Introduction to the financial system of India

In the development of economy of the country financial sector of a country plays a determining factor. Sound financial system induces the level of savings and investment, thus work as a stimulant for the variables responsible in the development process.

Weak financial system hinders the tempo of development process.

Thus, rapid economic development requires a sound financial system with adequate availability of finance and a strong system, of associated financial and investment institutions.

Let us understand the structure of financial system in India.

Structure of India’s Financial System

India’s financial system is broadly categorized in 4 types of banks

1)      Scheduled Banks

2)      Cooperatives

3)      Financial institution

4)      NBFC’s

The structure of banking in India looks like this.

Let us understand about each type of banks in detail.

Scheduled Bank: Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

The banks included in this schedule list should fulfill two conditions.

1. The paid capital and collected funds of bank should not be less than Rs. 5 lakh
2.Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities.

1. Such bank becomes eligible for debts/loans on bank rate from the RBI
2. Such bank automatically acquires the membership of clearing house.

Scheduled bank is further classified into the following type of banks.

1. Public sector
2. Private Sector
3. Foreign
4. Regional Rural Banks
5. Urban Cooperative Banks
6. State Cooperative Banks

Cooperative banks: The banks are so called because they have been organized under the provision of the cooperative ‘society’s’ law of the states. Under the law, societies may be organized for non credit purposes.

Cooperative bank is further classified into the following type of banks.

1. State Agriculture and Rural Development Banks
2. Primary Agriculture and Rural Development Banks

Financial Institutions: The financial institution plays a vital role in financial markets. They are also known as financial instruments. The financial institutions assist in allocation of funds by distributing to those who have surplus to those who have deficit.

It also ensures whether there is a proper circulation of money or not.

Financial institution is categorized under the following heads.

1. All India Development Banks – SIDBI, IDBI, IIBI, IFCI, IDFC
2. Refinance Institutions – NABARD, NHB
3. Specialized Financial Institutions – EXIM Bank. TFCI
4. Insurance companies
5. Mutual Funds

NBFCs: NBFC’s os the acronym of a non-banking financial company. It is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).