Components of the Financial System
Introduction
As discussed, the financial system has four major components. Let’s break them down.
1. Financial Institutions (Intermediaries)
These are the "middlemen" dealing in financial assets.
- Banking Institutions: Accept demand deposits (Savings/Current) and lend money. (E.g., SBI, ICICI).
- Non-Banking Financial Companies (NBFCs): Provide loans but cannot accept demand deposits. (E.g., Muthoot Finance).
- Development Financial Institutions: Promote specific sectors. (E.g., NABARD for Agriculture, SIDBI for MSMEs).
- Regulatory Institutions: Regulate the game. (RBI, SEBI).
2. Financial Markets
The marketplace where buyers and sellers meet.
- Organized vs Unorganized: Regulated vs Unregulated.
- Capital Market: For Long-term funds (> 1 year). (Shares, Debentures).
- Money Market: For Short-term funds (< 1 year). (Treasury Bills, Commercial Paper).
- Primary Market: New Issues (IPO).
- Secondary Market: Trading of existing securities (Stock Exchange).
3. Financial Assets (Instruments)
The "products" that are traded (Paper claims on future cash flows).
- Term: Short-term (T-Bills) vs Long-term (Shares).
- Primary: Direct claim roughly (Shares) vs Secondary/Derivative: Derived from another asset (Futures/Options).
- Examples: Equity Shares, Preference Shares, Bonds, Debentures, Certificate of Deposit (CD).
4. Financial Services (Intermediaries)
- Value-added services.
- Fund Based: Leasing, Hire Purchase.
- Fee Based: Merchant Banking, Credit Rating.
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Summary
- Institutions: Banks, NBFCs.
- Markets: Money Market vs Capital Market.
- Instruments: Shares, Bonds.
- Services: Leasing, Advisory.
Quiz Time! 🎯
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