1. Unit – I: Financial System
(Full Marks - 5)
Prof. Mahua Mukherjee

2. Chapter Details
➔ Meaning and significance;
➔ Role of finance in an economy;
➔ Components (instruments, markets, etc.);
➔ Kinds of finance – Rudimentary finance, Direct and Indirect finance;
➔ Role of financial intermediaries.
➔ The structure of Indian Financial System

3. What is finance?
Finance is defined as the management of money and includes activities such
as investing, borrowing, lending, budgeting, saving, and forecasting. There are
three main types of finance: (1) personal, (2) corporate, and (3)
public/government.
Finance is a broad term that describes activities associated with banking,
leverage or debt, credit, capital markets, money, and investments. Basically,
finance represents money management and the process of acquiring needed
funds. Finance also encompasses the oversight, creation, and study of money,
banking, credit, investments, assets, and liabilities that make up financial
systems.

4. What is system?
A system is a group of interacting or interrelated entities
that form a unified whole.
It is a set of things working together as parts of a
mechanism or an interconnecting network; a complex
whole.

5. What is a financial system?
A financial system is a set of institutions, such as banks, insurance companies,
and stock exchanges, that permit the exchange of funds.
Financial systems exist on firm, regional, and global levels. Borrowers,
lenders, and investors exchange current funds to finance projects, either for
consumption or productive investments, and to pursue a return on their
financial assets.
The financial system also includes sets of rules and practices that borrowers
and lenders use to decide which projects get financed, who finances projects,
and terms of financial deals.

6. ❖ A financial system is a network of financial institutions,financial markets,
financial instruments, and financial services to facilitate the transfer of
funds.
❖ The system consists of savers,intermediaries,instruments, and ultimate user
of funds.
❖ The level of economic growth largely depends upon it.
❖ Financial system deals with three interrelated and interdependent
variables-
★ Money
★ Credit and
★ Finance

7. According to ROBINSON, “ a financial system provides link between savings
and investment for the creation of new wealth.”
SIGNIFICANCE
1. A sound financial system is a sine qua non to capital formation.
2. The economic development depends on savings-investment process.A sound
financial system ensures steady economic growth and accelerates it.
3. Stronger the financial system, higher would be the mobilisation of
savings.Financial system attempts to pool the savings of thye society through
various intermediaries and facilitating organisations like banks,insurance
companies,stock exchanges etc.

8. 4. Financial System transfers the savings to entrepreneurs or productive
enterprises through prudent investment decisions.It is financial system which
can only ensure efficient channelisation of savings.
5. Financial system not only comprises of agencies of the capital market, it also
comprises of money market agencies like banks, insurance organisations etc.
Such financial institutions assemble resources released by domestic savings,NRI
savings or transfers,bank deposits & bill market operations and transfer them to
the hands of the investors.So it helps in financing the economic operations of
the business houses or institutions.

9. 6.Financial system acts as a link between savers and investors.Thus it facilitates
transfer or flow of savings into productive investments.It fills up the gap
between supply of savings and demand for investible funds.
7.A sound financial system makes efficient allocation of funds from the savings -
surplus units to savings -deficit units through various financial innovations and
development of new financial technology.
8. It promotes the all round development of the financial structure of the
economy.

11. Role of Finance in an economy
1. Finance is a branch of economics concerned with providing funds to individuals, businesses, and
governments.
2. Finance allows these entities to use credit instead of cash to purchase goods and invest in projects.For
example, an individual can borrow money from a bank to buy a home or an industrial firm can raise
money through investors to build a new factory. Governments can issue bonds to raise money for
projects.
3. Finance plays an important role in the economy. As banks, credit unions, and other financial
institutions provide credit, they help expand the economy by directing funds from savers to borrowers.
4. Finance holds the key to achieving long-term growth prospective for any country.