A TEXTBOOK ON
INDIAN FINANCIAL
SYSTEM
(As per New Syllabus based on SEP 2024 Model Curriculum w.e.f 2024-25 for
students of III SEM BBA Programme, of Bangalore University)
Dr. K. Ramachandra Dr. S. Alla Bakash
[Link]., MBA, LLB, PGDPM & IR, Ph.D., [Link]., MBA, Ph.D.,
Professor of Commerce, Professor of Commerce,
Maharani’s Arts, Commerce and Department of Commerce and Management,
Management College for Women, Hasanath College for Women,
(Cluster University) Dickenson Road, Bengaluru ‒ 560 042
Seshadri Road, Bengaluru ‒ 560 001 Karnataka.
Karnataka.
Dr. S. Nagabhushana
[Link]., MBA, Ph.D., NET, SET, PDF,
Assistant Professor,
Department of Commerce,
Government First Grade College,
Harohalli – 562 112, Dist. Ramanagaram
ISO 9001:2015 CERTIFIED
© Authors
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by
any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written
permission of the publisher.
First Edition : 2025
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PREFACE
The Karnataka State Government under the new dispensation has brought about new
curriculum under State Education Policy (SEP). Accordingly, the curriculum for [Link]./BBA/
other Under Graduate programmes has been restructured and curved the syllabus for the various
programmes. We therefore, earnestly have undertaken to author the book on the title Indian
Financial System. We expect the same patronage from our valued readers as before. Your
constructive suggestions helped us to strengthen the content of the syllabus, of course based on the
experience and interactions with luminaries in the field.
The book will provide ample insights to the readers about the various concepts, theories,
models, challenges, issues, opportunities, skill development and competency building in the
dynamic field of Indian Financial System and subsequent amendments. This book provides insight
about the complete Indian Financial System to the readers. This book gives the overall overview of
financial system to the readers such as flow of funds in financial system and how the system
contributes of economic development. It is also made to learn different financial system and their
frame work apart from understanding non-banking financial Companies (NBFCs). This book is
very useful for taking financial decisions at an individual level as well as company level.
The first chapter gives introduction to Financial System in India covering the entire structure,
instruments and types of markets. The second chapter dwells on Money Market and Capital
Market, Stock Markets and SEBI. Chapter three discusses the Banking and Non-Banking
Institutions, Indian Banking System and NBFCs. Chapter four deals with Financial and Insurance
Regulators like RBI, SEBI, IRDAI so on. Chapter five discusses Contemporary Challenges and
Emerging Trends like Green Finance, AI, Cyber Security and the like.
In the skill development component, the various activities include preparation of report on
the structure of the Indian financial system and its role in economic development, comparison
chart of banking and non-banking financial institutions, analyzing stock market indices (Sensex,
Nifty) for a week and prepare a report analyzing the trends, case study on a successful
microfinance institution or a fintech company in India, preparation of investor grievance form
based on SEBI guidelines and Creation of an infographic on green finance and sustainable
investment opportunities in India.
The book provides value for money. The first edition of Indian Financial System is the
outcome of the collective wisdom of all the authors. We believe and acknowledge that the readers
will benefit immensely by owning the present book for posterity. We thank all the people who
supported for the release of the first edition. We also acknowledge and thank the keen interest
shown by Himalaya Publishing House for the release of the first edition of Indian Financial
System under State Education Policy (SEP). We also thank the Almighty for the support and the
grace extended for this utilitarian venture.
We wish you all the best.
Dr. Ramachandra K.
Dr. Alla Bakash S.
Dr. Nagabhushana S.
SYLLABUS
COURSE OBJECTIVE:
To provide a detailed understanding of the structure, components, and functioning
of the Indian financial system.
To analyze the role of financial institutions, markets, and regulatory frameworks in
economic development.
To equip students with knowledge about financial instruments and service.
COURSE OUTCOMES:
CO1: Understand the structure and components of the Indian financial system.
CO2: Gain insights into the functioning of financial institutions and markets.
CO3: Develop knowledge of regulatory frameworks and financial services.
CO4: Analyze financial trends and their impact on economic growth.
MODULE 1: INTRODUCTION TO FINANCIAL SYSTEM 14 Hrs.
Concept & Components – Meaning, Functions, and Structure of Financial System –
Financial Markets (Money Market, Capital Market, Forex Market) – Financial
Institutions (Banks, NBFCs, Asset Management Company (AMC)) – Financial
Instruments (T-Bills, Commercial Papers, Derivatives, Delivery and Non-Delivery
Contracts in Capital Market) – Regulatory Bodies (RBI, SEBI, IRDAI, PFRDA). Impact
of Digital Rupee (e₹) on Traditional Banking - Rise of Fintech and Shadow Banking ‒
Case Study: Paytm Payments Bank Transition.
MODULE 2: MONEY MARKET AND CAPITAL MARKET 12 Hrs.
