Financial System

A financial system is a vertical arrangement of a well-integrated chain of financial markets and

institutions that provide financial intermediation. The main function of financial systems is the
collection of savings and their distribution for industrial investment, thereby stimulating the
capital formation and, to that extent, accelerating the process of economic growth. Financial
systems may be said to be made up of all those channels through which savings become
available for investment.
Financial System Includes:
(i) Financial Institutions/intermediaries like banks, insurance organisations, unit
trusts/mutual funds, and so on which collect capital from savers-investors and
distribute them to entrepreneurs/productive enterprises
(ii) Financial Markets comprising of the capital/securities market (i.e. stock exchange and
the new issue market), the money market and the foreign exchange (forex) market;
and
(iii) Financial Assets/Instruments (securities) such as shares, debentures, units, derivatives
and so on book.
(iv) Financial Services like underwriting, credit rating
(v) Regulators like SEBI, RBI, IRDA
Financial Market
Financial Markets include any place or system that provides buyers and sellers the means to
trade financial instruments, including bonds, equities, the various international currencies, and
derivatives. Financial markets facilitate the interaction between those who need capital with
those who have capital to invest.
Classification of Financial Market
1. By Nature of Claim
● Debt Market – It is a market where fixed bonds and debentures or bonds are exchanged
between investors.
● Equity Market – It is a place for investors to deal with equity.
2. By Maturity of Claim
● Money Market – It deals with monetary assets and short-term funds such as a certificate
of deposits, treasury bills, and commercial paper, etc. which mature within twelve
months.
● Capital Market – It trades medium and long term financial assets. It is further divided
into two: Primary Market and Secondary Market.

Primary market is where securities are created. It's in this market that firms sell (float)
new stocks and bonds to the public for the first time. An initial public offering, or IPO, is
an example of a primary market. These trades provide an opportunity for investors to buy
 securities from the bank that did the initial underwriting for a particular stock. An IPO
occurs when a private company issues stock to the public for the first time.
Secondary market refers to a market wherein already issued securities and financial
instruments are traded.

3. By Timing of Delivery
● Cash Market – It is a market place where trade is completed in real-time.
● Futures Market – Here, the delivery or compensation of products are taken in the future
specified date.
4. By Organizational Structure
● Exchange-Traded Market – It is the marketplaces where all the transactions pass through
a central source.
● Over-the-Counter Market – It is a dealer oriented market of securities, which is a
decentralized and unorganized market where trading happens by way of phone, emails,
etc. This a relatively unorganized system where trading did not occur at a physical place
but rather through dealer networks.

Functions of Financial Services

● Mobilization of funds: A financial service helps in mobilizing fund from investors,

individual, institutions and corporate entities. These funds are mobilized through
different financial instruments like equity shares, bonds, mutual funds etc.

● Effective utilization of funds: These financial services also help in effective

utilization of mobilized funds. Financial services helps in this regard through services
like factoring, securitization, credit rating etc. Services of Credit Rating Company
enables investors to make wise and informed decisions related to investment.
Similarly, merchant banking services helps companies in mergers and acquisitions.

● Transforming risk: Financial services like insurance helps in reduction of risk by

transferring risk to those who are more willing to bear it.

● Enhancement of economic development: A financial service helps in economic

development of the country by mobilization and deployment of funds. Ideal savings of
individuals are channelized into productive investment through financial services.

● Provision of liquidity: The financial service industry promotes liquidity in the

financial system by allocating and reallocating savings and investment into various
avenues of economic activity. It facilitates easy conversion of financial assets into
 liquid cash.

● Creation of employment opportunities: The financial service industry creates and

provides employment opportunities to millions of people all over the world.

