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Jun 8

How does the financial system work in India?

A financial system of any country comprises of end users, financial institutions like banks, markets (national stock exchange / other stock exchanges), bond market etc. These institutions together with the users compile the financial system.

The Indian financial sector

The Indian financial sector is diversified and is undergoing fast expansion. The rapid growth is both in terms of development of existing financial service firms as well new entities coming into the market.

The financial sector consists of commercial banks, non-banking financial companies, pension funds, insurance companies, mutual funds, co-operatives, and other smaller monetary entities.

A new entity like the payment banks is added to the types of institutions functioning in the sector. Though, the monetary sector in India is mainly a banking sphere with commercial banks making more than 64% of the total assets that is held by the Indian financial system.

The financial system is qualified by the presence of incorporated, coordinated and governed financial markets, as well as institutions. These markets and institutions meet both the short term plus long term financial necessities of the household in addition to the corporate sector. Both financial markets and financial institutions operate in close combo with each other.

Structure of Indian financial system

The Indian financial system is arranged into 2 major segments – Formal and Organised Financial System regulated by the ministry of finance, SEBI, RBI and other regulatory bodies and the Un-Organised financial system.

Un-organised financial system comprises of Individual moneylenders other private financial institutions, etc. Apart from this one can also find groups who collect money and lend it to the poor and needy. They collect interest for this service from those who borrow money.  This sector also includes the local brokers, chit fund companies, non-bank financial companies, and investment companies

Working of Indian financial system

Indian Financial System speeds the rate as well as volume of savings via the provision of several fiscal instruments and well-organized mobilization of savings. It helps in raising the national end product of the country by rendering funds to corporate customers to enhance their business. It assists in the economic development and raises the living standard of the people. The sector also promotes the growth of the weaker section through rural development banks as well as co-operative societies.


The Indian monetary system has experienced structural shift over the past decade. It has gained strength, efficiency as well as stability due to the aggregate result of competition, regulatory measures, plus policy environment. Competition, consolidation plus convergence are the most important drivers of the banking sector and this has helped in raising the quality of the working of the financial system on the whole.

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