Money Market – Meaning, Instruments (Call Money, T-Bills, CPs, CDs), Participants –
Capital Market – Primary vs Secondary Market – Stock Exchanges (NSE, BSE) – SEBI
Regulations – Recent Reforms (T+1 Settlement, ASBA). Adani-Hindenburg Case:
Market Volatility and SEBI’s Role ‒ IPO Boom in India (2021-2023).
MODULE 3: BANKING AND NON-BANKING INSTITUTIONS 12 Hrs.
Banking System – Structure (Commercial Banks, RRBs, Payment Banks) – RBI’s
Monetary Policy Tools (Repo Rate, Reverse Repo Rate, CRR, SLR) ‒ Income
Recognition and Asset Classification (Standard-Sub-Standard-Doubtful and Loss Assets)
– Punjab and Maharashtra Cooperative Bank (PMC) Crisis-NBFCs – Types, Regulations,
Role in Financial Inclusion ‒ Neo-Banks vs Traditional Banks (Fi vs SBI).
MODULE 4: FINANCIAL REGULATORS AND INSURANCE 12 Hrs.
Regulators – RBI, SEBI, IRDAI, PFRD– Functions and Recent Interventions – Insurance
Sector – Life and General Insurance – ULIPs – Micro Insurance – Deposit Insurance
Reforms – Deposit Insurance and Credit Guarantee Corporation (DICGC) ‒ Pension
System – NPS, Atal Pension Yojana. LIC IPO and Disinvestment Policy ‒ IRDAI’s
“Bima Sugam”.
MODULE 5: CONTEMPORARY CHALLENGES 10
Hrs.
Emerging Trends – Green Finance (Sustainable Bonds) – AI in Fraud Detection –
CBDCs – Challenges – NPAs, Cyber Security Risks, Crypto Regulation.
SKILLS DEVELOPMENT
1. Prepare a report on the structure of the Indian financial system and its role in
economic development.
2. Create a comparison chart of banking and non-banking financial institutions,
highlighting their roles and functions.
3. Track stock market indices (Sensex, Nifty) for a week and prepare a report analyzing
the trends.
4. Prepare a case study on a successful microfinance institution or a fintech company in
India.
5. Draft a simple investor grievance form based on SEBI guidelines.
6. Create an infographic on green finance and sustainable investment opportunities in
India.
CONTENTS
Chapter Title Page
No. No.
1. INDIAN FINANCIAL SYSTEM..........................................................1 ‒ 34
1.1 Introduction to Indian Financial System..................................................1
1.2 Meaning of Financial System..................................................................2
1.3 Definition of the Financial System........................................................2
1.4 Features of Financial System...................................................................3
1.5 Significance of the Financial System....................................................3
1.6 Objectives of Financial System................................................................4
1.7 Functions of Indian Financial System.....................................................4
1.8 Components of Financial System............................................................5
1.9 Asset Management Company (AMC)......................................................7
1.10 Delivery and Non-Delivery Contracts in Capital Market......................12
1.11 Structure of Indian Financial System.....................................................15
1.12 Role of Financial System.......................................................................15
1.13 Financial Regulators in India.................................................................16
1.14 Impact of Digital Rupee (e₹) on Traditional Banking...........................25
1.15 The Rise of FinTech in India.................................................................26
1.16 Shadow Banking...................................................................................29
1.17 Paytm Case Study: The dramatic downfall of a
Fintech Pioneer......................................................................................31
Review Questions..................................................................................33
2. MONEY MARKET AND CAPITAL MARKET...............................35 ‒ 82
2.1 Introduction to Financial Market...........................................................35
2.2 Meaning of Financial Market................................................................35
2.3 Functions of Financial Market...............................................................36
2.4 Structure or Types of Financial Market in India..............................37
2.5 Money Market........................................................................................38
2.6 Features of Money Market....................................................................39
2.7 Objectives of Money Market..............................................................39
2.8 Functions of Money Market................................................................39
2.9 Importance of the Money Market..........................................................41
2.10 Participants of Money Market................................................................42
2.11 Classification or Organization of Money Market.............................43
2.12 Money Market Instruments....................................................................45
2.13 Capital Market........................................................................................47
2.14 Meaning of Capital Market....................................................................48
2.15 Features of Capital Market.....................................................................49
2.16 Functions of Capital Market..................................................................50
2.17 Importance of Capital Markets..............................................................51
2.18 Organization of Capital Market............................................................52
2.19 Types or Classification of Capital Market.............................................52
2.20 Capital Market Instruments...............................................................54
2.21 Differences between Money Market and Capital Market......................56
2.22 Players in Capital Markets.....................................................................57
2.23 Secondary Market..................................................................................59
2.24 Types of Secondary Market...................................................................59
2.25 Stock Market in Stock Trading..............................................................60
2.26 National Stock Exchange.......................................................................61
2.27 Bombay Stock Exchange......................................................................64
2.28 Securities and Exchange Board of India (SEBI)....................................68
2.29 SEBI Regulations...................................................................................71
2.30 T+1 Settlement System of SEBI............................................................73
2.31 ASBA (Application Supported by Blocked Amount)............................74
2.32 Adani Hindenburg Issue.........................................................................75
2.33 Market Volatility and SEBI’s Role........................................................77
2.34 IPO Boom in India (2021-2023)............................................................78
Review Questions..................................................................................81
3. BANKING AND NON-BANKING FINANCIAL
INSTITUTIONS.................................................................................83 ‒ 127
3.1 Introduction to Banking.........................................................................83
