETS INSTRUMENTS SERVICES

Banks, insu rance Capita l markets, Stocks , bonds, Brokerage serv ices ,
companie s, mu tu al mon ey markets , loans, derivat iv e s investment advice,
funds, pension deriv at iv e s risk management
funds markets. services
 ROLE OF
FINANCIAL SYSTEM
IN
ECONOMIC
DEVELOPMENT
 ROLE OF FINANCIAL SYSTEM IN ECONOMIC DEVELOPMENT

• CAPITAL FORMATION: MOBILISES SAVINGS AND ALLOCATES THEM TO PRODUCTIVE INVESTMENTS.

• ECONOMIC GROWTH: FACILITATES THE FLOW OF FUNDS TO AREAS WHERE THEY CAN BE USED EFFICIENTLY.
• FINANCIAL INCLUSION: PROMOTES INCLUSIVE GROWTH BY PROVIDING FINANCIAL SERVICES TO ALL SECTIONS OF SOCIETY.
• STABILITY: ENSURES ECONOMIC STABILITY BY MANAGING RISKS AND PROVIDING LIQUIDITY.
• INNOVATION: ENCOURAGES INNOVATION BY FUNDING NEW TECHNOLOGIES AND BUSINESS MODELS.

IMPORTANCE OF THE INDIAN FINANCIAL SYSTEM IN ECONOMIC DEVELOPMENT

• HELPS IN MONITORING CORPORATE PERFORMANCE.

• IT OFFERS A METHOD FOR REDUCING RISK AND MANAGING UNCERTAINTY.
• IT OFFERS A MEANS OF MOVING RESOURCES ACROSS GEOGRAPHICAL BOUNDARIES.
• IT PROVIDES OPTIONS FOR PORTFOLIO ADJUSTMENT (OFFERED BY FINANCIAL MARKETS AND FINANCIAL INTERMEDIARIES).
• IT HELPS LOWER TRANSACTION COSTS AND INCREASES RETURNS. PEOPLE WILL BE INSPIRED TO SAVE MORE MONEY BY THIS.
• IT PROMOTES THE PROCESS OF CAPITAL FORMATION.
• IT SUPPORTS THE DEEPENING AND BROADENING OF THE FINANCIAL SYSTEM.
 STRENGTHS: WEAKNESSES:
• Ro bust re gulato r y framework . • L imited financial literacy.
• Div ersifi ed financia l institut io ns . • High leve ls of non-pe rfo rm ing as sets
• Rapid adoption of te chno lo gy. (NPAs) in banks .
• Growing Capital Marke t • Unde rde ve lo pe d bond marke t.
• Financia l Inclus io n Initia t ive s • Infras tr uct ure Gaps

OPPORTUNITIES:
• Growing finte ch s ector. THREATS:
• Incre as ing fore ign inves tme n t. • Glo bal e conomic v olatility.
• E xpanding financia l inclusi on • Regulato r y challenge s .
initia t ive s . • Cyber se curity ris ks .
• De velopment of Ne w Financia l • E co no mic Slowdown
Products • Po litical and Po licy Ris ks
• Infras tr uct ure De ve lopme nt
 Strengths

1. Robust Regulatory Framework

⚬ India's financial system is backed by a strong regulatory framework with institutions like the Reserve Bank of India
(RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India
(IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA). These regulators ensure stability,
transparency, and investor protection.
2. Diverse Financial Institutions
⚬ The system includes a wide range of financial institutions, such as commercial banks, cooperative banks, non-banking
financial companies (NBFCs), mutual funds, insurance companies, and pension funds. This diversity helps cater to
various financial needs across different segments of the economy.
3. Growing Capital Market
⚬ The Indian capital market, including major stock exchanges like the Bombay Stock Exchange (BSE) and National
Stock Exchange (NSE), is well-developed and continues to attract significant domestic and foreign investment.
4. Technological Advancement
⚬ Rapid adoption of financial technology (fintech) has improved efficiency, accessibility, and convenience in financial
services. Innovations such as digital payments, mobile banking, and online investment platforms have gained
widespread acceptance.
5. Financial Inclusion Initiatives
⚬ Government initiatives like Jan Dhan Yojana and Aadhaar-linked services have significantly improved financial
inclusion, bringing a large section of the unbanked population into the formal financial system.
 Weaknesses

1. Limited Financial Literacy

⚬ Despite improvements, financial literacy remains low, particularly in rural areas. This limits people's ability to make
informed financial decisions and access financial services effectively..
2. High Non-Performing Assets (NPAs)
⚬ The banking sector, particularly public sector banks, has struggled with high levels of NPAs. This affects their
profitability and lending capacity, posing a challenge to financial stability.
3. Underdeveloped Bond Market
⚬ Compared to equity markets, the corporate bond market in India is relatively underdeveloped. This limits the ability of
companies to raise long-term funds through debt.
4. Infrastructure Gaps
⚬ There are gaps in financial infrastructure, particularly in rural and semi-urban areas. This includes limited access to
banking services and internet connectivity, affecting the reach of financial services.
 Opportunities

1. Expanding Fintech Sector

⚬ The fintech sector presents immense opportunities for innovation and growth. Technologies like blockchain, artificial
intelligence, and big data can further revolutionize financial services, improving efficiency and customer experience.
2. Increasing Foreign Investment
⚬ India's economic growth prospects and market potential continue to attract foreign direct investment (FDI) and foreign
institutional investment (FII). Policies to ease investment norms can further enhance this inflow.
3. Financial Inclusion and Digital Banking
⚬ Expanding financial inclusion through digital banking and mobile financial services can bring more people into the
formal financial system. This will drive economic growth and reduce poverty.
4. Development of New Financial Products
⚬ There is scope for developing and introducing new financial products tailored to the diverse needs of the Indian
population, including small and medium enterprises (SMEs), rural households, and the middle class.
5. Development of New Financial Products
⚬ Investment in financial infrastructure, such as expanding bank branches, improving internet connectivity, and
enhancing payment systems, can significantly boost the reach and efficiency of financial services.
 Threats

