The financial sector is a section of the economy comprising of firms and institutions that provide financial services to commercial and retail customers. The sector comprises of a broad range of industries like banks, investment companies, insurance co’s, and real estate firms. The health of the economy largely depends on the strength of the financial sector. The stronger it is, the healthier the economy. This sector provides loans to businesses so that they can grow.
They also grant mortgages to homeowners and issue insurance policies to protect people, companies and their assets. It helps build up savings for retirement and employs millions of people. The financial sector generates a large portion of its revenue from loans and mortgages. These gain value when interest rate drops. When rates are low, the economic conditions open up the doors for more capital projects and investments. When this occurs, the financial sector benefits, meaning more economic growth.
Factors affecting the financial sector
- Rising interest rates on a moderate basis
In such cases, the financial companies can earn more like the return of their investment on loans they have made to their customers.
- Reducing Regulations
When the govt. dilute or lessen the regulations, the financial sector will benefit. It could lessen the burden while increasing their profit.
- Helping consumers with finance
As consumer pay their debt; they lessen the risk of default. The lighter debt load gives them tolerance for more debt. It further increases profitability.
On the other hand, some negative factors that affect this sector are
- A rapid rise in interest rates
It will cause a drop in demand for credit, negatively affecting the financial sector.
- A flat yield
If the spread or the difference between short term and long term interest rates drop too far, the financial sector can suffer a loss.
legislation has a big impact on the financial sector while it may help protect consumer, more strictness can hamper the business operated by financial services.
The demand and supply mechanism of the financial industry is largely driven by factors like.
- Potential field.
- Risk rating.
- Availability of information.
- Access to alternatives.
- Money supply.
- Interest rates.
- Economic condition
The financial service industry, include a wide range of companies and institutions involved with money that include businesses providing money management, lending, investment, ensuring and security insurance and trading services. The following institutions are a part of the financial industry.
- Credit card issues
- Insurance companies
- Investment Bankers
- Security traders.
- Financial planners
- Security exchanges
All the above companies of the financial service industry are in the business of managing money. Globally, the financial service industry leads the world in terms of earnings and equity market capitalization. The financial industry is an industry in itself a well as on ancillary that supports other industries. Trade and commerce across the world would become standstill without the support of the financial service industry. India has a diversified financial sector which is undergoing rapid expansion both in term of strong growth of existing financial industries and new entities entering the market. The financial sector with commercial banks accounting for more than 64% of the total asset held by the financial system.
The govt. of India has introduced several reforms to liberalize, regulate and promote this industry. RBI has taken various measures including credit guarantee fund scheme for micro and small enterprise and setting up micro-unit development and refinance Agency (MUDRA), with the combined efforts of both public and private sectors. India is one of the world’s most vibrant capital markets.
Another crucial component of India’s financial industry is the insurance industry. The total of the first-year premium of LIC reached to a level of Rs. 1590 Crores as of Jan 2019. Along with the secondary market, the market for Initial public offer (IPO) has also witnessed rapid expansion. Apart from this, BSE (Bombay stock exchange) will set a joint venture with Ebix Inc. to build a robust insurance distribution network in the country through a new distribution exchange platform.