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Overview of Financial System

Prof. Mishu Tripathi Asst. Professor- Finance

A financial system means the structure that is available in an economy to mobilize the capital from various surplus sectors of the economy and allocate and distribute the same to the various needy sectors.

The transformation of Savings into Investments and Consumption is facilitated by the active role played by the financial system. The process of transformation is aided by various types of financial assets suiting the individual needs and demands of both the investors and spenders. The offering of these diverse types of financial assets is supported by the role of financial intermediaries who invariably intermediate between these two segments of investors and spenders. Examples of intermediaries are banks, financial institutions, mutual funds etc. The place where these activities take place could be taken to connote financial market.

Overview of Financial System

a. Central Banking Authority 1. Monetary Control 2. Supervision over Commercial Banks NBFCs Primary Dealers Financial Institutions (FIs) Cooperative Banks Clearing and settlement System

3. Management of Government debt 4. Banker to government 5. Lender of last resort to banks 6. Regulating money markets through monetary instruments

Commercial Banks
Commercial Banks include public sector banks, foreign banks and private sector banks. Acceptance of deposits from the public for the purpose of lending or investment is the main area of activity.

NBFCs are allowed to raise monies as deposits from the public and lend monies through various instruments including leasing, hire purchase and bill discounting etc. These are licensed and supervised by the Central Banking Authority. Central Bank prescribes that no NBFC can operate without a valid license from the Central Banking Authority.

Primary Dealers
Primary Dealers are known as PDs. They deal in government securities and deal in both the primary and secondary markets. Their basis responsibility is to provide markets for government securities and strengthen the government securities market.

Financial Institutions (FIs)

FIs are development financial institutions which provide long term funds for industry and agriculture. All these institutions are under off-site and on-site surveillance of the Central Banking Authority. FIs raise their resources through long term bonds from the financial system and borrowings from international financial institutions.

Cooperative Banks
These are allowed to raise deposits and give advances from and to the public. Urban Cooperative Banks are controlled by state governments and RBI, while other cooperative are controlled by NABARD and State Governments. Except for certain exemptions in paying a higher interest on deposits, the Urban Cooperative Banks regulatory framework is similar to the other banks.

Clearing and Settlement System

An efficient and effective Payment and settlement system is a necessary condition for a well running financial system. Maintenance of clearing houses at various centers, creation of currency holdings chests in different geographical areas and creation of the mechanism for electronic transfer of funds are the vital activities undertaken by the central banks.

3. Management of Government debt

Most of the Central Banks manage the issue and servicing of government debt. This involves price discovery, volumes to be raised, tenure of debt and matching it with the overall cash management of the debt.

4. Banker to government: Most of the Central Banks maintain an account, government deposit and carry out their cash management through the issue of bonds and treasury bills. 5. Lender of last resort to banks: The Central bank provides liquidity support on a temporary basis through the facility of repurchase (REPO) of securities to banks to meet their short term liquidity requirements. 6. Regulating money markets through monetary instruments (CRR. SLR, BANK RATE , REPO RATE)

b. Capital Markets Regulatory Authority

Equity market and debt market supervision and control Supervision over
Stock Exchanges Brokers Equity and debt raisers Investment Bankers (Merchant Bankers) Foreign Institutional Investors (FIIs) Custodians Depositors Mutual Funds Listed Companies Service providers to capital markets like registrars

c. Insurance and Pension Regulators

Regulatory Framework including rules and regulations for running insurance business Supervising all insurance companies both in general and life insurance business Regulating pricing, investments and cost structure of insurance companies Regulating insurance brokers including agencies both individuals and banks

Framing rules for pension funds Regulating all pension funds