INDIAN FINANCIAL SYSTEM

Course Code: 25IMSI404DS02 | BBA 4th Sem | MDU Rohtak

COMPLETE EXAM READY NOTES

External Marks Internal Marks Total Time

70 30 100 3 Hours

Section Questions Marks How to attempt

Section A 7 Short Questions 2 x 7 = 14 ALL compulsory, max 50 words each

Section B 8 Questions (2 per unit) 14 x 4 = 56 Attempt 1 from each unit

TOTAL 70

UNIT I — Financial System and Money Market

Q1: Define Indian Financial System and explain its Components and Functions.
"Financial system is a complete set of institutions (banks, insurance, mutual funds), markets
(stock market, money market) and instruments (shares, bonds, FD) that work together to flow
money from savers to borrowers so that economy keeps running and growing smoothly."

Components:

1. Financial Institutions
"Financial institutions are organizations that collect money from savers and provide it to
borrowers."
Banks like SBI and HDFC accept deposits and give loans
Insurance companies like LIC protect people from financial risk
Mutual Funds collect money from many investors and invest professionally
NBFCs like Bajaj Finance give loans but without banking license

2. Financial Markets
"Financial markets are places where financial instruments are bought and sold."
Money Market handles short term funds less than 1 year
Capital Market handles long term funds through shares and bonds
Primary Market is where new shares are issued through IPO
Secondary Market is where existing shares are traded on NSE and BSE

3. Financial Instruments
"Financial instruments are products that represent money value and can be traded."
Shares give ownership in company with high risk and high return
Bonds give fixed return with low risk
FD gives guaranteed return for fixed period
Treasury Bills are short term government instruments

4. Financial Services
"Financial services are activities provided by financial institutions to help people manage
money."
Banking services include deposits loans and money transfers
Insurance services protect against financial loss
Investment services include mutual funds and portfolio management
Functions:

1. Mobilizes Savings
"Financial system collects scattered savings of people through banks and mutual funds and puts
them to productive use in economy."

2. Provides Credit
"Financial system gives loans to individuals and businesses who need money to grow and fulfill
their needs."

3. Risk Management
"Financial system reduces financial risk through insurance companies and diversification of
investments."

4. Payment System
"Financial system enables smooth transfer of money through modern payment systems like
NEFT, RTGS and UPI."

5. Price Discovery
"Stock market determines fair price of shares through demand and supply of buyers and
sellers."

6. Economic Growth
"By efficiently connecting savers and borrowers financial system helps businesses grow which
increases GDP of country."

"Thus all four components of financial system work together to ensure smooth flow of funds
from savers to borrowers and support economic growth of India."

Q2: Explain Reforms in Indian Financial System.

"Financial reforms are changes made in financial system to make it more efficient, transparent
and competitive by removing unnecessary government controls."

Why Reforms Were Needed:

"In 1991 India faced severe financial crisis where foreign exchange reserves were almost zero
and India had to mortgage gold to get loan from IMF. This forced government to reform the
entire financial system."

Reform 1 — Establishment of SEBI 1992

"SEBI was established in 1992 as independent regulator to control stock market, protect
investors and ensure fair and transparent trading in capital markets."

Reform 2 — Narasimham Committee Banking Reforms

"Narasimham Committee recommended major banking reforms to reduce government control,
allow private banks and improve efficiency of public sector banks."
Private banks like HDFC and ICICI were allowed
Foreign banks were given more freedom
NPA norms were made stricter

Reform 3 — Liberalization of Interest Rates

"Earlier RBI controlled all interest rates but after reforms banks were given freedom to set their
own interest rates based on market conditions."

Reform 4 — Entry of Private and Foreign Banks

"Before 1991 only government banks dominated but after reforms private banks like HDFC ICICI
and Axis were allowed which increased competition and improved banking services."

Reform 5 — Capital Market Reforms

 "Stock market was modernized with online trading, dematerialization of shares through NSDL
and CDSL and strict investor protection rules by SEBI."

