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Functions of Financial System

The financial system performs several important functions: 1. It mobilizes savings and channels them into productive investments. 2. It provides liquidity for production through monetary assets that can easily be converted to cash. 3. It offers convenient payment methods for goods and services like checks and credit cards.

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32K views

Functions of Financial System

The financial system performs several important functions: 1. It mobilizes savings and channels them into productive investments. 2. It provides liquidity for production through monetary assets that can easily be converted to cash. 3. It offers convenient payment methods for goods and services like checks and credit cards.

Uploaded by

rahulravi4u
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Functions of Financial System

The financial system of a country performs certain valuable functions for


the economic growth of that country. The main functions of a financial system
may be briefly discussed as below:
1. Saving function: An important function of a financial system is to mobilise
savings and channelize them into productive activities. It is through financial
system the savings are transformed into investments.
2. Liquidity function: The most important function of a financial system is to
provide money and monetary assets for the production of goods and services.
Monetary assets are those assets which can be converted into cash or money
easily without loss of value. All activities in a financial system are related to
liquidity-either provision of liquidity or trading in liquidity.
3. Payment function: The financial system offers a very convenient mode of
payment for goods and services. The cheque system and credit card system are
the easiest methods of payment in the economy. The cost and time of
transactions are considerably reduced.
4. Risk function: The financial markets provide protection against life, health
and income risks. These guarantees are accomplished through the sale of life,
health insurance and property insurance policies.
School of Distance Education
Indian Financial Management Page 7
5. Information function: A financial system makes available price-related
information. This is a valuable help to those who need to take economic and
financial decisions. Financial markets disseminate information for enabling
participants to develop an informed opinion about investment, disinvestment,
reinvestment or holding a particular asset.
6. Transfer function: A financial system provides a mechanism for the transfer
of the resources across geographic boundaries.
7. Reformatory functions: A financial system undertaking the functions of
developing, introducing innovative financial assets/instruments services and
practices and restructuring the existing assts, services etc, to cater the
emerging
needs of borrowers and investors (financial engineering and re engineering).
8. Other functions: It assists in the selection of projects to be financed and
also reviews performance of such projects periodically. It also promotes the
process of capital formation by bringing together the supply of savings and the
demand for investible funds.
Role and Importance of Financial System in Economic Development
1. It links the savers and investors. It helps in mobilizing and allocating the
savings efficiently and effectively. It plays a crucial role in economic
development
through saving-investment process. This savings investment process is called
capital formation.
2. It helps to monitor corporate performance.
3. It provides a mechanism for managing uncertainty and controlling risk.
4. It provides a mechanism for the transfer of resources across geographical
boundaries.
5. It offers portfolio adjustment facilities (provided by financial markets and
financial intermediaries).
6. It helps in lowering the transaction costs and increase returns. This will
motivate people to save more.
7. It promotes the process of capital formation.
8. It helps in promoting the process of financial deepening and broadening.
Financial deepening means increasing financial assets as a percentage of GDP
and financial broadening means building an increasing number and variety of
participants and instruments.
In short, a financial system contributes to the acceleration of economic
development. It contributes to growth through technical progress.
School of Distance Education
Indian Financial Management Page 8
Structure of Indian Financial System
Financial structure refers to shape, components and their order in the
financial system. The Indian financial system can be broadly classified into
formal (organised) financial system and the informal (unorganised) financial
system. The formal financial system comprises of Ministry of Finance, RBI,
SEBI
and other regulatory bodies. The informal financial system consists of
individual
money lenders, groups of persons operating as funds or associations,
partnership
firms consisting of local brokers, pawn brokers, and non-banking financial
intermediaries such as finance, investment and chit fund companies.
The formal financial system comprises financial institutions, financial
markets, financial instruments and financial services. These constituents or
components of Indian financial system may be briefly discussed as below:

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