Hi friends, in today’s article we are going to know about the Components of Financial System. So let’s discuss in details.
Table of Contents
What are the Components of Financial System?
Financial system refers to a system which enables the transfer of money between borrowers and investors. The term ‘Financial System’ indicates a group of complex and closely linked producer, institutions, agents and transactions within an economy.
There are three main constituents or components of financial system which are discussed in the following ground-
The financial assets or close to cash assets are the claims to money and perform a few functions of money. They have high degree of liquidity but are not as liquid as money is, financial assets are of two types (i) Primary or direct assets and (ii) Secondary or Indirect assets.
Primary or direct assets are the financial claims against real sector units or production units created by real sector units as ultimate borrowers for raising funds to finance their deficit spending. They are the obligations of ultimate borrowers.
As for example- bonds, bills, equities, book debits, etc. are called primary assets.
On the other hand, secondary or indirect assets are financial claims issued by financial institutions against themselves to raise funds from the public. This assets are the obligations of the financial institutions. As for example- life insurance policies, bank deposits, unit trust of India units, etc.
The financial system of a country works through the financial markets and the financial institutions. The financial markets deal with the financial assets of different types, cheques, currency deposits, bonds, bills, etc.
Financial markets provides short period and long period credit to the individual or firm, thus the financial market is of two types (i) Money market and (ii) Capital market.
Money markets deals with the short period borrowing and lending of funds in the money market, the short term securities are exchanged. Capital marketplace offers with the long period borrowing and lending of finances in the capital marketplace, long term securities are exchanged.
Capital market may also be categorized into (a) Primary market and (ii) Secondary market.
Financial institutions facilitate smooth working of the financial system by making lenders or investors and borrowers meet. They mobilize the financial savings of traders both immediately or not directly via economic markets through making use of various financial instruments as well as withinside the process the usage of the services of numerous financial services providers.
Financial institutions are generally divided into two categories (i) Banks and (ii) Non-bank financial intermediaries.
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