Functions of Financial System
The financial system supports the payment mechanism of an economy by offering distinct payment modes to public. It provides various convenient payment methods such as cheque, debit cards, credit cards, UPI etc. All these enable customers in easily doing payments for goods and services in market.
Pooling of funds
Financial system serve as an efficient tool for pooling funds among people in economy. Funds are transferred from people having excess of it (savers) to those who are in need of it (borrowers). It enables in channelizing the ideal lying resources into useful mean which increase production activities and create quality products resulting in raising the living standards of people.
This system facilitates business organizations in raising the funds for carrying out its activities. Business have many options available in front of them such as banks, large financial institutions, households etc. that are all parts of financial system. All these enables in mobilizing the saving of people into productive means that results in capital formation for economy.
Finance system offers proper liquidity in economy which means securities can be easily converted into cash. Investors have a better opportunity of liquidating their financial instruments such as shares, bonds, debentures etc. in financial markets. Price of securities are influenced in accordance with market forces of demand and supply.
Finances government needs
It serve as an efficient source of supplying funds to government. Government require huge amount of money for financing its wide infrastructure activities and defense operations. There are several social welfare activities too which need huge funds like public health, education etc. all of which is supplied by financial markets.
Finance system promotes economic development of country by supplying credit to corporates for carrying out their development activities. Business are easily able to acquire funds from multiple sources at cheaper rates. India is a mixed economy where government intervene the financial system for regulating macro-economic variables such as inflation and interest rate. When capital is available cheaply to corporates, it will lead to economic development.
It also serve as an important source of providing key information which assist in taking better decisions. Financial market supplies all details about financial assets and market movements to investors from time to time. It enables investors in doing proper analysis of distinct investment options available and choosing the most optimum one. Better decision making leads to creation of proper portfolio thereby raising overall wealth.