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Financial System

The word system means an ordered


organization & assemblage of facts ,
principles or components relating to
particular field or for specified purpose.
The word "system", in the term "financial
system", implies a set of complex and
closely connected or interlined institutions,
agents, practices, markets, transactions,
claims, and liabilities in the economy.


Finance" in our simple understanding it is
perceived as equivalent to 'Money'.


But Finance exactly is not money.


It is the source of providing funds for a
particular activity.
Finance is the art and science of managing
money.
Virtually all individuals and organisations earn
or rise money and spend or invest money.
Finance is concerned with the process,
institutions, markets and instruments involved
in the transfer of money among and between
individuals, business and governments.
The word system in Financial System
refers to set of closely held financial
institution, services, instruments &
markets.
A Financial System of country can be
defined as set of organizations & methods
of operational procedures that are
interrelated with each-other.

Every modern economy is based on a sound financial system. The
principal aim of financial system is to transform surplus income &
savings into investments.

SEEKERS OF
FUNDS,
MAINLY
BUSINESS
FIRM
& GOVT.


SUPPLIERS
OF FUNDS,
MAINLY
HOUSEHOLD
FLOW OF FUNDS
FLOW OF FINANCIAL
SERVICES
Mobilization Of Savings.
Provision Of Liquidity
Providing Information
Credit Function and payment function
Reduce cost of transaction and borrowing
Risk function
Proper allocation of the fund for the development of the
economy
Projects selection





Financial Component:

Financial Assets.
Financial Intermediaries.
Financial Markets.
Financial Instruments.
Financial Services

A Financial Asset is the one which is
used for production or consumption or for
future creation of assets.

Types Of Financial Assets:

Marketable
Non-marketable
Market
able
Assets
Debentures
Shares &
Bonds
Govt.
Securuties
Mutual fund
units
Financial Assets
Non-
Marketa
ble
Assets
PO
certificates
Bank
deposits
PF
LIC
schemes
Financial Assets
FINANCIAL MARKET
Financial markets provide channels for allocation of savings to
investment. It is a market where financial assets are created or
transferred through buying & selling of financial assets.
FINANCIAL MARKET
MONEY
MARKET
CAPITAL
MARKET
PRIMARY
MARKET
SECONDARY
MARKET
FOREX
MARKET
CREDIT
MARKET
A Financial Market can be defined as the
market in which financial assets are created
or transferred.
As against a real transaction that involves
exchange of money for real goods or
services, a financial transaction involves
creation or transfer of a financial asset.
Financial Assets or Financial Instruments
represents 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 Markets can be referred as to those centers
& arrangements which facilitate buying & selling of
financial assets, claims & services.

Financial markets in India consists of Organized &
Unorganized Sector.

Organized Sector consists of Capital market & Money
market.


Function of Financial Markets
1. Allows
transfers of
funds from
person or
business
without
investment
opportunitie
s to one who
has them
2. Improves
economic
efficiency
Source: Mishkin, Frederic S. and Apostolos Serletis, The Economics of Money, Banking and Financial Markets, 2
nd
Canadian Edition,
Pearson Addison Wesley, 2004
An Overview of the Financial System
Regulation of Financial Markets
Two Main Reasons for Regulation
1. Increase information to investors
A. Decreases adverse selection and moral hazard
problems
B. Securities commissions force corporations to
disclose information
2. Ensuring the soundness of financial
intermediaries
A. Prevents financial panics
B. Chartering, reporting requirements, restrictions
on assets and activities, deposit insurance, and
anti-competitive measures

Capital
Market
Industrial
Sector
Market
Govt.
Securities
Market
Long Term
Market
Money
Market
Call money
Market
Commercial
bill Market
Treasury bill
Market
Short term
loan Market
Financial Market
ORGANIZED
MARKET
UNORGANIZED
MARKET
LENDER
Money Market- The money market ifs a wholesale debt
market for low-risk, highly-liquid, short-term
instrument. Funds are available in this market for periods
ranging from a single day up to a year. This market is
dominated mostly by government, banks and financial
institutions.
it refers to the market, where borrowers & lenders exchange
short term funds to solve their liquidity needs. funds are
available in this market for periods ranging from a single day
upto a year. the financial claims here have low risk, high
liquidity & maturities under one year




Capital Market - The capital market is designed to finance the long-term
investments. The transactions taking place in this market will be for periods
over a year.



