- It act as a interlink between saver and investor by mobilizing the saving of scattered savers in more effective manner.
- It provides a payment mechanism for the exchange of goods and services.
- It provides a mechanism for the transfer of resources across geographical boundaries.
COMPONENTS
- Financial Institutions
- Financial Markets
- Financial Instruments
- Financial services
FINANCIAL INSTITUTIONS
Financial institutions can be classified into two types i.e. Banking Institutions and Non-Banking Institutions
1). BANKING INSTITUTIONS – Banking Industry is controlled by the Central Bank of India i.e. RBI. RBI is the apex body which supervises, regulates and develops the monetary system of country. It can be further classified into following :
A). Organised institutions – It includes workers employed by government, state owned enterprise and private sector enterprises.It includes:
Commercial banks- It is a type of institution that provides services such as accepting deposits, making business loans and offering basic investment product. Commercial banks are of two types :
Scheduled banks- The banks which are included in Second Schedule of Reserve Bank of India Act 1934 are schedule banks.RBI includes only those banks under this schedule which fulfill the criteria laid down under section 42(6)(a) of RBI Act 1934. Every schedule bank enjoys two principle facilities:
- It becomes eligible for debts/loans at the bank rate from RBI.
- It automatically acquires the membership of clearing houses.
At present there are 22 Public Sector banks, private and foreign banks and 19 nationalized banks.
In 1969, nationalization of 14 banks was done.
In 1980, nationalization of 6 banks was done.
Later on in 1993 New Bank of India merged with Punjab National Bank. Thus at present there are 19 Nationalized banks in India.
In year 2014 Bandhan Bank and IDFC get licensed by RBI in this category.
Non-Scheduled banks- The banks which are not included in Second Schedule of Reserve Bank of India Act 1934 are non-scheduled banks.
Co-operative banks- Co-operative banks are co-operative organizations which are governed by co-operative societies act 1904.
Co-operative banks have three tier structures:
Urban co-operative banks- These banks are registered and governed by state under the respective co-operative act of that state.
District co-operative banks- These banks work at district level.
State co-operative banks- These banks work at state level.
Regional rural banks- Regional Rural Banks are local level banking organizations operating in different states of India. RRBs were established in 1975 on the recommendations of Narsimham Committee. It is followed by Regional Rural Banks Act 1976. RRBs are regulated by NABARD (National Bank for Agriculture and Rural Development) act 1981.
- This bank provides credit to small farmers, small enterprises in rural areas.
- Basically it focused on rural areas.
All states in India have RRB except Goa and Sikkim.
Foreign banks – A foreign branch bank is type of that is obliged to follow the regulations of both the home and host countries.
B). Unorganised sector- It consists of all unincorporated private enterprises owned by individuals and households engaged in sale of goods and services. It comprises of following:
Indigenous bankers- Indigenous Bankers are the individuals and partnership firms performing banking functions. They are local bankers. They can be distinguished as professional money lenders whose primary business is not banking but money lending.
Money lenders- A money lender is a person or a group who typically offers personal loans at a high rate of interest.
2). NON- BANKING INSTITUTIONS -If the financial institutes have all the same functions but does not allow depositors to issue cheque and withdraw their money from deposits then it is Non Banking Institutions. It is further classified into:
A). Organised sector -It includes workers employed by government, state owned enterprise and private sector enterprises. It includes:
Development finance institutions - It is an alternative financial institution which includes microfinance institutions, community development financial institution and revolving loan funds. It includes:
IDBI (Industrial Development Bank of India) - It is established in 1964 by an Act of Indian industry.
IFCI (Indian Finance Corporation of India Ltd.) – It was the first development finance institution of India established by Indian government after independence. In 1993 it was reconstituted as a company to apart higher degree of operational flexibility. It is allowed to access to capital market directly.
EXIM (Export and Import Bank of India) - It is established in 1982 under Export Import Bank of India Act 1981. It acts as a key player in promotion of cross border trade and investment.
NABARD (National Bank for Agriculture and Rural Development)- NABARD was established in 1982 to implement National Bank for Agriculture and Rural Development Act 1981.
Investment institutions - It includes the institutions which mobilize savings of public at large through various schemes and invest these into corporate and government securities. It include:
LIC (Life Insurance Corporation) - The Life Insurance Industry in the country was nationalized by the government of India in 1956 and a fully government owned company, the Life Insurance Corporation of India setup.
GIC (General Insurance Corporation)-In 1971, the government of India nationalized the private sector companies playing in general insurance segment and the government company the General Insurance Corporation was formed in 1972.
UTI (Unit Trust of India) – It was created by the UTI act passed by the parliament of India on 1963.
B). Unorganised sectors- It includes number of NBFCs providing financial services such as
Asset Finance Companies- Its principle business is to finance physical assets.
Investment Companies- It involves in the business of acquisition of securities.
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