The Indian Financial system plays a crucial role for economic development of an every nation. So it has comprises financial institutions, Financial Market, Asset Management, and Financial service market. The Financial Institute such a s Banks, Insurance companies and asset management company such as Government Bonds, Mutual Funds, Stocks these are the main gateway of financial management of a nation. So these institutes allow the businesses and people to save, invest and manage risk.
So in this article, we explore an Indian Financial Systems such as Banks and their functions, regulations, customer type and various accounts available to individual and businesses, so that they can know the services are offer Financial Institutions.
What is Financial System?
A financial institutional is group of institutions, markets, regulatory bodies, and stock exchange that permits the exchange of funds between individuals, investors, businesses and the government. Its main purpose is to saving into investments, and thereby supports the economic growth and stability. It promotes economic growth by mobilizing saving into investment. The main importance of this financial system is that to maintain financial stability by managing risk and ensure liquidity, and as well as to increase the standard of living by offering various financial products and services.
Structure/Types of Financial System
The structure of Financial System is the based on various networks that facilitates the funds from saver to investors, for supporting the economic growth. There are following structure/Type of financial system are as follows:-
a) Financial Institutions:
The Financial Institution is the large network and it’s regulated by regulatory body of government. These institutions are the mediator’s that they flow funds between savers to borrower.
Banking Institutions:
Commercial Bank: Commercial Bank is a financial institute that gives the banking services to the public. They provide the services like:
- To take deposits from public
- Grants the loans and investment
- Generate the profits from the interest.
For examples: There are three types of commercial banks are there public sector bank (SBI), private sector bank (HDFC and ICICI Bank), foreign banks (Citi Bank, HSBC)
Schedule and Non-Schedule Banks:
The schedule banks are those banks they are register under RBI Act in 1934. So these banks are paid up capital and reserves at least 5lakh of rupees. These banks regulates under RBI. These banks participate in government securities market for example. Government Bonds etc. and gives higher interest rates on saving due to their stable financial condition.
The Non-Schedule Banks are not register under RBI Act. So these banks does not have own clearing house. The non-schedule banks access only for rural region or local region.
Private Banks:
The Private Sector Banks are own and operate by private owners or entities. So these banks are comes under the regulations of Reserve Bank of India (RBI). The main purpose to establish this banks to give fast service and as well as improve the technology and personalized services to all individual as well as businesses and enterprises. For example: HDFC Bank, ICICI Bank, AXIS Bank…etc.
Foreign Banks:
Foreign Banks are those banks that they are incorporated another country and these banks are comes under the global banking guidelines set by Reserved Bank of India (RBI). These banks have international experiences and expertise for banking and investment on various services offer to the businesses and enterprises. Those banks have innovative financial product and as well as better foreign exchange service. These banks also have access or good network to international market for global expansion of business. For examples: Citi Bank, HSBC Bank etc.
Co-operative Banks:
The Co-operative bank is that bank that they run by its member and the customers. These banks provide the maximum services to the rural areas. These banks have three types they are:-
- Urban Co-Operative Banks
- State Co-Operative Banks
- District Co-Operative Banks
Development Banks:
These Banks called as a development bank because it provides long term lending facilities to the public or private institutions. The main aim of this bank is to promote economic growth and development by providing financial support to the project. The example of the development banks are –
- Small Industrial Development Bank of India (SIDBI)
- National Bank for Agriculture and Rural Development (NABARD)
- Export –Import Bank of India (EXIM)
b) Non-Financial Institute:
These are the institute that RBI does not give the banking license. They also called as NBFC i.e. Non-Banking Financial Company. These company or institute is come under companies act in 1956. They provide the loans and credit cards and give facilities to provide the investment in stock, bond, sip, mutual funds to the public.
There are various examples for these companies:-
Bajaj Finance:
Bajaj Finance is top lending company to provide the personal loans, and credit cards. The Market Cap around 523111Cr.
Bajaj Holding and Investment Company:
This company holding company and it holds the other companies stocks and earn the dividends through the shares. The Market Cap around 134266Cr.
