ACHARYA INSTITUTE OF GRADUATE STUDIES

(NAAC Re-Accredited ‘A’ Grade and Affiliated to Bengaluru City University)

Soladevanahalli, Bengaluru-560107
DEPARTMENT OF COMMERCE
ACADEMIC YEAR 2024-25 (ODD)

FACULTY NAME : ASHWINI T G

COURSE : BCOM
SEMESTER :1st SEM
SUBJECT : INDIAN FINANCIAL SYSTEM

LECTURER NOTES
Unit 1: Introduction to Indian Financial System
Introduction – Meaning of Financial System, Features, Objectives, Components, Structure, Role of
Financial System in Economic Development - SWOT of Indian Financial System.Financial
Regulators in India- A brief note on RBI, SEBI, IRDAI, and PFRDAI.

1.1. Introduction :

Financial System: It is a set of all financial institution which facilitates financial transactions
in financial markets. It brings under its fold the financial markets and the financial institution
which support the system.
1.1.1. Meaning financial system
A financial system is a set of institutions such as banks, insurance companies, stock
market, finance companies that permit the exchange of funds.
Definition financial system: According to Gupta, Financial system is defined as “A set of
institutional arrangements through which financial surplus available in the economy are
mobilized”
(or)
Defined as “An establishment that focuses on dealing with financial transactions, such as
Investment, Loans and Deposits”
Functions of Indian Financial System
The Indian financial system has several functions that help to meet the financial needs of
individuals and businesses. Here are some of the key functions of the Indian financial
system:

