Unit 1- Indian Financial System - An Overview

A financial system means the structure that is available in an economy to mobilize the capital
from various surplus sectors of the economy and allocate and distribute the same to the various
needy sectors.
The transformation of 'Savings' into 'Investments and Consumption' is facilitated by the active
role played by the financial system.
The offering of these diverse types of financial assets is supported by the role of 'financial
intermediaries' who invariably intermediate between these two segments of investors and
spenders.
Examples of intermediaries are banks, financial institutions, mutual funds, etc.
The Central Banking Authority (Reserve Bank of India) has two distinct roles - Monetary
control including controlling inflation and bank supervision.
For ensuring the overall financial health of banks is not impaired. This is ensured through off-site
and on-site surveillance of banks.
Central Banks do act as lenders of last resort to banking system and are responsible for
ensuring an efficient payment and settlement system.
Commercial banks include public sector banks, foreign banks, and private sector banks.
Non-Banking Financial Companies (NBFCs) are allowed to raise monies as deposits from the
public and lend monies through various instruments including leasing, hire purchase and bill
discounting etc.
Central Bank prescribes that no NBFC can operate without a valid license from the Central
Banking Authority.
Primary dealers also known as PDs, deal in government securities and deal in both the primary
and secondary markets.
Financial Institutions (FI) are development financial institutions which provide long-term funds
for industry and agriculture.
FIs raise their resources through long-term bonds from the financial system and borrowings from
international financial institutions.
Cooperative Banks are allowed to raise deposits and give advances from and to the public.

Urban Cooperative Banks are controlled by State governments and RBI, while other cooperative
banks are controlled by National Bank for Agriculture and Rural Development (NABARD) and
State Governments.
The Central Bank provides liquidity support on a temporary basis through the facility of
repurchase (REPO) of securities to banks to meet their short-term liquidity requirements.
Cash Reserve Ratio (CRR) is the mandatory deposit to be held by Banks with the requisite
monetary authority.
It is a percentage of their Demand and Time liabilities.
The increase or decrease can be affected by the Central Bank to pump in or soak liquidity
in the banking system.
Statutory Liquidity Ratio (SLR) is the prescribed percentage of Demand and Time liabilities of a
bank to be held in prescribed securities, mostly government securities. The increase or decrease
in the CRR & SLR, contracts and enhances credit creation.
Marketability of corporate securities, i.e. bonds, debentures, and convertible debentures, enables
corporate to raise debt, while debenture holders enjoy very high liquidity.
A stock exchange is duly approved by the regulators to provide sale and purchase of securities on
behalf of investors.
Clearing houses guarantee all payments and deliveries.
Only brokers approved by the capital market regulator can operate on the stock exchange.
FIIs are foreign-based funds authorized by the Capital Market Regulator to invest in the Indian
equity and debt market through stock exchanges
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA).
The three regulatory authorities viz., RBI, SEBI and IRDA are controlling and supervising the
banking, capital market and insurance sectors respectively.