The Financial System

THE FINANCIAL SYSTEM

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System System is a set of inter-related components working together to achieve some purpose

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Financial System Financial System

Financial Institutions Commercial Banks

Financial Markets

Financial Services

Shares Money Market

Industrial Banks Provident Funds

Financial Instruments

Capital Market

Debentures / Bonds Commercial Paper (CPs)

Merchant Banking

Project Consultancy

Certificate of Deposits (CDs)

Mutual Funds

Public DepositS PDs)

NBFCs

Mutual Fund Units Insurance Policies Government Bonds

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Functions of Financial System • • • • • • • • •

Payment system Mobilisation of savings Size transformation Maturity transformation Risk transformation Provision of liquidity Cost reduction Price information Financial advice

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Evolution of Indian Financial System Phase I: Transition (1950 to 1960) Phase II: Expansion and Diversification (1969 to 1985) Phase III: Consolidation, Innovation and Liberalisation (after 1985 )

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Savers / Lenders

Flow of Funds Funds Deposits/Policies/Uni ts

Financial Institutions Banks Provident Funds Insurance Companies Mutual Funds NBFCs

Funds

Securities

 Householders Business Firms Government Foreigners

S e c u r i t i e s

Private Placement Mode

Securities: Shares/Bonds Funds

F u n d s

Financial Markets Money Market Capital Market Forex Market

Investors/Borrowers Loans

Funds

Householders Business Firms Government Foreigners

Funds Securities: Shares/Bonds 7

Assets and Financial Assets • Assets are the rights of owners • Fixed assets can be seen and can be touched (Tangible)

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Classification of Financial Assets Financial Assets

Marketable

NonMarketable

Bank Deposits

Post Office Certifica tes

Insurance Schemes

Equity Shares

Shares

Govt. Securities

Debe -ntures

MF Units

Preference Shares

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Return on Financial Assets Bonds Debentures Debt

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Preference share Equity share

Interest

Dividend

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Functions of Financial Markets • Price information • Marketability/Liquidity • Reduction of Transaction cost • Promotes savings and investments

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Distinguish between Money Market and Capital Market Points of Difference

Money Market

Capital Market

Maturity of Funds

Less than one year

Above one year

Instruments

Call Money market, Treasury Equity Shares, Bills (TBs) Market, Commercialpreference shares, Bills (CBs) market, Commercialdebentures, Government Papers (CPs) market, Certificatesecurities and loans of Deposits (CDs), Banker’s Acceptances (Bas), Repurchase Agreements (Repos), Money Market Mutual Funds (MMMF), etc.

Existence ofNo Secondary market

Yes

Place of Market

Stock Exchanges

No specific place

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Financial Instruments • Securities issued to public to raise funds • Example – Equity Share – Reference Share – Debenturers – Commercial papers – Certificate of Deposits etc.,

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Financial Intermediaries • FIs that act as bridge between savers and investors and provides needed funds to investors • FIs include: Banks and NBFCs Banks : RRBs, DBs (Industrial Banks), Cooperative Banks, Investment Banks, Commercial Banks. NBFCs: Insurance companies (life as well as General); Mutual funds etc 14

Structure of Indian Financial Intermediaries Structure of Financial Intermediaries in India

RBI Public and Pvt. Commercial Banks

SEBI

Mutual Funds

All India Development Banks Specialised FIs Exim Bank, IFCI

Venture Capital Funds

IRDA

Private Sector Insurance Companies

Public Sector Insurance Companies

Refinance Institutions NABARD, NHB NBFCs

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Regulatory Institutions • RBI • SEBI • IRDA • NABARD • NHB

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