Economic growth and development of any country depends upon a well-knit financial system. Financial System comprises of a set of sub-system of financial institutions financial markets, financial instruments and services which help in the formation of capital. It provides a mechanism by which savings are transformed into investments. Thus, a financial system can be said to play a significant role in the economic growth of a country by mobilizing the surplus funds and utilizing them effectively for productive purposes.
The financial system is characterized by the presence of an integrated, organized and regulated financial markets, and institutions that meet the short term and long term financial needs of both the householders and corporate sector.
A Financial system performs the following functions/norms:
- It promotes the process of capital formation by providing a mechanism for transformation of savings into investments.
- It serves as a link between savers and investors. It mobilizes the savings of the scattered savers into productive investments.
- It provides an efficient mechanism of payment for the exchange of services and goods.
- It ensures that the transactions are effected safely and swiftly on an ongoing basis.
- It provides alternate forms of deposits according to the preferences and liquidity position of the savers.
- It distributes the risk through diversification and thus reduce the risk of the savers, such as in the case of mutual funds.
- It helps in lowering the cost of transactions and increase in the returns through economies of scale in lending and borrowing.
- It provides a mechanism for the transfer of resources beyond geographical boundaries.
- It provides detailed needed information to the various players of the market such as individuals, intermediaries, business houses and government, etc.
- It helps is managing such portfolios whose risk is less return is more by providing better information.
The following are the four major components that comprise the IndianFinancial System :
- Financial Markets
- Financial Institutions
- Financial Instruments/Assets/Securities
- Financial Services.