Nature of Financial Services

Customer Oriented: Financial services are customer-focused services that are offered as per the
requirements of customers. Financial institutions properly study customer needs before designing
and offering such services. They are meant to fulfill the specific needs of a customer which
differs from person to person.
Intangibility: These services are intangible which makes their marketing a challenging task for
financial institutions. Such institutions need to focus on building their brand image by providing
innovative and quality products to customers. Firms enjoying better credibility in market are
easily able to sell off their products.
Inseparable: Financial services are produced and delivered at the same time simultaneously.
These services are inseparable and can’t be stored in advance. Here production and supply
function both occurs at the same time.
Manages Fund: Financial services are specialized at managing funds of people. These services
enable peoples in allocating their idle lying funds into useful means for ear
Financial Intermediation: These services does the work of financial intermediation as it brings
together the lender and borrower. Financial services mobilize the funds of people who are having
enough of it and made it available to the one who are in need of it.
Market Based: Financial services are market based which changes as per the changing
conditions. It is a dynamic activity which varies as per the variations in socio-economic
environment and varying needs of customers.
Distributes Risk: Risk distribution is the key feature offered by financial services. These
services transfer the risk of an individual not willing to take among different persons who all are
willing to bear it. Financial institutions diversify the risk and secure people against damages by
providing them various insurance policies.
Dominance of Human Element: Financial services are dominated by human element. Thus,
financial services are labour intensive. It requires competent and skilled personnel to market the
quality financial products.
Advisory: Financial services can be of three types i.e. a fund based or a fee-based or both. In
case of fee-based services, the advisory function is dominant. Issue management, registrar of
issue, merchant banking, pricing of securities etc. are few examples of advisory financial
services.
 Heterogeneity: Financial services are customized services. It cannot be uniform for all
clients. Financial services vary from one client to other. Institutional client requirements
differ from individual client. After analysing the needs of the clients, financial institutions
offer customised financial services to the clients.

Information based: Financial service industry is an information based industry. It

involves creation, dissemination and use of information. Information is an essential
component in the production of financial services.

Importance of Financial Services

The successful functioning of any financial system depends upon the range of financial services
offered by financial service organisations. The importance of financial services may be
understood from the following points:
1. Economic growth: The financial service industry mobilises the savings of the people, and
channels them into productive investments by providing various services to people in general
and corporate enterprises in particular. In short, the economic growth of any country
depends upon these savings and investments.

2. Promotion of savings: The financial service industry mobilises the savings of the people by
providing transformation services. It provides liability, asset and size transformation service
by providing huge loan from small deposits collected from a large number of people. In this
way financial service industry promotes savings.

3. Capital formation: Financial service industry facilitates capital formation by rendering

various capital market intermediary services. Capital formation is the very basis for economic
growth.

4. Creation of employment opportunities: The financial service industry creates and provides
employment opportunities to millions of people all over the world.

5. Contribution to GNP: Recently the contribution of financial services to GNP has been
increasing year after year in almost countries.

6. Provision of liquidity: The financial service industry promotes liquidity in the financial
system by allocating and reallocating savings and investment into various avenues of economic
activity. It facilitates easy conversion of financial assets into liquid cash.

Type of Financial Services

1. Provision of Funds
(a) Venture capital
(b) Banking services
(c) Asset financing
(d) Trade financing
(e) Credit cards
(f) Factoring and forfaiting
2. Managing Investible Funds
(a) Portfolio management
(b) Merchant banking
(c) Mutual and pension funds
3. Risk Financing
(a) Insurance
(b) Export credit guarantee
4. Consultancy Services
(a) Project preparatory services
(b) Project report preparation
(c) Project appraisal
(d) Rehabilitation of projects
(e) Business advisory services
(f) Valuation of investments
(g) Credit rating
(h) Merger and acquisition
5. Market Operations
(a) Stock market operations
(b) Money market operations
(c) Asset management
(d) Registrar and share transfer agencies
(e) Trusteeship
(f) Retail market operation
(g) Futures, options and derivatives
6. Research and Development
(a) Equity and market research
(b) Investor education
(c) Training of personnel
(d) Financial information services
Scope of Financial Services
The scope of financial services is very wide. This is because it covers a wide range of services.
The financial services can be broadly classified into two: (a) fund based services and (b)
non-fund services (or fee-based services).
a. Fund Based Activities.
Fund based activities comprises of activities which are concerned with acquiring funds and
assets for clients. Different services covered under fund based activities are: Primary and
secondary market activities, dealing in money market instruments, foreign exchange market
activities and involving in hire purchase, venture capital, equipment leasing etc.
● Underwriting
● Hire purchase
● Lease Financing
● Venture capital
● Bill discounting
● Insurance services
● Factoring
● Forfeiting
● Housing finance
● Mutual fund
● Banking Services