Mobilization of Savings: The Indian financial system helps to mobilize savings from various
sectors of the economy and channel them towards productive investments. This is achieved
through various financial intermediaries such as banks, mutual funds, and insurance
companies.
Allocation of Credit: The Indian financial system also plays a key role in allocating credit to
different sectors of the economy. Banks and other financial institutions provide loans and
credit facilities to businesses and individuals to help them meet their financial needs.
Payment System: The financial system provides a safe and efficient payment mechanism to
facilitate transactions between different individuals and businesses. This is achieved through
various payment systems such as NEFT, RTGS, and IMPS.
Risk Management: The financial system helps to manage risks associated with financial
transactions. Financial intermediaries such as insurance companies provide risk management
products such as life insurance, health insurance, and property insurance.
Price Discovery: The Indian financial system also helps in the discovery of prices of
financial assets such as stocks, bonds, and commodities. This is achieved through various
financial intermediaries such as stock exchanges and commodity exchanges.
Economic Development: The financial system plays a critical role in the economic
development of the country. It provides financial resources for investment in infrastructure,
industries, and other productive sectors of the economy.
Financial Inclusion: The Indian financial system also strives to promote financial inclusion
by providing access to financial services to individuals and businesses in remote and
underdeveloped areas of the country....
COMPONENTS/ CONSTITUENTS OF INDIAN FINANCIAL SYSTEM
The following are the four major components that comprise the Indian
Financial System:
1. Financial Institutions
2. Financial Markets
3. Financial Instruments/ Assets/ Securities
4. Financial Services
COMPONENT IS DISCUSSED BELOW:
FINANCIAL INSTITUTIONS
Financial institutions are the intermediaries who facilitate smooth functioning
of the financial system by making investors and borrowers meet. They
mobilize savings of the surplus units and allocate them in productive activities
promising a better rate of return. Financial institutions also provide services
to entities (individual, business, government) seeking advice on various issue
ranging from restructuring to diversification plans. They provide whole range
of services to the entities who want to raise funds from the markets or
elsewhere.
Financial institutions are also termed as financial intermediaries because they
act as middle between savers by accumulating Funds them and borrowers by
lending these fund.
It is also act as intermediaries because they accept deposits from a set of
customers (savers lend these funds to another set of customers (borrowers).
Like - wise investing institutions such ICCIC, mutual funds also accumulate
savings and lend these to borrowers, thus perform the role of financial
intermediaries.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be classified into two categories:
A. Banking Institutions
B. Non - Banking Financial Institution
A. BANKING INSTITUTIONS (Reserve Bank of India) Indian banking industry is subject to
the control of the Central Bank. The RBI as the apex institution organises, runs, supervises,
regulates and develops the monetary system and the financial system of the country. The main
legislation governing commercial banks in India is the Banking Regulation Act, 1949. The
Indian banking institutions can be broadly classified into two categories:
1. Organised Sector
2. Unorganised Sector.
1. Organised Sector The organised banking sector consists of commercial banks, cooperative
banks and the regional rural banks.
(a) Commercial Banks: The commercial banks may be scheduled banks or non – scheduled
banks. At present only one bank is a non - scheduled hank. All other banks are schedule
banks. The commercial banks consist of 27 public sector banks, private sector banks and
foreign banks. Prior to 1969, all major banks with the exception of State Bank of India in the
private sector. An important step towards public sector banking was taken in July 1969, when
14 major private banks with a deposit base of 50 crores or more were nationalised. Later in
1980 another 6 were nationalised bringing up the total number banks nationalised to twenty.
(b) Co-operative banks: An important segment of the organized sector of Indian banking
is the co-operative banking. The segment is represented by a group of societies registered
under the Acts of the states relating to cooperative societies. In fact, co-operative societies
may be credit societies or non-credit societies. Different types of co-operative credit societies
are operating in Indian economy.
These institutions can be classified into two broad categories:
(a) Rural credit societies which are primary agriculture,
(b) Urban credit societies which are primarily non-agriculture.
For the purpose of agriculture credit there are different co-operative credit institutions to meet
different kinds of needs.
(c) Regional Rural Banks (RRBs): Regional Rural Banks were set by the state
government and sponsoring commercial banks with the objective of developing the rural
economy. Regional rural banks provide banking services and credit to small farmers, small
entrepreneurs in the rural areas. The regional rural banks were set up with a view to provide
credit facilities to weaker sections. They constitute an important part of the rural financial
architecture in India. There were 196 RRBs at the end of June 2002, as compares to 107 in
1981 and 6 in 1975.
(d) Foreign Banks: Foreign banks have been in India from British days. Foreign banks as
banks that have branches in the other countries and main Head Quarter in the Home Country.
With the deregulation (Elimination of Government Authority) in 1993, a number of foreign
banks are entering India. Foreign Banks are: Citi Bank. Bank of Ceylon.
2. Unorganised Sector. In the unorganised banking sector are the Indigenous Bankers,
Money Lenders.
1. Indigenous Bankers Indigenous Bankers are private firms or individual who operate
as banks and as such both receive deposits and given loans. Like bankers, they also financial
intermediaries. They should be distinguished professional money lenders whose primary
business is not banking and money lending. The indigenous banks are trading with the
Hundies, Commercial Paper.
2. Money Lenders: Money lenders depend entirely to on their one funds. Money Lenders
may be rural or urban, professional or non-professional. They include large number of farmer,
merchants, traders. Their operations are entirely unregulated. They charge very high rate of
interest.
B. NON – BANKING INSTITUTIONS
The non – banking institutions may be categorized broadly into two groups:
(a) Organised Non – Banking Financial Institutions.
(b) Unorganised Non – Banking Financial Institutions.
(a) Organised Non – Banking Financial Institutions The organised non - banking financial
institutions include:
1. Development Finance Institutions. These include: The institutions like IDBT,
ICICI, IFCI, IIBI, IRDC at all India level. The State Finance Corporations (SFCs), State
Industrial Development Corporations (SIDCs) at the state level. Agriculture Development
Finance Institutions as NABARD,LDBS etc. Development banks provide medium and long
term finance to the corporate and industrial sector and also take up promotional activities for
economic development
2. Investment Institutions. These include those financial institutions which mobilise
savings at the public at large through various schemes and invest these funds in corporate and
government securities. These include LIC, GIC, LTT, and mutual funds. The non - banking
financial institutions in the organised sector) have been discussed at length in detail in
separate chapters of this book.
(b) Unorganised Non - Banking Financial Institutions The unorganised non - banking
financial institutions include number of non - banking financial companies (NBFCs)
providing whole range of financial services. These include hire - purchase 300 consumer
finance companies, leasing companies, housing finance companies, factoring companies,
Credit rating agencies, merchant banking companies etc. NBFCs mobilise public funds and
provide loanable funds.

