L-26-INDIAN FINANCIAL MANAGEMENT SYSTEM
PAGE 51 -
CHAPTER 26
INDIAN FINANCIAL MANAGEMENT SYSTEM
Meaning of Financial system
Economic growth and development of any nation depends upon a well-developed financial system. The term financial system includes financial institution, financial markets, financial instruments and financial services which help in generation of savings leading to capital formation.
A 'Financial system' is a system that allows the exchange of funds (e.g., money) between financial market participants which are lenders (e.g., Banks), investors (e.g., Individual persons with surplus money), and borrowers (e.g., businesses). Financial systems operate at national and global levels. The financial system enables lenders and borrowers to exchange funds. The financial system plays a significant role in the economic growth of a country by mobilizing the surplus funds and utilizing them effectively for productive purposes.
Indian Financial System - An Overview
India has a financial system that is controlled by independent regulators (e.g., IRDA, RBI, SEBI, etc.,) in the sectors of insurance, banking, capital markets and various services sectors. The services that are provided to a person by the various Financial Institutions including banks, insurance companies, pensions, funds, etc. constitute the financial system.
Features of the Indian Financial system
- It plays a vital role in the economic development of the country as it encourages both savings and investment
- It helps in mobilising and allocating one's savings
- It facilitates the expansion of financial institutions and markets
- Plays a key role in capital formation
- It helps form a link between the investor and the one saving
- It is also concerned with the Provision of funds
Components of Indian Financial System
There are four main components of the Indian Financial System. This includes:
- Financial Institutions
- Financial Assets
- Financial Services
- Financial Markets
PAGE 52 - FINANCIAL INSTITUTIONS
Let's discuss each component of the system in detail.
1. Financial Institutions
Financial institutions (e.g., banks) are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. They provide whole range of services to the entities who want to raise funds from the markets or elsewhere. They also act as intermediaries between Investors & borrowers, because they accept deposits from a set of customers (savers ) and lend these funds to another set of customers (borrowers).
The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.
The financial institutions can further be divided into two types:
A. Banking Institutions or Depository Institutions - This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need.
Diagram - Structure of Indian Financial System
The page contains an image-based organizational chart titled:
Structure of Indian Financial System
The complete visible structure is transcribed below.
STRUCTURE OF INDIAN FINANCIAL SYSTEM
|
----------------------------------------------------------------------
| | | |
FINANCIAL INSTITUTIONS FINANCIAL MARKETS FINANCIAL INTERMEDIARIES FINANCIAL SERVICES
| | | |
| | | |
| CAPITAL MARKET | |
| | | |
| ------------------- | |
| | | | |
| PRIMARY MARKET SECONDARY MARKET | |
| (New Issue Market) (Stock Exchange)| |
| | | | |
| Public Issue: BSE, NSE, | |
| IPO, FPO, NYSE, ISE, | |
| Rights Issue, NASDAQ | |
| Preferential Issue | |
| | |
| ORGANised SECTOR UNORGANISED SECTOR
| | |
| 1. Capital Market 1. Money Lenders
| Intermediaries 2. Indigenous Bankers
| - Development Banks 3. Pawn Brokers
| - Insurance Companies 4. Traders & Landlords
| - Unit Trust of India
| - IRBI
| - Exim Bank
| - NBFC
| 2. Money Market
| Intermediaries
| - RBI
| - Commercial Bank
| - Co-operative Bank
| - P.O SB
| - Govt. (Treasury Bills)
|
+-- Banking Institutions
| i) Scheduled Commercial Banks
| ii) Scheduled Cooperative Banks
|
+-- Non-Banking Institutions
| i) Non-Banking Finance Companies
| ii) Development Financial Institutions
|
+-- Mutual Funds
| i) Public Sector
| ii) Private Sector
|
+-- Insurance and Housing
Finance Companies
FINANCIAL MARKETS
|
+-- Money Market
1. Call money Market
2. Treasury Bills
3. Commercial Paper
4. Certificate of Deposits
5. Repurchase Agreement
6. Reserve Repos
7. Commercial bill market
8. Govt. Securities Market
9. Inter-Corporate Deposits
FINANCIAL SERVICES
|
+-- Fee Based Services
| Advisory Services
| - Issue Management
