Financial System

A financial systems plays a vital role in the economic growth of a country. It intermediates with the flow of funds between those who save a part of their income to those who invest in productive assets.

It mobilizes & usefully allocates scare resources of a country.

Functions
Facilitates capital formation by providing a link between savers & Investors a market for creation and exchange of financial assets

helps in efficient allocation of resources in the economy by:

facilitating price discovery

reducing the cost of the transactions

Providing liquidity

Mobilization of funds

Indian Financial System

Formal
Commercial Bank NBFCs Mutual Funds Insurance Organizations

Informal
Individual Money lenders Funds or Associations Local Brokers Chit fund companies

Components of Financial System

Financial Intermediaries Banks NBFCs, Includes Development financial institutions & State level financial institutions Mutual Funds Insurance Organizations Financial Markets Money markets (Short term) Capital Markets (long term) Main Participants FIIs Mutual Funds Individuals Corporates Insurance Cos Financial Instruments Primary securities (Direct) Eg. Debentures, equity shares,etc Secondary Securities (Indirect) Eg. Bank deposits, Insurance policies,etc Financial Services
Merchant Banking, Credit rating, etc. Bridges the gap between the knowledge on the part of investors & increasing sophistication of financial instruments & Markets

Ministry Of Finance RBI Commercial Banks Capital Markets Primary Markets Secondary Markets SEBI Mutual Funds IRDA Insurance Companies

PDs, DFIs, SIDCs

NBFCs Money Market

Ministry Of Consumer Affairs & Agriculture

FMC Commodity Exchanges

Money Market
The Money market is a market for financial assets that are close substitutes for money.

It is a market for overnight to short term funds & instruments having a maturity period of one or less than one year.
It is an over the counter market for short term instruments for working capital needs. Main Players RBI &Banks Characteristics Not a single market but a collection of markets

PDs, NBFCs, PSUs & PFs Corporates & OCBs

Individuals & NRIs

Wholesale market of short term debt instruments

Principal feature is honor where creditworthiness of the participants is important

Money Market Instruments

Commercial Paper. Call Money market. Inter-bank term money. Money market mutual funds. Repo. Treasury Bills. Commercial Bills. Inter-corporate Deposits. Certificate of Deposit.

Capital Market
It is a market for long term funds which are used for financing fixed investment.

It has 2 segments Primary market (New issue market) & Secondary market (Stock Exchange).
Main Players Banks PDs, NBFCs, PSUs, & PFs Corporates & FIIs Individuals & NRIs Insurance Cos. & Mutual Funds

Regulatory Framework
Company Law Regulation Issue of share Prospectus Rights Issue Debentures Allotment of shares Shares Certificates Securities Contracts (Regulation) Act Object Recognition of stock exchange Penalties Securities Contracts (Regulation) Rules Recognition of stock exchange Membership Qualification

SEBI
Establishment.

Power & Functions.

Penalties. SAT. SEBI Intermediaries Regulations 2008. SEBI Public Offer & listing of securitized Debt Instruments regulation 2008 Act. SEBI Buy Back of securities by listed companies Regulation 1998.