1. Global Economic Volatility

⚬ The Indian financial system is susceptible to global economic fluctuations, including changes in oil prices, currency
exchange rates, and international trade policies. Such volatility can impact market stability and investor confidence.
2. Regulatory Challengest
⚬ Ensuring effective regulation while promoting innovation poses a challenge. Overregulation can stifle growth, while
underregulation can lead to financial instability and fraud.
3. Cybersecurity Risks
⚬ The increasing reliance on digital technologies makes the financial system vulnerable to cyber threats. Cyberattacks,
data breaches, and fraud can undermine trust and disrupt financial services.
4. Economic Slowdown
⚬ An economic slowdown, whether domestic or global, can impact the financial system by reducing investment,
increasing loan defaults, and straining financial institutions.
5. Political and Policy Risks
⚬ Political instability and policy changes can create uncertainty in the financial markets. Inconsistent or unpredictable
policies can deter investment and affect the overall stability of the financial system.
 FINANCIAL REGULATORS IN INDIA

RBI SEBI IRDAI PFRDAI

Established: Established: Established: Established:
1935 1992 1999 2003
 1. Reserve Bank of India (RBI)
Established: 1935
Role: Central bank of India
Functions and Responsibilities:
• Monetary Authority: The RBI formulates and implements monetary policy to maintain price stability
and ensure adequate flow of credit to productive sectors.
• Issuer of Currency: It is responsible for issuing and managing the supply of the Indian rupee.
• Regulator of Financial System: The RBI regulates and supervises financial institutions to ensure their
soundness and safety, protecting depositors' interests.
• Manager of Foreign Exchange: It manages the Foreign Exchange Management Act, 1999, and oversees
the foreign exchange market to facilitate external trade and payments.
• Developmental Role: The RBI promotes financial inclusion, develops financial markets, and supports
national economic policies.
• Banker to the Government: It acts as the banker and financial advisor to the central and state
governments.
• Payment and Settlement Systems: The RBI oversees the payment and settlement systems, ensuring
their efficiency and security.
 2. Securities and Exchange Board of India (SEBI)
Established: 1992
Role: Regulates the securities market
Functions and Responsibilities:
• Protecting Investor Interests: SEBI ensures that investors' interests are protected by enforcing rules and
regulations that promote fair practices.
• Regulating Market Intermediaries: It regulates stock exchanges, brokers, merchant bankers, and other
intermediaries involved in the securities market.
• Promoting Market Development: SEBI works to develop the securities market by encouraging
transparency, efficiency, and innovation.
• Prohibiting Unfair Trade Practices: It takes action against fraudulent and unfair trade practices to
maintain market integrity.
• Educating Investors: SEBI conducts investor education programs to enhance financial literacy and
awareness among investors.
 3. Insurance Regulatory and Development Authority of India (IRDAI)
Established: 1999
Role: Regulates and promotes the insurance industry
Functions and Responsibilities:
• Issuing Licenses: IRDAI issues licenses to insurance companies and intermediaries, ensuring
they meet the required standards.
• Protecting Policyholders' Interests: It ensures that insurance companies follow fair
practices and that policyholders' interests are safeguarded.
• Promoting Insurance Growth: IRDAI works to develop the insurance sector by
encouraging healthy competition and innovation.
• Regulating Premium Rates: It monitors and regulates the premium rates for various
insurance products to ensure they are reasonable.
• Ensuring Solvency: IRDAI ensures that insurance companies maintain adequate solvency
margins to meet their liabilities.
 4. Pension Fund Regulatory and Development Authority (PFRDA)
Established: 2003
Role: Regulates and promotes the pension industry
Functions and Responsibilities:
• Implementing the National Pension System (NPS): PFRDA oversees the NPS, a voluntary,
defined contribution retirement savings scheme.
• Regulating Pension Funds: It regulates pension fund managers, ensuring they adhere to
investment guidelines and safeguard subscribers' interests.
• Promoting Pension Awareness: PFRDA conducts awareness programs to educate the public
about the importance of pension savings.
• Ensuring Subscriber Protection: It ensures that the rights and interests of pension
subscribers are protected, and grievances are addressed promptly.
• Developing the Pension Sector: PFRDA works to develop the pension sector by
encouraging participation and innovation in pension products.
 Other Financial Regulators in India
5. Ministry of Finance
Role: The central government ministry responsible for economic policy, government finances, and financial regulation.
Departments:
• Department of Economic Affairs: Manages economic policies, financial markets, and infrastructure development.
• Department of Expenditure: Oversees public financial management and expenditure control.
• Department of Revenue: Administers tax policies and laws.
• Department of Financial Services: Manages banking, insurance, and pension reforms.

6. Forward Markets Commission (FMC)

Merged with SEBI: 2015
Role: Previously regulated commodity futures markets; now integrated with SEBI for comprehensive regulation of commodity and
securities markets.

7. Financial Stability and Development Council (FSDC)

Established: 2010
Role: An apex body to strengthen and institutionalize the mechanism for maintaining financial stability, enhancing inter-regulatory
coordination, and promoting financial sector development.
Functions:
• Coordinating among Regulators: Facilitates cooperation and coordination among various financial sector regulators.
• Addressing Financial Stability Issues: Monitors and addresses financial stability issues that may arise.
• Promoting Financial Inclusion and Literacy: Works towards enhancing financial inclusion and promoting financial literacy.
THANK
YOU