The Financial System

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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