b. Non-fund based Activities

These services are provided by financial intermediaries on non-fund basis and are called
fees-based services. Non-fund bases activities are specialized services offered by financial
institutions to customers in exchange for fees, commission, dividend and brokerage. This
comprises of services such as Portfolio management, issue management, stock broking, merchant
banking, credit rating, debt and capital reconstructing, bank guarantee etc.
● Securitisation
● Merchant banking
● Credit rating
● Loan syndication
● Project advisory services
 ● Portfolio management
● Merger and acquisition Consulting
● Capital restructuring
● Debenture trusteeship
● Custodian services
● Stock broking
Fund Based Financial Services
1. Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires a
right to make use of a capital asset like machinery etc. on payment of an agreed fee called lease
rentals. The person (or the company) which acquires the right is known as lessee. He does not
get the ownership of the asset. He acquires only the right to use the asset. The person (or the
company) who gives the right is known as lessor.
2. Hire purchase and consumer credit: Hire purchase is an alternative to leasing. Hire purchase
is a transaction where goods are purchased and sold on the condition that payment is made in
instalments. The buyer gets only possession of goods. He does not get ownership. He gets
ownership only after the payment of the last instalment. If the buyer fails to pay any instalment,
the seller can repossess the goods. Each instalment includes interest also.
3. Bill Discounting: Discounting of bill is an attractive fund based financial service provided by
the finance companies. In the case of time bill (payable after a specified period), the holder need
not wait till maturity or due date. If he is in need of money, he can discount the bill with his
banker. After deducting a certain amount (discount), the banker credits the net amount in the
customer’s account. Thus, the bank purchases the bill and credits the customer’s account with the
amount of the bill less discount. On the due date, the drawee makes payment to the banker. If he
fails to make payment, the banker will recover the amount from the customer who has
discounted the bill. In short, discounting of bill means giving loans on the basis of the security of
a bill of exchange.
4. Venture capital: Venture capital simply refers to capital which is available for financing the
new business ventures. It involves lending finance to the growing companies. It is the investment
in a highly risky project with the objective of earning a high rate of return. In short, venture
capital means long term risk capital in the form of equity finance.
5. Housing finance: Housing finance simply refers to providing finance for house building. It
emerged as a fund based financial service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country. Till
now, a number of specialized financial institutions/companies have entered in the field of
housing finance. Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank
Housing etc.
6. Insurance services: Insurance is a contract between two parties. One party is the insured and
the other party is the insurer. Insured is the person whose life or property is insured with the
insurer. That is, the person whose risk is insured is called insured. Insurer is the insurance
company to whom risk is transferred by the insured. That is, the person who insures the risk of
insured is called insurer. Thus insurance is a contract between insurer and insured. It is a contract
in which the insurance company undertakes to indemnify the insured on the happening of certain
event for a payment of consideration.
7. Factoring: Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash payment to
the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm
(client) are purchased by a financial institution or banker. Thus, the factor provides finance to the
client (supplier) in respect of account receivables. The factor undertakes the responsibility of
collecting the account receivables. The financial institution (factor) undertakes the risk. For this
type of service as well as for the interest, the factor charges a fee for the intervening period.
8. Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is
a non-recourse purchase by a banker or any other financial institution of receivables arising from
export of goods and services. The exporter surrenders his right to the forfaiter to receive future
payment from the buyer to whom goods have been supplied. Forfaiting is a technique that helps
the exporter sells his goods on credit and yet receives the cash well before the due date. In short,
forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill and pay
ready cash to the exporter. The exporter need not bother about collection of export bill. He can
just concentrate on export trade.
9. Mutual fund: Mutual funds are financial intermediaries which mobilize savings from the
people and invest them in a mix of corporate and government securities. The mutual fund
operators actively manage this portfolio of securities and earn income through dividend, interest
and capital gains. The incomes are eventually passed on to mutual fund shareholders.
10) Underwriting: Underwriting is an agreement, with or without conditions, to subscribe to the
securities of a company when existing shareholders of the company or the public do not
subscribe to the securities offered to them.

