Indian Financial System – An Overview

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 channelling
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.
Financial System

Insurance and Pension

Regulators
Central Banking Authority Capital Market
Regulatory Authority

Central Bank (RBI) Capital Market (SEBI) Insurance and Pension

Regulators (IRDA)
1)Monetary Control 1)Equity market and debt 1)Regulatory framework
market supervision and including rules and
2)Supervision Over
control regulations for running
Commercial Bank insurance business
2)Supervision over
Primary Dealers 2)Supervising all insurance
Stoke exchange
companies both in general
Financial Institutions and life insurance business
Brokers
Cooperative Banks 3)Regulating pricing,
Equity and Debt raiser
Clearing and Settlement investments and cost
Investment bankers structure of insurance
System
(Merchant Bankers) companies
3)Management of
Foreign institutional 4)Regulation insurance
Government debt
investors brokers including agencies
4) Banker to both individual and Bank
Custodians
Government
Depositories PENSIONS
5) Regulating monetary
instruments (CRR, SLR, Mutual Funds 1)Framing rules for pension
BANK RATE, REPO RATE, funds
Listed companies
MSF) 2)Regulating all pension
Service providers to capital funds
Markets like registrars

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
Minimum- 3%
Note: The central bank, in its March 27 Developmental and Regulatory Policies Statement,
had reduced the requirement of minimum daily CRR balance maintenance from 90 per cent
to 80 per cent effective from the first day of the reporting fortnight beginning March 28,
2020. This one-time dispensation was initially available up to June 26, 2020.
xi) Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio or SLR is a minimum percentage of
deposits that a commercial bank has to maintain in the form of liquid cash, gold or other
securities. It is basically the reserve requirement that banks are expected to keep before
offering credit to customers. ... The SLR is fixed by the RBI.
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 Raisers- "Debt" 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.