FUNCTIONS OF THE FINANCIAL SECTOR

FUNCTIONS OF THE FINANCIAL SECTOR

Scope and Coverage of Financial Services 

There are five key services which are given by financial sector. 

1. Saving facilities; 

2. Allocation of credit and monitoring of borrowers; 

3. Making Payments, 

4. Mitigation of risk, and 

5. Liquidity services. 

    We can make use of “ratio of broad money to GDP” to assess the effectiveness of saving mobilization. Other ratios that we can make use of to assess saving facilities in our country are “ratio of bank deposits to GDP”; “% of population with bank accounts”; “total number of bank branches”; “Population covered per bank branch” and “rural-urban divide of bank branches”. It will indicate access to saving facilities. Thereafter, we need to assess different types of saving instruments that are available. In India, bank deposits and post office deposits are most common form of savings. Therefore, we need to bring financial diversity in the system. Insurance, pension, financial instruments like bonds, can be gainful in increasing financial diversity. The ratio of private sector bank credit to GDP is an indicator of availability of credit and banking depth. We also consider ratio of loans to total deposits and issuance of bonds and money market instruments to judge banking depth. We also consider the share of credit is going to which sector. 

    A basic function of financial systems is to provide a system of fast transfer of funds. It introduces newer means of making payments like cheques, debit cards, credit cards, e-transfers etc. the proportion of payments using different modes of payments shows the development status of payment system. Cash based economies lie on the bottom of the hierarchy. There is risk mitigating function offered by financial system. It includes services like insurance and derivative markets. Ratio of gross premium to GDP indicates the level of development of insurance sector. A well developed insurance sector will have a wide range of products. In derivative markets swaps, option, futures, forward markets will be available where liquidity and transactions costs will be important in risk mitigation functions. Liquid assets allow people to hold their savings in an income earning form. Assess of financial services is defined as the number of different types of clients served. The volume of services provided is another useful measure. The volume of services provided and its composition in terms of clientele is used as a useful indicator of supply side of assess. We also need to consider demand side of assess in terms of credit offered. Finally, we need to consider the costs of financial services. It includes, for example, fees, minimum balances for deposits, cost and time of payment services. etc. in addition, indicators of the financial infrastructure, information and governance arrangement systems, can provide useful insight into costs and efficiency of financial transactions.