Reform 6 — IRDA 1999

"Insurance sector was opened for private companies and IRDA was established in 1999 to
regulate insurance companies and protect policyholders."

Reform 7 — Foreign Investment

"FDI and FII were allowed in Indian financial sector which brought foreign capital modern
technology and better management to India."

"Financial reforms completely transformed Indian financial system from a controlled and
inefficient system to a modern competitive and transparent system that supports economic
growth."

Q3: Explain Money Market and its Segments.

"Money market is a financial market where short term funds of less than one year are borrowed
and lent between banks, government and companies to meet their short term financial needs."

Segment 1 — Call Money Market

"Call money market is where banks lend money to each other for very short period of 1 to 14
days to maintain their daily cash requirements."
Banks borrow from each other overnight
RBI regulates this market
Interest rate is called Call Money Rate

Segment 2 — Treasury Bills

"Treasury bills are short term borrowing instruments issued by Government of India through RBI
to meet its short term financial needs."
Government borrows for 91, 182 or 364 days
Completely risk free investment
Issued at discount redeemed at face value

Segment 3 — Commercial Paper

"Commercial paper is a short term instrument issued by large creditworthy companies to meet
their working capital needs directly from market."
Duration is 7 days to 1 year
Only creditworthy companies can issue
Cheaper than bank loans

Segment 4 — Certificate of Deposit

"Certificate of deposit is an instrument issued by banks to raise funds from market for a fixed
period at a fixed rate of interest."
Fixed return for investor
Can be traded in market

Segment 5 — Commercial Bills

"Commercial bills are instruments used in business transactions where buyer promises to pay
seller after a fixed period."
Used between buyers and sellers
Helps businesses manage cash flow

Point Money Market Capital Market

Period Less than 1 year More than 1 year

Risk Low High

Return Low High

 Regulator RBI SEBI

Instruments T-Bills, Call Money Shares, Bonds

"Money market plays very important role by maintaining liquidity in economy, helping meet
short term needs and helping RBI implement monetary policy effectively."

UNIT II — Stock Market and SEBI

Q4: Explain the Role and Functions of SEBI.
"SEBI which stands for Securities and Exchange Board of India is the statutory regulatory
authority of Indian capital market established in 1992 to protect investors and ensure fair
transparent and efficient functioning of securities market."

Why SEBI Was Needed:

"Before SEBI there was no proper regulation of stock market. Investors were being cheated
through price manipulation and insider trading. Companies were issuing shares fraudulently. So
SEBI was established to bring order and transparency."

Function 1 — Protective Functions

"Protective functions means SEBI protects investors from fraud and unfair practices in stock
market."
Prohibits insider trading where company insiders misuse secret information
Controls price manipulation by big traders
Educates investors about their rights
Takes strict action against fraudsters

Function 2 — Regulatory Functions

"Regulatory functions means SEBI makes and enforces rules for all participants in capital
market."
Registers and regulates stock brokers
Regulates stock exchanges like NSE and BSE
Controls mutual funds and their operations
Makes rules for IPO and share issuance

Function 3 — Developmental Functions

"Developmental functions means SEBI takes steps to develop and modernize capital market."
Promotes investor education and awareness
Introduces new financial products
Encourages use of technology in trading
Develops research and training programs

Powers of SEBI:
Can inspect books of any company
Can impose heavy penalties and fines
Can ban persons from trading
Can cancel registration of brokers

"SEBI plays crucial role in maintaining investor confidence and ensuring transparent and
efficient functioning of Indian capital markets which is essential for economic development of
India."

Q5: Explain NSE, BSE and Functions of Stock Exchange.