Non-Fund Based/Fee Based Financial Services

1. Merchant banking: Merchant banking is basically a service banking, concerned with
providing non-fund based services of arranging funds rather than providing them. The merchant
banker merely acts as an intermediary. Its main job is to transfer capital from those who own it to
those who need it. Today, merchant banker acts as an institution which understands the
requirements of the promoters on the one hand and financial institutions, banks, stock exchange
and money markets on the other. SEBI (Merchant Bankers) Rule, 1992 has defined a merchant
banker as, “any person who is engaged in the business of issue management either by making
arrangements regarding selling, buying or subscribing to securities or acting as manager,
consultant, advisor, or rendering corporate advisory services in relation to such issue
management”.
2. Credit Rating: Credit rating means giving an expert opinion by a rating agency on the
relative willingness and ability of the issuer of a debt instrument to meet the financial obligations
in time and in full. It measures the relative risk of an issuer’s ability and willingness to repay
both interest and principal over the period of the rated instrument. It is a judgement about a
firm’s financial and business prospects. In short, credit rating means assessing the
creditworthiness of a company by an independent organisation.
3. Stock Broking: Now stock broking has emerged as a professional advisory service. Stock
broker is a member of a recognized stock exchange. He buys, sells, or deals in shares/securities.
It is compulsory for each stock broker to get himself/herself registered with SEBI in order to act
as a broker. As a member of a stock exchange, he will have to abide by its rules, regulations and
bylaws.
4. Custodial Services: In simple words, the services provided by a custodian are known as
custodial services (custodian services). Custodian is an institution or a person who is handed
over securities by the security owners for safe custody. Custodian is a caretaker of a public
property or securities. Custodians are intermediaries between companies and clients (i.e. security
holders) and institutions (financial institutions and mutual funds). There is an arrangement and
agreement between custodian and real owners of securities or properties to act as custodians of
those who hand over it. The duty of a custodian is to keep the securities or documents under safe
custody. The work of custodian is very risky and costly in nature. For rendering these services,
he gets a remuneration called custodial charges. Thus custodial service is the service of keeping
the securities safe for and on behalf of somebody else for a remuneration called custodial
charges.
5. Loan Syndication: Loan syndication is an arrangement where a group of banks participate to
provide funds for a single loan. In a loan syndication, a group of banks comprising 10 to 30
banks participate to provide funds wherein one of the banks is the lead manager. This lead bank
is decided by the corporate enterprises, depending on confidence in the lead manager.
6. Securitisation (of debt): Loans given to customers are assets for the bank. They are called
loan assets. Unlike investment assets, loan assets are not tradable and transferable. Thus loan
assets are not liquid. The problem is how to make the loan of a bank liquid. This problem can be
solved
by transforming the loans into marketable securities. Now loans become liquid. They get the
characteristic of marketability. This is done through the process of securitization. Securitisation
is a financial innovation. It is conversion of existing or future cash flows into marketable
securities that can be sold to investors. It is the process by which financial assets such as loan
receivables, credit card balances, hire purchase debtors, lease receivables, trade debtors etc. are
transformed into securities. Thus, any asset with predictable cash flows can be securitised.
7) Debenture Trustee: A debenture trustee means a trustee of a trust deed for securing any issue
of debentures of a body corporate. In other words, debenture trustee is a liaison between the
issuer company and the debenture holders, who hold the secured property on behalf of the issuer
company, which is mortgaged in favor of debenture trustee for protecting the interest of
debenture holders.
To act as a debenture trustee, a certificate of registration from the SEBI is necessary. Only banks,
public financial institutions, insurance companies and body corporates fulfilling the capital
adequacy requirement of `2 crore in terms of net worth [i.e. aggregate of value of paid-up capital
