The Financial System

NEED to understand as Management

student!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

What is Financial system and why it is important????????

Financial System responsible for- Flow of funds from the people/organization

who have surplus money(i.e. save a part of the income)

The surplus money will go to the people/organization who need fund for investing in productive assets

As whole it is creates more money in the economy

A natural example to understand Financial System working

Suppose you as a individual having a monthly income of 20000 and your monthly expense is 10000 and the surplus money left with you is 10000.

Will you keep that money in your home idle????

If you are intelligent then suddenly you will invest in some productive resource so that your money grow over a period of time.

So naturally you can ask me what you actually want to tell by using the word money grow

Simple!!!!!!!!!! I want to say that if I give somebody 10000 then

after sometime I will be expecting more than 10000 i.e. 12000,13000………..

So the important point is over a period time there will be more money in the economy.

So more the money mobilization or circullation more money in the economy

Doubt !!!!!!!!!!!!!!!!!!

There must be lot of driving forces that makes the money grow over a period of time.

To do this I need Four weapons-------Financial InstitutionFinancial MarketFinancial InstrumentsFinancial services Again if you are fool and treat them individually then

I am quite sure you will end with zero knowledge in Financial system

Again with little effort we have to understand that Financial System is classified in two parts-----

• Formal Financial Sector

• Informal Financial Sector

Formal AttireYou have to wear formal shirtYou have to wear tieFormal shoeEtc.

Regulated or controlled by high level management of SSIM. So if you want to come in night dress certainly you will be not allowed.

There is other college by name IIPM which follows informal attire

• Wear informal shirt only• No need to wear tie• Chappals are allowed etc Overall flexibility is here but outcome maybe

very dangerous as it is not regulated

Formal Financial System

• Regulated• Controlled• Institutional• Organized

Those very much modern and crazy about there life they will come under this

Informal Financial System

• Non-Regulated• Non-Controlled• Non-Institutional• Non-organized

Those who want to be simple and sweet like normal village people they will come under this

Again keep in mind both are inter-related with each other

There is no free lunch in the world!!!!!!!!

To work out financial system perfectly the Transaction cost should be lowSequence of process should be followedetc

Formal Financial system comes under the purview of-------

• MOF(Ministry of Finance)• RBI(Reserve Bank of India)• SEBI(Security Exchange Board of India)• IRDA(Insurance Regulatory and Development

Authority)• PFRDA(Pension Fund Regulatory and

Development Authority's)Etc-----------------------------

Informal Financial system consists of--

Money lender and borrower such as neighbor relatives traders land lords etc.

Saving club Pawnbroker Chit fund companies etc

Component of Financial System

Financial Institution A organization act as

intermediaries/mediator/occurring between/medium responsible for Flow of funds from the people/organization who have surplus money(i.e. save a part of the income)

and responsible for putting the surplus money to the people/organization who need fund for investing in productive assets

Financial Institution can be divided into two parts

Banking Financial Institution

Non Banking Financial Institution

Then what is the difference between Banking and Non banking Financial Institution??????

Banking Financial Institution are mainly responsible for taking deposit from the customer and supply the loan or credit who is in need of fund.

Non Banking Financial institution are not eligible to

take deposit from the customer and cannot issue cheque to the customer and overdraft facility is also not available.

Banking Service

• Saving Account• Current Account• Fixed Deposit• Educational Loan• Term Loan• Insuranceetc

Non Banking Financial Institution is a company registered under the company act 1956

Mainly responsible for Giving Loan Acquisition of shares/bond/debenture and

other security issued by government of India and company or corporation

Leasing Hire PurchaseInsurance business A non-banking institution which is a company and

has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Financial Market

Financial Market is place where borrowers and lenders meet together and borrow and lend money for long and short term purpose

If the borrowing and lending done for short term purpose the it is referred as Money Market.

If the borrowing and lending done for long term purpose the it is referred as Capital Market.

What happens in Money Market???

The Market participants will borrow money for short term purpose i.e. for one year or less than one year by selling the short term security

Capital Market

If the borrowing and lending done for long term purpose the it is referred as Capital Market

Capital Market further classified as- Primary Market Secondary Market

Primary Market

Primary Market is a place where additional capital will flow from normal public i.e. investor to the company or Corporation by issue of new securities.

Way’s Company can raise Fund(Primary Market)

IPO(Initial Public Offer)FPO(Follow on public offer)Private PlacementRight IssueOffer for sale

Secondary Market

Secondary Market is a place where only ownership changes by buying or selling the security of listed company in the stock Exchange there is no additional flow of fund from normal public to the company.