INDIAN FINANCIAL SYSTEM

What is finance?

Basically, it is the concept of money or flow of money. specifically, how an individual, company or government acquires the required money from the source. and how they spend and invest to get good return or profit. here source is savings, borrowings, etc.

" The time value of money is one of the most fundamental theories in finance. It states that, money that is available at the present time is worth more than the same amount in the future, due to its potential earning capacity."the concept of interest on money is derived from this theory.

it is a broader term. we cannot define in a single line. but we can say, it is a study of "money management. "

Definition of finance:

There is no specific definition for the word "finance". but some professors and book authors has defined the finance.

they are,

In the words of John. J. Hapton(professor and books author),

“Finance can be defined as the management of the flow of money through an organization, whether it be a corporation, school, bank, or government agency. Finance concerns itself with the actual flow of money, as well as any claims against money"

In the words of M.Y khan P.K Jain (professor and books author)

"Finance may be defined as the art and science of managing money".

Financial system:

In simple terms, the flow of funds from supplier of funds(surplus) to seekers of funds(deficit).

According to Van Horne,

"financial system allocates savings efficiently in an economy to ultimate users, either for investment in real assets or for consumption"

According to christy

"supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires"

According to Robinson,

the primary function of a financial system is • “to provide a link between savings and investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth”

According to Prasanna Chandra,

“financial system consists of a variety of institutions, markets, and instruments related in a systematic manner and provide the principal means by which savings are transformed into
investments”.

Functions of Financial System

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 the liquidity-either provision of liquidity or trading in liquidity.

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.

Saving function

An important function of a financial system is to mobilize savings and channelize them into productive activities. It is through the financial system the savings are transformed into investments.

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.

Transfer function

A financial system provides a mechanism for the transfer of resources across geographic boundaries.

Reformatory functions

A financial system undertaking the functions of developing, introducing innovative financial assets/instruments services and practices and restructuring the existing assets, services, etc, to cater to the emerging needs of borrowers and investors.

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.