and free reserves (excluding reserves created out of revaluation) minus aggregate value of
accumulated losses and deferred expenditure not written off (including miscellaneous expenses
not writ-ten off)] as per the latest audited balance sheet can act as trustees.
Duties of the Debenture Trustee include:
(a) Call for periodical reports from the body corporate, i.e., issuer of debentures.
(b) Take possession of trust property in accordance with the provisions of the trust deed.
(c) Enforce security in the interest of the debenture holders.
(d) Ensure on a continuous basis that the property charged to the debenture is available and
adequate at all times to discharge the interest and principal amount payable in respect of the
debentures and that such property is free from any other encumbrances except those which are
specifically agreed with the debenture trustee.
(e) Exercise due diligence to ensure compliance by the body corporate with the provisions of the
Companies Act, the listing agreement of the stock exchange or the trust deed.
8) Stock Broker: A stockbroker is a financial professional who executes orders in the market on
behalf of clients i.e. they buy and sell stocks at the direction of their clients. They act as an
intermediary between buyers and sellers of securities, who would otherwise need to spend a lot
of time and cost in their search for buyers and sellers.
The process of buy-sell discovery, which is one of the most important features of the stock
market, is achieved with the help of stock brokers. Without the stock broking community, it
would be impossible to run the stock market transactions.
9) Bankers to an Issue
The bankers to an issue are engaged in activities such as acceptance of applications along with
application money from the investors in respect of issues of capital and refund of application
money. The term issue means an offer of sale/purchase of security by anybody
corporate/person/group of persons on his/its/their behalf to or from the public/the holders of
securities of the body corporate/person/group of persons.
10) Portfolio Management: Portfolio management refers to managing an individual’s
investments in the form of bonds, shares, cash, mutual funds etc. so that he earns the maximum
profits within the stipulated time frame. It refers to managing money of an individual under the
expert guidance of portfolio managers. In a layman’s language, the art of managing an
individual’s investment is called portfolio management.
Portfolio Management Services is further of the following types:
Active Portfolio Management: As the name suggests, in an active portfolio management service,
the portfolio managers are actively involved in buying and selling of securities to ensure
maximum profits to individuals.
Passive Portfolio Management: In passive portfolio management, the portfolio manager deals
with a fixed portfolio designed to match the current market scenario.
Discretionary Portfolio Management Services: In Discretionary portfolio management services,
an individual authorizes a portfolio manager to take care of his financial needs on his behalf. The
individual issues money to the portfolio manager who in turn takes care of all his investment
needs, paper work, documentation, filing and so on. In discretionary portfolio management, the
portfolio manager has full rights to take decisions on his client’s behalf.
Non-Discretionary Portfolio Management Services: In non-discretionary portfolio management
services, the portfolio manager can merely advise the client what is good and bad for him but the
client reserves full right to take his own decisions.
11) Share Transfer Agent: ‘Share transfer agent’ is an agent who, on behalf of the body
corporate, maintains records of holders of securities issued by such body corporate and deals
with the processes of transfer and redemption of securities. It is an agent appointed by a
company to maintain records of security owners. A transfer agent’s principal functions are to
issue and cancel certificates to reflect changes in ownership of the securities of an entity and to
act as an intermediary for the company.
12) Capital Restructuring Services: Capital Restructuring services are used to address issues
associated with insolvency, mergers, de-mergers, bankruptcies, liquidations, and distressed sales.
These services are mainly focused to optimize business costs, repositioning & regaining control
from stakeholders, introducing new technology, merging with another company, and complying
to new regulations in business environment. These capital restructuring services improve
financial position of companies to respond uncertainties occurred and helps businesses to
strengthen their position in the corporate world.

