The financial system of the country is also its backbone and needs to be carefully nurtured to ensure the financial stability of the nation. The financial system in India includes the financial institutions of the country and the financial markets. These components are integrated into the fabric of the nation and the government has been making many efforts to strengthen the financial system and ensure its maximum reach to every person in the country. Discussed hereunder are the meaning and related details of the financial markets and the financial institutions of the country.
What are financial markets and financial institutions?
Financial markets refer to organized platforms for buying and selling securities such as stocks, bonds, derivatives, currencies, and commodities. It is the platform for businesses to raise capital and mobilize funds that results in the ultimate progress of the nation. Some of the major financial markets in India include the Bombay Stock Exchange (BSE), the National Stock Exchange of India (NSE), and the National Commodity and Derivatives Exchange (NCDEX).
Financial institutions in India are multiple entities that provide financial services such as banking, insurance, and investment. These institutions are charged with providing timely and sufficient credit to participants like small businesses or individuals even in the remotest parts of the country to large corporations for building the assets of the nation. Some of the major financial institutions in India include the Central Bank of the country the Reserve Bank of India (RBI), commercial public sector and private sector banks, co-operative banks, insurance companies, and asset management companies.
The financial markets and financial institutions in India are heavily regulated by competent authorities like SEBI and RBI and related legislatures drafted in this regard. These regulations ensure the safeguarding of the interest of the common man at the same time regulated the movement of funds for the optimum progress of the nation as a whole.
Types of financial markets and financial institutions
The financial market and financial institutions are composed of several components or participants. The details of the same are given below.
Types of Financial Markets in India
The different types of financial markets in India and their meaning are mentioned below.
- Equity Markets
The equity markets comprise various securities that are traded on the stock exchanges in India. The National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) are the two major stock exchanges in India. These platforms provide the companies an opportunity to raise capital through public subscription and investors get the opportunity for wealth creation by investing in such companies.
- Debt Markets
The Indian government and corporate issuers can also raise capital through the sale of bonds. The debt market in India is regulated by the Securities and Exchange Board of India (SEBI) and is relatively less volatile as compared to the equity markets. This makes it an optimum investment option for risk-averse investors or investors looking for a stable source of income.
- Derivatives Markets
The secondary market or the derivative market is where securities are traded through forward contracts, futures and options contracts, and currency markets where the value of the derivative is derived from the value of an underlying asset, such as a stock, commodity, or currency. These derivatives are traded on stock exchanges such as NSE and BSE. Derivatives trading can be used as a tool for hedging, speculation, or arbitrage.
- Commodity Markets
The Commodity Market in India refers to the platform where physical commodities, such as agricultural products, metals, and energy, are bought and sold. The National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange (MCX) are the two major commodity exchanges in India.
- Foreign Exchange Market
The foreign exchange market in India is regulated by the Reserve Bank of India (RBI). It refers to the platform where currencies of different countries are traded and the foreign exchange market in India operates 24 hours a day, five days a week. It is considered the largest financial market in the world.
Types of Financial Institutions in India
The different financial institutions in In dia and their meaning are mentioned below.
- Central Bank
The Reserve Bank of India (RBI) is the central bank of India and was established in 1935. It is the central agency that is responsible for formulating and implementing monetary policy in the country, regulating and supervising the banking system, and maintaining stability in the financial system. RBI also acts as a regulator for the financial sector in India, including commercial banks, and non-banking financial companies (NBFCs).
Banks in India are financial institutions that have the function of accepting deposits and providing credit facilities and other financial services to individuals, businesses, and governments. Banks in India can be broadly categorized into two types: public sector banks and private sector banks. All banks in India have to function as per the regulations laid by the Reserve Bank of India (RBI) and are required to comply with all the formulated standards to ensure the stability and soundness of the banking system.
- Insurance Companies
Insurance Companies in India are financial institutions that provide insurance products and services to individuals and businesses. The insurance sector in India is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). Insurance companies in India can be broadly categorized into two types, namely, life insurance companies and non-life insurance companies.
- Investment Companies
Investment companies in India are financial institutions that are in charge of managing investments and providing investment products and services to individuals and institutions. Mutual funds, pension funds, and alternative investment funds are some of the major investment companies in India. Investment companies in India are regulated by the SEBI and the sector has seen rapid growth in recent years.
- Non-Banking Financial Companies (NBFCs)
NBFCs in India are regulated by the Reserve Bank of India (RBI) and are required to comply with a range of regulations and standards to ensure the stability and soundness of the financial system. These institutions provide a range of financial services, including loans, investment products, and insurance, but do not have a banking license. RBI has taken a number of measures to address challenges like liquidity and security issues, including increasing regulatory oversight. RBI has been striving to implement new regulations to improve the governance and risk management practices of NBFCs
Role of financial institutions
Financial institutions in India play a critical role as they are instrumental in facilitating the flow of capital, providing credit access, and offering investment products and services to individuals and institutions.
Some of the key roles of financial institutions in India are as follows.
- Regulating the Financial System
Financial institutions in India are involved in regulating the financial system. They are also charged with supervising and enforcing regulations, drafting and implementing monetary policy, as well as ensuring the stability and soundness of the financial system. It is the responsibility of the regulators of the financial system to ensure that the financial sector operates with optimum transparency, stability, and efficient manner to ultimately support overall economic growth and development.
- Supporting Financial Inclusion
Financial institutions also play an important role in promoting financial inclusion by providing access to financial services and products to individuals and businesses even in the remotest parts of the nation or who have been left out of the traditional banking system of the country. The aim of financial inclusion is to ultimately increase the reach and accessibility of financial services in the country and thereby promoting overall financial literacy and financial stability.
- Mobilizing Savings
Financial institutions play a crucial role by mobilizing the savings from individuals and institutions and engaging them in productive investments. This flow of funds is instrumental in increasing the availability of capital for investment in the economy and accelerating economic growth.
- Providing Credit Access
Providing timely credit and loans to individuals and businesses even in the remotest parts of the country is one of the primary functions of financial institutions. Financial institutions are charged to increase the flow of credit and improve access to finance for those who need it. These functions of the financial institutions are necessary for supporting economic growth and development.
- Providing Investment Products and Services
Financial institutions in India also offer a wide range of investment products and services, including mutual funds, portfolio management services (PMS), and insurance products. These investment products and services help individuals and institutions are required to safeguard the interest of the commission investors and manage their financial resources effectively thereby aiding them in making informed investment decisions.
The stability of the financial institutions and the regulation of the financial markets is significant for improving the ultimate financial literacy of the masses of the country. Financial institutions and financial markets are the backbone of any economic setup of a nation and thus have to work in sync to ensure the financial stability of the economy and the progress of the nation.
The various advantages of financial institutions are providing credit access, banking services, savings, and investment options, professional financial services, increasing financial literacy, etc
Some of the disadvantages of financial institutions are the lack of accessibility in rural and remote areas of the country, security challenges, higher fees/charges, technical issues, the complexity of processes, etc
In terms of delivery structure, financial markets can be classified into cash markets or futures markets.
The key role of the financial market includes allocating capital, risk management, price discovery, facilitating investments, improving liquidity, and promoting economic growth