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November 06, 2016

Financial Awareness for Bank Exams : Overview of Indian Financial System

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Friends, here is the Introductory lesson of our Financial Awareness for Bank Exams series. This lesson will give you the basic overview of the Financial System, it's Functions and Financial Concepts. Happy Reading :)

Introduction :
The economic development of any country depends upon the existence of a well-organised financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in turn promotes the well-being and standard of living of the people of a
country. Thus, the 'financial system' is a broader term, which brings under its fold the financial markets and the financial institutions which support the system.

The major assets traded in the financial system are money and monetary assets. The responsibility of the financial system is to mobilise the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the free flow of funds to more productive activities and thus, promotes, investment. Thus, the financial system provides the intermediation between savers and investors and promotes faster economic development. 

Functions of The Financial System

As we know, financial system is very important for the economic and all round development of any country, its major functions can be explained as following :

Promotion of Liquidity 

The major function of the financial system is the provision of money and monetary assets for the production of goods and services. There should not be any shortage of money for productive ventures. In financial language, the money and monetary assets are referred to as liquidity. The term 'liquidity' refers to cash or money and other assets which can be converted into cash readily without loss of value and time. Hence, all activities in a financial system are related to liquidity either provision of liquidity or trading in liquidity. In fact, in India the R.B.I. has been vested with the monopoly power of issuing coins and currency notes. Commercial banks can also create cash (deposit) in the form of 'credit creation' and other financial institutions also deal in monetary assets. Over supply of money is also dangerous to the economy. In India, the R.B.I. is the leader of the financial system and hence, it has to control the money supply and creation of credit by banks and regulate all the financial institutions in the country in the best interest of the nation. It has to shoulder the responsibility of developing a sound financial system by strengthening the institutional structure and by promoting savings and investment in the country.

Mobilisation of Savings

Another important activity of the financial system is to mobilise savings and channelise them into productive activities. The financial system should offer appropriate incentives to attract savings and make them available for more productive ventures. Thus, the financial system facilitates the transformation of savings into investment and consumption. The financial intermediaries have to play a dominant role in this activity.

Financial Concepts

An understanding of the financial system requires an understanding of the following concepts : 
  1. Financial Assets
  2. Financial Intermediaries
  3. Financial markets
  4. Financial rates of returns
  5. Financial instruments
We shall learn about these in detail from our next class. Happy Reading :)

Shared by Bihu Ray

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