1) What is a financial system?
A financial system is a network of:
- institutions,
- markets,
- instruments, that facilitate:
- mobilization of savings,
- allocation of credit/investment,
- payments and settlement,
- risk management.
Economic role: supports growth by channeling funds from savers to investors efficiently.
2) Core components of India’s financial system
2.1 Financial institutions
- RBI (central bank)
- Commercial banks (public, private, foreign)
- Co-operative banks
- Regional Rural Banks (RRBs)
- NBFCs (Non-Banking Financial Companies)
- Development finance institutions (conceptual; role varies over time)
- Insurance companies, mutual funds, pension funds
2.2 Financial markets
- Money market
- Capital market
- Foreign exchange market
- Derivatives market (basic awareness)
2.3 Financial instruments
- deposits, loans
- T-bills, CP, CDs
- bonds, equity shares
- mutual fund units, insurance products
3) RBI: key roles (high-yield)
- Monetary authority (inflation and liquidity management)
- Issuer of currency
- Banker to government
- Bankers’ bank / lender of last resort
- Regulator and supervisor of banks and many NBFCs
- Manager of forex reserves and external stability support
- Payment systems oversight (UPI/RTGS/NEFT ecosystem in broad terms)