India is currently the fastest growing economy in the world.
In December 2016, the Indian economy overtook the UK to become the 6th largest economy in the world.
A well developed economy always needs an equally strong financial system comprising of Banks, Stock market, Capital market etc.
All the major economies like the US,China, Japan etc. has been built on very strong banking system, securities market etc.
relation between Financial system and Economic development
Economic development of a country is measured in terms of GDP or Gross Domestic product. Any country that has higher GDP, is said to be economically more developed.
You don't need to learn how to measure GDP in detail.
Just keep an eye on the GDP estimates that the Government releases periodically. It will help you understand how India is growing relative to previous year.
But what does GDP depend on ?
You can roughly say that GDP depends on consumption. When the people of a country spend more money on consumption -
- More products must be manufactured by factories to support this spurt in consumption. This increases manufacturing output.
- More services must be rendered by businesses like restaurants, hospitals, hotels etc. It increases output of services sector.
- More people must be employed to support manufacturing and services.
- More wages have to be paid to workers by businesses.
- More tax is collected by the Government.
So you see...
A growing GDP is win-win for everybody.
To ensure that all of these happens smoothly, the Government must establish six supporting facilities first. What are these 6 facilities?
- The Banking System
- The Securities Market.
- The Foreign Exchange Market.
- The Commodities Market.
- The Insurance Market.
- The Pension Market.
You should have basic idea about how they work.
Especially how they try to secure the Indian financial system and protect the investors from frauds and scams.
So, let's start.
Indian Banking System
Indian economy is based on a robust 3 tier banking system.
In the top most tier there are the different regulators for different fields of banking. They are- Reserve Bank of India (RBI), EXIM Bank (Export- Import), NABARD (Rural based development) and the National Housing Bank ( Housing Sector ).
You can see the different sectors that these regulators manage. Among them the most powerful is the RBI. It's job is to-
- Issue banking licenses.
- Regulate the banking sector for secure and stable services.
- Issue currency notes.
- Act as the banker to the Government.
- Control the liquidity of money via different measures like the CRR, SLR etc.
Below the regulators, there are Public and Private sector banks, Foreign banks, Regional Rural Banks. The form the second tier of Indian banking system.
The 3rd tier is formed by the State and District level Co-operative banks, Payment banks and Small Finance banks etc. that carry out the financial transactions for the Indian public.
How do The Banks work ?
The main job of banks are to collect money from general public like you and lend it to people who need it.
They provide your money as loan to them and get interest in return. The banks provide a part of this interest to you for the initial money you kept with them.
You see, the bankers are really smart people! They make money with your money. 🙂
But the question is...
Who needs your money?
There are plenty of people. For example,
- People who want to buy a home or car takes loans from banks.
- Many big companies require capital to expand their business.
- The Government needs money to implement various schemes and projects etc.
The big companies and the Government are the biggest borrower of money from banks and the public in general.
But, they can't take your money whenever they want to.
But they must borrow it according to very strict rules. This brings us to our next topic The Security Market .