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Indian Financial

System
Instructor : Nishant Dhruv
Department of Management
Atmiya Institute of Technology & Science
E-mail : npdhruv@aits.edu.in

Indian Financial System

Why financial system is required ?


It

intermediates between the flow of funds


between those who save a part of income
(surplus fund) and those who invest in
productive assets.

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Indian Financial System

Formal financial system organized and


regulated system

Informal financial system unorganized


and non-regulated system

Financial dualism

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Components of Formal Financial


System

Financial Institutions (Classification)


Banking(Creators

and Purveyors)
Non-banking (Purveyors)
Term Finance e.g. IFCI
Specialized e.g. TFCI,ICICI Venture, IDFC
Sectoral e.g. NABARD
Investment e.g. Mutual fund, Insurance
Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Financial Markets
A

mechanism enabling participants to deal in financial


claims

Types

: Money Market
Capital Market

Classification

: Primary Market
Secondary Market

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Financial Instruments
It

represent Shares, Debentures, Bonds etc..

Marketable

as they are traded in organized

markets.
The

distinct feature of financial instruments


has enabled people to hold a portfolio of
different financial assets which in turn, helps
in reducing risk.
Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Financial Services
Financial

intermediaries provide key financial services


such as merchant banking, leasing, hire purchase
and credit rating.

Need

for financial services : Buying and Selling


securities, Payments and settlements.

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Financial System Designs


Two prominent financial design can be
identified
Bank

Based
Market Based

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Bank Based financial system


Banks

play pivotal role in mobilizing savings,


better
allocation and monitoring the
performance of the corporate.

Market Based financial system


The

financial markets/securities
shares the center stage with bank.

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

market

Suitability of Financial Design


Bank

Based financial system :

Its suitable when government is directly involve in


industrial development.

Suitable when there is a nationalization of banks,


administered interest rate regime, government
policy of favouring banks.
Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Market-based

financial system:

Financial systems are more developed in rich


countries. So, there is tendency for the financial
system become more market- oriented as the
country becomes richer.

Countries with more strong protection of


shareholders rights, and lower level of corruption
tend to be market based financial system

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Examples :
Bank

based financial system

Germany, France

Market

based financial system

US, UK, Singapore

India Banks based or market based


financial system ?
Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Market based financial system


Advantages

Provide attractive terms to both investors and


borrowers
Facilitate diversification

Drawbacks

Exposure to market risk


Prone to instability
Free
- rider problem

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science

Bank based financial system:


Advantages:

Close relationship with parties


Provide tailor- m
ade products/contracts
No free
- rider problem

Drawbacks:

Retards innovation and growth


Impede (slow down) competition

Instructor :Nishant Dhruv, Atmiya Institute of Technology & Science