2.CAPITAL MARKET :
THE CAPITAL MARKET IS DESIGNED TO FINANCE THE LONG TERM INVESTMENTS.
THE TRANSACTIONS TAKING PLACE IN THIS MARKET WILL BE FOR PERIODS OVER A
YEAR.
AGAIN THE CAPITAL MARKET CAN BE CLASSIFIED ON THE BASIS OF CLAIMS
REPRESENTING NEW ISSUES OR OUTSTANDING ISSUES AS PRIMARY & SECONDARY
.

A capital market is a market for securities (debt or
equity), where business enterprises (companies)
and governments can raise long-term funds. It is
defined as a market in which money is provided for
periods longer than a year

PRIMARY MARKET

SECONDARY MARKET


PRIMARY MARKET : First Time Sales
of Equity Also Called the new issue
market, is the market for issuing new
securities. Many companies, especially
small and medium scale, enter the
primary market to raise money from the
public to expand their businesses. They
sell their securities to the public through
an initial public offering.
it is the market which provides the
channel for sale of new issues.
resources are required for both new as
well as existing projects with a view to
expansion, modernisation,
diversification & upgradation. it is the
market where resources are mobilised
by companies through issue of new
securities.
A market where investors trade
outstanding securities/ issues are called
secondary market. secondary market
comprises of stock exchanges, which
provide platform for purchase & sale of
securities by investors, where the
trading is accessible only through
brokers & trading is confined only to
stock exchanges.


FOREX MARKET:

THIS MARKET DEALS WITH THE MULTICURRENCY
REQUIREMENTS, WHICH ARE MET BY THE EXCHANGE OF
CURRENCIES. DEPENDING ON THE EXCHANGE RATE THAT IS
APPLICABLE, THE TRANSFER OF FUNDS TAKES PLACE IN THIS
MARKET. THIS IS ONE OF THE MOST DEVELOPED & INTEGRATED
MARKET ACROSS THE GLOBE.

CREDIT MARKET:
IT IS A PLACE WHERE BANKS, FINANCIAL INSTITUTIONS &
NBFCS RENDER SHORT, MEDIUM & LONG TERM LOANS TO
CORPORATE & INDIVIDUALS.
Intermediary

Market

Role

Stock Exchange Capital Market Secondary Market to
securities
Investment Bankers Capital Market, Credit Market

Corporate advisory services,
Issue of securities

Underwriters Capital Market, Money Market Subscribe to unsubscribed
portion of securities
Registrars, Depositories,
Custodians
Capital Market Issue securities to the
investors on behalf of the
company and handle share
transfer activity
Primary Dealers Satellite
Dealers
Money Market Market making in
government securities


Forex Dealers Forex Market Ensure exchange ink
currencies

It refers to document that represent financial claims or
financial assets.

A financial instrument is either cash; evidence of an
ownership interest in an entity; or a contractual right to
receive, or deliver, cash or another financial instrument.

Features Of Financial Instruments:

Easily Transferable.
Ready Market.
Posses Liquidity.
Used as securuty for raising loan.
Specified maturity period.


Money Market Instruments
THE MONEY MARKET IS A MARKET FOR SHORT TERM
MONEY & FINANCIAL ASSETS THAT ARE CLOSER
SUBSTITUTES OF MONEY. HERE THE TERM SHORT TERM
MEANS GENERALLY A PERIOD UPTO ONE YEAR &
CLOSER SUBSTITUTES OF MONEY MEANS ANY ASSET
WHICH CAN BE QUICKLY CONVERTED INTO MONEY
WITH MINIMUM TRANSACTION COST.

