8/29/2007

Financial System & Financial

Institutions

A brief
Introduction

What is a Financial System?

• It is an orderly mechanism and structure available in an
economy to mobilise the monetary resources or capital
from various surplus sectors of the economy and
allocating the same into various deficient sectors.
• The group of different entities that are engaged in the
task of garnering the monetary resources into a number
of needy avenues in the economy will constitute the
financial system.

What are Financial Institutions?

An institution (public or private) that collects funds (from the public or
other institutions) and invests them in financial assets.

They are organisations which facilitate mobilisation of monetary

resources.

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Evolution of Financial System

• The path of growth of the financial system in any
developing economy can grossly be classified into
three different phases:
• Active State Intervention: It is mainly with a view to build up
institutional infrastructure so that the economy will be in a
position to catch up with the developed countries. This
phase is marked with a fast growth of financial systems
creating a number of pitfalls and aberrations.
• Partial Liberalisation: The complications in the system
becomes a gross problem to handle, so simplification and
rationalisation of the system becomes the main focus.
• Total Liberalisation: Where maximum autonomy is provided
for to the functionaries in the system so that they can
emerge as global players.

Role of Financial Institutions

• The growth and development of an economy is a reflection of
the growth and development of its financial system.
Fin Institutions

SAVINGS INVESTMENT CONSUMPTION

Fin Assets

• With effective mobilisation and productive deployment of funds

the economy can ensure a faster growth, because this efficacy
will reduce transaction cost and increase productivity of capital.
• Thus more efficient a financial system the stronger is the
economy.

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Role of Financial Institutions

•• Role as a Financial
financial intermediary
Intermediary
•• Role as a catalytic agent
•• Role as a creator of money
•• Role as a promoter
•• Role as a counselor

1) Role as a Financial Intermediary

• FIs provide the means and mechanism of transferring command

over resources from those who have an excess of income over
expenditure to those who can make use of the same with a view to
adding to the volume of productive capital.
Intermediates and acts as a link between the two
segments of Investors and Spenders
• They pool the savings of myriads of people with typical
characteristics of safety, liquidity and profitability (return.) –
[Diversification of Risk and expert investment knowledge]

• Besides acting as conduits of aggregation and then disaggregation

of savings it also helps in a balanced allocation of funds among
different industries and different sectors.

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Role as a Catalytic Agent

• Financial Institutions play the role of a catalytic agent to bring
about economic and social changes through dynamism and
innovativeness in their operation.

• Infrastructure development

• Agricultural, Industrial and Entrepreneurship development.

• All round development through induction of special assistance

schemes for weaker and isolated sections of the society

Role as Creator of Money

• Through acceptance of public deposits and
lending money against it for funding
transactions they create further deposits.

Through Entrepreneurship and

Project Financing.