FINANCIAL MARKET Prof. (Dr.) Paresh Shah FCMA., Ph.D. (Finance)., F.D.P.(IIMA) Prof. (Dr.) Paresh Shah 1 Session– 1.

FINANCIAL MARKETProf. (Dr.) Paresh Shah

FCMA., Ph.D. (Finance)., F.D.P.(IIMA)

Prof. (Dr.) Paresh Shah1

Session– 1

INTRODUCTION

Prof. (Dr.) Paresh Shah2

System stands for a set of bodily organs like composition or concurring in function, a scheme of classification and a method of organisation.

Finance holds the key to all human activities.

Finance is the study of money – its nature, creation, behaviour, regulation and administration.

FINANCIAL SYSTEM

Prof. (Dr.) Paresh Shah3

A set of inter-related activities or services working together to achieve some predetermined purpose or goals.

Includes indifferent markets, institutions, instruments, services and mechanism which influence the generation of savings, investment, capital formation and growth.

FINANCIAL SYSTEM

Prof. (Dr.) Paresh Shah4

Van Horne : the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption.

Robinson: To provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth.

FUNCTIONS

Prof. (Dr.) Paresh Shah5

Mobilisation of savingsDistribution for industrial investmentStimulating capital formationTHE VERY OBJECTIVE IS ECONOMIC

GROWTH.

PROCESS

Prof. (Dr.) Paresh Shah6

The process of savings, finance, and investment involves financial institutions, markets, instruments and services.

Supervision, control and regulation are equally significant.

FINANCIAL MANAGEMENT IS AN INTEGRAL PART OF THE FINANCIAL SYSTEM.

Prof. (Dr.) Paresh Shah7

ECONOMIC GROWTH GOAL

FINANCIAL MARKETS

SYSTEMFINANCIAL SYSTEM

FINANCIAL INSTITUTI -ONS

FINANCIAL INSTRUM -ENTS

FINANCIAL SERVICES

SEGMENTS OF THE ECONOMY

FINANCIAL ASSETS AND INTERMEDIARIES

Prof. (Dr.) Paresh Shah8

Financial assets with attractive yield, liquidity, and risk characteristics encourage savings in financial form.

By evaluating alternative investments and monitoring the activities of borrowers, financial intermediaries increase the effciency of resource use.

The efficient use of resources, saving and risk taking are the corner stones of a growing economy.

CURRENCY CRISIS

Prof. (Dr.) Paresh Shah9

A FOREIGN EXCHANGE OR CURRENCY CRISIS occurs when a speculative attack on a country’s currency results in a devaluation or sharp depreciation or forces the central bank to defend the currency by selling large amounts of reserves or by significantly raising interest rates.

BANKING CRISIS

Prof. (Dr.) Paresh Shah10

Occurs when actual or potential bank runs, or failures, induce banks to suspend the internal convertibility of their liabilities or force the government to intervene to prevent this by providing banks with large-scale financial support.

DEBT CRISIS

Prof. (Dr.) Paresh Shah11

Occurs either when a borrower defaults or when lenders believe default is likely and therefore withhold new loans and try to liquidate existing ones. Debt crisis can be associated with either commercial or private or sovereign or public debt.

USERS OF FIANCIAL SERVICES

Prof. (Dr.) Paresh Shah12

House hold sector viz., unregulated firms and individuals. The seek convenience, liquidity, and security.

Businesses – complicated needs. Needs short term credit to finance inventories and long term funds to finance capital expansion.

