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INDIAN FINANCIAL SYSTEMAn Overview

A financial system may be defined as a set of institutions, instruments and markets which foster savings and channels them to their most efficient use.

  Financial institutions are business organizations that act

as mobilizers and depositories of savings and as purveyors of credit or finance.

  Financial Institutions are also classified as intermediaries

and non-intermediaries.  

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Intermediaries intermediate between savers and investors - They lend money as well as mobilize savings.

All banking Institutions are intermediaries.  Other intermediaries like UTI, LIC, GIC are known as

Non Banking Financial Intermediaries (NBFI).  Financial Systems deal in financial services & claims or

financial assets or securities or financial instruments  Financial assets represent a claim to payment of a sum of

money sometime in future (repayment of principal) and /or periodic payment in the form of interest or dividend.

 

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Financial System

A financial system 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

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Functions

Facilitates capital formation by providing a link between savers & Investors

A market for creation and exchange of Financial Assets

Performs the following Functions essential for the economy:

PaymentSystem

Transfer of Resources

Pooling of Funds

Risk Management

Price Information

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Formal Commercial Banks

NBFCs

Mutual Funds

Insurance

Organizations

Informal Individual Money

lenders

Funds or Associations

Local Brokers

Unregistered Chit funds

Components of Financial System

Financial Intermediaries Banks NBFCs, Includes Development FIs & State level FIs Mutual Funds Insurance Cos

Financial MarketsMoney 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 Secondary Securities (Indirect) Eg. Bank deposits, Insurance policies

Financial Services Merchant Banking, Broking,Credit rating, etc.

Bridges gap between knowledge on part of investors & increases sophistication of financial instruments & Markets

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Ministry of Finance

RBI SEBI IRDA

Commercial Banks

PDs, DFIs, SIDCs

Money Market

NBFCs

Capital Markets

Mutual Funds

Primary Markets

Secondary Markets

Insurance Companies

Ministry Of Consumer Affairs & Agriculture

FMC

Commodity Exchanges

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Money Market

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.

RBI &Banks

PDs, NBFCs, PSUs & PFs

Individuals & NRIs

Corporates & OCBs

Main Players

Not a single market but a collection of markets

Wholesale market of short term debt instruments

Principal feature is reputation where creditworthiness of the participants is important

Characteristics

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Money Market Instruments Commercial Paper

Money market mutual funds

Repo

Treasury Bills

Certificate of Deposit

Commercial Bills

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Capital Market

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

It has Two segments Primary market (New issue market) & Secondary market (Stock Exchange).

Banks

PDs, NBFCs, PSUs, & PFs

Individuals & NRIs

Corporates & FIIs

Main Players

Insurance Cos. & Mutual Funds

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Instruments

Equity Shares

Preference shares

Debentures

Forward Contract

Options

Futures

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Regulatory Framework

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SEBI

Establishment

Power & Functions

Penalties

SAT

Regulations

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