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Financial Institutions and Services

Notes
no-frills accounts to their customers with zero or minimum balance and also relax criteria
for identification and account opening, the goal of financial inclusion may not be achieved.
Also, there is nothing in the rules-based system that disallows innovation. If that were the
case, Indian banks wouldn't have been allowed to offer several products that they now
offer. The pace of innovation would be slow but if it ensures financial stability for the
system, the trade-off would be well worth it.

Question
Discuss the importance of rules and regulation in financial system.

Source: http://www.thehindubusinessline.in
1.3 Summary

The financial system is the system that allows the transfer of money between savers and
borrowers.

It is a set of complex and closely interconnected financial institutions, markets, instruments,
services, practices, and transactions.
India has a financial system that is regulated by independent regulators in the sectors of
banking, insurance, capital markets, competition and various services sectors.
In a number of sectors Government plays the role of regulator.
RBI is regulator for financial and banking system, formulates monetary policy and
prescribes exchange control norms.

The commercial banking sector comprises of public sector banks, private banks and foreign
banks.
The public sector banks comprise the 'State Bank of India' and its seven associate banks
and nineteen other banks owned by the government and account for almost three fourth
of the banking sector.

India has a two-tier structure of financial institutions with thirteen all India financial
institutions and forty-six institutions at the state level.
All India financial institutions comprise term-lending institutions, specialized institutions
and investment institutions, including in insurance.
State level institutions comprise of State Financial Institutions and State Industrial
Development Corporations providing project finance, equipment leasing, corporate loans,
short-term loans and bill discounting facilities to corporate.
Non-banking Financial Institutions provide loans and hire-purchase finance, mostly for
retail assets and are regulated by RBI.
RBI also regulates foreign exchange under the Foreign Exchange Management Act (FEMA).
SEBI established under the Securities and Exchange Board of India Act, 1992 is the regulatory
authority for capital markets in India.

Insurance sector in India has been traditionally dominated by state owned Life Insurance
Corporation and General Insurance Corporation and its four subsidiaries.
Insurance Development and Regulatory Authority (IRDA) is the regulatory authority in
the insurance sector under the Insurance Development and Regulatory Authority Act,
1999.

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