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Financial System Overview and Functions
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Financial System Overview and Functions

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@ImmenseMolybdenum

Questions and Answers

What characterizes the formal financial sector?

  • It consists of unregistered financial entities.
  • It is organized and regulated. (correct)
  • It primarily serves rural economies.
  • It operates without government regulation.

    • What does the term 'financial dualism' refer to?

  • The interaction between national and international markets.
  • The coexistence of formal and informal financial sectors. (correct)
  • The dependence on foreign investments.
  • The presence of multiple regulatory bodies.

    • Which regulatory body oversees the formal financial sector in India?

  • International Monetary Fund
  • World Bank
  • Ministry of Trade
  • Reserve Bank of India (correct)

    • What is a key feature of the informal financial sector?

    <p>It is unorganized and non-institutional.</p> Signup and view all the answers

    Which of these markets is NOT part of the financial system?

    <p>Real Estate Markets</p> Signup and view all the answers

    What is the primary characteristic of the informal financial sector's emergence?

    <p>Financial repression and economic dualism.</p> Signup and view all the answers

    Which of the following best describes the money market?

    <p>It focuses on short-term financial instruments.</p> Signup and view all the answers

    Which financial sector predominantly serves traditional and rural areas?

    <p>Informal financial sector</p> Signup and view all the answers

    What is one of the primary functions of banks that distinguishes them from non-banking institutions?

    <p>Creating credit</p> Signup and view all the answers

    Which of the following is NOT an ancillary service provided by banks?

    <p>Insurance underwriting</p> Signup and view all the answers

    How many public sector banks are there in the Indian banking system?

    <p>12</p> Signup and view all the answers

    Which category does NOT fall under the priority sector lending in India?

    <p>Luxury item purchases</p> Signup and view all the answers

    What is one role of the RBI among the listed regulatory bodies?

    <p>To regulate banking practices</p> Signup and view all the answers

    Which of the following is true about banks as financial intermediaries?

    <p>They leverage uncollateralised deposits for credit creation.</p> Signup and view all the answers

    Which type of bank has the largest number in India?

    <p>Rural cooperative banks</p> Signup and view all the answers

    What is the main function of financial markets?

    <p>To enable participants to deal in financial claims</p> Signup and view all the answers

    What is the primary function of financial institutions in the financial system?

    <p>To facilitate transactions between savers and borrowers</p> Signup and view all the answers

    Which sector does the financial system NOT include?

    <p>Agricultural sector</p> Signup and view all the answers

    What do financial markets primarily facilitate?

    <p>The transfer of money and allocation of funds</p> Signup and view all the answers

    What is a key characteristic of a financial system?

    <p>It includes complex and interconnected components.</p> Signup and view all the answers

    Which of the following markets are part of the financial markets?

    <p>Debt and equity markets</p> Signup and view all the answers

    What does financial intermediation primarily involve?

    <p>Mobilizing savings and investing in productive uses</p> Signup and view all the answers

    How does the financial system aid in capital formation?

    <p>By meeting capital needs of various economic units</p> Signup and view all the answers

    What is a key service provided by financial intermediaries?

    <p>Matching savers with borrowers</p> Signup and view all the answers

    What characterizes spot trades in an OTC market?

    <p>They are negotiated for immediate delivery.</p> Signup and view all the answers

    How do financial markets contribute to business growth?

    <p>By creating liquidity for investor confidence.</p> Signup and view all the answers

    What does the term 'financial instrument' refer to?

    <p>A claim for payment at a future date.</p> Signup and view all the answers

    What is a distinctive feature of many financial instruments?

    <p>They can be traded in organized markets.</p> Signup and view all the answers

    What role do financial instruments play in an investor's portfolio?

    <p>They offer various risk and return options.</p> Signup and view all the answers

    Which of the following is NOT a function of financial markets?

    <p>Guaranteeing profits on investments.</p> Signup and view all the answers

    What types of payments can be associated with financial instruments?

