Indian Financial System:An Overview

Indian Financial System:An Overview (Module A/Unit-1 For Jaiib Exam 

Financial Market


Financial system

Financial system a network of financial institutions (COMMERCIAL BANKS, BUILDING SOCIETIES, etc.) and markets (MONEY MARKET, STOCK MARKET), dealing in a variety of financial instruments BANK DEPOSITS, STOCKS and SHARES, etc.), which are engaged in money transmission activities and the provision of LOAN and CREDIT facilities. The financial institutions and markets occupy a key position in the economy as intermediaries in chanelling savings and other funds to borrowers and investors. In doing this one of their main roles is to reconcile the different requirements of savers and borrowers, thereby facilitating a higher level of saving and investment in the economy than would otherwise be the case.

  • i)Central Banking Authority
  • ii)Capital Market Regulatory Authority
  • iii) Insurance and Pension Regulators
Central Bank (RBI) Capital Market (SEBI) Insurance and Pension Regulators (IRDA)
1)Monetary Control

2)Supervision Over

  • Commercial Bank
  • Primary Dealers
  • Financial Institutions
  • Cooperative Banks
  • Clearing and Settlement System

3)Management of Government debt

4) Banker to Government

5) Regulating monetary instruments (CRR, SLR, BANK RATE, REPO RATE, MSF)

1)Equity market and debt  market supervision and control

2)Supervision over

  • Stoke exchange
  • Brokers
  • Equity and Debt raiser
  • Investment bankers (Merchant Bankers)
  • Foreign institutional investors
  • Custodians
  • Depositories
  • Mutual Funds
  • Listed companies
  • Service providers to capital
  • Markets like registrars
1)Regulatory framework including rules and regulations for running insurance business

2)Supervising all insurance companies both in general and life insurance business

3)Regulating pricing, investments and cost structure of insurance companies

4)Regulation insurance brokers including agencies both individual and Bank


1)Framing rules for pension funds

2)Regulating all pension funds

Central Bank Authority

i)Commercial Bank: A commercial bank is a type of bank that provides services such as accepting deposits, making business loans, and offering basic investment products that is operated as a business for profit. Public Sector Bank, Private sector Bank, Foreign Bank etc …

ii)Non- Banking Financial Companies (NBFC): A Non – Banking Financial Corporation is a company incorporated under the Companies Act 2013 or 1956 which is engaged in the business of Loans and Advances, Acquisition of stocks, equities, debt etc issued by the government or any local authority. The main objective of this type of a company is to accept deposits under any scheme or manner.

According to section 45-I (c) of the RBI Act, a Non – Banking Company carrying on the business of a financial institution will be an NBFC. It is governed by the Ministry of Corporate Affairs as well as the Reserve Bank of India.

The following NBFC’s are not required to obtain any registration with the Reserve Bank of India:

  • Core Investment Companies – (assets are less than 100 crore or public funds not taken)
  • Merchant Banking Companies
  • Companies which are engaged in the business of stock-broking
  • Housing Finance Companies
  • Companies engaged in the business of Venture Capital.
  • Insurance companies holding a certificate of registration issued by IRDA.
  • Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982
  • Nidhi Companies

iii)Primary Dealers (PDs): Primary dealers are registered entities with the RBI who have the license to purchase and sell government securities. They are entities who buys government securities directly from the RBI (the RBI issues government securities on behalf of the government), aiming to resell them to other buyers.

iv)Financial Institutions (FIs): Financial institutions are companies in the financial sector that provide a broad range of business and services including banking, insurance, and investment management. Governments of the country consider it important to oversee and to regulate financial institutions as they play an integral part in the economy of the country.

FIs are development financial institutions which provide long term-funds for industry and agriculture.

v)Cooperative Banks: Cooperative credit society in 1904 led to formation of cooperative banks. Presently, registered under Cooperative Society Act, 1965 and regulated by NABARD & RBI. These banks run for social welfare and not for profit maximization.

They are owned and operated by members itself to provide financial service to agriculturist and small businessmen.

Their main function is to get the deposit from members and public and grant loans to farmers (even farmer who is not member) and small industrialists in both rural and urban area.

vi) Payment and Settlement system: They are covered by the Payment and Settlement Systems Act, 2007 (PSS Act), legislated in December 2007 and regulated by the Reserve Bank of India and the Board for Regulation and Supervision of Payment and Settlement Systems. India has multiple payments and settlement systems, both gross and net settlement systems.

vii) Management of Government Debt: Sovereign debt management is the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet any other sovereign debt management goals the government may have set, such as developing

viii)Bankers to Government: The RBI acts as banker to the government the Central as well as state governments. As such, it transacts all banking business of the government, which involves the receipt and payment of money on behalf of the government and carrying out of its exchange, remittance and other banking operations (Bonds and Treasury Bill).

ix) Lender of Last resort to banks: The Central Bank provides Liquidity supports on a temporary basis through the facility of repurchase (REPO) of security to banks to meet their short-term liquidity requirements.

x)Cash Reserve Ratio (CRR): Section 42(I) of RBI Act 1934, cash reserve ratio (CRR) is the amount of funds that all scheduled Commercial Banks (SCBs) are required to maintain with RBI.

The cash reserve is either stored in the bank’s vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

Under Section 42 of RBI Act 1934

  • Maximum-20%
  • Minimum– 3%
  • xi) Statutory Liquidity Ratio (SLR): The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits in the form of cash so that the same can be given to the bank’s customers if the need arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total deposits, is called the Cash Reserve Ratio.
  • Minimum- 0%
  • Maximum– 40%

Equity and Debt Market

i)Stoke Exchanges:- A stock exchange, securities exchange or bourseis a facility where stockbrokers and traders can buy and sell securities, such as shares of stock and bonds and other financial instruments.

ii)Brokers:- A broker is an individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. A broker also refers to the role of a firm when it acts as an agent for a customer and charges the customer a commission for its services.

iii) Equity and Debt RaisersDebt” involves borrowing money to be repaid, plus interest, while “equity” involves raising money by selling interests in the company. Essentially you will have to decide whether you want to pay back a loan or give shareholders stock in your company.

iv)Investment Bankers (Merchant Bankers): An Investment bank is a financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments.

v) Foreign institutional investors: A foreign institutional investor (FII) is an investor or investment fund registered in a country outside of the one in which it is investing. Institutional investors most notably include hedge funds, insurance companies, pension funds, and mutual funds.

vii) Custodians: A custodian is a financial institution that holds customers’ securities for safekeeping in order to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form.

viii) Depositories: A depository is a building, office, or warehouse in which something is deposited for storage or safeguarding. Depositories may be organizations, banks, or institutions that hold securities and assists in the trading of securities.

ix) Mutual Funds: A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds.

x) Markets like registrars: The registrar accounts for all issued and outstanding shares, as well as the number of shares owned by each individual shareholder.

Insurance Regulatory and Development Authority

i)Multi Commodity Exchange of India (MCX): The Multi Commodity Exchange of India Limited (MCX),- India’s first listed exchange, is a state-of-the-art, commodity derivatives exchange that facilitates online trading of commodity derivatives transactions, thereby providing a platform for price discovery and risk management.

ii)Let us sum up: Sum insured is the maximum value for a year that your Insurance Company can pay in case you are hospitalized. Any amount above and beyond the sum insured will have to be taken out from your own pocket. For instance, suppose your sum insured is 2 lacs and you are hospitalized twice in a period of 12 months.

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