Money market instruments are briefly discussed below;

1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent on
demand for a very short period. When money is
borrowed or lent for a day, it is known as Call
(Overnight) Money. Intervening holidays and/or
Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working
day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed
or lent for more than a day and up to 14 days, it is
"Notice Money". No collateral security is required to
cover these transactions.
2. Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14
days is referred to as the term money market. The
entry restrictions are the same as those for
Call/Notice Money except that, as per existing
regulations, the specified entities are not allowed to
lend beyond 14 days.
3. Treasury Bills.
Treasury Bills are short term (up to one year)
borrowing instruments of the union government. It
is an IOU of the Government. It is a promise by the
Government to pay a stated sum after expiry of the
stated period from the date of issue
(14/91/182/364 days i.e. less than one year). They
are issued at a discount to the face value, and on
maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price
are determined at each auction.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market
instrument and issued in dematerialized form or as a Usance
Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India, as amended
from time to time. CDs can be issued by (i) scheduled
commercial banks excluding Regional Rural Banks (RRBs) and
Local Area Banks (LABs); and (ii) select all-India Financial
Institutions that have been permitted by RBI to raise short-
term resources within the umbrella limit fixed by RBI. Banks
have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits,
commercial papers and interoperate deposits should not
exceed 100 per cent of its net owned funds, as per the latest
audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer. On
issuing commercial paper the debt obligation is transformed into
an instrument. CP is thus an unsecured promissory note
privately placed with investors at a discount rate to face value
determined by market forces. CP is freely negotiable by
endorsement and delivery. A company shall be eligible to issue
CP provided - (a) the tangible net worth of the company, as per
the latest audited balance sheet, is not less than Rs. 4 crore; (b)
the working capital (fund-based) limit of the company from the
banking system is not less than Rs.4 crore and (c) the borrowal
account of the company is classified as a Standard Asset by the
financing bank/s. The minimum maturity period of CP is 7 days.

Capital Market Instruments
The capital market generally consists of the following long
term period i.e., more than one year period, financial
instruments; In the equity segment Equity shares,
preference shares, convertible preference shares, non-
convertible preference shares etc and in the debt segment
debentures, zero coupon bonds, deep discount bonds etc.
Hybrid Instruments
Hybrid instruments have both the features of equity and
debenture. This kind of instruments is called as hybrid
instruments. Examples are convertible debentures,
warrants etc.

CALL/NOTICE MONEY:
IT IS THE MONEY BORROWED OR LENT ON DEMAND FOR A VERY SHORT PERIOD.
WHEN MONEY IS BORROWED OR LENT FOR A DAY, IT IS KNOWN AS CALL/ OVERNIGHT
MONEY. HOLIDAYS & SUNDAYS ARE EXCLUDED HERE. THUS MONEY BORROWED ON A
DAY & REPAID ON THE NEXT WORKING DAY IS CALL MONEY. BUT WHEN MONEY LENT
OR BORROWED FOR MORE THAN A DAY & UPTO 14 DAYS, IT IS NOTICE MONEY.

TERM MONEY :
INTER BANK MARKET FOR DEPOSITS OF MATURITY BEYOND 14 DAYS IS REFERRED TO
AS THE TERM MONEY MARKET.

TREASURY BILL :
IT IS A SHORT TERM BORROWING INSTRUMENT OF THE UNION GOVT. IT IS AN IOU I.e.
ACKNOWLEDGEMENT OF DEBT OF THE GOVT. TO PAY A STATED SUM OF AFTER EXPIRY OF
STATED PERIOD FROM THE DATE OF ISSUE.(LESS THAN 1 YEAR).