| - Portfolio Management
| - Corporate Counselling
| - Loan Syndication
| - Securitization
| - Credit Rating
| - Stock Broking
| - Forfeiting
|
+-- Fund Based Services
Assets based Services
- Equipment Leasing
- Hire Purchase
- Bills Discounting
- Housing Finance
- Insurance Services
- Venture Capital
The diagram also shows the following labels exactly as visible:
-
Financial Institutions
- Banking Institutions
- Scheduled Commercial Banks
- Scheduled Cooperative Banks
- Non-Banking Institutions
- Non-Banking Finance Companies
- Development Financial Institutions
- Mutual Funds
- Public Sector
- Private Sector
- Insurance and Housing Finance Companies
-
Financial Markets
- Capital Market
- Primary Market (New Issue Market)
- Public Issue: IPO, FPO
- Rights Issue
- Preferential Issue
- Secondary Market (Stock Exchange)
- BSE, NSE, NYSE, ISE, NASDAQ
- Money Market
- Call money Market
- Treasury Bills
- Commercial Paper
- Certificate of Deposits
- Repurchase Agreement
- Reserve Repos
- Commercial bill market
- Govt. Securities Market
- Inter-Corporate Deposits
-
Financial Intermediaries
- Organised Sector
- Capital Market Intermediaries
- Development Banks
- Insurance Companies
- Unit Trust of India
- IRBI
- Exim Bank
- NBFC
- Money Market Intermediaries
- RBI
- Commercial Bank
- Co-operative Bank
- P.O SB
- Govt. (Treasury Bills)
- Capital Market Intermediaries
- Unorganised Sector
- Money Lenders
- Indigenous Bankers
- Pawn Brokers
- Traders & Landlords
- Organised Sector
-
Financial Services
- Fee Based Services
- Advisory Services
- Issue Management
- Portfolio Management
- Corporate Counselling
- Loan Syndication
- Securitization
- Credit Rating
- Stock Broking
- Forfeiting
- Fund Based Services
- Assets based Services
- Equipment Leasing
- Hire Purchase
- Bills Discounting
- Housing Finance
- Insurance Services
- Venture Capital
- Fee Based Services
After the diagram:
Let's discuss each component of the system in detail.
1. Financial Institutions
Financial institutions (e.g., banks) are the intermediaries who facilitate smooth functioning of the financial system by making investors and borrowers meet. They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. They provide whole range of services to the entities who want to raise funds from the markets or elsewhere. They also act as intermediaries between Investors & borrowers, because they accept deposits from a set of customers (savers ) and lend these funds to another set of customers (borrowers).
The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.
The financial institutions can further be divided into two types:
A. Banking Institutions or Depository Institutions - This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need.
PAGE 53 - NON-BANKING INSTITUTIONS AND FINANCIAL ASSETS
B. Non-Banking Institutions or Non-Depository Institutions - Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers.
2. Financial Assets
The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other. A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and stocks. Financial assets are usually more liquid than other tangible assets, such as commodities or real estate, and may be traded on financial markets.
Some important Financial Assets have been discussed briefly below:
A. Call Money - When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction.
B. Notice Money - When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction.
C. Term Money - When the maturity period of a deposit is beyond 14 days, it is called term money.
D. Treasury Bills - Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government.
E. Commercial Paper - It is an unsecured short-term debt instrument issued by corporations which have maturity between 7 days and 1 year. CP can be issued in denominations of Rs.5 lakh or multiples thereof.
F. Certificate of Deposit - These are unsecured negotiable money market instruments, which usually offer higher returns than Bank term deposits, are issued in demat form or as Usance Promissory Notes against funds deposited at a bank or other eligible financial institution. There are several institutions that can issue CDs. Banks can offer CDs which have maturity between 7 days and 1 year.
3. Financial Services
Services provided by Asset and Liability Management Companies (e.g., SBI Mutual Funds, LIC). They help to get the required funds and also make sure that they are efficiently invested.
