Structure of Indian Financial System, Components, Functions

Structure of Indian Financial System is a complex network of financial institutions, markets and services. Read all about Indian Financial System Code, Components and Functions for the UPSC exam.

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The Indian financial system plays a crucial role in the economy by facilitating the flow of funds from savers to investors, thus promoting economic growth and development. This complex system encompasses various institutions, markets, instruments, and regulatory frameworks that work together to provide financial services to individuals, businesses, and the government. Understanding the structure of the Indian financial system is essential for UPSC aspirants as it is a key component of the economy.

Structure of Indian Financial System

The structure of the Indian financial system can be broadly divided into two parts: the organized sector and the unorganized sector.

Organized sector includes formal financial institutions such as banks, insurance companies, NBFCs, mutual funds, stock exchanges, and pension funds. These institutions are regulated by the Reserve Bank of India (RBI) and other regulatory bodies such as the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA).
The unorganized sector, on the other hand, includes informal financial intermediaries such as moneylenders, chit funds, and other unregulated entities that cater to the financial needs of the unbanked and underserved sections of society.

Check here in detail the Difference Between the Organized Sector and the Unorganized Sector.

Components of Indian Financial System

The Indian Financial System is composed of various components, including:

S. No	Components of Indian Financial System	Description
1.	Banks	Banks are financial institutions that accept customer deposits and provide loans and other financial services. In India, banks can be classified into public sector banks, private sector banks, and foreign banks.
2.	Non-Banking Financial Companies (NBFCs)	NBFCs are financial institutions that provide banking services without holding a banking license. They offer a wide range of financial services, such as loans, leasing, hire purchase, and investment advisory services.
3.	Insurance Companies	Insurance companies offer a range of life and non-life insurance products, including health insurance, motor insurance, and property insurance. They are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
4.	Capital Markets	The capital markets in India comprise the stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), and other capital markets intermediaries such as brokers, depositories, and registrars. They provide a platform for companies to raise capital through the issuance of equity and debt instruments.
5.	Mutual Funds	Mutual funds are investment vehicles that pool money from various investors and invest in a diversified portfolio of stocks, bonds, and other securities. They are regulated by the Securities and Exchange Board of India (SEBI).
6.	Pension Funds	Pension funds in India offer retirement solutions to individuals and are regulated by the Pension Fund Regulatory and Development Authority of India (PFRDA).

Indian Financial System Code

The Indian financial system is governed by various laws, regulations, and codes issued by different regulatory bodies. For example, the Reserve Bank of India Act, of 1934 governs the functioning of the Reserve Bank of India, while the Securities and Exchange Board of India (SEBI) Act, of 1992 regulates the securities market in India. There have been proposals in the past to introduce a comprehensive financial code, but they are still in the drafting stages and have not been implemented yet.

Features of Financial System

The Indian financial system is a complex and interconnected network of institutions, markets, and instruments that facilitate the flow of funds between savers and borrowers. It plays a vital role in the economic development of the country by mobilizing savings and allocating them to productive investments. The Indian financial system is characterized by the following features:

Dual structure system consisting of a formal sector and an informal sector.
Intermediated, meaning that financial institutions play a key role in mobilizing savings and allocating them to borrowers
Increasingly market-based
Regulated by the government through some regulatory bodies
Promote financial inclusion, through the Pradhan Mantri Jan Dhan Yojana and the Pradhan Mantri Mudra Yojana etc.
Promoting economic growth

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.

Indian Financial System UPSC

The Indian financial system is an important topic for the UPSC exam as it is a critical component of the Indian economy. Knowledge of the Indian financial system is a part of the UPSC Syllabus 2024 and is frequently tested in the exam. It is also a key topic covered by StudyIQ UPSC Online Coaching and is included in the UPSC Mock Test. Understanding the structure and functions of the Indian financial system is essential for aspirants to score well in the economics and finance-related sections of the UPSC exam.

Indian Financial System FAQs

What is the Indian financial system?

The Indian financial system is a network of financial institutions, markets, and instruments that facilitate the flow of savings from individuals and businesses to investments in the economy.

What are the main features of Indian financial system?

The main features of the Indian financial system include the presence of various financial institutions such as banks, insurance companies, and mutual funds, a well-developed stock market, and a well-regulated regulatory framework.

What do you mean by financial system?

A financial system is a network of financial institutions, markets, and instruments that facilitate the flow of savings from individuals and businesses to investments in the economy.

What is the structure of the financial system?

The structure of the financial system includes financial institutions such as banks, insurance companies, and mutual funds, financial markets such as stock exchanges and bond markets, and regulatory bodies such as the Reserve Bank of India.

What are the 7 elements of the financial system?

The 7 elements of the financial system include financial institutions, financial markets, financial instruments, payment and settlement systems, regulatory bodies, credit rating agencies, and financial advisors.

What are the types of financial system?

The types of financial systems include market-based financial systems, bank-based financial systems, and mixed financial systems, depending on the role played by financial institutions and markets in the economy.