INTRODUCTION

A Financial System is a composition of various institutions, markets, regulations and laws, practices, money transactions, claims and liabilities. The word "system", in the term "financial system", implies a set of complex and closely connected institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance the three terms are intimately related yet are somewhat different from each other. !ndian financial system consists of financial market, financial instruments, financial intermediaries and financial services. According to "r.#rasanna $handra, %the financial system consists of a variety of financial intermediaries, markets and instruments that are related to each other. it provides the principal means by which savings are transformed into investment&. Financial systems are comprised into ' parts. They are( Financial institutions Financial markets Financial intermediaries Financial services

FUNCTIONS OF FINANCIAL SYSTEM

The financial system performs the following functions that are inter related and are essential for the development process of a modern economy. #ayment system )obili*ation and allocation of funds +isk management #rice information for decentrali*ed decision making "ealing with the problem of incentives ,- Payment system The commercial banking system constitutes the payment system in the financial market. The credit card and debit card companies play a vital role with large number of commercial banks having their independent credit card and debit card divisions, the debit and credit card system becomes a part of banking system. .- Mobilization and allocation o !nds The financial intermediaries both banking and non banking plays a crucial role in mobili*ing plays a crucial role in mobili*ing funds from the persons. The financial markets also help in efficient allocation of scarce financial resources and individuals and households are provided the opportunity to invest their financial resources in attractive financial avenues of investment.

/- Ris" mana#ement A developed financial system provides a variety of financial instruments that enable financial intermediaries to mobili*e, price and exchange risk. The three basic methods of managing risk are( hedging, diversification and insurance.0edging would re1uire movement from a risk loaded asset to a risk free asset. "iversification involves pooling and sub division of risks. !nsurance enables the insured to en2oy the economic benefits of ownership while eliminating the possible losses. '- P$ice in o$mation o decent$alized decision%ma"in# Financial system helps decentrali*ed decision making.the money market offers short term credit financial instruments and the capital market offers long term credit financial instruments. !nformation pertaining to these instruments is readily made available to all financial investors so that they can determine their portfolio allocations based on their risk taking abilities and understanding of the financial markets. 3- Dealin# &it' t'e ($oblem o incenti)es 4hen financial information is not e1ually available to all, the problem of informational ine1uality comes into existence. This leads to the problems of moral ha*ard and adverse selection. These problems are known as agency problems.

FINANCIAL INSTITUTIONS
Financial institutions are classified into ban"in# and

non%ban"in# inancial instit!tions*

A ban"in# com(any is an institution to accept deposit of money from the public withdrawable by che1ue.thus, the combination of the functions of acceptance of public deposits and withdrawable of money by che1ue by any institution cannot be performed with the approval of +5!. A banking company accepts short term and long term deposits up to an unlimited extent and money can be withdrawn by drawing che1ues on the accounts maintained with it. !ndian financial system has strong groups of financial institutions which are different in nature from banks. These institutions are called as non bank financial institutions. A non%ban" inance com(any can be defined as an institution, which mobili*es the savings of the community and diverts them for financing different activities. !nvestment companies, investment trusts, nidhis, hire purchase and leasing companies and housing finance companies speciali*e in giving loans for consumption, commerce and trading purpose. They have local links and they constitute small scale decentrali*ed sector of the financial system in !ndia.

FINANCIAL MAR+ET
A Financial )arket is an institution that facilitates the exchange of financial instruments such as deposits, loans, corporate stocks and bonds, government bonds, etc. it is a market where in financial instruments such as financial claims, assets and securities are traded. Financial markets are classified into 3 types( ,- Debt ma$"et and e.!ity ma$"ets The debt market is the financial market for fixed claims and the e1uity market is the financial market for residual claims. /- Money and ca(ital ma$"ets The market for short term financial claims is known as money market and the market for long term financial claims is known as capital market 0- P$ima$y and seconda$y ma$"ets The market in which issuers sell new claims is known as primary market and the market in which investors6 trade outstanding securities is called as secondary market.

1- S(ot and o$&a$d ma$"ets The cash or spot market is one were the delivery takes place immediately and forward or futures market is one where the delivery takes place at a predetermined time in future. 2- E3c'an#e t$aded ma$"et and o)e$ t'e co!nte$ ma$"et An exchange traded market has a centrali*ed organi*ation with standardi*ed procedures. An over the counter market is a de centrali*ed market with customi*ed procedure.

FINANCIAL INTERMEDIARIES
financial intermediaries are those financial institutions that provide financial services and financial products to the customers in an efficient manner. Financial instruments help in borrowing and lending money. The financial intermediaries in !ndia consists of banking and non banking financial institutions, development finance institutions, insurance companies, investment banks such as the mutual funds, merchant banks, venture capital firms and information services companies. Some of the important money market instruments are briefly discussed below7 ,.$all89otice )oney .. Treasury 5ills /. Term )oney '. $ertificate of "eposit 3. $ommercial #apers

,* Call 4Notice%Money Ma$"et $all89otice money is the money borrowed or lent on demand for a very short period. 4hen money is borrowed or lent for a day, it is known as $all :;vernight)oney. !ntervening holidays and Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, is "$all )oney". 4hen money is borrowed or lent for more than a day and up to ,' days, it is "9otice )oney". 9o collateral security is re1uired to cover these transactions.

