Table of Contents
Financial system is a structure that is available in economy to mobilize capital from various surplus sectors of economy and allocate and distribute the same to the various needy sectors of the economy. It provides a system by which savings are transformed into investments.
The place where this activity of transformation takes place is known as Financial Market. Various intermediaries like banks, financial institutions, mutual funds etc. are involved in this process of transformation.
Commercial Banks includes all public sector banks, foreign banks, new and old private banks. These banks accept deposit from public for the purpose of lending or investment.
NBFCs are allowed to raise deposit from public and lend through instruments like leasing, hire purchase and bill discounting etc.
NBFCs are licensed by RBI. No NBFC can operate without valid license from RBI.
Primary Dealers mainly deals with government securities. Their primary purpose is to provide market for government securities and strengthen them. They are also called market makers of government securities.
FIs focus on dealing with financial transactions such as investments, deposits and loans. These are development institutions which provide long-term funds for industry and agriculture. FIs raise resources through long-term bonds from financial system and borrowing from international FIs. They are under offsite and onsite surveillance of RBI.
Cooperative banks serve the needs of agriculture and allied activities, rural based industries and to lesser extent trade and industry in urban areas. They are allowed to raise deposit and give advance from and to the public. They provide higher interest on deposits.
Urban cooperative banks are controlled by state government and RBI while other cooperative banks are controlled by NABARD.
An efficient payment and settlement system is the backbone for smooth functioning of financial system. Payment and settlement system is undertaken by RBI. It includes:
RBI maintains accounts and deposits of government. It carries out their cash management through issue of bonds and Treasury bills.
CRR is the amount of cash that scheduled commercial banks are required to maintain with RBI. It is percentage of their Net Demand and Time Liabilities. It enables RBI to control liquidity in the banking system thereby, controlling inflation and bank lending.
SLR is percentage of Net Demand and Time Liabilities of a bank to be held in prescribed securities mainly government securities. These are liquid assets in the form cash, gold and un-encumbered approved government securities.
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