Indian Financial System - Meaning, Features and Functions

Meaning and definition of financial system:

The financial system is possibly the most important institutional and functional vehicle for economic transformation. Finance is a bridge between the present and the future and whether the mobilization of savings or their efficient, effective and equitable allocation for investment, it the access with which the financial system performs its functions that sets the pace for the achievement of broader national objectives.

According to Christy, the objective of the financial system is to “supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires.”

According to Robinson, the primary function of the system is “to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth.

A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the deficit. It is a composition of various institutions, markets, regulations and laws, practices, money manager analyst, transactions and claims and liabilities.

Features of financial system

The features of a financial system are as follows

1. Financial system provides an ideal linkage between depositors and investors, thus encouraging both savings and investments.

2. Financial system facilitates expansion of financial markets over space and time.

3. Financial system promotes efficient allocation of financial resources for socially desirable and economically productive purposes.

4. Financial system influences both the quality and the pace of economic development.

FUNCTIONS OF FINANCIAL SYSTEM

Good financial system search in the following ways:

1. Promotion of liquidity:  The major function of financial system is the provision of money and monetary assets for the production of goods and services. There should not be any shortage of money for productive ventures. In financial language, the money and monetary assets are referred to as liquidity. The term liquidity refers to cash or money and other assets which can be converted into cash readily without loss of value and time.

2. Link between savers and investors: One of the important functions of financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings effectively and efficiently. By acting as an efficient medium for allocation of resources, it permits continuous up gradation of technologies for promoting growth on a sustained basis.

3. Information available: It makes available price- related information which is a valuable assistance to those who need economic and financial decision.

4. Helps in projects selection: A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. It provides a payment mechanism for the exchange of goods and services, and transfers economic resources through time and across geographic regions and industries.

5. Allocation of risk: One of most important function of the financial system is to achieve optimum allocation of risk bearing. It limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An effective financial system aims at containing risk within acceptable limit and reducing cost of gathering and analyzing information to assist operators in taking decisions carefully.

6. Minimizes situations of Asymmetric information: A financial system minimizes situations where the information is Asymmetric and likely to affect motivations among operators or when one party has the information and the other party does not. It provides financial services such as insurance and pension and offers portfolio adjustments facilities.

7. Reduce cost of transaction and borrowing: A financial system helps in creation of financial structure that lowers the cost of transactions. This has a beneficial influence on the rate of return to the savers. It also reduces the cost of borrowings. Thus, the system generates an impulse among the people to save more.

8. Financial deepening and broadening: A well –functioning financial system helps in promoting the process of financial deepening and broadening. Financial deepening refers to an increase of financial assets as a percentage of the gross domestic product. Financial broadening refers to building an increasing number and a variety of participants and instruments.