Page 13 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes 3. The supply of funds depends on aggregate savings and credit creation by the banking
system, while the need for funds depends upon demand for investment, consumer durables,
housing and so on.
4. The functions of a financial system are to establish a bridge between savers and investors
and thereby encourage savings and investment, provide finance in anticipation of savings,
enlarge markets over space and time and allocate financial resources efficiently for socially
desirable and productive purposes. The ultimate goal of the financial system is to accelerate
the rate of economic development.
5. Deficient financial markets are characterized by the absence of information-based game,
by correct evaluation of assets, by maximization of convenience and minimization of
transaction costs and maximization of marginal efficiency of capital.
6. In reality, the contribution of financial system to growth is highly constrained because it
does not work efficiently and capital is not the most important barrier to growth. The role
of finance in development is believed to be secondary by many experts.

7. A framework to evaluate the working of any financial sector must include economic,
commercial as well as social and ethical criteria.
8. Financial innovations refer to wide ranging changes in the financial system. The
introduction of new financial institutions, markets, instruments, services, technology,
organization and so on.

9. Financial engineering connotes skillful development and use of new financial technology
creates solutions and tools to cope with financial changes. It involves construction,
designing, re-construction of innovative financial instruments, institutions and processes
to reduce risk and to maximize profits quickly.
10. Financial revolution means that the magnitude, speed and spread of changes in the financial
sector are simply phenomenal.
11. The markets that attract funds in large volume and from all types of investors are known
as broad financial markets.
12. The markets which provide opportunities for sufficient orders at fine rates below and
above the market price are called deep financial markets. The underdeveloped markets
due to government regulations and controls are termed as swallow financial markets.
13. Financial repression exists when the regularity polices of the government distort interest
rates, discourage savings, reduce investment and misallocate resources.
1.4 Nature and Role of Financial Instruments

Financial systems deal in financial services and claims and are many and varied in character.
This is so because of the diversity of motives behind borrowing and lending. The general
characteristics of these claims are given below:

Financial Assets

An asset, broadly speaking, is any possession that has value in an exchange. An asset may be
tangible or intangible. A tangible asset is one whose value depends on particular physical
properties, such as buildings, land, machinery, etc. An intangible asset, by contrast, represents
legal claims to some future benefit. The intangible value does not bear relation to the form,
physical or otherwise, in which these claims are recorded. Financial assets, also known as

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