INDIAN FINANCIAL SYSTEMINDIAN FINANCIAL SYSTEM

Presented Presented byby

Dr.S.C.BihariDr.S.C.Bihari

WHAT IS A FINANCIAL SYSTEM

• Financial system: An integral part of modern economy.

• The financial system of a country : A set of • Organizations, • Instruments, • Markets, • Services and • Methods of operations, procedures -• Closely interrelated with each other.

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Structure of a Financial System

FinancialServices

Financial Markets

FinancialInstruments

Financial Intermediaries

Organized Unorganized

Primary / Secondary

Primary / Secondary

Capital Markets

Money Markets

Primary / Secondary

Short Term

Medium Term

Long Term

Regulatory

Non-Intermediaries Others

BANKING

NON-BANKING

Intermediaries

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Financial Services

Leasing

Stock Holding

Refinancing

Discounting Rediscounting

Factoring

Merchant Banking

HirePurchase

FinancialPerformanceGuarantees

Credit functions

Acceptance Of Deposits

FinancialServices

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Financial Instruments• Enable movement of funds from surplus

units to deficit units• There are instruments for savers such as

deposits, equities, mutual fund units, etc.• There are instruments for borrowers such

as loans, overdrafts, etc.• Like businesses, governments too raise

funds through issuing of bonds, Treasury bills, etc.

• Instruments like PPF, KVP, etc. are available to savers who wish to park money with safe government avenues.

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Financial Instruments contd.Financial Instruments contdFinancial Instruments contd.

KVPs

Relief Bonds

National Savings

CertificateDebt Equity

Swaps

DepositsWith

Companies

CapitalGains Bonds

Preference Shares

EquityShares

Financial Instruments

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Financial Markets• Money Market-

for short-term funds (less than a year)• Organised (Banks)• Unorganised (money lenders, chit funds,

etc.)

• Capital Market-for long-term funds• Primary Issues Market• Stock Market• Bond Market

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Organised Money Market

• Call money market• Bill Market

• Treasury bills• Commercial bills

• Bank loans (short-term)• Organised money market comprises

RBI, banks (commercial and co-operative)

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Money Market Instruments• Money market instruments are those

which have maturity period of less than one year.

• The most active part of the money market is the market for overnight call and term money between banks and institutions and repo transactions

• Call money/ repo are very short-term money market products

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Money Market Instruments contd…• Certificates of Deposit• Commercial Paper• Inter-bank participation certificates• Inter-bank term money• Treasury Bills• Bill rediscounting• Call/notice/term money• Market Repo

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Capital Market• Market for long-term capital. Demand

comes from the industrial, service sector and government

• Supply comes from individuals, corporates, banks, financial institutions, etc.

• Can be classified into:• Gilt-edged market• Securities market (new issues and stock

market)

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Securities MarketIt refers to the market for shares and debentures of old and new companies

• New Issues Market- also known as the primary market- refers to raising of new capital in the form of shares and debentures

• Stock Market- also known as the secondary market deals with securities already issued by companies

Types of Financial Intermediaries• Depository institutions and • Non-depository institutions.

DEPOSITORY INSTITUTIONS• 1. Commercial Banks.• 2. Saving and Loans

Institutions.• 3. Credit Unions.

NON-DEPOSITORY

INSTITUTIONS

• 1. Finance Companies.• 2. Mutual Funds.• 3. Security Firms, Investment

Bankers, Brokers, and Dealers.• 4. Pension Funds.• 5. Insurance Companies.

Depository institutions provide

Funds to serve the interests of the society

Safeguard their monies and

Act as an important source for the investment community.

FINANCE COMPANIES

CONSUMERCONSUMER

SALESSALES

•The consumer finance companies (for example, GE Countrywide) provide finance to individuals for purchase of consumer goods.

•Sales finance companiesmake direct loans to consumers-by purchasing installment paper from dealers selling automobiles

and other consumer durables.

•Sales finance companiesmake direct loans to consumers-by purchasing installment paper from dealers selling automobiles

and other consumer durables.

MUTUAL FUNDSPortfolio of stocks, bonds, and/or

cash managed by an investment company

on behalf of many investors.

•When an individual invests in a mutual fund: Becomes a part owner of

a large investment portfolio

Non-life insurance do Automobile insurance

Fire insurance, Home insurance,

Engineering insuranceLiability Insurance etc.

INSURANCE COMPANIES• There are two types of insurance companies

– life insurance companies, and Non-life insurance companies.

• The principal business of life insurance companies is to insure the policyholder against death

INVESTMENT BANKING

Assist companies in raising capital,through a private placement or

public offering of company stock.

•They market large amounts of new securities on behalf of

governments, government agencies and companies.

LEASING COMPANIESLeasing :Provides access

to productive assets.

•A lessor :Gives assets on lease: Gets regular inflow of lease rentals.

•A lessee: Gets the asset at a lower cost without borrowing or owning it.

MORTGAGE BANKS

•Mortgage bankers :Fund the construction of homes, offices, buildings and other structures.

•They sell their assets to a long-term lender

such as an insurance company to get back liquidity

PENSION FUNDS Dedicated to protecting individuals and families against loss of income

Allow investors to invest a portion of their current income

as pension funds.

•Importance of pension funds :Due to increased life expectancy

Types of Financial Institutions

Financial Sector -Regulators

Regulators

Reserve Bank of India(RBI)

Securities ExchangeBoard of India

(SEBI)

Insurance Regulatoryand Development

Authority(IRDA)

Banks Capital Markets/Mutual Funds

Insurance Companies

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A Glimpse of Indian Financial SystemRegulatory

BodiesFinancial

IntermediariesDevelopme

nt Institutions

Financial Services

Financial Instruments

Reserve Bank of India Reserve Bank of India EXIM Bank Hire Purchase Equity Shares

as a regulator as a banker NABARD Deposit Insurance Preference shares

SEBI Commercial Bnaks SCICI Insurance Debentures

BIFR Cooperative banks and IDBI Guarantees Bonds

IRDA Societies SIDBI SolvenciesGovernment Securities

DICGCPost Office Savings Banks TFCI Acceptances KVP

ECGC PF Organization Bill Discounting NSS

SHCI Pension Funds Merchant Banking NSC

FMCSmall savings organizations Factoring Bank Deposits

LIC of India Credit ratingDeposit with Companies

GIC Credit information

UTIEconomic consultancy

Mutual Funds Stock holding

Investment Trusts Refinancing

Underwriting

Leasing

Thanks for your attention

•Dr. S. C. Bihari• Tell:08417-236660 to 65(Extn: 6214)• Mail:scbihari@gmail.com