Structure of Financial System - Financial Markets and Institutions | Financial Markets and Institutions - B Com PDF Download

Indian Financial System

The basic structure of Indian Financial System is divided into four components which are:

• Financial Services 

• Financial Markets

• Financial Instruments

• Financial Institutions

Financial Services

As the name suggests financial services are the services provided by the Financial Institutions. These services generally include the banking services, Foreign exchange services, investment services, insurance services and few others. Following is a very brief description of the services

1. Banking Services – Includes all the operations provided by the banks including to the simple deposit and withdrawal of money to the issue of loans, credit cards etc.

2. Foreign Exchange services – this includes the currency exchange, foreign exchange banking or the wire transfer

3. Investment Services – It generally includes the asset management, hedge fund management and the custody services

4. Insurance Services – It deals with the selling of insurance policies, brokerages, insurance underwriting or the reinsurance

5. Some of the other services include the advisory services, venture capital, angel investment etc.

Financial Intermediaries

A financial intermediary is an institution which connects the deficit and the surplus. The best example of an intermediary can be a bank which transforms the bank deposits to bank loans. The role of financial intermediary is to channel funds from people who have extra inflow of money i.e., the savers to those who do not have enough money to fulfill the needs or to carry out the basic activities i.e. the borrowers.

Functions of Financial Intermediaries

Functions of Financial Intermediary are basically classified in three parts which are as follows:

• Maturity transformation – Deals with the conversion of short-term liabilities to long term assets.

• Risk transformation – Conversion of risky investments into relatively risk-free ones.

• Convenience denomination – Way of making the unmatched matching which is matching small deposits with large loans and large deposits with small loans.

Financial Intermediaries are classified into two types namely, Depository and Non-Depository Institutions.

Financial Instrument

Financial Instrument is a trade-able asset which can be in terms of cash, agreement, evidence of an ownership in an entity; or a contractual right which has the right to deliver cash or any kind of asset.

The types of financial instrument used worldwide are in the form deposits, stock, and debt.

1. Deposits – Deposit in a layman’s term, means to save or to keep safely. Deposits can be made either with banking or non-banking firm.

2. Stock – Stocks represents the ownership of the issuing company. It is a form of corporate equity ownership where in the total stock of the company is divided into shares and the individuals has the provision to trade the shares in the exchange.

3. Debts – Unlike the stocks, financial assets which are in the form of debts create an obligation on the borrower of the fund to repay the amount borrowed. The debt instrument, thus in a sense, is a contract entered into by the borrower and the lender which specifies the amount of fund borrowed, period of borrow, the rate of interest that will be charged and the repayment methods.

Financial Market

Financial Market is a mechanism that allows people to indulge themselves in the buying and selling i.e. trade of financial securities (for example stocks and bonds), commodities (for example precious metals) at prices that reflect the market’s effectiveness.

Following are the verticals of financial market:

1) Capital Market – Market where business enterprises or government entities raise fund for long term using the weapon of securities or debts. It includes the Stock market (equities) and Bond Market (debt) for fund raising.

2) Commodity Market – Commodity is a good for which there is a demand by the people thus commodity market is the market where such goods are traded.

3) Money Market – Deals with the assets involved in short-term borrowing and lending with original maturities ranging from a period of one year or even lesser time frames.

4) Derivative Market – The derivative market is the financial market meant for derivatives. The financial instruments like the futures contracts or options, which are derived from other forms of assets, are traded in these markets.

5) Insurance Market – Deals with the trading of insurance policies.

6) Futures Market – A vertical in financial market where people can trade standardized futures contracts which is a contract to buy specific number of quantities of a commodity or financial instrument at a specified price with the delivery of the commodity or financial instrument set at a specified time in the future. 

7) Foreign Exchange Market – Also known as Forex is a global, worldwide decentralized financial market meant only for the trading of currencies.