formal financial system comes under the purview of the Ministry of Finance
(MOF), Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI)
and other regulatory bodies. Formal financial sector is characterized by the
presence of an organized institutional and regulative system.
Formal financial system
A financial institution is an establishment that is engaged in the business of
dealing with monetary transactions such as deposits, loans and exchange of currency.
They are the intermediaries of financial markets; they act as a middlemen
between savers and borrowers. They facilitate the allocation of funds in an
effective manner. Financial institutions mainly provide 3 transformation
services such as Liability, asset and size transformation, Maturity transformation
and Risk transformation.
are classified into Banking institutions, Non-banking institutions, Mutual
funds and Insurance and Housing Corporation.
Banking institutions include public and private
sector banks that collects deposits from the public in return for interest and
utilize that money for providing loans to customers. They are the creators of
credit in the country. They act as an intermediary between depositors and
borrowers. Banks are highly regulated in the country because of their importance
in controlling the financial stability of the country. Apart from accepting
deposits and lending, they also offer services like wealth management, currency
exchange and safe deposit locker facilities.
On the other hand, non-banking institutions are the
purveyors of credit in the country. They does not have a full banking license
and they are not supervised by any banking regulatory agency. They cannot issue
cheques to the customers. All the non-banking institutions in the country are
regulated by the Reserve Bank as in the case of banking institutions
Mutual fund is a professionally managed investment
fund that pools money from the investors and invests them in securities like shares,
bonds and other money market instruments by a professionally managed fund
manager who is specialized in the work. They generate revenue from the funds
and it is passed back to investors. It is an ideal investment for people who
wants to invest money but does not have much information about investing.
Insurance is an agreement or a contract where the
insurer undertakes to provide guarantee to pay a certain sum of money to the
insurer in the case of any unforeseen events or for any uncertain financial
loss as mentioned in the insurance contract. The insured pays a certain sum of
money known as premium to the insurer.