COMMERCIAL PAPERS :
IT REPRESENTS SHORT TERM UNSECURED PROMISORY NOTES ISSUED BY FIRMS THAT ARE
GENERALLY CONSIDERED TO BE FINANCIALLY STRONG. COMMERCIAL PAPERS USUALLY
HAS A MATURITY PERIOD OF 90 - 180 DAYS. IT IS GENERALLY SOLD AT DISCOUNT &
REDEEMED AT PAR.
IT IS EITHER DIRECTLY PLACED WITH THE INVESTORS OR SOLD THROUGH DEALERS. BUT IT
DOES NOT PRESENTLY HAVE A WELL DEVELOPED SECONDARY MARKET IN INDIA.
EQUITY SEGMENTS : DEBT SEGMENTS :
EQUITY SHARES . DEBENTURES .
PREFERENCE SHARES . ZERO-COUPON BOND
CONVERTIBLE PREFERENCE SHARES . DEEP DISCOUNT BOND
NON-CONVERTIBLE PREFERENCE SHARES .
CAPITAL MARKET INSTRUMENTS :

THE CAPITAL MARKET GENERALLY CONSISTS OF THE FOLLOWING LONG TERM
PERIOD i.e. MORE THAN 1 YEAR PERIOD. THE MAJOR FINANCIAL INSTRUMENTS
USED FOR A CAPITAL MARKET ARE :
HYBRID INSTRUMENTS :

HYBRID INSTRUMENTS HAVE BOTH THE FEATURES OF EQUITY & DEBENTURE. THIS KIND OF
INSTRUMENT IS CALLED AS HYBRID INSTRUMENTS. EXAMPLES ARE: CONVERTIBLE
DEBENTURES.

WARRANTS, ETC.

Financial Intermediaries
WHEN THE BORROWER OF THE FUNDS APPROACHES THE FINANCIAL MARKET TO
RAISE FUNDS, ADEQUATE INFORMATION OF ISSUE, ISSUER & THE SECURITY
SHOULD BE PROVIDED. SO THERE SHOULD BE A PROPER CHANNEL TO ENSURE
SUCH TRANSFER WITHIN THE FINANCIAL SYSTEM. FOR THIS PURPOSE FINANCIAL
INTERMEDIARIES CAME INTO EXISTENCE.

IN INDIA FINANCIAL INTERMEDIATION IN THE ORGANISED SECTOR IS
CONDUCTED BY VARIOUS INSTITUTIONS UNDER THE VIGILANCE OF R.B.I. IN THE
INITIAL STAGE THE ROLE OF INTERMEDIARIES WAS MOSTLY RELATED TO ENSURE
TRANSFER OF FUNDS FROM THE LENDER TO THE BORROWER. THIS SERVICE WAS
OFFERED BY BANKS, INANCIAL INSTITUTIONS, BROKERS & DEALERS.

HOWEVER, AS THE FINANCIAL SYSTEM WIDENED ALONG WITH THE
DEVELOPMENTS TAKING PLACE IN THE FINANCIAL MARKETS, THE SCOPE OF ITS
OPERATION TOO WIDENED.
Financial Intermediaries
Specialized financial firms that facilitate the
indirect transfer of funds from savers to
borrowers by offering savings instruments and
borrowing instruments
Financial Intermediation
The process by which financial intermediaries
transform funds
provided by savers into funds
used by borrowers
The Financial Intermediation Process
Benefits of Intermediaries
Reduced costs
Risk/diversification
Funds divisibility/pooling
Financial flexibility
Related services
Types of Intermediaries
Commercial banks
Credit unions
Thrift institutions
Mutual funds
Whole life insurance
companies
Pension funds
Safety (Risk) of Financial Institutions
Banks, thrifts and credit unions
insured by FDIC
regulated by Federal Reserve
Insurance companies
regulated by states
Pensions
ERISA established PBGC
Mutual funds
SEC
Having designed the instrument, the issuer should
then ensure that these financial assets reach the
ultimate investor in order to garner the requisite
amount. When the borrower of funds approaches
the financial market to raise funds, mere issue of
securities will not suffice. Adequate information of
the issue, issuer and the security should be passed
on to take place. There should be a proper channel
within the financial system to ensure such transfer.
To serve this purpose, Financial intermediaries
came into existence.
This service was offered by banks, FIs, brokers, and
dealers. However, as the financial system widened
along with the developments taking place in the
financial markets, the scope of its operations also
widened. Some of the important intermediaries
operating ink the financial markets include;
investment bankers, underwriters, stock
exchanges, registrars, depositories, custodians,
portfolio managers, mutual funds, financial
advertisers financial consultants, primary dealers,
satellite dealers, self regulatory organizations, etc.
Financial intermediaries includes all types of
organisation which intermediate & facilitate
financial transactions of both individuals &
corporate customers.

