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INDIAN FINANCIAL

SYSTEM

3rd semester b.com

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FINANCIAL SYSTEM

“a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.”

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Financial concepts

Financial assets Financial intermediaries/Institutions

Financial markets Financial rate of return Financial instruments Financial services

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FINANCIAL INSTITUTIONS It include all organisations which intermediate or facilitate financial transactions between individuals and corporate entities.

They mobilise savings from those have it and make it available for investment.

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TYPES OF FINANCIAL INTERMEDIARIES Capital market intermediary

Capital market intermediaries are mainly institutions which provide long term funds to individuals and corporate customers. They include term lending institutions like ICICI and investing institutions like LIC and GIC.

Money market intermediaryMoney market intermediaries supply only short term funds to individuals and corporate entities. E.g. commercial banks

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FINANCIAL MARKETS Financial markets can be referred to as

those centres and arrangements which facilitate buying and selling of financial assets, claims and services.

Financial markets may have a geographical location

Wherever a financial transaction takes place, it is deemed to have taken place in financial market.

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CLASSIFICATION OF FINANCIAL MARKETS:

Un Organised Market consists of number of money lenders, indigenous bankers and private finance companies, chit funds whose activities are not fully controlled by RBI.

Organised MarketIn the organised market there are standardised rules and regulations governing their dealings. In organised market there is also a high degree of institutionalisation and instrumentalisation.

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CAPITAL MARKET The capital market is a market for

financial assets or financial instruments having a long maturity period.

It deals with securities which have a maturity period of more than a year. E.g. equity shares, debentures.

It mobilises long term capital for the companies

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CLASSIFICATION OF CAPITAL MARKETSo Industrial securities Market

oGovernment securities Market

oLong term loans Market

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INDUSTRIAL SECURITIES MARKET It is market which deals the securities issued by industrial companies.

It is a market where industrial companies raise their capital or long term debt in the form of shares and debentures

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CLASSIFICATION OF INDUSTRIAL SECURITIES MARKET

Primary market or New issue Market

Secondary market or Stock exchanges

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PRIMARY MARKETS It deals with securities which are issued

to the public for the first time. New issue market helps in capital

formation. There is no specific location where these

transactions take place. it is an arrangement where companies

issue their shares and debentures to the public for long term funds

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Stock Exchanges

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SECONDARY MARKET securities which have already passed

though the primary market are bought and sold in this market.

The securities are listed in stock exchanges and are continuously bought and sold.

This market provides continuous and regular market for securities.

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GOVERNMENT SECURITIES MARKETS

It is a market where securities issued by the government are traded.

Otherwise known as Gilt-Edged securities market.

Securities issued by Central and state Governments, Semi-government authorities like City Corporations, Port Trusts, State Electricity boards, All India and state financial institutions and public sector enterprises are dealt in this market.

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LONG TERM LOANS MARKET It is the collection of institutional lenders

and borrowers of long term loans. Development banks and commercial

banks play a significant role in this market.

This market includes term loans market, mortgages market, and financial guarantee market.

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MONEY MARKET Money market deals with securities

which have a maturity period of up to one year.

Short term financial requirements of corporate entities and government are raised in this market.

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FINANCIAL INSTRUMENTS it refers to a claim to the repayment of a

certain sum of money at the end of a specified period together with interest or dividend

Classification:Primary securities:- issued directly by the

ultimate investors to the ultimate savers. E.g. shares

Secondary securities:-issued by some intermediaries called financial intermediaries to the ultimate savers. E.g. mutual fund units

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FINANCIAL SERVICES Financial services can be defined

as the products and services offered by institutions like banks of various kinds for the facilitation of various financial transactions.

It also includes other related activities in the world of finance like loans, insurance, credit cards, investment opportunities and money management as well as providing information on the stock market

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FINANCIAL SERVICES The organizations involved are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises.

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FUNCTIONS OF FINANCIAL SERVICES

Facilitating financial transactions in the economy.

Mobilizing savings Allocating capital funds Monitoring managers (so that the funds

allocated will be spent as envisaged). Transforming risk (reducing it through

aggregation and enabling it to be carried by those more willing to bear it).

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CHARACTERISTICS AND FEATURES Customer-Specific

Intangibility

Tendency to Perish

Dynamic

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SCOPE OF FINANCIAL SERVICES

Traditional ActivitiesFund based activities andNon-fund based activities

Modern activities.

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TRADITIONAL ACTIVITIES – FUND BASED Underwriting or investment in shares,

debentures, bonds, etc. of new issues. Dealing in secondary market activities. Participating in money market

instruments like commercial Papers, certificate of deposits, treasury bills, discounting of bills etc.

Involving in equipment leasing, hire purchase, venture capital, seed capital,

Dealing in foreign exchange market activities.

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NON FUND BASED ACTIVITIES/ FEE BASED’ ACTIVITIES Managing the capital issue — i.e.

management of pre-issue and post-issue activities

Making arrangements for the placement of capital and debt instruments with investment institutions.

Loan syndication for clients Assisting in the process of getting all

Government and other clearances.

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MODERN ACTIVITIES Rendering project advisory services Planning for M&A Guiding corporate customers in capital

restructuring. Acting as trustees to the debenture

holders. Structuring the financial collaborations /

joint ventures. Rehabilitating and restructuring sick

companies

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MODERN ACTIVITIES Hedging of risks Undertaking risk management services

like insurance services Consultancy on capital structure and

cost of capital Providing credit rating services. Undertaking services relating to the

capital market, such as 1)Clearing services 2)Registration and transfers 3)Safe custody of securities

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DEVELOPMENT OF FINANCIAL SYSTEM IN INDIA Nationalisation of financial

institutionRBI in 1948Imperial bank of India to SBI in 195614 banks in 1969 and 6 more in 1980

Start of UTIStarted in 1964

UTI bank 1994 UTI investor services ltdUTI security exchange ltd

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Establishment of development banksIFCI 1948, ICICI 1955, IDBI 1964

Institution for financing agricultureNABARD 1982

Institution for foreign tradeEXIM Bank 1982

Institution for housing financeNHB 1988

SHCIL 1987 MF Industry

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VC institutionsIDBI venture capital fund 1986IFCI’s The Risk Capital and

Technology Finance Corporation Credit rating agencies

CRISIL, ICRA and CARE Legislative support Financial sector legislative

reforms commission

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FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT Mobilising savings Promoting investments Encouraging investment in financial

assets Allocating savings on the basis of

national priorities Creating credit Providing a spectrum of financial assets Financing trade, industry and agriculture Encouraging entrepreneurial talents Developing backward areas

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WEAKNESSES OF INDIAN FINANCIAL SYSTEM Lack of coordination between different

financial institutions Monopolistic market structure Dominance of development banks in

industrial financing Inactive and erratic capital market Imprudent financial practices