Indian Financial System Functions
Encourage Savings:
- Financial system promotes savings by providing a wide array of financial assets as Stores of value are helped by financial market services and other types of intermediaries. All of this provides asset holders with a wide range of portfolio options that combine income, safety, and yield.
- The range of portfolio options has expanded as a result of financial success and technological advancements. As a result, it is often assumed that the savings-income ratio has a direct relationship with both financial assets and financial institutions. That is, financial advancement typically results in more savings from the same amount of real income.
- As repositories of wealth, financial assets have many benefits over tangible assets (physical capital, stocks of commodities, etc.): they are easier to retain or store, more liquid, which means they are more readily encashable, divisible, and less hazardous.
- One major characteristic of financial assets is that they do not need frequent management in the same way that most real assets do. Financial assets have enabled the separation of ultimate ownership from administration of actual assets. The separation of savings from management has significantly increased savings.
- Savings are made by people, corporations, and the government. We categorize savers into three categories based on the official categorization issued by the Central Statistical Organization (CSO) of the Government of India: household, domestic private corporation, and public sector.
- Individuals, non-governmental, non-corporate companies in agriculture, commerce, and industry, as well as non-profit organizations such as trusts and charity and religious institutions, are all considered part of the household sector.
- The public sector includes central and state governments, departmental and non-departmental organizations, the RBI, and so on. The domestic private corporate sector consists of non-governmental public and private limited firms (whether financial or non-financial) as well as correctional facilities.
- The household sector is the largest saver among these three, followed by the domestic private corporate sector. The public sector makes a very tiny contribution to overall net domestic savings.
- The Risk Function
- Financial markets provide insurance against life, health, and income hazards. These assurances are provided via the sale of life, health, and property insurance policies.
- The financial system effectively mobilizes savings. In a fully monetised economy, this occurs automatically when the public’s savings are first held in the form of money. However, this is not the only method for instantly mobilising savings.
- Other financial strategies employed include deductions at the source for payments to the provident fund and other savings plans. More broadly, savings are mobilised when savers invest in financial assets such as currencies, bank deposits, post office savings deposits, life insurance plans, bills, bonds, equity shares, and so on.
- Transfer Function
- A financial system facilitates the movement of resources across geographic borders.
- A financial system plays a crucial role in ensuring equal and efficient loan distribution. Modern financial growth and new financial assets have led to the formation of institutions and markets that play an increasingly significant role in loan supply.
- The allocative functions of financial organizations are their primary source of power. By providing simple and inexpensive financing to certain enterprises, they may push their resource constraints outward, allowing them to develop quicker.
- On the other hand, by refusing other enterprises appropriate financing on acceptable conditions, financial institutions may significantly limit their expansion or even normal operations. Thus, credit may be utilized discriminatorily to benefit some while harming others.
- Reformatory Functions.
- A financial system that develops and introduces novel financial assets/instruments, services, and practices, as well as restructuring current assets, services, and so on, to meet the changing demands of borrowers and investors.
- Key Points
- Issuing and collecting deposits.
- Loans are made from the money that has been gathered.
- The execution of financial transactions.
- Enhancing the development of stock and other financial markets.
- Establishing the legal commercial foundation.
- Providing monetary and consulting services.
- Allows portfolio adaption for existing assets.
- Allocation of chance and risk.
- It connects depositors and investors.
- Increases the depth and breadth of finances by expanding their scope.
- It is responsible for capital formation.
- Adds temporal value to both assets and money.
- Set up a complete payment structure and mechanism.
- Allocate and distribute economic resources.
- Maintaining economic stability in the nation and markets.
- To build marketplaces that can evaluate investment success.