INTRODUCTION TO FINANCIAL SYSTEMS

Economic growth and development of any country depends upon a well-knit

financial system. Financial system comprises, a set of sub-systems of financial
institutions financial markets, financial instruments and services which help in the
formation of capital. Thus a financial system provides a mechanism by which
savings are transformed into investments and it can be said that financial system
play an significant role in economic growth of the country by mobilizing surplus
funds and utilizing them effectively for productive purpose.

The financial system is characterized by the presence of integrated, organized

and regulated financial markets, and institutions that meet the short term and
long term financial needs of both the household and corporate sector. Both
financial markets and financial institutions play an important role in the financial
system by rendering various financial services to the community. They operate in
close combination with each other.

INTRODUCTION TO INDIAN FINANCIAL SYSTEM

The organizations of Indian Financial system witnessed transformation

after launching of new economic policy 1991. The development process
shifted from controlled economy to free market for these changes were
made in the economic policy. The role of government in business was
reduced the measure trust of the government should be on development
of infrastructure, public welfare and equity. The capital market an
important role in allocation of resources. The major development during
this phase are:-

1. Privatisation of Financial Institutions –

At this time many institutions were converted in to public company and
number of private players were allowed to enter in to various sectors:

a) Industrial Finance Corporation on India (IFCI): The pioneer

development finance institution was converted in to a public
company.
b) Industrial Development Bank of India & Industrial Finance
Corporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their
equity capital to private investors.
 c) Private Mutual Funds have been set up under the guidelines
prescribed by SEBI.
d) Number of private banks and foreign banks came up under the RBI
guidelines. Private institution companies emerged and work under
the guidelines of IRDA, 1999.
e) In this manner government monopoly over financial institutions
has been dismantled in phased manner. IT was done by converting
public financial institutions in joint stock companies and permitting
to sell equity capital to the government.

2. Reorganization of Institutional Structure –

The importance of development financial institutions decline with shift to
capital market for raising finance commercial banks were give more
funds to investment in capital market for this. SLR and CRR were
produced; SLR earlier @ 38.5% was reduced to 25% and CRR which
used to be 25% is at present 5%. Permission was also given to banks to
directly undertake leasing, hire-purchase and factoring business. There
was trust on development of primary market, secondary market and
money market.

3. Investors Protection –
SEBI is given power to regulate financial markets and the various
intermediaries in the financial markets.