The financial services in India include:
A. Banking Services - Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc.
PAGE 54 - FINANCIAL SERVICES AND FINANCIAL MARKETS
B. Insurance Services - Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services.
C. Investment Services - It mostly includes asset management (Shares & Mutual funds).
D. Foreign Exchange Services - Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services.
The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing.
4. Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market.
The financial market can be further divided into four types:
A. Capital Market
The capital market is a market for financial assets which have a long or indefinite maturity. Generally, it deals with long term securities which have a maturity period of above one year.
The capital market can further be divided into three types:
i. Industrial/ Corporate Securities Market
ii. Government Securities Market
iii. Long Term Loan Market
INDUSTRIAL/CORPORATE SECURITIES MARKET
As the very name implies, it is a market for industrial/Corporate securities namely:
a. Equity shares or ordinary shares,
b. Preference shares and
c. Debentures or bonds.
It is a market where Corporates raise their capital or debt by issuing appropriate instruments.
It can be further subdivided into two. They are:
Primary market or New issue market - The primary market deals with those securities which are issued to the public for the first time, e.g., IPO (Initial Public Offer).
Secondary market or Stock exchange - Secondary market is a market for secondary sale of securities. In other words, securities which have already passed through the new issue market are traded in this market. Generally, such securities are quoted the Stock Exchange and it provides a continuous and regular market to buying and selling of securities. This market consists of all stock exchanges recognised by the Government of India.
GOVERNMENT SECURITIES MARKET
It is also called Gilt - Edged securities market. It is a market where Government securities are traded. In India there are many kinds of Government Securities - short term and long term. Long term securities are traded in this market while short term securities are traded in the money market. Securities issued by the Central Government; State Governments are dealt in this market.
PAGE 55 - LONG TERM LOANS AND MONEY MARKET
LONG TERM LOANS MARKET
Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers.
B. Money Market
Money market is a market for dealing with financial assets and securities which have a maturity period of upto one year. In other words, it is a market for purely short term funds.
The money market may be subdivided into four. They are:
i. Call money market - The call money market is a market for extremely short period loans say one day to fourteen days.
ii. Commercial bills market - It is a market for Bills of Exchange arising out of genuine trade transactions. In the case of credit sale, the seller may draw a bill of exchange on the buyer. The buyer accepts such a bill promising to pay at a later date specified in the bill. The seller need not wait until the due date of the bill. Instead, he can get immediate payment by discounting the bill.
iii. Treasury bills market - It is a market for treasury bills which have ' short - term ' maturity. A treasury bill is a promissory note or a finance bill issued by the Government.
iv. Short term loan market - It is a market where short - term loans are given to corporate customers for meeting their working capital requirements. Commercial banks play a significant role in this market. Commercial banks provide short term loans in the form of cash credit and overdraft.
C. Foreign exchange Market
One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate.
D. Credit Market
The credit market is a financial market where the government and companies issue debt to investors to raise money. It is also known as debt market since it deals in debt instruments. Participants in the credit market work as lenders and borrowers of debt. The credit market in India plays an important role in meeting the financing needs of various segments of the economy. This market is regulated by Reserve bank of India (RBI), Securities and exchange board of India (SEBI), The Securities Contracts Regulation Act (SCRA) and Department of company affairs(DCA).
Indian Financial System Code
The Indian Financial System Code (IFS Code or IFSC) is an alphanumeric code that facilitates electronic funds transfer in India. A code uniquely identifies each bank branch participating in the three main Payment and settlement systems in India: the National
PAGE 56 - IFSC AND QUESTIONS
Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS) and Immediate Payment Service (IMPS) systems.
Multiple Choice Questions
Q 1. Which of these is a type of Capital Market?
- Corporate Securities Market
- Government Securities Market
- Long Term Loan Market
- All of the Above
Answer: (4) All of the Above
Q 2. Which of these is not a type of Financial Assets?
