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8/3/2019 introduction to financial management system
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INDIAN FINANCIAL SYSTEM
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FINANCIAL SYSTEMFINANCIAL SYSTEM
A financial system is a set of :
* markets
* institutions,
* instruments
which foster savings and channels them to their mostefficient use.
The major stakeholders:* savers
* intermediaries
* users
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Role of Financial System in An Economy
Linking saving and investment
Accelerating the rate of savings & investment byoffering diversified financial services and
instruments
Assisting in larger production of goods and
services
Boosting Economic Growth
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Indian Financial System
Formal / OrganizedFinancial
System
Informal / UnorganizedFinancial
System
Regulators
Financial Markets
Financial Intermediaries
Major Players
Financial Instruments
Financial Instruments
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Extent of
Development
Bank Based Market Based
Developed Japan, Germany,
France, Italy
US, UK, Singapore, Korea
Developing India Brazil
Under
Developed
Argentina, Pakistan,
Sri Lanka,
Bangladesh
Mexico, Philippines, Turkey
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FUNCTIONS OF FINANCIAL MARKETFUNCTIONS OF FINANCIAL MARKET
Mobilize and allocate savings
Provides payment and settlement system
Monitor corporate performance
Price discovery process
Provision of liquidity
Low cost of transactions and information.
Limits and reduces the risk
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Asset Transformation activity is provided by
institutions issue claims against themselves whichdiffer from the assets they acquire.
size transformation
maturity transformation
risk transformation
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FINANCIAL SYSTEM AND ECONOMYFINANCIAL SYSTEM AND ECONOMY
Economic activity and growth are greatly facilitated by the existence of afinancial system developed in terms of the efficiency of the market in mobilizing
savings and allocating them among competing users.
Basic elements of sound financial system -
* strong legal and regulatory environment
* stable money
* good integration between various market segments
It is essential that financial institutions are developed sufficiently and the marketoperations be -
** free
** fair
** competitive
** transparent
Market Efficiency would be reflected in :
* wide dissemination of information
* reduction of transaction cost
* allocation of capital to the most productive uses
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I ntegration of financial markets is a process of unifying
markets and enabling convergence of risk-adjusted returns
on the assets of similar maturity across the markets.
The process of integration is facilitated by :
access of participants to various market segments
deregulation
capital has become more mobile
technological developments
changes in the operating framework
harmonization of prudential regulations
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Importance of integrated financial markets
serve as a channel for authorities to transmit important price signals
constitute an important vehicle for promoting domestic savings,investment and consequently economic growth
fosters the necessary condition for a country¶s financial sector to emergeas an international or a regional financial centre
by enhancing competition and efficiency of intermediaries in their operationsand allocation of resources, contributes to financial stability
lead to innovations and cost effective intermediation, thereby improvingaccess to financial services for members of the public, institutions and
companies alike
induce market discipline and informational efficiency
promotes the adoption of modern technologyand payment systems toachieve cost effective financial intermediation services.
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RECENT REFORMS IN THE INDIAN FINANCIALRECENT REFORMS IN THE INDIAN FINANCIAL
SYSTEMSYSTEM
Monetary
MarketCredit
MarketForex
Market
Capital
Market
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THE REGULATORS IN THE INDIANTHE REGULATORS IN THE INDIAN
FINANCIAL SYSTEMFINANCIAL SYSTEM
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RESERVE BANK OF INDIA
The RBI was established on April 1,1935 under the Reserve
Bank of India Act,1934.
Rationale :
safety of public money
ensure productive use of funds ensure sound and healthy banking system
stable monetary position
maintain value of rupee
ensure effective coordination and control among variousparticipants of Indian financial system
control overall credit and price level in the country
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RBI acts as w atchdog of the entire financial system.
It is the sponsor bank for top ranking bank and financial
institutions like SBI,NABARD, NHB etc.
It counsels the Central and State Govt. and all public sector institutions on monetary matters.
Major role of RBI is to regulate and supervise financial
intermediaries
Regulates the quantity of money supply and availability of
credit for industry , business and trade .
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The central bank¶s basic functions are :
Issue note
Banker¶s bank
Government bank
Promote the growth of economy
Controller of foreign exchange
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RBI Regulates
Monetary
MarketCredit
MarketForex
Market
Capital
Market
* Efficiency of
resource
allocation
* Ensure priority
sector lending
* Act as debtmanager for
govt.
