Structure of the Indian Financial System

A financial system links people who have surplus money with people who need it. It does three jobs: it channels household and business savings into productive investment, it provides a payment mechanism so money can move, and it helps price and spread risk.

It does this through institutions (banks, insurers, mutual funds), markets (where instruments are bought and sold), instruments (deposits, bonds, shares, bills), and regulators (who set the rules and supervise). The rest of this topic maps those four parts for India.

India divides financial regulation by activity:

• RBI (Reserve Bank of India): the central bank. Regulates banks and most non-banking financial companies, runs monetary policy, manages the currency, and oversees payment and settlement systems.
• SEBI (Securities and Exchange Board of India): the securities market - stock exchanges, listed companies, brokers, mutual funds.
• IRDAI (Insurance Regulatory and Development Authority of India): insurance companies and intermediaries.
• PFRDA (Pension Fund Regulatory and Development Authority): the National Pension System and pension funds.

Coordination across regulators runs through the Financial Stability and Development Council (FSDC), chaired by the Union Finance Minister.

Both are markets for funds; the split is by maturity.

• Money market: short-term funds, up to one year. Instruments include treasury bills, commercial paper, certificates of deposit, and call and notice money between banks. The RBI is the key regulator; it is where monetary policy is transmitted first.
• Capital market: medium and long-term funds, over one year. It has a primary market (new issues of shares and bonds) and a secondary market (trading of existing securities on stock exchanges). SEBI regulates it.

Government securities of longer tenor trade in the G-sec market, regulated by the RBI.

Financial intermediaries stand between savers and users of funds.

• Banks: take deposits repayable on demand and lend. Only banks can offer chequable demand deposits; NBFCs, unlike banks, are not part of the payment and settlement system.
• Non-Banking Financial Companies (NBFCs): lend and invest but cannot take demand deposits; RBI-regulated.
• Mutual funds: pool investor money into portfolios of securities; SEBI-regulated.
• Insurance companies: pool premiums to pay claims; IRDAI-regulated.
• Pension funds: invest long-term retirement savings; PFRDA-regulated.
• All-India Financial Institutions: NABARD, SIDBI, EXIM Bank and NHB provide refinance and long-term finance to specific sectors; NaBFID, for infrastructure, is the fifth AIFI the RBI regulates.

The organised (formal) sector is regulated: scheduled banks, cooperative banks, NBFCs, insurers, and the recognised markets. Its terms are documented and its conduct is supervised.

The unorganised (informal) sector - moneylenders, indigenous bankers, chit funds outside regulation, unregistered self-help arrangements - is not supervised by the financial regulators. A long-running policy aim, financial inclusion, is to move households from the informal to the formal sector so they get fair pricing and legal protection.

• A financial system channels savings to investment, moves payments, and spreads risk, through institutions, markets, instruments and regulators.
• Regulators by activity: RBI (banks, NBFCs, payments, monetary policy), SEBI (securities market), IRDAI (insurance), PFRDA (pensions). FSDC coordinates, chaired by the Finance Minister.
• Money market: short-term funds up to a year (T-bills, CP, CDs, call money). Capital market: over a year, primary and secondary.
• Intermediaries: banks (demand deposits, direct settlement access), NBFCs (no demand deposits), mutual funds, insurers, pension funds, and the AIFIs NABARD, SIDBI, EXIM Bank, NHB and NaBFID.
• Organised sector is regulated; the informal sector is not, and moving households into the formal sector is the goal of financial inclusion.

Answer in one line each.

1. Who regulates the banking system in India?
2. Who regulates the stock market and mutual funds?
3. Who regulates the insurance sector?
4. Who regulates pension funds?
5. The financial system channels funds from whom to whom?
6. Banks, NBFCs and insurers are examples of what part of the system?
7. Shares, bonds and deposits are examples of what?
8. A market for funds borrowed for less than one year is called what?