"A stock exchange is an organized and regulated market where buyers and sellers trade shares
bonds and other securities in a transparent manner under strict rules and regulations."
BSE — Bombay Stock Exchange:
"BSE is the oldest stock exchange in Asia established in 1875 in Mumbai whose benchmark
index SENSEX tracks performance of top 30 companies."
Oldest in Asia established 1875
Located at Dalal Street Mumbai
Index = SENSEX 30 companies
More than 5000 companies listed

NSE — National Stock Exchange:

"NSE is Indias largest stock exchange by trading volume established in 1992 whose benchmark
index NIFTY 50 tracks performance of top 50 companies."
Established 1992
First fully electronic exchange
Index = NIFTY 50 companies
Largest by trading volume

Point NSE BSE

Established 1992 1875

Index Nifty 50 Sensex 30

Volume Largest Smaller

Type Fully Electronic Traditional then Electronic

Functions of Stock Exchange:

1. Price Discovery
"Stock exchange determines fair market price of shares through continuous buying and selling
by millions of investors based on demand and supply."

2. Provides Liquidity
"Stock exchange allows investors to easily convert their shares into cash at any time by buying
and selling whenever they want."

3. Mobilizes Savings
"Stock exchange encourages people to invest their savings in shares and bonds instead of
keeping idle cash which helps in capital formation."

4. Economic Indicator
"Movement of stock market index like Sensex and Nifty indicates the overall health and
performance of Indian economy."

5. Safe Investment Platform

"Stock exchange provides regulated and transparent platform where investors can safely invest
their money under SEBI supervision."

6. Capital Formation
"Companies raise funds from public through stock exchange which helps them expand business
and create employment."

Depositories:
"Depositories are organizations that hold shares in electronic form in demat accounts so that
physical share certificates are not needed."
NSDL = National Securities Depository Limited
CDSL = Central Depository Services Limited

"Stock exchanges play vital role in economic development by providing platform for capital
formation, investment and efficient price discovery."
UNIT III — Banks, RRBs and NBFCs
Q6: Explain Functions of Commercial Banks.
"Commercial banks are financial institutions that accept deposits from general public and
provide loans and other financial services to earn profit while contributing to economic
development."

Primary Function 1 — Accepting Deposits:

"Banks collect money from public in different types of accounts to keep their savings safe and
earn interest."
Savings Account = daily use with low interest for individuals
Current Account = for businesses with no interest but unlimited transactions
Fixed Deposit = money kept for fixed period with high interest
Recurring Deposit = fixed amount deposited every month

Primary Function 2 — Giving Loans and Advances:

"Banks use collected deposits to give loans to individuals and businesses who need money for
various purposes."
Personal loans for individual needs
Home loans for buying property
Business loans for companies
Overdraft facility for current account holders

Secondary Function 3 — Agency Functions:

"Banks act as agents for customers and perform various financial tasks on their behalf."
Transfer money through NEFT and RTGS
Collect cheques and payments
Pay insurance premiums and utility bills

Secondary Function 4 — General Utility Functions:

"Banks provide various general services to customers beyond basic banking."
Safe deposit locker facility
Foreign exchange services
ATM and debit card services
Credit cards for cashless payments

"Commercial banks are backbone of Indian financial system as they mobilize savings of public
and provide credit for economic development of country."

Q7: What are NBFCs? Explain their Role in Indian Financial System.
"NBFC stands for Non Banking Financial Company which is a company registered under
Companies Act that provides financial services like loans and investments but does not hold a
banking license from RBI."

Point NBFC Bank

License No banking license Has banking license

Deposits Cannot take demand deposits Can take all deposits

Insurance No deposit insurance Deposit insurance available

Regulation Partially by RBI Fully by RBI

Types of NBFCs:
1. Loan Companies
"Loan companies provide personal and business loans to individuals and small businesses who
cannot get loans from banks easily."
2. Asset Finance Companies
"Asset finance companies provide loans for purchase of physical assets like vehicles, machinery
and equipment."

3. Microfinance Companies
"Microfinance companies provide very small loans to poor people and small businesses who
have no access to banks."

Examples: Bajaj Finance, Muthoot Finance, Mahindra Finance

Role in Financial System:

1. Fill Gap of Banks
"NBFCs provide credit to people and businesses that banks reject due to lack of collateral or
credit history."

2. Serve Rural Areas

"NBFCs reach rural and semi urban areas where banks have limited presence and provide
financial services to underserved people."

