Financial system refers to the system of borrowings and lending of funds or demand and supply of funds of all individuals, institutions, companies and of the government. Indian Financial System includes many institutions and the mechanism that effect the generation of savings, mobilization of savings and distribution of savings amongst all those who demand these funds for investment purpose.
Indian Financial System thus covers/consists of the following:
1. Financial market
2. Financial institutions and financial intermediaries
3. Financial assets/Financial instruments.
The financial market can be classified or sub divided into:
(i) Money Market
(ii) Capital Market
(iii) Government Security Market
Financial Institutions/intermediaries can be sub divided into following:
(i) Regulatory Institutions
(ii) Banking intermediaries
(iii) Non-banking intermediaries
Financial assets/instruments can also be divided into following:
Financial instruments and their main kinds.
Financial Asset/Instrument is a liability of issuer towards holder. It is a claim against a person/institution for payment at future date and a periodic payment in the form of interest or dividend. A financial instrument helps the financial market and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers. They differ in terms of marketability, liquidity, types of options, return, risk and transaction cost.
Examples of Financial Instrument are:
– Currency notes issued by RBI, Govt. of India.
– Mutual Funds units
– Debt Instruments such as-
– Insurance policies issued by Insurance companies
Kinds of Financial Instruments
1. On the basis of marketability-
Marketable such as shares, debentures, CD, CP, Commercial Bills Non-marketable such as Bank deposits, insurance policies.
2. On the basis of nature
Cash securities- Such as currency notes
Debt Securities- Such as shares, debentures
3. Types of instrument/asset-
Physical – Created not for earning profit e.g. residential house
Financial- Created for income generation e.g. shares, debentures.
4. Direct and Indirect also known as primary & secondary
Primary/direct- e.g. shares, debentures
Secondary/Indirect- e.g. mutual fund, insurance policies
5. Capital Market & Money Market instruments-
Money Market- e.g. Treasury bill, CD
Capital Market- e.g. Shares, debentures, bonds Govt. securities.