Financial System:- A financial system is an economic arrangement

wherein financial institutions facilitate the transfer of funds and assets

between borrowers, lenders, and investors. Its goal is to efficiently distribute
economic resources to promote economic growth and generate a return on
investment (ROI) for market participants.

Components of Financial Systems:-

There are several financial system components to ensure a smooth transition
of funds between lenders, borrowers, and investors.

i. Financial Institutions: - Financial institutions act as intermediaries

between the lender and the borrower when providing financial services.
These include:
 Banks (Central, Retail, and Commercial)
 Insurance Companies
 Investment Companies
 Brokerage Firms

ii. Financial Markets:- These are places where the exchange of assets
occurs with borrowers and lenders, such as stocks, bonds, derivatives,
and commodities.
Financial markets help businesses to grow and expand by allowing
investors to contribute capital. Investors invest in company stock with
the expectation of it producing a return in the future. As the business
makes a profit, it can then pass on the surplus to the investors.

iii. Financial Instruments:- Tradable or financial instruments enable

individuals to trade within the financial markets. These can include cash,
shares of stock (representing ownership), bonds, options, and futures.

iv. Financial Services:- Financial services provide investors a way of

managing assets and offer protection against systemic risk. These also
ensure individuals have the appropriate amount of capital in the most
 efficient investments to promote growth. Banks, insurance companies,
and investment services would be considered financial services.

v. Currency (Money):- A currency is a form of payment to exchange

products, services, and investments and holds value to society.

Structure of the Indian Financial System:-

The financial system is a network. It consists of buyers and sellers like a
market. But, the buyers are the borrowers who seek money. Sellers are
investors who want to invest their surplus. The system facilitates this flow so
that the funds reach the right place. One must understand the basic flow
function to explain the structure of Indian financial system. The system
classifies into two parts.

 Organized sector: This sector includes banks, financial institutions,

NBFCs, insurance companies, etc. This organized sector is also regulated.
Official bodies like the Reserve Bank of India or the Securities and
Exchange Board monitor their activities.
 Unorganized sector: This sector is not regulated. The
moneylenders, chit funds, or other institutions outside regulations are
present. They provide money to people without bank accounts or
sufficient collateral securities.

Components of Indian Financial System:-

i. Banks:- Banks are financial institutions that accept deposits from
customers and provide loans and other financial services. In India, banks
can be classified into public sector banks, private sector banks, and
foreign banks.
ii. Non-Banking Financial Companies (NBFCs):- NBFCs are
financial institutions that provide banking services without holding a
banking license. They offer a wide range of financial services, such as
loans, leasing, hire purchase, and investment advisory services.
iii. Insurance Companies:- Insurance companies offer a range of life
and non-life insurance products, including health insurance, motor
insurance, and property insurance. They are regulated by the Insurance
Regulatory and Development Authority of India (IRDAI).
iv. Capital Markets:- The capital markets in India comprise the stock
exchanges, such as the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE), and other capital markets intermediaries such as
brokers, depositories, and registrars. They provide a platform for
companies to raise capital through the issuance of equity and debt
instruments.
v. Mutual Funds:- Mutual funds are investment vehicles that pool
money from various investors and invest in a diversified portfolio of
stocks, bonds, and other securities. They are regulated by the Securities
and Exchange Board of India (SEBI).
vi. Pension Funds:- Pension funds in India offer retirement solutions to
individuals and are regulated by the Pension Fund Regulatory and
Development Authority of India (PFRDA).