3. Finance Small Businesses

"NBFCs provide working capital and equipment loans to small businesses and MSMEs that
cannot fulfill strict bank requirements."

4. Vehicle and Equipment Loans

"NBFCs specialize in financing vehicles and equipment which banks usually avoid due to the
nature of these assets."

5. Support Microfinance
"NBFCs provide microfinance loans to poor women and small entrepreneurs to help them start
or grow their small businesses."

"NBFCs play a very important complementary role to banks in Indian financial system by
providing credit to underserved segments and filling the gaps left by traditional banking
system."

UNIT IV — Mutual Funds and Insurance

Q8: Explain Mutual Funds — Types and Importance.
"A mutual fund is an investment vehicle where money from many small investors is pooled
together and professionally managed by a qualified fund manager who invests it in stocks
bonds and other securities to generate returns."

Simple: "Instead of one person investing alone, thousands pool money together, a professional
invests it wisely and profits are shared among all investors."

Type 1 — Equity Funds:

"Equity funds invest majority of money in stocks of companies to generate high returns over
long term."
High risk but high return
Best for long term investment of 5 years or more

Type 2 — Debt Funds:

"Debt funds invest in bonds and government securities to provide stable and regular returns
with low risk."
Low risk and stable return
Best for short to medium term

Type 3 — Balanced or Hybrid Funds:

 "Balanced funds invest in both equity and debt instruments to provide a balance between
growth and stability."
Medium risk and medium return
Good for investors who want both growth and safety

Type 4 — Index Funds:

"Index funds simply track and replicate a market index like Nifty 50 without active management
at very low cost."
Very low cost fund
Returns equal to market index

Type 5 — ELSS Tax Saving Funds:

"ELSS funds invest in equity but also provide tax benefit of up to 1.5 lakh under Section 80C
with a lock in period of 3 years."

Term Full Form Meaning

NAV Net Asset Value Price of one unit of mutual fund

SIP Systematic Investment Plan Invest fixed amount every month

AMC Asset Management Company Company that manages the fund

Importance:
1. Professional Management
"Qualified fund managers invest money wisely on behalf of investors which individual investors
cannot do themselves."

2. Diversification
"Mutual funds invest in many different companies so that loss in one investment is covered by
gains in others which reduces overall risk."

3. Affordable for Small Investors

"Even a person with very little money can start investing through SIP with as little as 500 rupees
per month."

4. Regulated and Safe

"All mutual funds are strictly regulated by SEBI which ensures transparency and protects
interests of investors."

5. Liquidity
"Investors can easily withdraw their money from open ended mutual funds at any time at
current NAV."

"Mutual funds have democratized investing in India by allowing small investors to benefit from
professional management and stock market growth."

Q9: Explain Insurance — Meaning, Types, Principles and Role of IRDA.

"Insurance is a legal contract between insurance company called insurer and a person called
insured where insurer promises to pay financial compensation for specified losses in exchange
for regular premium payments."

Simple: "Many people pay small premium regularly. When one person suffers a big financial
loss, insurance company pays them compensation from the pool of premiums."

Type 1 — Life Insurance:

"Life insurance provides financial protection to family of insured person in case of death or
disability by paying a lump sum amount called sum assured."
Covers risk of death or disability
Family gets money after death of insured
 Examples = Term Plan, Endowment Plan, ULIP
LIC is largest life insurer in India

Type 2 — General Insurance:

"General insurance provides financial protection against losses to assets and health other than
life such as car, house, health and travel."
Health Insurance = covers medical expenses
Motor Insurance = covers vehicle damage
Property Insurance = covers house and property

Principles of Insurance:
1. Utmost Good Faith
"Both insurer and insured must disclose all material facts honestly to each other without hiding
any important information."

2. Insurable Interest
"A person can only insure something in which they have a financial interest meaning they will
suffer loss if that thing is damaged."

3. Indemnity
"Insurance only compensates for actual financial loss suffered and insured cannot make profit
from insurance claim beyond actual loss."

