Tuesday, 19 April 2016

Facts you didn't know about Finance

A financial system plays a major role in the economic growth of a country. Can you imagine a country without a financial system? The answer is a big NO. The financial system acts as the backbone of any country. It is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments and services. Their role lies in the transfer and allocation of funds in a much effective and efficient manner. There are formal and informal financial sectors. Most of the developing countries are characterized by coexistence between the formal and informal financial sectors.

The financial system of India is classified into both the formal and informal financial sectors. The formal financial sector comes under the purview of Ministry of Finance (MoF), Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI). The informal financial system comprises of moneylenders like relatives, neighbors, traders, landlords and storeowners.

The formal financial system consists of the following components:

Financial Institutions: Their role is to allocate the funds effectively and act as intermediaries that facilitate and mobilize savings. Financial institutions can either be banking or non-banking.

Financial Markets: These financial markets are a mechanism that enables the participants to deal in financial claims. In these markets demands and requirements interact and then set a price for such claims. Financial markets are of 2 types i.e. primary and secondary markets.

Financial Instruments: It a claim against an institution or any person for payment at a future date of a sum of money or a periodic payment in the form of interest and dividend. Among financial instruments, financial securities are the ones that are negotiable and tradable.

Financial Services: These services are related to the borrowing and funding, lending and investing, selling and buying securities etc. Liquidity is an essential factor to smoothen the financial working system.

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One of the most important functions of the financial system is to link the savers and the investors and then help in mobilizing the transfer and allocation of funds. It provides a payment mechanism for exchange of goods and services. It also inspires the operators to monitor the performance of the investment. It ensures the transfer of funds smoothly, safely, quickly and in a timely manner. Various kinds of payment facilities have been provided by the banks that include cheques, drafts, promissory notes, credit cards and debit cards.

The financial system of the country should also keep in mind the concept of optimum allocation of risk bearing. It limits and trades the risks involved in mobilizing savings and allocating credit. Risk reduction is achieved by holding diversified portfolios and proper screening of borrowers. Thus a financial system is a vertical management of a well-integrated chain of financial markets and institutions that provide the required financial facilities.

Article by Anisha Dutta
She is a content evangelist who believes that the Science of today is the Technology of tomorrow. 
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