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