Last updated on June 30th, 2025 at 09:58 am
When we use the blanket term, our economy, we often overlook the financial system that runs the economy. Every financial movement – be it salary being credited or personal investments or even how funds in financial institutions are managed, the underlying financial systems run the entire game. Financial systems focuses on tracking how money moves within an economy and how it can be stabilised to contribute to the economy.
If finance is the way you want to move forward in your career, then you have to understand how financial systems move. That’s why you should take a Banking and Finance course. It gives you both the theory and the real-world insights you need to get ahead.
In this blog, we’ll break down the parts of the financial system and see how the structure of the Indian financial system supports the country’s growth plans.
What Is a Financial System?
A financial system is a set of rules and a proper network allowing the flow of money between people, businesses, and governments. The system shows the right way to interact with \financial institutions (banks and NBFCs) and how financial instruments like loans and securities can be distributed. The financial system also instructs how financial markets (stock and bond markets) work, and what is the the role of regulatory bodies as they regulate all the above.
Overall, it helps in fair capital formation, managing risk and focuses on overall economic growth.
Why Financial Systems Matter
A healthy financial system provides a stable backdrop for economic activity. It ensures that:
- Savers can invest funds securely.
- Borrowers get access to credit efficiently.
- Risks, which are common when it comes to finances, can be assessed and managed.
- Capital is properly managed and allocated to productive ventures.
In a country like India, the financial systems also helps in going for broader developmental goals such as financial inclusion, digital banking, and supporting micro, small, and medium enterprises (MSMEs).
Structure of the Indian Financial System
The structure of the Indian financial system has several layers and checks – and most importantly, all these layers are interconnected.
Broadly, it includes:
| Tier | Key Institutions | Role |
| Regulatory Bodies | RBI, SEBI, IRDAI, PFRDA | Supervision, policy-making, regulation |
| Financial Institutions | Commercial banks, cooperative banks, NBFCs | Credit and savings facilitation |
| Financial Markets | Capital markets, money markets, forex markets | Trading of assets, price discovery |
| Financial Instruments | Equity, debt, derivatives, insurance, pensions | Tools for investment and risk transfer |
| Financial Services | Asset management, advisory, payments, fintech | Supporting financial intermediation |
Key Components of Financial System
Understanding the components of the financial system helps decode how financial intermediation takes place. These are:
- Financial institutions: Financial institutions refers to spaces where money is moved either by putting them on savings or putting them out as an investment. They also provide credit in the form of loans. Examples include banks, NBFCs, mutual funds, and insurance companies.
- Financial markets: Organised marketplaces where securities are traded are considered financial markets. NSE and BSE are examples of it.
- Financial instruments: These are the tools used for investing and borrowing, like simple loans or other credit systems.
- Financial services: Financial services include advisory boards and monitoring of financial status and movement within the system – it includes credit rating to investment advisory, payment processing to wealth management.
- Regulatory framework: Bodies like RBI, SEBI, and IRDAI govern how the system operates so that there is fairness in every financial movement.
Each of these plays a specific role, but together they ensure the financial system operates with efficiency, integrity, and resilience.
Core Functions of Financial System
Let’s take a closer look at the functions of the financial system and how they help economic activity:
| Function | Description |
| Mobilisation of Savings | Encouraging individuals and institutions to save and invest systematically. |
| Facilitating Credit Allocation | Directing funds to productive sectors through lending and investments. |
| Risk Management | Offering instruments like insurance and hedging tools to manage financial risk. |
| Liquidity Provision | Ensuring assets can be bought or sold quickly without drastic price changes. |
| Information and Price Discovery | Helping investors make informed decisions by revealing price signals. |
| Ensuring Financial Stability | Regulatory oversight maintains systemic balance and public confidence. |
Financial Systems in India
As India grows, the financial system is becoming more complex and needs further layers to control it. Nowadays, from digital payments and UPI to ESG investing and fintech innovation – each of these new developments are becoming a part of the financial system. The financial systems in India act as an intersection of tradition and innovative technology.
For example:
- UPI has made real-time digital payments mainstream.
- SEBI and RBI have increased their focus on investor protection.
- Credit flow to MSMEs and startups has been prioritised for economic revival.
Conclusion
Let’s say you are managing a portfolio or want to analyse a risk of a specific investment – you need to know how the financial system interacts with the market or the portfolio you are focusing on.
In the Indian context, the structure of the Indian financial system will make sure that there is better financial inclusion, more oversight into financial movement using regulatory bodies, and fair market for all financial institutions.
As you might already know, finance is a very important role in any business and government as well. Imarticus Learning offers a Banking and Finance course where you learn about the financial system, and know how to thrive in it.
FAQs
- What is a financial system?
A financial system is a rules and regulations as per which the network of financial institutions, markets, instruments, and regulatory frameworks work. The system helped in the flow of funds within an economy. - Why is understanding financial systems in India important?
India’s financial ecosystem is evolving rapidly – especially now with changing financial habits of people and the surge of fintech, UPI or digital banking – all of which are resulting in constant regulatory changes. Professionals must keep pace to stay relevant. - What are the main components of the financial system?
Financial institutions, markets, instruments, services, and regulators form the core of any financial system. - How does the structure of the Indian financial system differ from others?
India has a mixed system. While it focuses on financial inclusion, India has has strong regulatory control esepcially for the private sector to ensure fairness in the financial system. - What are the key functions of the financial system?
It mobilises savings, facilitates lending, manages risk, provides liquidity, and maintains systemic stability. - Can financial literacy help in career growth?
Absolutely. When you have a understanding of finances and how financial systems work, you can take up important roles like risk analyst, investment banker, and even a compliance officer. - How can I learn more about financial systems and their applications?
You should try to enroll yourself in specialised Banking and Finance courses like that from Imarticus Learning. A proper course will not only get the much-required theoretical grounding but also integrate practical insights to succeed in the real evolving financial world.