How Indian Financial System Works?

Offlate we always hear different news about Indian economy being up and down. Sensex being on high and low, BSE, NSE, Basis points, loan waivers and loan rates etc. But have we ever wondered how all this thing works. How Indian Financial System work, what is the function of different banks like State Bank of India, Punjab National Bank, Syndicate Bank. ICICI Bank, HDFC Bank and all other banks as well what these banks do where do they get money apart from your deposits. How the entire ecosystem is defined. We here at want to educate our readers on the same and let discuss some finance masala here.

Indian financial system is divided into two major segments Formal and Organised Financial System which comes under the ministry of finance, SEBI, RBI and other regulatory bodies and the second is Un-Organised financial system.

Un-organised financial system doesn’t include any of these State Bank of India, Punjab National Bank, Syndicate Bank. ICICI Bank, HDFC Bank, Bank of Baroda, Oriental Bank of Commerce, CITIBANK etc but it includes only Individual moneylenders, neighbours, relatives, landlords and May from any other friend and mostly happens in cash transactions.

Then there are some groups who collect money from different people and then lend it one out of the groups and collect interests and distribute profit among each other which is called as committees.

Unorganised financial system comprises of local brokers and non-bank financial companies, chit fund companies and investment companies

Earlier there was very limited banking facilities available in the rural and distant areas of India but after Mr. Narendra Modi became prime minister of India he launched Jan Dhan Yojana because of which people started opening their Bank accounts. Some millions of bank accounts were opened within a record time of 3-4 months and all of these accounts had Pradhan Mantri Bima Yojana linked which was a great motivating factor for rural population to link themselves to Banking and enjoy banking facilities.

What all is covered under formal Indian Financial System?

Financial Institutions are the institutes and bodies which work properly and efficiently in the regulated manner to invest the savings of users and further earn money out of the investment and give some interest to the users. Banking institutes create and preserve the deposits and credits whereas Non-banking financial institutes can only purvey the Credit.

Three types of Non-Banking Financial Institutions

Developmental financial Institutions
Non-Banking Financial Companies
Housing Finance Companies

Types of Term Financial Institutions

Industrial Development bank of India (IDBI)
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Financial Corporation of India (IFCI)
Small Industries Development Bank of India (SIDBI)
Industrial Investment Bank of India (IIBI)

Specialized Financial Institutions

Export Import Bank of India (EXIM)
Tourism Finance Corporation of India (TFCI)
ICICI Venture
Infrastructure Development Finance Company (IDFC)
National Bank of Agriculture and Rural Development (NABARD)
National Housing Bank (NHB)

Institutions in Mutual fund business

Unit trust of India (UTI)
Life Insurance Corporation (LIC)
General Insurance Corporation (GIC)

State Level Financial Institutions

State Financial Corporations (SFC’s)
State Industrial Development Corporations (SIDC’s)

After the reforms, banks have now started doing non-bank activities and financial institutes have taken up banking functions. Click on our next article to read about financial markets and Financial Instruments and how these function to raise money from the market and run the entire economy.

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