Regulatory Framework for Financial Services

1) RBI
Established in April, 1935 in Calcutta, the Reserve Bank of India (RBI) later moved to
Mumbai in 1937. After its nationalization in 1949, RBI is presently owned by the Govt.
of India. It has 19 regional offices, majorly in state capitals, and 9 sub-offices. It is the
issuer of the Indian Rupee. RBI regulates the banking and financial system of the country
by issuing broad guidelines and instructions.

Role of RBI
● Control money supply
● Monitor key indicators like GDP and inflation
● Maintain people’s confidence in the banking and financial system by providing tools such
as ‘Ombudsman’
 ● Formulate monetary policies such as inflation control, bank credit and interest rate
control.
● RBI acts as a banker for both the central as well as state governments. It sells and
purchase government securities on their behalf. It also manages liquidity in the system.
● Regulates Money Market.
● RBI is the custodian of foreign reserve, controller of credit and manage printing and
supply of currency notes in the country.
On July 6, 2005, a new department, named financial market department in reserve bank of
India was constituted for surveillance on financial markets.This newly constituted dept. will
separate the activities of debt management and monetary operations in the future. This
department will also perform the duties of developing and monitoring the instruments of the
money market and also monitoring the government securities and foreign money markets.

2) Securities and Exchange Board of India (SEBI)

Established on April 12, 1992, under the SEBI Act 1992, the Securities and Exchange Board of
India (SEBI) is a statutory body owned by the government of India. Its primary function is to
safeguard the interests of investors in securities exchange and regulate the securities market. The
headquarters of SEBI is located in Mumbai and the branch offices are located at Delhi, Kolkata,
and Chennai.
Following are the key responsibilities of SEBI:
● Formulates the code of conduct and guidelines for the proper functioning of the
intermediaries and businesses.
● Promotes investor education.
● Regulates business in the stock and also other securities markets.
● Audits the stock market performance.
● Protects the interest of security market participants.
● Levies fees.
● Formulates, implements and monitors exercising powers.
● Regulates credit rating agencies.
● Furthermore, identifies and prohibits insider trading and unfair trade practices.

3) Insurance Regulatory and Development Authority of India (IRDAI)

Established under the Insurance Regulatory and Development Authority Act, 1999, IRDAI is an
autonomous statutory body tasked with regulating and promoting the insurance and re-insurance
industries in India. Headquartered in Hyderabad, it is a 10-member body consisting of Chairman,
five full-time members, and four part-time members appointed by the government of India.
Following are the duties, powers and functions of Insurance regulator:
● Issue certificate of registration, renew, modify, withdraw, suspend, or cancel the
registration.
● Protects the interest of the policyholders
 ● Specifies code of conduct, qualifications, and practical training for insurance
intermediaries and agents.
● Also, specifies the code of conduct for surveyors and loss assessors.
● Promotes efficiency in conducting insurance business.
● Promotes and regulates firms that deal in the insurance and also reinsurance business.
● Levies fees and other charges for carrying out the business as per the Act.
● Calls for information, conducts an inspection, enquires and also investigates all the
related parties to the insurance business.
● Controls and regulates the rates, terms and conditions of the insurance policies.
● Specifies the format for bookkeeping.
● Regulates investment of funds by insurance companies.
● Also, regulates maintenance of margin of solvency.
● Resolves disputes between insurers and intermediaries or insurance intermediaries.
● Supervises the functioning of the Tariff Advisory Committee.
● Also, specifies the percentage of premium income of the insurer.
● Specify the percentage of life and general insurance business that the insurer will do in
the rural or social sector.

4) PFRDA under the Finance Ministry

PFRDA stands for Pension Fund Regulatory and Development Authority. Established by the
government of India on August 23, 2003, by executive order, PFRDA was mandated to act as a
regulator of pension funds. Headquartered in Delhi, India. The organizational structure consists
of a chairperson, 3 whole-time members from finance, law, and economics along with a chief
vigilance officer.
Following are the key functions of the Pension Fund Regulator:
● Creates investment standards for pension funds.
● Resolves issues between pension fund subscribers and middlemen.
● Increases public awareness of retirement and also pension plans.
● Registers and regulates intermediaries.
● Protects the interest of pension fund subscribers.
● Investigates intermediaries and other participants for possible malpractices.
● Formulates standard practices, code of conduct and also norms for the pension industry.
Forward Market Commission of India
Headquartered in Mumbai, FMC is a regulatory authority for commodity futures market in India.
FMC is the chief regulator of forward and futures markets in India. FMC comes under the
Ministry of Consumer Affairs, Food and Public Distribution because futures traded in India are
traditionally in food commodities.
FMC is a legal body set up under Forward Contracts (Regulation) Act 1952. The Act provides
that the Commission should consist of minimum two and maximum four members appointed by
the Central Government. The chairman of the FMC is nominated by the central government. The
FMC is now merged with SEBI.
Functions of FMC
● To advise the central government in respect of the recognition or the withdrawal of
recognition from any association.
● To advise the central government in respect of issues arising out of the administration of
the Forward Contracts (Regulation) Act 1952.
● To keep forward markets under observation and to take such action in relation to them, as
it may consider necessary, in exercise of the powers assigned to it under the Act.
● To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of the
Act is made applicable, including information regarding supply, demand and prices, and
to submit to the central government, periodical reports on the working of forward markets
relating to such goods.
● To make recommendations to improve the organisation and working of forward markets
● To undertake the inspection of accounts and other documents of any recognised
association, registered association or any member of such association whenever it
considers it necessary.
NABARD
National Bank for Agriculture and Rural Development (NABARD) is an apex regulatory body
for overall regulation of regional rural banks and apex cooperative banks in India. It is under the
jurisdiction of the Ministry of Finance, Government of India. The bank has been entrusted with
"matters concerning policy, planning, and operations in the field of credit for agriculture and
other economic activities in rural areas in India". NABARD is active in developing and
implementing financial inclusion.
NABARD came into existence on 12 July 1982 by transferring the agricultural credit functions
of RBI and refinance functions of the then Agricultural Refinance and Development Corporation
(ARDC).
NABARD discharge its duty by undertaking the following roles:
1. Serves as an apex financing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas
2. Takes measures towards institution building for improving absorptive capacity of
the credit delivery system, including monitoring, formulation of rehabilitation
schemes, restructuring of credit institutions, training of personnel, etc.
3. Co-ordinates the rural financing activities of all institutions engaged in
developmental work at the field level and maintains liaison with Government of
India, state governments, Reserve Bank of India (RBI) and other national level
institutions concerned with policy formulation
4. Undertakes monitoring and evaluation of projects refinanced by it.
 5. NABARD refinances the financial institutions which finances the rural sector.
6. NABARD partakes in development of institutions which help the rural economy.
7. NABARD also keeps a check on its client institutes.
8. It regulates the institutions which provide financial help to the rural economy.
9. It provides training facilities to the institutions working in the field of rural
upliftment.
10. It regulates and supervise the cooperative banks and the RRB's, throughout India.