FINANCIAL MARKET
It is through financial markets and institutions that the financial system of an economic
works. Financial markets refer to the institutional arrangements for dealing in financial assets
and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds
 etc. Functions of financial markets are:
(i) To facilitate creation and allocation of credit and liquidity
(ii) To serve as intermediaries for mobilisaton of savings.
(iii) To assist the process of balanced economic growth.
(iv) To provide financial convenience.
(v) To cater to the various credit needs of the business houses.
These organised markets can be further classified into two they are
(i) Capital Market
(ii) (ii) Money Market
CAPITAL MARKET
The capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a maturity period of
above one year.
Capital market may be further divided into three namely:
(I) Industrial securities market
(II) Government securities market and
(III) Long term loans market
1. INDUSTRIAL SECURITIES MARKET: As the very name implies, it is a market for
industrial securities namely:
(i) Equity shares or ordinary shares,
(ii) Preference shares and
(iii) Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments. It can be further subdivided into two. They are:
Primary market or New issue market
(i) Secondary market or Stock exchange
PrimaryMarket Primary market is a market for new issues or new
financial claims. Hence, it is also called New Issue market. The primary
market deals with those securities which are issued to the public for the first
time. In the primary market, borrowers exchange new financial securities for
long term funds. Thus, primary market facilitates capital formation. There are
three ways by which a company may raise capital in a primary market. They
are:
(i) Public issue
(ii) Rights issue
(iii) Private placement
The most common method of raising capital by new companies is through
sale of securities to the public. It is called public issue. When an existing
company wants to raise additional capital, securities are first offered to the
existing shareholders on a pre-emptive basis. It is called rights issue. Private
placement is a way of selling securities privately to a small group of
investors. SecondaryMarket
Secondary market is a market for secondary sale of securities. In other
words, securities which have already passed through the new issue market
are traded in this market. Generally, such securities are quoted the Stock
Exchange and it provides a continuous and regular market to buying and
selling of securities. This market consists of all stock exchanges recognised
by the Government of India. The stock exchanges in India are regulated
under the Securities Contracts (Regulation) Act 1956. The Bombay Stock
Exchange is the principal stock exchange in India which sets the tone of the
other stock market.
GOVERNMENT SECURITIES MARKET:
It is otherwise called Gilt - Edged securities market. It is a market where
Government securities are traded. In India there are many kinds of
Government Securities - short term and long term. Long term securities are
traded in this market while short term securities are traded in the money
market. Securities issued by the Central Government, State Governments,
Semi Government authorities like City Corporations, Port Trusts etc.
Improvement Trusts, State Electricity Boards, All India and State level
financial institutions and public sector enterprises are dealt in this market.
LONG TERM LOANS MARKET:
Development banks and commercial banks play a significant role in this
market by supplying long term loans to corporate customers. Long term
loans market may further be classified into:
(1) Term loans market
(2) Mortgages market
(3) Financial Guarantees market.
Term Loans Market In India, many industrial financing institutions have
been created by the Government both at the national and regional levels to
supply long term and medium term loans to corporate customers directly as
well as indirectly. These development banks dominate the industrial finance
in India.
Institutions like IDBI, IFCI, ICICI, and other financial corporations come
under this category.
Mortgages Market
A mortgage loan is a loan against the security of immovable property like
real estate. The transfer of interest in a specific immovable property to secure
a loan is called mortgage. This mortgage may be equitable mortgage or legal.
MONEY MARKET
Money market is a market for dealing with financial assets and securities
which have a maturity period of upto one year. In other words, it is a market
for purely short term funds. The money market may be subdivided into four.
They are:
(i) Call money market
(ii) Commercial bills market
(iii) Treasury bilis market
(iv) Short term loan market.
Call Money Market
The call money market is a market for extremely short period loans
say one day to fourteen days. So, it is highly liquid. The loans are
repayable on demand at the option of either the lender or the
borrower. In India, call money markets are associated with the
presence of stock exchanges and hence, they are located in major
industrial towns like Bombay, Calcutta, Madras, Delhi, Ahmedabad
etc. The special feature of this market is that the interest rate varies
from day to day and even from hour to hour and Centre to Centre. It
is very sensitive to changes in demand and supply of call loans.
Commercial Bills Market
It is a market for Bills of Exchange arising out of genuine trade
transactions. In the case of credit sale, the seller may draw a bill of
exchange on the buyer. The buyer accepts such a bill promising to
pay at a later date specified in the bill. The seller need not wait until
the due date of the bill. Instead, he can get immediate payment by
discounting the bill.
Treasury Bills Market
It is a market for treasury bills which have ' short - term ' maturity. A
treasury bill is a promissory note or a finance bill issued by the
Government.