It refers to all financial institutions & investing
institutions which facilitate financial transactions in
financial markets.

Financial intermediaries in India consisits of
Organised & Unorganised Sector.
SOME OF THE IMPORTANT INTERMEDIARIES OPERATING IN
THE FINANCIAL MARKETS INCLUDE :

INVESTMENT BANKERS

STOCK EXCHANGES

MUTUAL FUNDS

FINANCIAL ADVISORS

FINANCIAL CONSULTANTS

PRIMARY DEALERS, ETC.
The Function of Financial Institutions
Financial intermediaries channel funds between
borrowers and lenders.
Intermediation transforming
assets
the function of transforming assets or
liabilities into other assets or liabilities
Liabilities deposits
Assets loans
this is the principal activity of most financial
institutions.
intermediation improves social welfare by
channeling resources to their most effective
use.
The Functions of Intermediation
Facilitate the acquisition/payment of goods
&services via lower transactions costs
Chequing services provided by banks improve economic
efficiency.
Facilitate the creation of a portfolio
A portfolio is a collection of financial assets
The financial system provides economies of scale & scope
Economies of Scope: cost savings that stem from engaging in
complementary activities.
Economies of Scale: obtained when the unit cost of an operation
decreases as more of it is done.
Function of Financial Intermediaries
Financial Intermediaries
Engage in process of indirect finance
Are needed because of transactions costs and
asymmetric information
Function of Financial Intermediaries
(Contd)
Transactions Costs
1. Financial intermediaries make profits by reducing
transactions costs.
2. They reduce transactions costs by developing
expertise and taking advantage of economies of
scale.

Function of Financial Intermediaries
(Contd)
Risk Sharing
Create and sell assets with low risk characteristics
and then use the funds to buy assets with more risk
(also called asset transformation)
Lower risk by helping people to diversify portfolios

Asymmetric Information

Adverse Selection
Before transaction occurs
Potential borrowers most likely to produce adverse
outcomes are ones most likely to seek loans and be
selected

Asymmetric Information (Contd)

Moral Hazard
After transaction occurs
Hazard that borrower has incentives to engage in
undesirable activities making it more likely that
loan wont be paid back
Ease liquidity constraints
Reallocate consumption/savings patterns
Often the liquidity required to make certain purchases is not in
line with the immediate flow of income available to
individuals.
The ability to influence the allocation of consumption
and investment is probably the most important function
of intermediation.
Provide security
Intermediation provides a host of services that reduce or
shift risk.
Financial institutions can also influence the riskiness of
financial transactions [contracts and insurance].

