International School of Business

International School of Business & Media
(Batch 2024-26)
Section: E
Finance Assignment-1
Submitted To: Dr. Manoj Sharma
Vishnu Malkan-MNP20242130
Present Scenario of the Indian Financial System and Its Role in Economic Development
The financial system in India is essential to the country's economic growth because it
effectively manages risks, distributes resources, facilitates transactions, and mobilises
savings. By 2023, the system has changed significantly as a result of technical improvements,
legislative changes, and a focus on financial inclusion. Underpinned by recent data from
credible sources, this overview explores the current state of the Indian financial system, its
constituent parts, and its role in economic growth.
Components of the Indian Financial System

1. Banking Sector
 Structure: Dominated by public sector banks (PSBs), private sector banks, foreign
banks, and regional rural banks (RRBs).
2. Non-Banking Financial Companies (NBFCs)
 Role: Provide credit to underserved sectors like SMEs, housing, and infrastructure.
3. Capital Markets
 Components: Stock markets (BSE, NSE), bond markets, and derivative markets.
4. Insurance Sector
 Growth Drivers: Increasing awareness, regulatory support, and digital penetration.
5. Pension Funds and Mutual Funds
6. Fintech and Digital Payments
 Expansion: Rapid growth in digital financial services, driven by smartphone
penetration and internet access.
Role in Economic Development

1. Mobilization of Savings
 The financial system aggregates individual savings and channels them into productive
investments. With a savings rate of approximately 30% of GDP, India mobilizes
substantial domestic resources for economic activities.
2. Resource Allocation
 Efficient allocation ensures that capital flows into high-growth sectors. The banking
and capital markets prioritize funding for infrastructure, manufacturing, technology,
and services, fostering balanced economic growth.
3. Facilitating Transactions
 Advanced payment systems and digital platforms have streamlined transactions,
reduced transaction costs, and enhanced financial accessibility, contributing to
smoother economic operations.
4. Risk Management
 Financial instruments like insurance, derivatives, and diversification mechanisms help
businesses and individuals manage risks, promoting stability and encouraging
investment.
5. Financial Inclusion
 Initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY) have expanded banking
access to over 430 million accounts, enhancing financial inclusion and empowering
underserved populations.
6. Supporting Entrepreneurship and Innovation
 Access to credit and venture capital supports startups and innovative enterprises,
driving technological advancements and job creation.
7. Stimulating Investment
 Robust capital markets attract both domestic and foreign investments, fueling
economic expansion and integration into the global economy.
Effects on Economic Growth and GDP:
• GDP Contribution: The financial industry makes up roughly 7-8% of India's GDP, of
which about 4% comes from banking alone.
• Investment Flows: The industry supports the government's large-scale projects by
facilitating around ₹1,00,000 crore (~$1.2 billion) in infrastructure investments each
year.
• Employment: The financial industry employs more than 40 million people directly
and indirectly, contributing significantly to both job creation and economic well-
being.
• Foreign Direct Investment (FDI): Significant FDI has been drawn to the banking
sector since its liberalisation, which has improved capital inflows and technology
transfer.
Current Advancements and Difficulties:


Reforms in Regulation
The resolution of troubled assets has improved since the introduction of laws like the
Insolvency and Bankruptcy Code (IBC), improving the general health of financial
institutions.
 Digital Conversion
Fintech solutions have made financial services more accessible, but they also present
cybersecurity and regulatory issues.
 Assets that do not perform (NPAs)
Even though NPAs have dropped from their highest points, preserving asset quality is
still essential to guaranteeing the stability of the financial system.
 Interest Rate Context
Lending and investment practices have been impacted by the RBI's monetary policy,
which has managed inflationary pressures and the need for economic growth.
 Uncertainties in the World Economy
External variables impacting the performance and stability of the Indian financial
system include geopolitical concerns and volatility in the global markets.
Sources:
 Reserve Bank of India (RBI) Reports
 Securities and Exchange Board of India (SEBI) Data
 Insurance Regulatory and Development Authority of India (IRDAI) Statistics
 National Payments Corporation of India (NPCI) Annual Reports
 Ministry of Finance, Government of India Publications
 World Bank and International Monetary Fund (IMF) Data

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International School of Business & Media

Submitted To: Dr. Manoj Sharma

Components of the Indian Financial System

Role in Economic Development

Effects on Economic Growth and GDP:

Current Advancements and Difficulties:

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