Indian financial system 1

Aditya kumar

INDIAN FINANCIAL SYSTEM

Introduction The experiences of the The economic scene in

the post independence period has seen a sea change; the end result being that the economy has made enormous progress in diverse fields. There has been a quantitative expansion as well as diversification of economic activities 1980s have led to the conclusion that to obtain all the benefits of greater reliance on voluntary, market-based decision-making, India needs efficient financial systems

Indian Financial System

It is the financial system that supplies the necessary financial inputs for the production of goods and services which in tern promote the well being and standard of living of the country.

Financial system is a broader term which brings under its fold the financial markets (long term & short term.) and the financial institutions which support the system

MEANING OF THE FINANCIAL SYSTEM

The major assets traded in the financial system is to mobilize the savings in the from money and monetary assets and invest them to productive ventures.

An efficient functioning of the financial system facilitates the three flow of funds to more productive activities and thus promotes investments.

Thus the financial system provided the intermediation between savers and investors and promotes faster economic development.

To link the savers & investors.To inspire the operators to monitor the

performance of the investment.To achieve optimum allocation of risk

bearing.It makes available price - related information.It helps in promoting the process of financial

deepening and broadening

Functions of the Financial system

FINANCIAL INSTITUTIONFINANCIAL MARKETFINANCIAL INSTRUMENTFINANCIAL SERVICES

COMPONENTS OF INDIAN FINANCIAL SYSTEM

Banking Institutions: Participate in the economy's payment mechanism, deposit liabilities constitute a major part of national money supply.

Non-Banking Institutions: LIC, SIDBI, IIBI, IFCI ( All India Financial Institutions), SFCs & SIDCs

FINANCIAL INSTITUTION

Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

FINANCIAL MARKET

Classification

Money market(Short term instrument)

Capital markets(Long term instrument)

The most important distinction between the two: The difference in the period of maturity.

Main Function To channelize savings into short term productive

investments like working capital .

Instruments in Money Market Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note

Money Market

Part of the national money market

Day-to day surplus funds mainly of banks are traded

Short term in nature

Maturity of these loans vary from 1 to 15 days

Lent for 1 day: Call money

Lent for more than 1 day but less than 15 days: Notice money

Convenient interest rate

Highly liquid loan repayable on demand

Call Money Market

Unsecured Promissory note.

Issued by well known companies with strong and high credit rating.

Sold directly by the issuers to investors or through agents like merchant banks and security houses.

Flexible Maturity

Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.

Commercial Papers

Referred as note payable in accounting

It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee).

The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Promissory Note

Defined as short term deposit by way of usance promissory notes.

Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Transferable in nature

Free negotiability and limited flexibility

Certificates of deposits

Invest primarily in money market instruments of very high quality.

RBI and public financial institution can set it either directly or through its existing subsidiaries.

MMMF Open Ended Close Ended

Money market mutual funds

Provided resources needed by medium and large scale industries.

Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources of funds

Capital Markets

Main Activity

Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.

Provides opportunities to various class of individuals and entities.

Structure of Capital Markets

Primary Markets Secondary MarketsWhen companies need financial resources for its expansion, they borrow money from investors through issue of securities.

The place where such securities are traded by these investors is known as the secondary market.

Securities issued a) Preference Sharesb) Equity Sharesc) Debentures

Securities like Preference Shares and Debentures cannot be traded in the secondary market.

Equity shares is issued by the under writers and merchant bankers on behalf of the company.

Equity shares are tradable through a private broker or a brokerage house.

People who apply for these securities are: a) High networth individualb) Retail investorsc) Employeesd) Financial Institutionse) Mutual Fund Housesf) Banks

Securities that are traded are traded by the retail investors.

One time activity by the company. Helps in mobilising the funds for the investors in the short run.

Primary Securities: Equity, Preference, Debt and Various combinations.

Secondary Securities: Mutual Fund Units and Insurance Policies etc.

Financial Instruments

DepositoriesCustodialCredit RatingLeasingPortfolio ManagementUnderwriting etc.

Financial Services

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