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How do Financial Institutions work?

By Aayush Upadhyay

1st Apr 2022

2 mins read

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Banks are an incredibly old concept, even for a complex economy like India. Even though our nation ranks second in adults not holding bank accounts (might also credit this to the population), the fundamental concept of a Bank runs deep in the country. The same is true for multiple financial institutions.

Because of the value-conscious nature of Indian consumers, financial institutions in the country, banks and stock exchanges, for example, have established a strong base with them. For instance, just the last two years saw more than 1.42 Crore new investors entering the markets. However, the majority of the Indian population is still highly unaware of the processes followed by these financial institutions to provide them with their services.

This blog gives a brief introduction of these institutions that Indians interact with on a day to day basis.

Banks

Banks are probably the most significant economic drivers for a country. A bank's primary task is to facilitate the flow of money between people and businesses. The main customers in this ecosystem are depositors and borrowers. Depositors get to deposit, withdraw and transfer their funds at any time, all the while getting guaranteed security on these funds.

Using these deposited funds, Loans are lent out to the Borrowers at a higher interest rate, thereby letting the banks make money in the process. The Reserve Bank of India is the regulatory body overseeing all the other banks.

Mutual Fund Companies (AMCs)

Mutual funds are a common term now. A tool for long term wealth creation, these instruments also offer excellent stability. These mutual funds are managed by professionals making up what is known as an Asset Management Company (AMC).
Apart from these specialists, there are Trustees involved, responsible for overseeing operations. These parties are responsible for handling your money and investing it across different themes. SEBI (Security Exchange Board of India) is the regulatory body that oversees AMCs.

Stock Exchanges

This is an institution where financial instruments such as stocks, bonds, securities are traded. Stock exchanges provide a floor where buyers and sellers can meet and execute trades. This trading cycle is completed by stock exchanges and brokers (mediators). The two largest stock exchanges in India are the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange) whereas, the New York Stock Exchange is the world's largest stock exchange.  Investing in direct stocks is risky, but it can also yield higher returns.

Now that the essential checkpoints are covered, you are ready to dive deeper into investing. Stay tuned for more!

FAQs

Will the banking system change in the future?

Yes, with new technology, the financial system has the potential to become decentralised, which means that banks will no longer have control over your transactions through the use of Smart Contracts on a Blockchain.

What will happen if the broker through which I invested such as Spenny shuts down?

Whenever you invest in Mutual Funds, there is a separate account under your name with the AMC. So if god forbid, Spenny shuts shop, your account will still be available with the AMC of your mutual fund and all your money will be safe.

What is the role of the broker in the Stock Exchange?

Brokers are like middlemen in between the Stock Exchange and Investor. They buy and sell shares on behalf of the investor on the Stock exchange. Zerodha, Groww, Upstox are some of India’s top Brokers.

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Copyright 2021 Spenny Fintech Pvt. Ltd.
Made with ❤️ in India