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study material on finance 22

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CHAPTER- 1
INTRODUCTION
Introduction to Financial system:
Financial system is that part of economy, which includes all the financial institutions
and markets involved in Moving savings from savers to borrowers; and Transferring,
sharing & insuring risks. A nation consists of three economic units basically-Government,
Industry and Household
These units may perform various activities due to which they may be facing surplus or
deficit budgetary situations.
Industry: Industry sector may be able to generate funds from their activities and use them for
various investment decisions like expansion, diversification, modernization, replacement etc.
Government: Government needs fund for financing public expenditure involved is quite
high, it generally is in deficit budgetary situation.
Individuals: Individual/household sector requires funds for meeting basic necessities as well
as for expenditure on luxury items. They however may have been surplus funds in the form
of saving.
Importance of financial system:
Financial system acts as such a channel, which allows funds to move from people,
who lack productive investment opportunities (i.e. savers) to those have such opportunities.
By doing so the financial system contributes to higher production and efficiency in the
economy. It also improves the well-being of consumers by allowing them to time their
purchases better.
Financial institutions and financial markets are the two Components of financial
system. Both of these further consists of the organized and unorganized sector

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Financial institutions:
1. Regulatory and promotional institutions-
The two major regulatory and promotional institutions in India are-
Reserve Bank of India (RBI) and
Securities Exchange Board of India (SEBI)
Both RBI &SEBI administer, legislate, supervise, mentor, control and discipline the
entire financial system. The reigns of financial institutions lie in the hands of RBI, while the
financial markets are monitored by SEBI. Both of these have several policies, procedure and
guidelines, which are changed from time to time so as to set the financial system in the right
direction in, order it to contribute towards healthy functioning of the economy.
2. Banking institutions:
Banking institutions are the depositors and lenders of money and have been categorized
on the basis of the function being performed by them. The basic categories are
Commercial banks - Their function is to act as depositors of public savings and function
with profit motive. They accept deposits and lend them to those in need for a charge called
interest which is their profit.
Cooperative banks- Cooperative banks are a part of cooperative institutions which are based
principles of cooperation and mutual help. They accept deposits and lend short-term and long
term credit at reasonable rate of interest.
Developmental banks they are set-up for the purpose of promoting certain sectors of the
economy and cater to those only for e.g. NABARD (National Bank for Agriculture & Rural
Development), set-up for providing agriculture credit and development of the rural sector of
the economy.
Non banking finance companies-These are privately owned financial intermediaries,
which are engaged in accepting and disbursing funds. They are categorized into various types
depending on the fund based activities performed by them. The most common of them are

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CHAPTER- 1 INTRODUCTION Introduction to Financial system: Financial system is that part of economy, which includes all the financial institutions and markets involved in –Moving savings from savers to borrowers; and Transferring, sharing & insuring risks. A nation consists of three economic units basically-Government, Industry and Household These units may perform various activities due to which they may be facing surplus or deficit budgetary situations. Industry: Industry sector may be able to generate funds from their activities and use them for various investment decisions like expansion, diversification, modernization, replacement etc. Government: Government needs fund for financing public expenditure involved is quite high, it generally is in deficit budgetary situation. Individuals: Individual/household sector requires funds for meeting basic necessities as well as for expenditure on luxury items. They however may have been surplus funds in the form of saving. Importance of financial system: Financial system acts as such a channel, which allows funds to move from people, who lack productive investment opportunities (i.e. savers) to those have such opportunities. By doing so the financial system contributes to higher production and efficiency in the economy. It also improves the well-being of consumers by allowing them to time their purchases better. Financial institutions and financial markets are the two Components of financial system. Both of these furth ...
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