FINANCIAL SYSTEMS AND MARKETS IN INDIA

A system that aims at establishing and providing a regular, smooth, efficient and cost effective linkage between depositors and investors is known as financial system. The functions of financial system are to channelize the funds from the surplus units to the deficit units. Financial system is one of the industries in an economy. It is a particularly important industry that frequently has a far reaching impact on society and the economy. But if its occult trappings are stripped it is like any industry, a group of firms that combine factors of production (land, labour and capital) under the general direction of a management team and produce a product or cluster of products for sale in financial market. The product of the financial industry is not tangible rather it is an intangible service. Financial industry as a whole, produces a wide range of services but all these services are related directly or indirectly to assets and liabilities, that is, claims on people, organization, institutions, companies and government. This is the process of diversion of the productive capacity of the conomy to the making of capital goods which increase future productive capacity. Process of capital formation involve three distinct but inter-dependent activities: savings, finance and investment. The financial system in process of capital formation has to decide as to how capital is to be used. Poor choice in deciding which economic projects are to be embarked upon, leads to wastage of resources. The better the quality of judgment exercised in allocation, the more rapid economic progress.

- Dr. Morusu Siva Sankar

Financial Concepts

An understanding of the financial system requires an understanding of the following concepts:

• Financial assets
• Financial intermediaries
• Financial markets
• Financial rates of return
• Financial instruments

Financial Assets

In any financial transaction, there should be a creation or transfer of financial assets. Hence, the basic product of any financial system is the financial asset. A financial asset is one which is used for production or consumption or for further creation of assets.

Classification of Financial Assets

Financial assets can be classified differently under different circumstances. One such classification is:

• Marketable assets
• Non-marketable assets

Marketable Assets:

Marketable assets are those which can be easily transferred from one person to another without much hindrance. Examples are shares of listed companies, Government securities, bonds of public sector undertakings etc.

Non-Marketable Assets:

On the other hand, if the assets cannot be transferred easily,they come under this category. Examples are bank deposits, provident, funds, pension funds, National Savings Certificates, insurance policies etc.

Yet another classification is as follows:

• Money or cash asset
• Debt asset
• Stock asset

Financial Intermediaries