3.2 Definition of Banking............................................................................83
3.3 Meaning of Bank....................................................................................84
3.4 Characteristics or Features of a Bank...................................................84
3.5 Origin of Banking..................................................................................85
3.6 Banking Company.................................................................................86
3.7 Functions of a Banking Company..........................................................86
3.8 Structure of Banking System in India...................................................87
3.9 Comparing Scheduled and Non-Scheduled Banks................................89
3.10 Commercial Banks.................................................................................90
3.11 Functions of Commercial Banks............................................................91
3.12 Structure or Types of Commercial Banks in India................................93
3.13 Public Sector Banks..............................................................................94
3.14 Private Sector Banks.............................................................................94
3.15 Differences between Public Sector Banks and
Private Sector Banks..............................................................................95
3.16 Foreign Banks........................................................................................95
3.17 Regional Rural Banks...........................................................................96
3.18 Payment Banks.......................................................................................98
3.19 Reserve Bank of India............................................................................99
3.20 Monetary and Credit Policy of RBI.....................................................106
3.21 Punjab and Maharashtra Cooperative Bank Crisis..............................112
3.22 Non-Banking Financial Companies (NBFCs).....................................114
3.23 Role of NBFCs for Economic Development.......................................115
3.24 Types of NBFCs...................................................................................116
3.25 Differences Between Banks and NBFCs..........................................118
3.26 Regulations for NBFCs.......................................................................119
3.27 Neo-Banks vs Traditional Banks.........................................................122
3.28 Traditional Banks.................................................................................124
Review Questions..........................................................................................126
4. FINANCIAL REGULATORS AND INSURANCE.......................128 ‒ 165
4.1 Introduction to Financial Regulators in India......................................128
4.2 Meaning of Financial Regulator..........................................................128
4.3 Important Financial Regulatory Bodies in India.................................129
4.3.1 Reserve Bank of India..............................................................129
4.3.2 Securities and Exchange Board of India (SEBI)......................134
4.3.3 Insurance Regulatory and Development
Authority of India (IRDAI)......................................................137
4.3.4 Pension Fund Regulatory and Development
Authority of India (PFRDAI)................................................139
4.4 Insurance Sector...................................................................................140
4.5 Life Insurance and General Insurance................................................141
4.6 General Insurance................................................................................142
4.7 Key Differences Between Life Insurance and
General Insurance................................................................................143
4.8 ULIP.....................................................................................................144
4.9 Micro Insurance...................................................................................145
4.10 Deposit Insurance.................................................................................148
4.11 Deposit Insurance and Credit Guarantee
Corporation (DICGC)..........................................................................149
4.12 Pension System....................................................................................151
4.13 National Pension System (NPS)..........................................................151
4.14 Atal Pension Yojana (APY).................................................................154
4.15 LIC IPO (Life Insurance Corporation,
Initial Public Offer)..............................................................................157
4.16 Disinvestment in LIC..........................................................................159
4.17 IRDAI’s Bima Sugam..........................................................................160
Review Questions..........................................................................................164
5. CONTEMPORARY CHALLENGES..............................................166 ‒ 204
5.1 Introduction to Contemporary Challenges...........................................166
5.2 Types of Contemporary Issues.............................................................166
5.3 Introduction to Emerging Trends.........................................................167
5.4 Recent Trends in Financial Market......................................................167
5.5 Green Finance (Sustainable Bonds).....................................................168
5.6 Types of Green Financing....................................................................169
5.7 Sustainable Bond.................................................................................171
5.8 AI (Artificial Intelligence) Fraud Detection........................................172
5.9 AI Fraud Detection..............................................................................172
5.10 Common Types of Fraud in AI............................................................176
5.11 CBDC (Central Bank Digital Currency)..............................................178
5.12 Important Challenges in Financial System..........................................181
5.12.1 Non-Performing Assets (NPA).................................................181
5.12.2 Cyber Security Risks................................................................185
5.13 Cybersecurity Risk..............................................................................186
5.14 Cybersecurity Challenges in India.......................................................191
5.15 Types of Cybersecurity Threats in India..............................................192
5.16 Cyber Security Challenges..................................................................194
5.17 CRYPTO Regulation...........................................................................197
5.18 Cryptocurrencies Challenges...............................................................200
5.19 Regulation of Cryptocurrency in India................................................201
Review Question............................................................................................203
MODEL QUESTION PAPER....................................................................205