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A financial system plays a vital role in the economic development of a country. It acts as an intermediator between individuals or firms whose expenditure is less than the income and individuals or firms whose expenditure is more than their incomes. It successfully mobilises and allocates savings and converts it into investment for production of goods or services by various industries, and increases efficiency of a market. Indian financial institution can be broadly classified into the formal (organized) financial system and the informal (unorganized) financial system. The formal financial system comes under the purview of the Ministry of Finance (MoF), the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and other regulatory bodies. The informal financial system consists of individual independent moneylenders, local brokers, pawnbrokers, and non-bank financial intermediaries. The two main segments of formal financial system are, financial markets and financial institutions. Financial market mainly consists of debt market or bond market and stock markets. where a certificate of indebtedness that specifies the obligations of the borrower is provided to the holder of the bond and an interest rate is being paid of the loan amount, and the stock market that allows a claim to partial ownership in a firm to the creditors, therefore it also allows a claim on profit and assets of a firm. The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance.

 

Financial institutions in India can be classified as banking and non-banking financial institutions. Banking institutions are the creator and purveyors of credit, while non-banking institutions such as the developmental financial institutions (DFIs), and non-banking financial companies (NBFCs) as well as housing finance companies (HFCs) are major institutional purveyors of credit.

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