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Luxman sharma 11/PMB/022

Financial system is a set of inter-related activities/services working together to achieve some predetermined purpose or goal.
It includes different markets, the institutions, instruments, services and mechanisms which influence the generation of savings, investment capital formation and growth.

The primary function of the system is to provide link between saving and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth. (Robinson)

To supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires."


ORGANISED FINANCIAL SYSTEM The organised financial system comprises of an impressive network of banks, other financial and investment institutions and a range of financial instruments, which together function in fairly developed capital and money markets.
Short-term funds are mainly provided by the commercial and cooperative banking structure.

Banking Cooperative system Development banking system public sector private sector Money market Financial institutions


Unorganised financial system comprises of relatively less controlled moneylenders, indigenous bankers, lending pawn brokers, landlords, traders etc. This part of the financial system is not directly amenable to control by the Reserve Bank of India (RBI).

The Reserve Bank of India as the central bank of the country, is at the head of this group. These regulations are basically of two types. First, regulations which result in the formation of new banks to meet the specific needs of a group of economic activities. Secondly, legislation that affects the structure by means of nationalisation, mergers or liquidation

The commercial banking system may be distinguished intoA. Public Sector Banks i) State Bank of India B. Private Sector Banks i) Other Private Banks;

The cooperative banking sector has been developed in the country to supplant the village moneylender, the predominant source of rural finance, as the terms on which he made finance available have generally been usurious and detrimental to the development of Indian agriculture.

Money market is concerned with the supply and the demand for investible funds. Money market provides a mechanism by which short-term funds are lent out and borrowed; it is through this market that a large part of the financial transactions of a country are cleared.

The money market is generally expected to perform following three broad functions.

(i) To provide an equilibrating mechanism to even out demand for and supply of short term funds. (ii) To provide a focal point for Central bank intervention for influencing liquidity and general level of interest rates in the economy. (iii) To provide reasonable access to providers and users of short-term funds to fulfill their borrowing and investment requirements at an efficient market clearing price.

The capital market is the place where the medium-term and long-term financial needs of business and other undertakings are met by financial institutions which supply medium and long-term resources to borrowers.

liberalisation of policies relating to foreign direct investment, public enterprise reforms, reforms of taxation system, trade liberalisation and financial sector reforms have been initiated in 1992-93.
In the area of capital market, the Securities and Exchange Board of India (SEBI) was set up in 1992 to protect the interests of investors in securities and to promote development and regulation of the securities market.

RBI is the apex financial institution of the country's financial system entrusted with the task of control, supervision, promotion, development and planning.
The RBI influences the management of commercial banks through its various policies, directions and regulations.

The central bank relies on two types of instruments. the direct and the indirect. The direct instruments of monetary control are reserve requirements, administered interest rates and credit controls. Indirect instrument of control is open market operation.

Open market operations is mainly related to the sale of government securities.

When commercial banks sell the securities and when RBI purchases them, The reserve position of the banks is improved and they can expand their credit to meet growing demands.

Cash Reserve Ratio

Statutory Liquidity Ratio

Issuing currency notes, Serving as banker to the Government. Acting as bankers' bank and supervisor. Monetary regulation and management Exchange management and control. Collection of data and their publication. Miscellaneous developmental and promotional functions and activities. Agricultural Finance. Industrial Finance Export Finance.

Internal debt of the Government of India comprises of market loans, treasury bills, special securities issued to the Reserve Bank, and International financial institution and others.

External Debt
Under the Constitution, the Central Government but not State Governments, has access to external debt as IBRD, IDA etc.

DEBT MARKET ISSUERS, INSTRUMENTS AND INVESTORS Issuer Instruments Issuance Maturity Major Investors Government of India Govt. Securities 2 to 10 years Banks, LIC, UTI, RBI Government of India T- Bills 91 days and 364 days Banks, LIC, UTI, RBI

Government of India Zero Coupon Bonds 5 to 10 years Banks, LIC, UTI, RBI, MFs. State Government State Government Securities 5 to 10 years Banks, LIC, PFs. Development Financial Institutions (DFIs), State Electricity Boards Government Guaranteed Bonds 5 to 10 years Banks, LIC, PFs Public Sector Undertakings PSU Bonds 5 to 10 years Banks, UTI, Corporates, MFs Private Sector Corporates Corporate Debentures 10 to 12 years UTI, Other MFs, LIC, GIC, Fls Public and Private Sector Corporates Commercial Papers 3 months to 1 year Banks, MFs, Fls Banks and Financial Institutions Certificates of Deposit 3 months to 1 year (Banks) 1-3 years (fls) Banks, Corporates, MFs

Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India.

Intermediary Stock Exchange

Market Capital Market

Investment Bankers

Capital Market, Credit Market


Capital Market, Money Market

Role Secondary Market to securities Corporate advisory services, Issue of securities Subscribe to unsubscribed portion of securities

Registrars, Depositories, Custodians

Issue securities to the investors on behalf of the Capital Market company and handle share transfer activity

Primary Dealers Satellite Dealers

Forex Dealers

Market making Money Market in government securities Ensure Forex Market exchange ink currencies