Transcript
The Financial The Financial SystemSystem
Prepared by:- PANDYA KIRANPARMAR RANJITPATEL JIGNESHBHAYANI SANJAY
In this chapter we will In this chapter we will learn….learn….Functions of financial systemFinancial assetsFinancial marketsFinancial market returnsEquilibrium in financial marketsFinancial intermediariesRegulatory infrastructureTrends in the Indian financial
system
Function of the financial Function of the financial marketsmarketsPayment systemPooling of fundsTransfer of resourcesRisk managementInformation for decentralized
decision makingDealing with incentive problem
Financial assetsFinancial assetsTangible assets
◦ Land, Building, Machinery….
Intangible assets◦ Goodwill, Patent, Trademark
Financial marketsFinancial marketsFunctions of financial markets◦To facilitate price discovery◦To provide liquidity◦To reduce the cost of transacting
Classification of financial markets
◦Type of financial claims Debt market Equity market
◦Maturity of claims Money market Capital market
◦Seasoning of claim Primary market Secondary market
◦Timing of delivery Cash market Future market
◦Nature of organizational structure Exchange traded market Over the counter market
Financial market returnsFinancial market returnsInterest ratesRates of return on risk assetsInflation and real interest rates
Determinants of rates of return◦Expected productivity of capital◦Degree of uncertainty about
productivity of capital◦Time preference of people◦Degree of risk aversion
Equilibrium in financial Equilibrium in financial marketsmarkets
Amount Of Loanable Funds
Inte
rest
R
ate
A B
ie
i’e
Interest Rates in IndiaInterest Rates in IndiaRepo rateBank ratePrime lending rateFixed deposit rateGovernment bond rate
Financial IntermediariesCommercial BankDevelopmental Financial
InstitutionsInsurance CompaniesOther Public Sector Financial
InstitutionsMutual FundsNon Banking Financial CorporationsOther Organizations
Rationale for financial Rationale for financial intermediariesintermediariesDiversificationLow transaction costEconomies of scaleSignalingConfidentiality
Regulatory infrastructureRegulatory infrastructureReserve Bank of India
◦Formulate and implement monetary and credit policies
◦Banker’s bank◦Supervision ◦Regulates foreign exchange transaction◦Developing Indian financial system◦Promote the development of new
institution◦Influences the allocation of credit◦Encourage the banking system in rural
area
Security Exchange Board of India◦Regulate business in stock exchange◦Register and regulate capital market
intermediaries◦Prohibit fraudulent and unfair trade
practice◦Regulate acquisition of shares and
take over of companies◦Regulate the mutual funds
Growth and TrendGrowth and TrendEmergence of financial institution
Expansion of network
Growth in primary and secondary segment of capital market
Introduction of new schemes
Financial Development Financial Development MeasuresMeasuresFinance ratio = total financial claims
National income
Financial interrelations ratio = total financial claims
Net physical capital formation
New issue ratio = primary issues______
Net physical capital formation
Intermediation ratio = issue of financial institutions
total financial issue in the economy
1950 1995
(Approx.) (Approx.)
Finance ratio (%) 5 45
Financial interrelation ratio 0.60 3.0
New issue ratio 0.45 2.0
Intermediation ratio 0.25 0.70
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