Indian Financial System - Meaning, Features and Functions
[Indian Financial System Notes BCOM NEP Syllabus]
Meaning and definition of financial system:
The financial system is possibly the most important institutional and
functional vehicle for economic transformation. Finance is a bridge
between the present and the future and whether the mobilization of savings
or their efficient, effective and equitable allocation for investment, it the
access with which the financial system performs its functions that sets the
pace for the achievement of broader national objectives.
According to Christy, the objective of the financial system is to “supply
funds to various sectors and activities of the economy in ways that promote the
fullest possible utilization of resources without the destabilizing consequence
of price level changes or unnecessary interference with individual desires.”
According to Robinson, the primary function of the system is “to provide
a link between savings and investment for the creation of new wealth and to
permit portfolio adjustment in the composition of the existing wealth.
A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the deficit. It is a composition of various institutions, markets, regulations and laws, practices, money manager analyst, transactions and claims and liabilities.
Features of Indian Financial System
1. Linkage Between Savers and Investors: The primary role of the financial system is to
act as a bridge. It mobilizes small, scattered savings from households
(depositors) and channels them into large-scale productive investments for businesses
and the government.
2. Market Expansion Across Space and Time: A robust financial system facilitates the
expansion of markets beyond physical boundaries. It allows capital to move from
surplus regions to deficit regions (Space) and enables transactions involving
future claims, such as pensions or long-term loans (Time).
3. Efficient Resource Allocation: The system ensures that capital is not just
moved, but optimized. It promotes the allocation of funds toward projects that
are both "socially desirable" (like public infrastructure) and
"economically productive" (like new technology), ensuring the highest
possible return for the economy.
4. Catalyst for Economic Development: The financial system directly influences the
pace and quality of growth. By reducing transaction costs and providing a
regulated environment, it accelerates industrialization, infrastructure
building, and job creation.
5. Risk Transformation and Sharing: One of the most vital features is the ability
to manage risk. Through mechanisms like insurance and diversified mutual fund
portfolios, the system allows individuals and businesses to transfer or spread
risks that they would otherwise have to bear alone.
6. Provision of Liquidity: The financial system provides liquidity, meaning it allows financial
assets (like stocks or bonds) to be converted into cash quickly and easily.
This ensures that investors can exit their positions when they need money,
which encourages more people to participate in the market.
Also Read: Indian Financial System Topic Wise notes
Functions of Financial System or Functions of Indian Financial System
Good financial system search in the following ways:
1. Promotion of liquidity: The major function of
financial system is the provision of money and monetary assets for the
production of goods and services. There should not be any shortage of money for
productive ventures. In financial language, the money and monetary assets are
referred to as liquidity. The term liquidity refers to cash or money and other
assets which can be converted into cash readily without loss of value and time.
2. Link between savers and investors: One of the
important functions of financial system is to link the savers and investors and
thereby help in mobilizing and allocating the savings effectively and
efficiently. By acting as an efficient medium for allocation of resources, it
permits continuous up gradation of technologies for promoting growth on a
sustained basis.
3. Information available: It makes available price- related
information which is a valuable assistance to those who need economic and
financial decision.
4. Helps in projects selection: A financial system not only
helps in selecting projects to be funded but also inspires the operators to
monitor the performance of the investment. It provides a payment mechanism for
the exchange of goods and services, and transfers economic resources through
time and across geographic regions and industries.
5. Allocation of risk: One of most important function of the
financial system is to achieve optimum allocation of risk bearing. It limits,
pools, and trades the risks involved in mobilizing savings and allocating
credit. An effective financial system aims at containing risk within acceptable
limit and reducing cost of gathering and analyzing information to assist
operators in taking decisions carefully.
6. Minimizes situations of Asymmetric information: A
financial system minimizes situations where the information is Asymmetric and
likely to affect motivations among operators or when one party has the
information and the other party does not. It provides financial services such
as insurance and pension and offers portfolio adjustments facilities.
7. Reduce cost of transaction and borrowing: A financial
system helps in creation of financial structure that lowers the cost of
transactions. This has a beneficial influence on the rate of return to the
savers. It also reduces the cost of borrowings. Thus, the system generates an
impulse among the people to save more.
8. Financial deepening and broadening: A well –functioning financial system helps in promoting the process of financial deepening and broadening. Financial deepening refers to an increase of financial assets as a percentage of the gross domestic product. Financial broadening refers to building an increasing number and a variety of participants and instruments.
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