The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy.

The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other.

Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;

1.FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset

Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

2.Money Market- The money market ifs a wholesale debt market for low-

risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

3.Capital Market – The capital market is designed to finance the long-

term investments. The transactions taking place in this market will be for periods over a year.

4.Forex Market – The Forex market deals with the multicurrency

requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

5.Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Financial systems one of the industries in an economy. It performs certain essential functions for the economy including maintenance of payment system ,collection & allocation of the savings of society and creation of a variety of stores of wealth to suit the preferences of savers.

Finance is the flowing blood in the body of financial system. It is a link between the saving & investments by providing the mechanism through which savings of savers are pooled and are put into the hands of those able & willing to invest by financial intermidateres.

The role of financial system is thus, to promote savings and their channelization in the economy through financial assets that are more productive than the physical Assets. This means that the operations of financial system are vital to pace &structure of the growth of the economy.

This system plays a significant role inaccessthe rate of economic development, which is to improving general standard of living & higher social welfare.

Development of Financial Systems in India:Some serious attention was paid to the

development of a sound financial system In India. Only after the launching of the planning in the country.

With the adoption of the theory of mined economy, the development of financial system took a different turn so as to fulfill the socio-economic & political objectives

Nationalization of Financial Institutions:-

RBI is the leader of the financial systems. It was nationalized in 1948. It was followed by the nationalization of Imperial Bank of India in 1956. In the same Year, 245 Life Insurance companies were brought under Govt. control by merging all of them into a single corporation called Life Insurance Corporation of India. Another significant development was the nationalization of 14 major commercial banks in 1969.

(b) Starting of Unit Trust of India:-

UTI was established in 1964 as a public sector

institution to collect the savings of the peoples and make them available for productive ventures.

It is the oldest & largest mutual fund in India. However in1994, the scheme of UTI have to the approved by SEBI.

It has introduced a number of open ended & close-ended schemes. It has established the following subsidiaries.

(i) UTI Bank Ltd., in April 1994(ii) UTI Investors Service Ltd.(iii) UTI Security Exchange Ltd.

(c ) Establishment of Development Banks:-

Many development banks were started not only to extent credit facilities to FI’s but also to render advisory services. These

banks are multi purpose Institutions which provide medium & long-term credit to Industrial undertakings, discover investment projects, undertake the preparation of project reports provide technical advice to managerial services.

IFCI was set up in1948 with the project of “making medium & long term credit more easily available to The term “Financial Services” in a broad sense means “mobilization and allocating savings”. Thus, it includes all activities involved to the transformation of savings into investments. The financial service can also be called “financial intermediation”. It is a process by which funds are mobilized from a large no. of savers and make them available to all those who are in need of it and particularly to corporate customers.

The Present Scenario of Financial Service Sector is :-

(1) Conservatism to Dynamism:-

At present, the financial system in India is in a process of rapid transformation, particularly after the introduction of reforms in the financial sector, In this changed content, the role of Financial services have assumed greater significance in our country.

At Present, numerous new financial Intermediaries have started functioning with a view to extending multi functional services to the investing public in the area of the financial services. The emergence of various financial institutions and regulatory bodies has transformed the financial services sector from being conservative industry to a very dynamic one.

(2) Emergence of Primary equity market:- The capital markets which were very sluggish, have become a popular

source of raising financing. The number of stock exchanges in the country has gone up from 9 in 1980 to24 in 2004.

Thus the primary equity market has emerged as an Important vehicle to channelize the savings of the individuals &Corporates for productive purposes & thus to promote the industrial and Economic growth of the nation.

(3) Concept of Credit Rating:- The concept of credit rating would play a significant role

in identifying the rule level of the corporate entry in which the investor wants to take part.

Now, it is mandatory for the NBFC to get credit rating for their debt instruments. The three major credit rating agencies functioning in India are:-

(a) Credit rating Imp. Service of India Ltd. (CRISIL)(b) Credit Analysis & Research Ltd. (CARE)(c) Investment Information and Credit Rating Agency

(4) Process of Globalization:- Again, the process of globalization has paved way for the

entry of innovative and sophisticated financial products into our country. Since the Govt. is very keen in removing all obstacles that stand in the way of inflow of foreign capital, the potential abilities for the introduction of innovative international financial products in India are very great.

(5) Process of Liberalization:- Relating all these factors, the Govt. of India has

imitated many steps to reform the financial services industry. The Govt. of India has already switched over to free pricing of issues from pricing issues.

The interest rates have been deregulated, the private sector has been permitted to participate in banking and mutual funds and the public sector undertakings are being privatized.

The securities exchange Board of India has liberalized many stringent conditions so as to boost the capital and money markets.

In this changed context, the financial serviceindustry in India has to play a very position and dynamic role in the years to come by offering many innovative products to suit to the varied req.nations of investors spread through out the country.

Challenges facing the Financial Sector Are:-(1) Lack of qualified personnel:- The financial services sector is fullygeared to the taste of “Financial Creativity” However, this sector has toface many challenges, In fact the dearth, of qualifies and trainedpersonnel is an important implement in its growth. Hence, It is very vitalthat a proper and comprehensive training must be given to the variousfinancial intermidateres.(2) Lack of Investor Awareness:- The introduction of new financialproducts

and instruments will be of no use unless the investor is aware ofthe advantages and uses of the new and innovative products &instruments. Hence, the financial intermidateres should educate theprospective users of the advantages of the instruments through literature,seminars, workshops etc.

(3) Lacks of transparency:- The whole financial system are undergoing aphenomenal (change in accordance) with the recruitments of the nationaland global environments. Hence, this section should opt for better level oftransparency.

(4) Lack of specialization:- In the Indian Scene, each intermediary seems todeal in different financial service lines without specializing in one or twoareas only. This helps them to achieve high levels of efficiency

(5) Lack of Recent Data:- Most of the intermediaries do not spend more onresearch. It is very vital that one should build up a proper database on thebasis of which one could embark upon “Financial creativity”. Moreover,a proper database would keep oneself aware of the recent development inother parts of the whole world & above all. It would enable the fundmanagers to take sound judicial decisions.

Scope of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into namely :

1. Traditional activities

2. Modern activities

1. Traditional activitiesThese are activities which comprise of both capital and money

market. They come under two categories:

1.Fund based2.Non-fund based or Fee based

1.Fund Based activities: The traditional services which come under fund based are the following:

1.Underwriting of or investment in shares, debentures, bonds etc. of new issues (Primary market activities)

2.Dealing in secondary market activities.3.Participating in money market instruments like commercial

papers, certificate of deposits, Treasury bills, discounting of bills etc.

4.Involving in equipment leasing, hire purchase, venture capital, seed capital etc.

5.Dealing in foreign exchange market activities.

2.Non-fund based activities: Today, customers whether individual or corporate are not satisfied with mere provision of finance. They expect more from financial service companies. Hence, a wide variety of services, are being provided under this head. They include the following:

Managing the capital issues ( management of pre-issue and post issue activities in accordance with the SEBI guidelines)

Making arrangements for the placement of capital and debt instruments with investment institutions.

Arrangement of funds from financial institutions for the clients project cost or his working capital requirements.

Assisting in the process of getting all government and other clearances.

2. Modern activities

Besides the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are of the non-fund based activity. They are also referred to as new financial products and services.