Importance of Financial System

Importance of Financial System. For the economic transformation of a country, the financial system is the key to the institutional and functional vehicle. Finance assists in reducing the gap between the present and the future, and covers every aspect like channelization and effective usage of savings and making an efficient investment. It formulates the base, the sets, and the tone for the accomplishment of wider national objectives.

According to Christy, the objective of the financial system is to “Supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires”.

Importance of Financial System

The following are the signs of the financial system:

1) Increment in the Output and Production of the Economy:

The surplus savings are channelized in such a manner that adequate resources are available for the production sector. This eventually results in an increase in the output of the economy. The market, institutions, and instruments are the basic market transformers who get adequate funds which lead to economic development. The financial system directs toward savings and contributes more value-added areas which leads to national development.

2) Accelerating the Quantum and Pace of Savings:

Apart from channelizing savings, a financial system also drives the rate of savings by diversifying the financial instruments, thus making a number of options available for investors to invest in. This creates competition among the intermediary; hence the investor gets the maximum return.

3) Facilitates Innovation:

Healthy competition is promoted in the financial system. This leads to the innovation of new products and investment opportunities. The overall cost is reduced which enhances profitability. Countries having a well-diversified financial system maintain national competitiveness and their products are regularly updated.

4) Evaluation of Assets, Increasing the Liquidity, Production, and Spreading of Information:

Apart from having an effect on the rate of return, it also influences economic development. A good financial system evaluates the assets, increases the liquidity and transmits the required information.

5) Provide Risk Management Services:

A financial system is a need-based system. It changes with the change in requirement for funds. During the current scenario, the world has observed an increase in demand for better risk management services. This was fulfilled by increasing the trading volume and by introducing risk management products. So, economic growth and the financial system work hand in hand.

6) To Ensure Stability and Resilience: ( Importance of Financial System )

A financial market is a part of the main branch of the financial system. There will be more stability and resilience as the system gets deeper. The Central Bank of the country can make effective policies if it is supported by well-organized money and capital market instruments. The onus is on the financial markets to create a well-balanced and efficient financial system that comprises both the financial market and the financial institutions. If there is any imbalance, similar problems will arise as experienced in South-East Asia.

7) Introduction of Discipline in Management Companies and Guiding them:

The financial system also Ensures that management companies work under discipline and constantly guide for the same. When The domestic and the foreign financial system are linked together, the flow of capital is increased. This combination reduces the risk by diversifying the portfolio and boosts growth.

8) Accelerating the Rate of Economic Growth:

There exists a bilateral and mutual relationship between the financial system and economic growth. A well-developed and balanced financial system boosts the rate of economic growth.

Structure of Indian Financial System.

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