Shriram Finance:
Shriram Transport and Finance Company Limited is an NBFC that provides the finance to the employer for engaging the enterprise and provides the industrial vehicles. The company primarily gives the loans for business and gives overdraft and cash credits to the enterprises for running the businesses.
c) Financial Market:
Financial market is the place that public can buy or sell the stock, bonds, commodity and currencies and derivatives. So it is also known as capital market. So there are different types of financial market they are as follows:-
● Stock Market:
Stock market is a market that public listed companies are traded. But before the listing in secondary market the public companies listed on primarily market called as IPO i.e. Initial
Public Offer IPO is that the private limited company offers the shares to the public for the first time then later it listed on secondary market.
● Bond Market:
Bond Market is also called as a Debt Market because buyer and seller trade in debt market. Bond market is the financial market that borrower raise the funds for various business activity. So it is also known as a Credit Market. Bond Market can control and manage by SEBI i.e. (Security Exchange Board of India).So there are various types of Bonds:
- Government Bond
- Corporate Bond
- Municipal Bond
- Emerging Market Bond
- Zero Coupon Bond
● Commodity Market:
Commodity market is a market that buying and selling of commodity products such as oil, gold, natural gas, sugar, coffee, wheat, tea, cotton, livestock, etc. These are the market that buying and selling of product in economic sector rather than manufactured product. These markets are essential role in economic sector and as well as it manage consumer’s opportunity and manage risk and investment for the traders.
● Currencies Market (FOREX):
Currencies market is also called as FOREX market i.e. Foreign Exchange market. This market is a currencies market that trades the currencies like Dollar USD, Euro, Rupees and Pound. This market is available 24 * 7 in five days a week. This market has global financial center in New York, Tokyo, London, and Sydney. In this market, the agreement in currencies to set price in future it called as future market currencies. So there are FOREX trading instrument are as follows:
Spot Market
Future Contract
Option
● Derivatives Market:
Derivatives market are those market that financial instrument are traded i.e. buying and selling of instrument. Investors use this market for hedging or speculation. In this market there are four categories:
- Forward contract
- Future contract
- Options contract
- Swap Contract
So investors trade these types of derivatives market.
d) Financial Services:
Financial services are that services offer by financial institute which are generally offering investment, money management and provide financial transaction. These services provided to individuals, businesses and the government and provide the services like accountancy, investment banking, investment management, and personal asset management and the product are insurance, credit cards, loans and pension funds. There are certain types in financial services are as follows:
● Banking services-
Retail Banking
Commercial Banking
Investment Banking
● Investment Services-
Wealth Management
Asset Management
Brokerage Service
● Insurance Service
Life Insurance
Property Insurance
Health Insurance
Reinsurance
● Financial Advisory Services
Retirement Planning
Tax Planning
Estate Planning
● Payment Transaction Services:
Payment Processing
Mobile Payment
Foreign Exchange (FOREX) Service:
● Capital Market Services
Equity and Debt Services
Securitization
Trading and Hedging Services
These all are services are offering in Financial Services.
Functions of Banks
1) Accept Deposit:
It is the main and primarily functions of banks to accept deposits of saving, current, fixed deposit, and recurring deposit, so accepting the deposit public can transfer the money from one bank to another or withdraw also.
2) Providing Loans and Credit Facility:
It is a second function in banking system is that to grants the loan and credit facility so that it’s support for a development of a global economy. The bank provides various kinds of loans for individual and businesses also. For an individual the bank grants such a loan like mortgage loan, car loan, bike loan, house loan, personal loan etc.
For business the bank grants such loan like a Business loan, commercial loan, Project loan, Cash Credit and Overdraft facility are also allowed to the business for working capital.
3) Foreign Exchange (FOREX) Transaction:
In these functions banks supports the FOREX transactions for businesses. Its supports the businesses to grow and expansion to the international market.
Who can participate to the FOREX transaction?
The Individuals, Institutional Investors, Businessmen, Companies, Banks, Central Banks, Government and FOREX agents are participate to these FOREX transactions. The people invest the FOREX transaction because to invest in another country, to travel abroad and to generate the profits.
4) Financial Services:
In today’s banks are also provide another financial services such as opening demat account , creating a SIP, Mutual Funds, IPO they are also providing these kinds of services so that public can invest their money into the market, so it also helpful for economic of a nation.