Stability of externalvalue of Rupee
Generate
confidence in
monetary and
exchange rate
policiesMaintain foreign
exchange liquidity
*Determine foreign
exchange rates
*Regulate inter
bank dealings
*Regulate capital
inflow and outflow
*Regulate liquidity
position
* Promote
liquidity
* Supervise
money
market
activities
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Two Major Charters are:
Reserve Bank of India Act , 1934
Banking Regulation Act ,1949
Monetary Policy refers to the use of instruments of control to
regulate money supply and credit with a view to influence thelevel of aggregate demand for goods and services.
The objectives of monetary policy are: Price stability and growth
Maintain orderly conditions in foreign exchange market Curb destabilizing speculative activities
Check undue volatility in the exchange rates
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RBI influences three intermediate targets to implement
monetary policy , they are :
broad money expansion in line with the expected
rate of growth of GDP
exchange rate
inflation
These takes into account :
* reserve money expansion
* movement in interest rates and availability of credit
* net foreign exchange reserves
* net RBI credit to government
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The central bank makes use of two types of
instruments :
Direct Instruments
Reserve Requirements : CRR ; SLR
Administered Interest rates : changes in bank rates
Credit Control : priority sector lending
Indirect Instruments
Open Market Operation
Repos
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SECURITIES AND EXCHANGE BOARD OF INDIA
The Securities and Exchange Act of 1992, providesfor the establishment of a board to protect the
interests of investors in securities and to promote the
development and regulation of the securities market.
The Board consists of : A Chairman
Two members from Government of India, Ministry of
Law and Finance
One member from RBI and
Two other members
The head office is at Bombay.
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FUNCTIONS of the BoardFUNCTIONS of the Board
regulate business in stock exchanges and any other
securities market
register and regulate the working of stockbrokers,sub-brokers, share transfer agents, bankers to issue ,trustees of trust deeds , registrars to issue , merchant
bankers ,underwriters, portfolio managers, investmentadvisors and other intermediaries associated withsecurities market
register and regulate the working of depositories,
custodians of securities ,FIIs, credit rating agencies register and regulate the working of venture capital
funds and collective investment schemes, includingmutual funds
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prohibit fraudulent and unfair trade practices
relating to securities market
promoting investor¶s education and trainingintermediaries of securities market
prohibiting insider trading in securities
regulating substantial acquisition of shares andtakeover of companies
calling for information from the corporates,
undertaking inspection ,
conducting inquiries and audits of stock exchanges,mutual funds, intermediaries and self regulatoryorganizations in the securities market
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INSURANCE REGULATOR Y AND DEVELOPMENTINSURANCE REGULATOR Y AND DEVELOPMENT
AUTHORITY (IRDA) ACT, 1999AUTHORITY (IRDA) ACT, 1999
The IRDA Act was enacted in 1999 , to provide for the
establishment of the IRDA :
to protect the interests of policy holders,
to regulate , promote and
ensure orderly growth of the industry and for matters
connected therewith/incidental thereto and also to amend the Insurance Act 1938, the LIC Act 1956
and the GIC Act 1972.
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The IRDA consists of :
A chairperson
Five full time members , to be appointed by the
government from amongst persons of ability, integrity
and standing who have knowledge/experience of life
insurance/general insurance/actuarial service,
finance/economics/law/accountancy/administration/
any other discipline which in the opinion of the
government would be useful to it. Four members to act between the chairperson and
the five full time directors .
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Powers and Functions :
These powers and functions would enable the IRDA to
perform the role of an effective watchdog and
regulator for the insurance sector in India:
Issue certificate of registration; review; modify;
withdraw; suspend or cancel such registration.
Protection of interest of the policy holders by
controlling and regulating the terms and
conditions offered by insurer ; settlement of
insurance claim ; insurable interest etc
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Specifying requisite qualifications and practicaltraining for insurance intermediaries and agents.
Specifying code of conduct for surveyors and lossassessors
Promoting efficiency in conduct of insurancebusiness
Regulating investment of funds by insurancecompanies; regulating maintenance of margin of solvency
Adjudication of disputes between insurers and
intermediaries
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Specifying the percentage of life insurancebusiness and general insurance business to be
undertaken by the insurer in the rural or social sector; Specifying the form and manner in which books of
account shall be maintained and statement of accounts shall be rendered by insurers and other
insurance intermediaries Calling for information from, undertaking inspection
of, conducting enquiries
Bring about speedy and orderly growth of the
insurance industry To set, promote, monitor and enforce high standards
of integrity, transparency, financial soundness,fair dealing and competence of those it regulates;
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To ensure speedy settlement of genuine
claims, to prevent insurance frauds and other
malpractices and put in place effective grievanceredressal machinery ;
To take action where such standards are
inadequate or ineffectively enforced.
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Thank you