4. Subrogation
"After paying compensation to insured the insurance company gets the right to recover money
from the third party who caused the loss."

5. Contribution
"If a person has taken insurance from multiple companies for same risk then all companies
share the compensation proportionally."

IRDA — Insurance Regulatory and Development Authority:

"IRDA is the statutory regulatory authority established in 1999 to regulate and develop
insurance industry in India and protect interests of policyholders."

Functions of IRDA:
1. Regulate Insurance Companies
"IRDA gives license to insurance companies and makes sure they follow all rules and maintain
enough funds to pay claims."

2. Protect Policyholders
"IRDA ensures that insurance companies treat customers fairly, settle claims honestly and do
not cheat policyholders."

3. Promote Insurance Sector

"IRDA promotes growth of insurance sector by allowing private companies, foreign investment
and introducing new insurance products."

4. Set Standards
"IRDA sets standards for insurance products, premium rates and agent qualifications to ensure
quality of insurance services."

"Insurance plays very important role in Indian financial system by providing financial security to
individuals and businesses against unexpected losses while IRDA ensures insurance companies
operate fairly."

SECTION A — SHORT ANSWERS (2 Marks Each — Max 50 Words)

Q: What is SEBI?
 "SEBI stands for Securities and Exchange Board of India. It is the statutory regulatory authority
of Indian capital market established in 1992. Its main role is to protect investors from fraud and
ensure fair and transparent functioning of stock market."

Q: What is IPO?
"IPO stands for Initial Public Offering. It is the process through which a private company offers
its shares to general public for the first time through primary market to raise funds for business
expansion."

Q: What is IRDA?
"IRDA stands for Insurance Regulatory and Development Authority. It was established in 1999
as statutory body to regulate and develop insurance industry in India and protect interests of
policyholders."

Q: What is NBFC?
"NBFC stands for Non Banking Financial Company. It is a company that provides financial
services like loans and investments similar to banks but without holding a banking license from
RBI."

Q: What is Mutual Fund?

"A mutual fund is an investment vehicle where money from many investors is pooled together
and professionally managed by a fund manager who invests it in stocks and bonds to generate
returns for investors."

Q: What is Money Market?

"Money market is a financial market where short term funds of less than one year are borrowed
and lent between banks, government and companies through instruments like treasury bills and
call money."

Q: What is NSE and BSE?

"NSE is National Stock Exchange established in 1992 with Nifty 50 as its index while BSE is
Bombay Stock Exchange established in 1875 with Sensex as its index. Both are major stock
exchanges of India regulated by SEBI."

Q: What is Call Money?

"Call money is a short term borrowing instrument in money market where banks lend money to
each other for very short period of 1 to 14 days to maintain their daily cash reserve
requirements."

Q: What is Treasury Bill?

"Treasury bill is a short term government borrowing instrument issued by Government of India
through RBI for period of 91, 182 or 364 days. It is the safest money market instrument as it
carries no risk of default."

Q: What is NAV?
"NAV stands for Net Asset Value. It is the price of one unit of a mutual fund calculated by
dividing total value of funds assets minus liabilities by total number of units outstanding."

EXAM STRATEGY — LAST MINUTE TIPS

Step What to Do Marks Time

1 Section A — Write all 7 short answers first 14 marks 25 minutes

 2 Unit I — Financial System or Money Market 14 marks 35 minutes

3 Unit II — SEBI or NSE/BSE 14 marks 35 minutes

4 Unit III — Banks or NBFC 14 marks 35 minutes

5 Unit IV — Mutual Funds or Insurance 14 marks 35 minutes

TOTAL 70 marks 3 Hours

ANSWER FORMAT FOR EVERY BIG QUESTION:

Part What to Write Length

1. Question Write the full question first 1 line

2. Definition Meaning of the topic in 2-3 lines 2-3 lines

3. Points Each point with small explanation 5-6 points

4. Table If comparison asked make a table Optional

5. Conclusion End with "Thus..." line 1 line

ALL THE BEST FOR YOUR EXAM! YOU GOT THIS!