5) Digital Banking Services:
Digital Banking is a banking service that provides the banking products through the online. So that banks can give the service as fast as possible. There are various types of services banks are given: - online banking, mobile banking, digital –only bank (Neo Bank), mobile payments, ATM with branchless service, Unified Payment Interface (UPI).
Regulatory Authorities in Indian Banking System
1) RBI:
The RBI is also known as Reserve Bank of India. It is an apex bank of all banking system. In the guidelines of RBI the banks runs the monetary policy smoothly. RBI controls all the banks and their policy frame by Government of India for example: Mudra Yojana, Digital Rupee, all these policy frame by the government. RBI plays the crucial role to maintain the financial stability and as well as increase the economic development of a nation.
2) SEBI:
The SEBI is also known as Security Exchange Board of India. It is a regulatory body of capital market. It protects the investors’ funds against fraud. There are lot of banks, that they open the demat account of their customer and invest them in IPO, creating a SIP, mutual funds in these places public invest their money. SEBI have also guidelines that should follow by banks also. So there some important regulations are as follows:-
Security Exchange Board of India ACT 1992
● SEBI (Substantial Acquisition of Shares and Take over) Regulation
● SEBI (Prohibition of Insider Trading) Regulations
● SEBI (Mutual Fund) Regulations
● SEBI (Alternative Investment Fund) Regulation
So these are some regulations should follow by banks and other financial institutions and brokerage firms also.
3) IRDAI:
IRDAI is also known as Insurance Regulatory and Development Authority of India. It is regulatory body of insurance sector in India. The main primarily function of this body to regulate and create guidelines for insurance companies. It regulates the life and general insurance the main purpose of this board to protection of consumer policy and claims the settlement.
There are also certain body to regulates the banking system.
1) Pension Fund Regulatory and Development Authority (PFRDA) these boards regulates the pension funds in India for Government Sector Employee and as well as individual and private sector employees.
2) National Bank for Agriculture and Rural Development (NABARD) this board regulates and manage the agriculture financing for the rural farmers so that they can buy their product for their agriculture cultivation.
These are the body to regulate the Indian Banking System. So that banks can manage the finance according to the public need.
Types of Bank Customer
1) Retail Customer:
Retails customer is an individual customer that takes the service from banks such as:-
Opening a saving account
Take the loans from banks
Apply for Credit cards
2) Corporate Customer:
Corporate banking is type of banking service that offer to businesses or industry or enterprises supporting a financial backup requirement for working capital. These types of customer take the services like industrial loans, project loan, business loan, term loan, and they also provide cash credits and overdraft facility for manage businesses.
3) Government Entities:
In banking sector government entities means public sector organization that are owned by Government of India. That their range local, semi-local, state level and all over the nation. These entities are managed by public funds with a large number of government transactions and fiscal policy. There are various examples such as Central Bank, Municipal Corporation, Public Company, Government Company and all assets of government like a gold, silver etc.
4) Non-Resident Indians(NRI):
The Non Resident Indian is that citizen who located in outside the India for education, working or any business or any other reason. So any NRI want to open a bank account in Indian Bank they open an account NRE/NRO and FCNR.
Types of Bank Account
1) Saving Account:
Saving account is an account that individual open this account for saving money takes the good interest rates and benefits. To opening this account you have to require a certain documents like Aadhar-Card, Pan-Card, and three passport size photos. This account can anyone open it. This account allows the individual to deposit the money and keep it safe and invest this money in bank F.D. and R.D and stocks also.
2) Current Account:
Current account is the account used for business transaction for cash flow and fund flow. You can also do unlimited transaction and it uses professional individuals and businesses. So that it will get good facility for overdraft for working capital management.
Conclusion
The Financial system is a strong structure in economic development of every nation. The bank, insurance company and mutual funds companies play the vital role for economic growth and development. The banking system offers various services to the individual and businesses so that money will circulate to our economy. The cash credit and overdraft play crucial role in development of an economy. So in today advancement of digital banking is a financial presence that praised the further development of society, this helps empower the individual and business to make financial contributing to wide ranging of the economy.
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