Financial System

FINANCIAL SERVICES

Financial servicesMeans Mobilizing and allocating savings Also called financial intermediation Mobilization of savings into investments

Definition “activities, benefits and satisfaction

connected with the sale of money that offer to users and customers financial related value.”

EVOLUTION OF FINANCIAL SERVICES IN INDIA:

1. Initial phase (1960-80)2. Second phase (1980-90)3. Third phase (1990 onwards )

Financial system

Financial institutio

ns

1.Merchant banking

1. Investment companies

Era2.Modern

services era3.Depository

era3.Legislative

era

3.FIIs era

FinancialMarkets

Stages Phase 1 Merchant banking era Between 1960 & 1980 Merchant banking Involved in- Identifying projects- Conducting feasibility analysis- Advice- Issue management- Leasing activities was started in the year 1970

Stages phase 1 Investment companies era Growth of Insurance and

investment companies LIC, GIC and UTI initiated to enter

into this segment during this period

Stages phase 2 modern services era counter share transfers pledging of shares mutual funds Factoring Discounting venture capital credit rating- Most important to bring

financial discipline

Stages phase 3 depository era The depositories the stock lending schemes online trading paperless trading Dematerialization book buildings are the services in

this phase

The lender shall enter into an agreement with the approved intermediary for depositing the securities for the purpose of lending through approved intermediary as per the scheme and the borrower shall enter into an agreement with the approved intermediary for the purpose of borrowing of securities and as such there shall be no direct agreement between the lender and the borrower for the lending or borrowing of securities.

Stock lending scheme

Stages phase 3 Legislative era Indian economy got liberalized

during 1991, FERA was replaced by FEMA-

Stages phase 3 FII era financial services industry in India was

dominated by commercial banks The economic liberalization has brought

in a complete transformation in the Indian financial services industry .

Divestment guidelines by SEBI . More FIIs

Financial system is a system which supplies the necessary financial Inputs for the production of goods & services which in then promote the well being & standard of living of the people of a country

1- provision of liquidity

2-mobilisation of savings

FINANCIAL SYSTEM

Functions of financial system

FINANCIAL MARKETS Wherever a financial transaction takes

place, it is deemed to have taken place in the financial market.

Financial markets are pervasive throughout the economic system.

Financial markets can be referred to as those centre and arrangements which facilitate buying and selling of financial assets, claims and services.

Organised market Unorganised market 

Unorganized markets

In these markets, there are a number of money lenders, indigenous bankers, and traders etc. who lend money to the public.

Indigenous bankers also collect deposits from the public.

Private finance companies, chit funds etc. whose activities are not controlled by the RBI.

Recently the RBI has taken steps to bring private finance companies and chit funds under its strict control by issuing non-banking financial companies (Reserve Bank) Directions, 1998.

Financial instruments have not been standardized

Organized Markets

standardized rules and regulations governing their financial dealings.

High degree of institutionalization and instrumentalisation.

These markets are subject to strict supervision and control by the RBI or other regulatory bodies.

Classified as Capital Market  Money Market

CAPITAL MARKET

Capital market is a market for financial assets which have a long or indefinite maturity.

It deals with long-term securities which have a maturity period of above one year.

Capital market may be further divided in to three;

Industrial Securities Market Government Securities Market Long-term Loans Market 

i. Industrial Securities Market It is a market for industrial securities namely; i) equity shares or ordinary shares, ii) preference shares iii) debentures or bonds. Market where industrial concerns raise

capital or debt by issuing appropriate instrument

subdivided in to:  Primary Market or New issue market Secondary Market or Stock exchange

Primary market deals with those securities which are issued to the public for the first time.

3 ways to raise capital Public issue Rights issue Private placement Secondary market is a market for secondary

sale of securities. Stock exchanges regulated under Securities

Contract Regulation Act, 1956

ii. Government Securities Market It is otherwise called Gilt-edged securities market. It is a market where government securities are traded. Government securities:-short-term and long-term. Long-term securities are traded in this market while

short-term securities are traded in the money market. E.g securities issued by central Govt, state Govt, semi

govt authorities ( city corporations, port trust, state electricity boards, PSE)

iii. Long-term Loans Market Development banks and commercial

banks play a significant role in this market by supplying long-term loans to corporate customers.

Long-term loans market can be classified in to:

Term loans Market Mortgages market Financial Guarantees Market

Term loans market- Long term & medium term loans to

corporate customers- Development banks operate- E.g IDBI, IFCI, ICICI- Helps in identifying investment

opportunities, encourage entrepreneurs

Mortgages Market- Supply mortgage loan to individual

customers- Loan against an immovable property- Equitable mortgage - Legal mortgage- E.g HUDCO

Financial Guarantees Market- Finance provided against the guarantee

of a reputed person in financial circle- On non repayment , liability falls on the

guarantor- Provided by development banks,

commercial banks- ECGC( Export credit guarantee

corporation)

MONEY MARKET

Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year.

It is a market for purely short-term funds.

Money Market InstrumentsTreasury Bills A treasury bill is a promissory note or

a finance bill issued by the government.

Maturity period is 3-12 months. 14 days T- bill, 91 days, 182 days,

364 days Government uses T bill to raise short

term funds Ad hoc and ordinary T bill

Money Market InstrumentsCommercial paper It is an unsecured promissory

transferable after a particular maturity period ( 3 months or less).

Issued by creditworthy and highly rated corporate for meeting working capital requirements

E.g of corporate : BPCL ,HPCL,IOC , L&T,Dabur etc.

Commercial Bills It is a bills of exchange arising out of

genuine trade transactions. They are negotiable instruments drawn

by the seller on the buyer, which are accepted and discounted by commercial banks

Maturity period – 30 days, 60days or 90 days

E.g demand bills, export bills, import bills

Call money Call money market is a market for

extremely short period loans - one day to fourteen days.

Associated with stock exchanges Interest rate varies ( day & hourly) Money borrowed for 1 day – call money Money borrowed for more than 1 day to

14 days– notice money

Certificate Of deposit Unsecured short term instruments issued

by commercial banks and developmental institutions

Similar to fixed deposits, but transferable and tradeable

Repo Instruments stands for repurchase The borrower parts with the securities to the

lender with an agreement to repurchase them at the end of a fixed period at a specific price

The difference between the repurchase price and the original price is the cost for the borrower.

Cost of borrowing – repo rate India – repos are conducted for a period of 3 days Eligible securities are decided by RBI

Short-term loan Market  Short –term loans are given to corporate

customers For meeting their working capital

requirements.  

DFHI Discount & finance house of India Set up to provide liquidity to money market

instruments Constituted under Indian Companies Act,

1956 Commenced operations in April 1988 Joint stock company jointly owned by RBI,

Public sector banks and financial institutions. Function – discount, rediscount, buy/ sell/

underwrite marketable securities

Financial instruments Financial instruments refer to the documents

which represent financial claims on assets. Financial assets refer to the claims to

repayment of certain sum of money the end of a specified period together with interest of individual.

Eg: Bill of exchange, promissory notes, Treasury bill, government bond, deposit receipt, share, debenture etc

Financial instruments can also be called financial securities.

A good teacher must know how to arouse the interest of the pupil in the

field of study for which he is responsible. He must himself be a master in the field of study and be in touch with the latest developments in the subject, he must

himself be a fellow traveller in the exciting pursuit of knowledge..."

- Dr. S Radhakrishnan

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