Questions and Answers
What is the primary role of a financial system in economic development?
Which of the following best describes the financial system?
How does the financial system contribute to economic growth?
What is indicated by the soundness of a financial system?
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Which of the following factors is NOT a component of the financial system?
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What distinguishes the formal financial system from the informal financial system?
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Which component is NOT part of the formal financial system?
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What is the primary function of financial institutions?
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Why is the formal financial system considered preferable?
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Which of the following is a characteristic of the informal financial system?
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Study Notes
Formal Financial System
- Governed by the Ministry of Finance (MOF), Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), and other regulatory bodies.
- Comprises four subsystems:
- Financial Institutions
- Financial Markets
- Financial Instruments
- Financial Services
- Preferred for its systematic, transparent structure and various benefits over informal systems.
Informal Financial System
- Consists of individual money lenders, local associations, partnership firms, pawn brokers, and non-banking financial intermediaries.
- Operates with informal rules, lacking regulatory oversight.
- Less systematic than formal financial systems, posing potential risks.
Structure of Indian Financial System
- Financial structure includes the arrangement and components within the financial system.
- Four main components:
- Financial Institutions
- Financial Markets
- Financial Instruments
- Financial Services
Financial Institutions
- Serve as intermediaries between savers and investors, facilitating credit allocation.
- Primarily provide financial services, notably financial intermediation.
Importance of Financial System
- Essential for economic development, ensuring funds flow from savers to investors.
- Enhances productivity, bolstering economic growth and improving living standards.
- Acts as a critical vehicle for economic transformation, linking present financial resources with future investments.
Definition and Functionality of Financial System
- Comprises interrelated activities and services aimed at achieving economic goals.
- Includes various markets, institutions, instruments, and services influencing savings and capital growth.
Key Functions of Financial System
- Provision of Liquidity: Enables conversion of assets into cash without loss, thus meeting obligations effectively.
- Mobilization of Savings: Collects savings from individuals and groups into financial assets, essential for economic activity.
- Transformation of Savings to Investments: Channels small savings into larger investments by acting as an intermediary.
- Maturity Transformation: Matches short-term savings from depositors with long-term lending needs, supporting various financial terms.
- Risk Transformation: Financial institutions absorb risks for small savers, transforming conservative savings into investment opportunities.
- Payment Function: Provides convenient payment methods through systems like cheques and credit cards, facilitating transactions.
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Description
This quiz covers the key concepts of the Indian financial system, including formal and informal systems as well as the structure and components of financial institutions, markets, instruments, and services. Understand the regulatory framework and the roles of governing bodies like the MOF, RBI, and SEBI.
