THE STRUCTURE OF THE INDIAN FINANCIAL SYSTEM

THE STRUCTURE OF THE INDIAN FINANCIAL SYSTEM 

In India, financial markets have been classified into following types: 

(a) Debt and Equity Markets which can be: Primary and Secondary Markets 

(b) Money and Capital Market 

The structure of Indian financial system can be judged by looking at the institutions that comprise this sector and financial markets in which these institutions interact with each other. Banking sector is most important segment of financial sector. It comprises of RBI at the top, commercial banks, cooperative banks, and these banks can be public sector banks, private sector banks or foreign banks. Commercial banks include schedules as well as non-scheduled banks and Regional Rural Banks. Other financial institutions include insurance sector, mutual funds and development banks like IDBI, ICICI, and SIDBI etc. 

There are three types of markets in which financial sector interact. These are money market, capital market and credit market. Money market consists of call money, certificates of deposits, commercial papers and commercial bills. Capital market includes government securities market and the market for corporate stocks and debentures. The credit market consists of short-term loans by commercial banks and long-term loans by term lending institutions. It is shown by the figure given below: 

In last few decades, with the growth of banking and non-banking sector, financial sector has grown. As per CSO records, share of banking services in total value added in GDP has increased from 6.3% in 1980s to 11.2% in 1990s and to 12% in 2000-01. According to Sen and Vaidhya, the segment of financial and business services constitutes 20% of total value added. It includes commercial banks, non-commercial financial institutions, post office saving accounts, life and non-life insurance activities and other economic activities like ownership of dwellings, real estate services and business services. It has increased from 24.7% in 1980-86 to 32% in 2004-05. It grew at an average of 11.8% in 1990s and 15.8% in 1999-00 which is much above service sector growth rate of 7-8%. Insurance sector grew of 6.6% which is lower than average growth rate. 

Reasons behind growth of financial sector in India: 

(a) Growing monetization and financial intermediation in the economy. 

(b) Policy of liberalization, privatization and globalization (LPG) adopted in 1991. 

(c) Increased portfolio investment and FDI. 

(d) Sector has attracted 8% of total cumulative foreign investment and 52% was directed at banks.