/* Inte$%5an" Te$m Money

!nter bank market for deposits of maturity beyond ,' days is referred to as the term money market. The entry restrictions are the same as those for $all89otice )oney except that, as per existing regulations, the specified entities are not allowed to lend beyond ,' days.

0* T$eas!$y 5ills*
Treasury 5ills were first issued by the !ndian government in ,<,=.Treasury 5ills are short term :up to one year- borrowing instruments of the union government. !t is a promise by the >overnment to pay a stated sum after expiry of the stated period from the date of issue. !t is issued by the central bank of the country. !t is one of the safest money market instruments and is circulated in the primary as well as secondary markets.

1* Ce$ti icate o De(osits $ertificates of "eposit :$"s- is a borrowing note for the short term similar to that of a promissory note. The maturity date, fixed rate of interest and a fixed value are the three components of a certificate of deposit. The term is generally between / months to 3 years. The funds cannot be withdrawn instantaneously on demand, but has the facility of being li1uidated, if a certain amount of penalty is paid. The risk associated with certificate of deposit is higher and so is the return :compared to T bills-. !t was in ,<?< that the certificate of deposit was first brought into the !ndian money market. 2* Comme$cial Pa(e$ $# is an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. The commercial paper is issued for settling short term liabilities or loans, for financing of inventories. The minimum maturity period of $# is = days. !t was in ,<<@ that $# was first issued in the !ndian money market.

FINANCIAL SER6ICES
A financial service is any kind of service of a financial nature offered by a financial service provider. All banking and insurance related services are included in this concept. These services are intangible and invisible. The financial services were developed in order to meet the needs of individuals as well as companies. Financial service is a very wide field. 0owever we can classify these services in the following groups( ,- 5an"in# and inancial se$)ices( the banking and financial services include the following the services such as $ustody services $redit card services Aetter of credit )utual fund services Securities trading services .- Ins!$ance and ins!$ance $elated se$)ices( insurance and insurance related financial services include the following( !nsurance brokerage

 Speciality insurance products Bnderwriting of financial risk +einsurance /- F!nd based inancial se$)ices( financial services based on fund or money is as follows( C1uipments leasing 0ire purchase 5ill discounting Denture capital 0ousing finance '- Fee based inancial se$)ices( financial services based on fees are as follows( !ssue management #ortfolio management $orporate counseling Aoan based syndication Arrangement of foreign collaboration 3- Ca(ital ma$"et se$)ices( capital market is a market for raising capital. The following are the financial services rendered by various intermediaries in relation to the capital market. !ssue management )erchant banking

RE7ULATORY SYSTEM
The government of !ndia is responsible to regulate the financial market in !ndia. The two important regulatory institutions of the government of !ndia are the Rese$)e ban" o India 8R5I- and the Sec!$ity and E3c'an#e boa$d o India 8SE5I-. The +5! is the central bank of the country and as the apex authority7 it performs the following central banking and developmental functions( !t provides currency and operates the clearing system for the banks. !t serves as the bankers bank !t supervises the operations of credit institutions !t regulates foreign exchange transactions !t controls the fluctuations in the exchange value of the rupee !t formulates and implements the monetary and credit policies !t encourages banking development in !ndia. !t influences the allocation of credit

The Securities and exchange board of !ndia is responsible for dealing with various matters pertaining to the capital market. The SC5! is responsible for the following(

 +egulate the business in stock exchanges and any other securities market +egister and regulate the capital market intermediaries :brokers, merchant brokers, portfolio managers, etc. +egister and regulate the working of mutual funds #romote and regulate self regulatory organi*ations #rohibit fraudulent and unfair trade practices in security markets #rohibit insider training in securities

CONCLUSIONFinancial System of any country consists of financial markets, financial intermediation and financial instruments or financial products.

Financial system is an information system, comprised of one or more applications, that is used for any of the following( collecting, processing, maintaining, transmitting, and reporting data about financial events supporting financial planning or budgeting activities7 accumulating and reporting cost information. The !ndian financial system has undergone structural transformation over the past decade. The financial sector has ac1uired strength, efficiency and stability by the combined effect of competition, regulatory measures, and policy environment. 4hile competition, consolidation and convergence have been recogni*ed as the key drivers of the banking sector in the coming years.

Class: - S.Y.Banking & Insurance Subject: - Financial market

Topic:-Indian financial s stem

Submitted to: - !rof.Tejinder

INDE9
!ntroduction Functions of financial system Financial institutions

Financial markets Financial intermediaries Financial services +egulatory system +5! SC5! $onclusion