Podcast
Questions and Answers
What characterizes the formal financial sector?
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?
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?
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?
What is a key feature of the informal financial sector?
Which of these markets is NOT part of the financial system?
Which of these markets is NOT part of the financial system?
What is the primary characteristic of the informal financial sector's emergence?
What is the primary characteristic of the informal financial sector's emergence?
Which of the following best describes the money market?
Which of the following best describes the money market?
Which financial sector predominantly serves traditional and rural areas?
Which financial sector predominantly serves traditional and rural areas?
What is one of the primary functions of banks that distinguishes them from non-banking institutions?
What is one of the primary functions of banks that distinguishes them from non-banking institutions?
Which of the following is NOT an ancillary service provided by banks?
Which of the following is NOT an ancillary service provided by banks?
How many public sector banks are there in the Indian banking system?
How many public sector banks are there in the Indian banking system?
Which category does NOT fall under the priority sector lending in India?
Which category does NOT fall under the priority sector lending in India?
What is one role of the RBI among the listed regulatory bodies?
What is one role of the RBI among the listed regulatory bodies?
Which of the following is true about banks as financial intermediaries?
Which of the following is true about banks as financial intermediaries?
Which type of bank has the largest number in India?
Which type of bank has the largest number in India?
What is the main function of financial markets?
What is the main function of financial markets?
What is the primary function of financial institutions in the financial system?
What is the primary function of financial institutions in the financial system?
Which sector does the financial system NOT include?
Which sector does the financial system NOT include?
What do financial markets primarily facilitate?
What do financial markets primarily facilitate?
What is a key characteristic of a financial system?
What is a key characteristic of a financial system?
Which of the following markets are part of the financial markets?
Which of the following markets are part of the financial markets?
What does financial intermediation primarily involve?
What does financial intermediation primarily involve?
How does the financial system aid in capital formation?
How does the financial system aid in capital formation?
What is a key service provided by financial intermediaries?
What is a key service provided by financial intermediaries?
What characterizes spot trades in an OTC market?
What characterizes spot trades in an OTC market?
How do financial markets contribute to business growth?
How do financial markets contribute to business growth?
What does the term 'financial instrument' refer to?
What does the term 'financial instrument' refer to?
What is a distinctive feature of many financial instruments?
What is a distinctive feature of many financial instruments?
What role do financial instruments play in an investor's portfolio?
What role do financial instruments play in an investor's portfolio?
Which of the following is NOT a function of financial markets?
Which of the following is NOT a function of financial markets?
What types of payments can be associated with financial instruments?
What types of payments can be associated with financial instruments?
How does investor confidence impact the economy?
How does investor confidence impact the economy?
What is a characteristic of financial instruments that distinguishes them from each other?
What is a characteristic of financial instruments that distinguishes them from each other?
Which of the following are considered primary or direct securities?
Which of the following are considered primary or direct securities?
What term is used to describe financial instruments that are issued by financial intermediaries to ultimate savers?
What term is used to describe financial instruments that are issued by financial intermediaries to ultimate savers?
What is the primary role of financial instruments in the market?
What is the primary role of financial instruments in the market?
Which of the following describes financial assets?
Which of the following describes financial assets?
What is the process of intermediation?
What is the process of intermediation?
Which of the following is NOT a function of financial services?
Which of the following is NOT a function of financial services?
Which instrument is classified as a debt instrument?
Which instrument is classified as a debt instrument?
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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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