Financial Sector

Reviewed by Annapoorna | Updated on Aug 27, 2020

What are Financial Markets?

The financial sector is a segment of the economy composed of companies and institutions that provide commercial and retail customers with financial services. A large portion of this sector produces mortgage and loan income, which increases the value as interest rates decline.

The economy's health is mainly dependent upon the efficiency of its financial sector. The better the economy is, the safer it is for the country. A weak financial sector typically means a declining economy.

The financial sector is equated with Dalal Street by many people and the exchanges that operate on it. However, the financial sector is one of the essential components of many developed economies. It's made up of brokers, financial institutions, and money markets—all of which provide the necessary services to help keep the Main Street going every day.

For an economy to remain stable, a healthy financial sector is required. This sector is advancing loans for businesses so they can expand, grant homeowners mortgages, and issue insurance policies to protect individuals, businesses, and their assets. It also helps to build up retirement savings, which supports millions of people.

The financial sector generates a good portion of its lending and mortgage income in a setting where interest rates go down. When the rates are low, the economic conditions open the doors for more spending and capital projects. If that happens, the financial sector gains, which means more economic growth.

Classification of Financial Sector

The financial sector consists of many different industries ranging from banks, investment houses, insurance firms, real estate brokers, consumer finance firms, mortgage lenders, and real estate investment trusts (REITs).

Primarily, the financial sector includes financial institutions, banks, and non-banking financial institutions. Financial institutions provide members and clients with financial services. It is also called financial intermediaries since they act as intermediaries between savers and borrowers.

Banks are financial intermediaries who provide lenders with capital to generate revenue and accept deposits. They are strictly regulated as they provide market stability and consumer protection. Banks include:

  • Public banks
  • Commercial banks
  • Central banks
  • Cooperative banks
  • State-managed cooperative banks
  • State-managed land development banks

Non-banking financial institutions are financial institutions, not banks, that facilitate financial services, such as investment, risk pooling, and market brokering. They generally don't have full banking licenses.

  • Finance and loan companies
  • Insurance companies
  • Mutual funds
  • Commodity traders

Insight into the Financial Sector in India

India has a variegated financial sector which is experiencing rapid expansion, both in terms of the healthy growth of existing financial services firms and new market entry entities. The industry comprises commercial banks, insurance companies, financial non-banks, cooperatives, pension funds, mutual funds, and other smaller financial institutions.

However, India's financial sector is predominantly a banking sector with commercial banks accounting for over 64 per cent of the financial system's total assets. India's government has introduced several reforms to liberalize, regulate, and enhance that industry.