- Cheque
- Call Money
- Notice Money
- Treasury Bill
- Commercial Paper
Answer: (1) Cheque
Q 3. Which of these is not a fundamental objective of Indian Financial System?
- To give time value to money
- Offer Services that reduce risk of loss
- Issuing Bank Notes
- Provide a payment System
- All of the above
Answer: (3) Issuing Bank Notes
Q 4. When a loan is granted for only one day, it is called _________?
- Notice Money
- Immediate Bill
- Treasury Bill
- Call Money
- Commercial Bill
Answer: (4) Call Money
VISUAL / DIAGRAM CHECK
The source has one major image-based diagram on page 52. It is the “Structure of Indian Financial System” chart. It has four top-level branches:
- Financial Institutions
- Financial Markets
- Financial Intermediaries
- Financial Services
The diagram further breaks these into capital market, money market, organized and unorganized intermediaries, banking/non-banking institutions, mutual funds, insurance and housing finance companies, fee-based services, and fund-based services. The text above reproduces the labels and branches visible in the diagram rather than omitting the image content.
📌 ADDENDUM — RBI policy rates & current updates
[!warning] Added because the exam asked it 2024·Q97 asked "Bank Rate definition" — the chapter names the RBI as regulator but never defines the policy rates. Zero hits for "bank rate" across all 600 MCQs.
1. ⭐ The RBI policy rates — definitions
| Rate | What it means | Security involved? |
|---|---|---|
| Repo Rate | rate at which banks borrow from the RBI against government securities, short-term (usually overnight) | ✅ Yes — securities are sold & repurchased |
| ⭐ Bank Rate | rate at which banks borrow from the RBI WITHOUT any sale of securities, for a longer period | ❌ No |
| Reverse Repo Rate | rate at which the RBI borrows from banks (absorbs liquidity) | ✅ Yes |
| MSF (Marginal Standing Facility) | emergency overnight borrowing against SLR securities; always higher than repo | ✅ Yes |
| SDF (Standing Deposit Facility) | banks park surplus with the RBI without collateral | ❌ No |
| CRR (Cash Reserve Ratio) | % of deposits banks keep as cash with the RBI — earns no interest | — |
| SLR (Statutory Liquidity Ratio) | % of deposits banks keep in liquid assets with themselves (gold, govt securities) | — |
[!tip] The one-line distinction that gets asked Repo Rate = borrowing AGAINST securities, short term. Bank Rate = borrowing WITHOUT securities, longer term. Bank Rate = MSF Rate (they move together, currently equal).
2. Current rates (as of the RBI policy of 5 August 2026 — verify before the exam)
| Rate | Current |
|---|---|
| Repo Rate | 5.25% |
| Bank Rate | 5.50% |
| MSF Rate | 5.50% |
| Reverse Repo Rate | 3.35% |
⚠️ Policy rates change at each bi-monthly MPC meeting — re-check the latest before the exam. The definitions above never change; the numbers do.
3. Money market vs Capital market
| Money Market | Capital Market | |
|---|---|---|
| Maturity | less than 1 year | more than 1 year |
| Regulator | RBI | SEBI |
| Instruments | Treasury Bills, Commercial Paper, Certificate of Deposit, Call Money | Shares, Debentures, Bonds |
| Purpose | short-term liquidity | long-term funds |
- ⭐ Commercial Paper = unsecured, short-term money-market instrument issued by companies (asked in 2024·Q96)
- SEBI was set up in 1988, given statutory powers in 1992
- Primary market = new issues (IPO) · Secondary market = stock exchange trading
- RBI = lender of last resort
4. Finance Bill → Finance Act (2024·Q54)
A Finance Bill becomes the Finance Act when passed by BOTH Houses of Parliament AND assented to by the President. (A Money Bill is introduced only in the Lok Sabha; the Rajya Sabha may only recommend, within 14 days.)
5. Budget 2026-27 — financial-system points
- ₹10,000 crore SME Growth Fund
- STT raised on equity derivatives
- Fiscal deficit target 4.3% of GDP for FY27
- Income-tax Act, 2025 in force from 1 April 2026 (see the Ch 23 addendum)