Reduce asymmetric information problem
Moral hazard
the chance that an individual may have an incentive to
act in a way such as to put that individual at greater risk;
the individual perceives as beneficial actions that are
deemed undesirable by another.
Adverse selection
decision making that results from the incentive for some
people to engage in a transaction that is undesirable to
everyone else
Banks have a comparative advantage in
offering specialized services that help to
reduce this problem.
Banks can also take advantage of this
asymmetric information problem, with dire
consequences.
Adverse Selection
1. Before transaction occurs
2. Potential borrowers most likely to produce
adverse outcomes are ones most likely to
seek loans and be selected
Moral Hazard
1. After transaction occurs
2. Hazard that borrower has incentives to
engage in undesirable (immoral) activities
making it more likely that wont pay loan
back
Financial intermediaries reduce adverse selection and
moral hazard problems, enabling them to make profits
The Function of Financial Institutions
Brokerage an agency
function
Brokers are agents who bring would-be
buyers and sellers together so
transactions can be made.
Intermediation provides value-
added but there are potential
externalities. One intermediarys
actions can have consequences for
the entire system.
Banks are particularly adept at
intermediation because they can
perform the necessary functions more
cheaply than most institutions.
Technological change and deregulation
have narrowed the comparative
advantage of banks.
Types of Financial Institutions
Deposit-taking (a.k.a. depository institutions)
accept and manage deposits and make loans.
These institutions are divided into banks and
other deposit-taking institutions (near-banks).
Other deposit-taking institutions:
Trust companies also provide administrative services
for estates and trusts (fiduciaries).
Credit unions or caisses populaires these are
member owned so that depositors are also
shareholders.
Mortgage loan companies also permit investors to
invest in a portfolio of assets primarily real estate.
Insurance Companies and Pension Funds
Insurance companies provide the means of channeling
savings to provide for unforeseen expenses by pooling
the risks of their clientele.
There are also institutions that specialize in the
management of pension plans and funds.
Government legislation plays are large role in dictating
how these pensions are administered.
Registered Retirement Savings Plans (RRSPs) are individuals tax-
sheltered funds administered by the individuals themselves or by a
deposit-taking institution or investment dealer on their behalf.
Registered Retirement Plans (RRPs) are the pooled retirement
savings of a group of employees administered by their employer or
labour union.
Investment Dealers and Investment Funds
The plethora of investment funds (a.k.a. mutual funds) pool funds
for investment in a wide range of activities and instruments
without providing the other functions of a typical bank
Investment dealers primarily underwrite corporate and
government securities.
Government financial institutions
Deposit-taking role
Channeling funds from the public to private sector
Protecting private funds by providing deposit insurance (CDIC).
Other Intermediaries
Sales, finance, and consumer loan companies.
Financial services refer to the services
provided by the finance industry.

Finance industry encompasses a broad
range of organisations that deal with
management of money.

Organisations are Banks , Credit card co.s,
Insurance co.s , Consumer Finance co.s , Stock
brokerage , Investment Funds etc.




Merchant Banking.
Loan Syndication.
Mutual Funds.
Factoring, Forfaiting, Leasing.
Venture Capital.
Corporate Advisory Services.
Securitisation
Forwards, Futures, Swaps, Options.



The economic development of a nation is reflected by the
progress of the various economic units, broadly classified
into corporate sector, government and household
sector. While performing their activities these units will be
placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are
those with a deficit. A financial system or financial sector
functions as an intermediary and facilitates the flow of
funds from the areas of surplus to the areas of deficit. A
Financial System is a composition of various institutions,
markets, regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
Most banks were state-owned
Banks, pension funds and
insurance companies were
forced to buy State Issued
bonds - primary investment.
Bombay Stock Exchange was
closed market. Run by Brokers
for the benefit of its members.
There was no right
governance and regulation.
There was no single derivative
market.
All financial transactions were
controlled by the RBI and
Ministry of Finance
Socialistic Model Weapons
Strict entry barriers in every sub-
industry.
Difficult to start a bank, a mutual
fund, a brokerage firm, an
insurance company, a pension
fund, a securities exchange or
sub-broking firm.
Foreign firms were restricted to
touch any one of these parts
Comprehensive capital control
and restrictive legislations
Look at a typical bureaucrats of
yester years as perceived
Big Villains were
MRTP act, 1969
The Capital Issues
(control) act, 1947
Indian Companies Act,
1956
Industries Act, 1956
Foreign Exchange
Regulation Act, 1973
Male , Balding head , Ugly stained metal rimmed
glasses .
Thick bushy eyebrows[Usually as a mono-brow],
Mustache[See pictures], No beard., Paan Chewing [
The teeth and tongue are often discolored].
I-don't-care-what-you-say, I'll-do-it-only-my-way
attitude.
Drinking coffee 10 times a day.
Looking for a slightest opportunity to take bribe.
Take home salary is Rs. 5000[Official] + Rs.
25000[Bribes and Misc. tips].
Taking the rules and law by word and not
understanding the true essence of it. Even though the
laws usually date back to the 1850 British Colonial
period .
No respect for anyone's privacy.
Not taking anyone's ideas on improving productivity
even though they are right.
Piles and piles of paper with folders and gem-clips
strewn about.
A rotary dial telephone on the desk..
No air-conditioning and a ceiling fan that rotates 6
times in an hour.
Runs errands for his bosses or chats with family
during work. Also misuses official equipment.
Is usually in a vital position of authority/ In a position
that requires interaction with people everyday.
www.sriraminhell.com
Individuals,
Firms, State
Surplus Units Money Market
Debt Market
Equity Market
Derivative Market
Forex Market