Regulatory body Sector Headquarter

Reserve Bank of India (RBI) Banking & Finance Mumbai
Securities and Exchange Board of Stock & Capital Mumbai
India (SEBI) Market
Insurance Regulatory & Insurance Hyderabad
Development Authority of India
(IRDA)
Pension Fund Regulatory & Pension New Delhi
Development Authority (PFRDA)
National Bank for Agriculture & Financing Rural Mumbai
Rural Development (NABARD) Development
Small Industries Development Financing Micro, Lucknow
Bank of India (SIDBI) Small & Medium
Enterprises (MSMEs)
National Housing Bank (NHB) Financing Housing New Delhi

Management of Risk in Financial Services

In the financial world, risk management is the process of identification, analysis, and acceptance
or mitigation of uncertainty in investment decisions. Essentially, risk management occurs when
an investor or fund manager analyzes and attempts to quantify the potential for losses in an
investment, such as a moral hazard, and then takes the appropriate action (or inaction) given the
fund's investment objectives and risk tolerance.
Financial risk management is the process of understanding and managing the financial risks that
your business might be facing either now or in the future. It's not about eliminating risks, since
few businesses can wrap themselves in cotton wool. Rather, it's about drawing a line in the sand.
The idea is to understand what risks you're willing to take, what risks you'd rather avoid, and
how you're going to develop a strategy based on your risk appetite.

