Indian Financial System
Financial system of any country represents the organizational setup for financial market.
l Financial market like any other market is the market, which facilitates mobilization of fund between buyer of the fund (Deficit unit) and seller of the fund (Surplus unit) either directly with the help of associate financial intermediaries or indirectly i.e. through Financial Intermediaries (FI) alongwith associate financial intermediaries using financial products or fund itself. In other words, financial market facilitates funding requirement of deficit unit.
l Associate financial intermediaries are those intermediaries, which advise/assist financial intermediaries, buyer of the fund (deficit unit) and seller of the fund (surplus unit) in mobilization of fund on the basis of fee/commission.
l Merchant bankers, credit rating agencies and financial regulators are examples of associate financial intermediaries.
l Merchant bankers provide a blend of financial services on the basis of fee/commission. Underwriter, Lead manager/Co-manager, registrar, book building runner, issue banker are some roles performed by merchant banker
l Thus deficit unit, surplus unit and financial intermediary’s alongwith associate financial intermediaries are players of financial market.
l Products offered in financial market are known as financial products/instruments. Broadly, there are two categories of products viz. long-term instruments or capital market instruments and short-term instruments or money market instruments. For the purpose of liquidity, financial instruments are traded at secondary markets e.g. stock exchanges are secondary market for capital market instruments.
l Institutions, which are engaged in rating of financial products on the basis of risk and return, are termed as credit rating agencies. The objective of such institutions is to help the players of financial market in decision-making process.
l Services offered by financial intermediaries and associate financial intermediaries are termed as financial services. There are three categories of financial services viz. Fund based services, asset based services and fee/advisory based services.
l Institutions, which regulate financial market means, those institutions which provides guidelines for mobilization of fund, and are termed as financial regulators. RBI, IRDA, BIFR, FIPB, SEBI and Capital issue board are examples of financial regulators. Thus financial regulators help in smooth functioning of entire financial system. The objective of financial regulator is to protect the interest of each player of the financial market.
In a nutshell financial markets, financial instruments, financial services alongwith associate financial intermediaries like merchant bankers, credit rating agencies and financial regulators all taken together constitute the financial system of concerned economy.