Free Financial
System
Equity
Bonds
Hybrid
Money Market Instruments
All are customized
Vehicles
Individuals,
Firms,
State
Deficit Units
Market driven
All players with integrity and accountability
Innovators and Creators flourish
Contributes favorably to the Economy
No greedy
Global but not taking external shocks
State facilitates rather than suppresses
Liberalization Facilitators
Eighteen to Three
Scheduled Industries
Eight Hundred to Fifty SSI
MRTP not active
Capital Issues Act repealed
Foreign Exchange
Regulation Act repealed
Insurance, Banking
Industries open its gates for
Private Players
MNC allowed

Banking Regulation Act
simplified
Security Exchange Board
constituted
Foreign Exchange
Management Act passed
Companys Act subject to
scrutiny
Private players allowed to
do insurance and banking
business
SEZs opened
FDI encouraged

Lender's risk has dwindled
substantially
Liquidity position is improved
Return is certain on his
savings (either fixed or
variable)
Lender gets impetus to save
He will get accurate
information from specialized
financial institutions.
Lenders botheration with
respect to selecting a prompt
borrower is reduced


Their need make less
effort and minimum
time in questing for an
ultimate lender.
In whatsoever fashion
they needs funds they
can procure
They can seek
professionals and
specialized assistance
from specialist in the
field.



1. Banking financial institutes (RBI, Commercial banks
and co-operative banks)
2. Development banks (all India financial institutes
like IDBI, IFCI)
3. Investment financial institutes (LIC,GIC,UTI, since
2000 Private insurance companies like SunLife, Allianz
Bajaj, ICICI Prudential etc. )
4. Non-Banking financial institutes (SBI capital
services, Merchant banking companies Hire-purchase
companies, etc.,)
5. Postal department Financial services (Recurring
deposits, NSC, KVP, Postal Life-Insurance etc.).

Individuals,
Firms, State
Surplus Units
Market
State
Financial System
Money
Market
Equity Market
Debt Market
Financial Market
Customized
Instruments
Vehicles
Individuals,
Firms, State
Deficit Units
1. Under developed saving Vehicles or
Negative Returns on Saving or both
2. Inefficient allocation of saving by
Finanacain intermediaries
3. Poor financial policies Discourage firms
from investing
Indian financial system was characterized by :
Absence of organized capital market
Dependence of industries & other users on
internal sources.
Rare cases of public issues of capital for expansion
& modernization.
Few financial institutions & players in the market.
Awkward & very strict conditions for loan
assistance to companies .
Nationalization of banks in 1969 was a major step to ensure that
timely and adequate credit support was available.
Grant of credit to agricultural & small industries by expansion of
rural banking proved to be a boon offered by the new policy.

the Indian financial system has made command able progress in
extending its geographic spread & functional reach. the sudden
burst of activities of banking system has been a major factor in
promoting financial intermediation in the economy & growth of
financial savings.

Indian money market consists of formal & informal segments. the
formal market comprises of RBI, various commercial banks,
cooperative banks, uti etc. informal market consists of chitfunds,
nidhis, indegenous bankers etc. the money market instruments
includes treasury bills, commercial papers etc.
INDIAN
FINANCIAL
STSTEM
IN

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