Types of Financial Risks

Credit Risk
Credit risk is the possibility that you'll lose money because someone fails to perform according
to the terms of a contract. For example, if you deliver goods to customers on 30-day payment
terms and the customer does not pay the invoice on time (or at all), then you have suffered a
credit risk. Businesses must retain sufficient cash reserves to cover their accounts payable or they
are going to experience serious cash flow problems.
Liquidity Risk
Also known as funding risk, this category covers all the risks you encounter when trying to sell
assets or raise funds. If something is standing in your way of raising cash fast, then it's classified
as a liquidity risk. A seasonal business, for example, might experience significant cash flow
shortages in the off-season. Do you have enough cash put aside to meet the potential liquidity
risk? How quickly can you dispose of old inventory or assets to get the cash you need to keep the
lights on?
Operational Risk
Operational risk is a catch-all term that covers all the other risks a business might encounter in its
daily operations. Staff turnover, theft, fraud, lawsuits, unrealistic financial projections, poor
budgeting and inaccurate marketing plans can all pose a risk to your bottom line if they are not
anticipated and handled correctly.
Market Risk
Market risk involves the risk of changing conditions in the specific marketplace in which a
company competes for business. One example of market risk is the increasing tendency of
consumers to shop online. This aspect of market risk has presented significant challenges to
traditional retail businesses.
This type of risk has a very broad scope, as it appears due to the dynamics of supply and
demand. Variations in the prices of assets, liabilities and derivatives are included in these sources
of risk. For example, this is the risk to which an importer company paying its supplies in dollars
and then selling the final product in local currency is exposed. In the event of devaluation, that
company may suffer losses that would prevent it from fulfilling its financial obligations.
● Change in interest rate
● Change in Foreign exchange
● Demand & Supply Change
● Price Change of products
Managing Risk Process
Companies that have been able to make the necessary adaptations to serve an
1. Identify the Risk
The initial step in the risk management process is to identify the risks that the business is
exposed to in its operating environment.
There are many different types of risks:
● Legal risks
● Environmental risks
● Market risks
● Regulatory risks etc.
It is important to identify as many of these risk factors as possible. In a manual environment,
these risks are noted down manually. If the organization has a risk management solution
employed all this information is inserted directly into the system.
The advantage of this approach is that these risks are now visible to every stakeholder in the
organization with access to the system. Instead of this vital information being locked away in a
report which has to be requested via email, anyone who wants to see which risks have been
identified can access the information in the risk management system.
2. Analyze the Risk
Once a risk has been identified it needs to be analyzed. The scope of the risk must be determined.
It is also important to understand the link between the risk and different factors within the
organization. To determine the severity and seriousness of the risk it is necessary to see how
many business functions the risk affects. There are risks that can bring the whole business to a
standstill if actualized, while there are risks that will only be minor inconveniences in the
analysis.
In a manual risk management environment, this analysis must be done manually. When a risk
management solution is implemented one of the most important basic steps is to map risks to
different documents, policies, procedures, and business processes. This means that the system
will already have a mapped risk management framework that will evaluate risks and let you
know the far-reaching effects of each risk.
3. Evaluate the Risk or Risk Assessment
Risks need to be ranked and prioritized. Most risk management solutions have different
categories of risks, depending on the severity of the risk. A risk that may cause some
inconvenience is rated lowly, risks that can result in catastrophic loss are rated the highest. It is
important to rank risks because it allows the organization to gain a holistic view of the risk
exposure of the whole organization. The business may be vulnerable to several low-level risks,
but it may not require upper management intervention. On the other hand, just one of the
highest-rated risks is enough to require immediate intervention.
There are two types of risk assessments: Qualitative Risk Assessment and Quantitative Risk
Assessment.
Qualitative Risk Assessment
Risk assessments are inherently qualitative – while we can derive metrics from the risks, most
risks are not quantifiable. For instance, the risk of climate change that many businesses are now
focusing on cannot be quantified as a whole, only different aspects of it can be quantified. There
needs to be a way to perform qualitative risk assessments while still ensuring objectivity and
standardization in the assessments throughout the enterprise.
Quantitative Risk Assessment
Finance related risks are best assessed through quantitative risk assessments. Such risk
assessments are so common in the financial sector because the sector primarily deals in numbers
– whether that number is the money, the metrics, the interest rates, or any other data point that is
critical for risk assessments in the financial sector. Quantitative risk assessments are easier to
automate than qualitative risk assessments and are generally considered more objective.
4. Treat the Risk
Every risk needs to be eliminated or contained as much as possible. This is done by connecting
with the experts of the field to which the risk belongs. In a manual environment, this entails
contacting each and every stakeholder and then setting up meetings so everyone can talk and
discuss the issues. The problem is that the discussion is broken into many different email threads,
across different documents and spreadsheets, and many different phone calls. In a risk
management solution, all the relevant stakeholders can be sent notifications from within the
system. The discussion regarding the risk and its possible solution can take place from within the
system. Upper management can also keep a close eye on the solutions being suggested and the
progress being made within the system. Instead of everyone contacting each other to get updates,
everyone can get updates directly from within the risk management solution.
5. Monitor and Review the Risk
Not all risks can be eliminated – some risks are always present. Market risks and environmental
risks are just two examples of risks that always need to be monitored. Under manual systems
monitoring happens through diligent employees. These professionals must make sure that they
keep a close watch on all risk factors. Under a digital environment, the risk management system
monitors the entire risk framework of the organization. If any factor or risk changes, it is
immediately visible to everyone. Computers are also much better at continuously monitoring
risks than people. Monitoring risks also allows your business to ensure continuity.
Risk Management Evaluation
Any business that wants to maximize its risk management efficiency needs to focus on risk
management evaluations. These evaluations and assessments help businesses truly understand
their own capabilities, strengths, and vulnerabilities. More evaluations result in more insights
about where the business needs to improve its risk management framework. It can be difficult to
carry out these evaluations manually, but risk management solutions and technology can simplify
the evaluation and assessment workflow. It is important to do an evaluation before making any
major changes to the risk management framework.