Government – use payment services, net borrowers

PROVIDERS OF FINANCIAL SERVICES

Prof. (Dr.) Paresh Shah13

FROM SAVINGS SIDE:Financial institutionsDeposit institutionsContractual savings institutionsCollective investment institutions

FROM LENDING SIDE:Commercial banks Universal bankingFactoring

Prof. (Dr.) Paresh Shah14

Structure of Financial Institutions in India

Commercial Co – operative OtherBanks Societies Institutions

Commercial Banks

Prof. (Dr.) Paresh Shah15

Public SectorState Bank of IndiaAssociate BanksNationalised Banks

14 Major Banks Nationalised on 19th July, 1969 6 Banks Nationalised on 15th April, 1980

Regional Rural Banks

Commercial Banks

Prof. (Dr.) Paresh Shah16

Private SectorForeign Banks in IndiaOther Indian BanksNon – Scheduled Banks

Co – Operative Societies

Prof. (Dr.) Paresh Shah17

Central Co – Operative Banks State Co – Operative Banks

Primary Agriculture Credit Societies Farmers Services Societies

Central Land Development Banks State Land Development Banks

PLDBs

Other Institutions

Prof. (Dr.) Paresh Shah18

GovernmentNational Savings CorporationPost Office Savings BankEmployees Provident Fund

Other Institutions

Prof. (Dr.) Paresh Shah19

Public SectorLIC GICUTI DICGCECGC Exim BankICICI Bank IDBIIFCI IRBINABARD SFCsSIDCs AFCSIDBI SEBISTCI IIDB

Other Institutions

Prof. (Dr.) Paresh Shah20

Private SectorChitsNidhisCorporate BodiesHire Purchase CompaniesInvestment CompaniesMerchant Bank DivisionsLeading CompaniesStock ExchangeFinance CompaniesCredit Rating AgenciesDepositories

Prof. (Dr.) Paresh Shah21

Rural Financial System

Providers Users

RBI NABARD Farmers

Co – Operatives Cottage Industries

Banks Artisans

RRB’s Individuals

AFC Processing Industries

Prof. (Dr.) Paresh Shah22

RBI Discount & Money Market Brokers & Stock &Finance House (Banks & FIs) Intermediaries Capital

Market

Near Short Term Short to LongCash Money Assets Funds Term Money Long

TermGovt. Securities FundsGilt-edged Market

Ready Overnight up Few Days From Few to Few Months

Money to 15 days to a few Many Years -- to fewmonths Short, Mediumyears

Long TermMONEY AND STOCK MARKETS

Prof. (Dr.) Paresh Shah23

Creation of Thrift and Transfer Exchange FinancialMoney saving of Funds Services

Lending Investment Capital Entrepreneurshipformation

Agriculture Industry Trade Services Consumption

Employment Income Environmental InstitutionalGeneration Development Building

Rural Poverty Social ImprovementDevelopment Alleviation Growth of Standard of

Living

Socio – Economic GrowthSCHEMATIC PRESENTATION OF THE FINANCIAL SYSTEM

MONEY market

Prof. (Dr.) Paresh Shah24

Ensures efficient functioning of the financial system and provides increased flexibility in banks operation.

J.S.G. Wilson : a centre in which financial institutions congregate for the purpose of dealing impersonally in monetary assets.

Short term funds are lent and borrowed.

MONEY MARKET COMPONENTS

Prof. (Dr.) Paresh Shah25

Two componentsCall money market – where day to day

surplus funds, mostly of banks, is traded in.Bill market – RBI made advances to

scheduled commercial banks in the form of demand loans against their promissory notes. To reduce reliance on cash credit arrangement.

Money Market Instruments

Prof. (Dr.) Paresh Shah26

Treasury billShort-term borrowings of the government14-day treasury bill

The auction of 14-day treasury bills are held on a weekly basis

Cater to the needs of investing the surplus funds of state government, foreign central bank, etc.

91-day treasury bills182-day treasury bills364-day treasury bills

Money Market Instruments

Prof. (Dr.) Paresh Shah27

Commercial billsInter bank call moneyCommercial paperCertificate of depositRepurchase option

CAPITAL Market

Prof. (Dr.) Paresh Shah28

Productive capital raised and made available for industrial purposes.

Developed capital market solved the problem of paucity of funds.

Facilitates increase in production and productivity in the economy

Enhances economic welfare of the society.