In its simple meaning the term ‘finance’ refers to monetary resources & the term ‘financing’ refers to the activity of providing required monetary resources to the needy persons and institutions. The term ‘financial system’ refers to a system that is concerned with the mobilization of the savings of the public and providing of necessary funds to the needy persons and institutions for enabling the production of goods and/or for provision of services. Thus, a financial system can be understood as a system that allows the exchange of funds between lenders, investors, and borrowers. In other words, the system that facilitates the movement of finance from the persons who have surplus funds to the persons who need it is called as financial system. It consists of complex, closely related services, markets, and institutions used to provide an efficient and regular linkage between investors and depositors. Financial systems operate at national, global, and firm-specific levels. It includes the public, private and government spaces and financial instruments which can relate to countless assets and liabilities. Components/Constituents/Elements/Parts of Financial System 1. Financial Assets 2. Financial Intermediaries/Financial Institutions 3. Financial Markets 4. Financial Rates of Return 5. Financial Instruments and 6. Financial Services Functions/Importance/Objectives/Advantages of Financial System 1. Provision of liquidity 2. Mobilization of savings 3. Size transformation/Capital formation 4. Maturity transformation 5. Risk transformation 6. Lowering of cost of transaction 7. Payment mechanism 8. Assisting new projects 9. Enable better decision making 10. Meet short and long term financial needs 11. Provide necessary finance to the Government 12. Accelerate the process of economic growth of the country Features/Characteristics of Financial System 1. Financial system acts as a bridge between savers and borrowers 2. It consists of a set of inter-related activities and services 3. It consists of both formal and informal financial sectors. The existence of both formal and informal system is also called as financial dualism. 4. It formulates capital, investment and profit generation 5. It is universally applicable at firm level, regional level, national level and international level 6. It consists of financial institutions, financial markets, financial services, financial instruments, financial practices and financial transactions. 2 | I n d i a n F i n a n c i a l S y s t e m D r . R . K . S r e e k a n t h FINANCIAL ASSETS Meaning of financial assets Financial assets refer to the cash or cash equivalents that are used for production or consumption or for further creation of assets. Cash, Bank Deposits, Shares, Debentures, Investment in Gold, Land & Buildings, Contractual right to receive cash or another financial asset, etc., are called as financial assets. Classification of Financial Assets Financial assets are classified in two ways 1. On the basis of marketability 2. On the basis of nature Classification of Financial Assets on the basis of marketability 1. Marketable – The financial assets that can be bought and sold are called as marketable financial assets. They include Shares, Government Securities, Bonds, Mutual Funds, Units of UTI, Bearer Debentures 2. Non-marketable – The financial assets that cannot be bought and sold are called as nonmarketable finance assets. They include Bank Deposits, Provident Funds, LIC Policies, Company Deposits, Post Office Certificates Classification of Financial Assets on the basis of nature 1. Money or Cash Asset – Coins, Currency Notes, Bank Deposits 2. Debt Asset – Debenture & Bonds 3. Stock Asset – Equity Shares & Preference Shares FINANCIAL INTERMEDIARIES/FINANCIAL INSTITUTIONS Different kinds of organizations/institutions which intermediate and facilitate financial transactions of both individual and corporate customers are called as financial intermediaries or financial institutions. Basically they are classified into two types: 1. Unorganized Sector 2. Organized Sector Unorganized Sector The sector that is not governed by any statutory or legal authority is known as unorganized sector. This sector consists of the individuals and institutions for whom there are no standardized rules and regulations governing their financial dealings. They are not under the supervision and control of RBI or any other regulatory body. This sector consists of the individuals and institutions like Local money lenders, Pawn brokers, Traders, Landlords, Indigenous bankers, etc., who lend money to needy persons and institutions. Organized Sector The sector that is governed by some statutory or legal authority is known as organized sector. This sector consists of the institutions like Commercial Banks, Non Banking Financial Institutions, etc. They are further classified into two: 1. Capital Market Intermediaries 2. Money Market Intermediaries Capital Market Intermediaries Capital Market refers to the market for long term finance. The intermediaries provide long term finance to individuals and corporate customers. IDBI, SFCs, LIC, GIC, UTI, MFs, EXIM BANK, NABARD, NHB,