    <p>Payments may include principal and/or periodic interest or dividends.</p> Signup and view all the answers

    How does investor confidence impact the economy?

    <p>It stabilizes the economy.</p> Signup and view all the answers

    What is a characteristic of financial instruments that distinguishes them from each other?

    <p>Marketability</p> Signup and view all the answers

    Which of the following are considered primary or direct securities?

    <p>Equity shares</p> Signup and view all the answers

    What term is used to describe financial instruments that are issued by financial intermediaries to ultimate savers?

    <p>Indirect securities</p> Signup and view all the answers

    What is the primary role of financial instruments in the market?

    <p>To facilitate borrowing and lending</p> Signup and view all the answers

    Which of the following describes financial assets?

    <p>Assets from contractual agreements on future cash flows</p> Signup and view all the answers

    What is the process of intermediation?

    <p>Matching lenders with borrowers through an intermediary</p> Signup and view all the answers

    Which of the following is NOT a function of financial services?

    <p>Creating market monopolies</p> Signup and view all the answers

    Which instrument is classified as a debt instrument?

    <p>Government bonds</p> Signup and view all the answers

    Study Notes

    Financial System Overview

    • A financial system consists of interconnected institutions, agents, practices, markets, transactions, claims, and liabilities that facilitate money transfer between savers and borrowers.
    • It enables capital formation and meets the short- and long-term capital needs of households, corporations, governments, and foreigners.

    Functions of Financial Markets

    • Financial markets are categorized into primary and secondary markets, money markets, and capital markets.
    • Types of financial markets include debt markets, equity markets, foreign exchange markets, derivatives (futures and options), and commodity markets.
    • Functions include enhancing liquidity, reducing risk, and stabilizing the economy through investor confidence.

    Formal vs. Informal Financial Sectors

    • Formal financial sector: Organized, regulated institutions catering to modern economic needs (e.g., banks).
    • Informal financial sector: Unorganized and non-regulated systems relevant to traditional and rural economies.
    • Financial dualism describes the coexistence of both sectors, particularly in developing countries.

    Indian Financial System

    • Split into organized (formal) and unorganized (informal) sectors regulated by entities like the Ministry of Finance and the Reserve Bank of India (RBI).
    • The formal banking structure includes public sector banks, private sector banks, foreign banks, regional rural banks, urban cooperative banks, and rural cooperative banks.

    Role of Banks in Credit Creation

    • Banks serve as specialized financial intermediaries, accepting deposits and creating credit through lending practices.
    • Their ancillary functions include fund transfers, foreign exchange, safe deposit services, and more.

    Regulatory Bodies in India

    • Key regulatory bodies include:
      • RBI (Reserve Bank of India)
      • SEBI (Securities and Exchange Board of India)
      • IRDA (Insurance Regulatory and Development Authority)
      • PFRDA (Pension Fund Regulatory and Development Authority)
      • FMC (Forward Markets Commission)

    Financial Markets Dynamics

    • Facilitate liquidity for business expansion and money-raising for entrepreneurs.
    • Offer transparent information to investors, which reduces risk and fosters confidence.

    Financial Instruments

    • Represent claims against individuals or institutions for future payments, either as lump sums or through periodic interest/dividend payments.
    • Common examples include equity shares, bonds, debentures, bank deposits, and various securities.

    Classification of Financial Assets and Securities

    • Financial assets arise from contractual agreements related to future cash flows or equity ownership (e.g., bonds).
    • Securities can be primary (directly issued by borrowers) or secondary (issued by intermediaries to savers).

    Importance of Financial Services

    • Enable activities such as borrowing, lending, buying/selling securities, managing payments, and risk management.

    Concept of Intermediation

    • Intermediation involves matching lenders with borrowers through agents like banks, making them essential for corporate external funding.

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    Description

    Explore the intricate components of financial systems, including their institutions and the role they play in capital formation. This quiz also delves into the functions of various financial markets and distinguishes between formal and informal financial sectors.

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