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OVERVIEW OF THE INDIAN FINANCIAL SYSTEM

The economic development of any country depend upon the existence of well organized financial system. It is the financial system which supplies the necessary financial inputs for production of goods and services which in turn promotes the well being and standard of living. The responsibility of financial system is to mobilize the saving in form of money and invest them to productive

ventures.

Financial

system functions as an intermediary and facilitate the flow of fund from surplus area to deficit area.

A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities

WORKING OF INDIAN FINANCIAL SYSTEM


FUNDS
FINANCIAL INSTITUTIONS
Commercial bank Insurance company Mutual fund

FUNDS

SUPPLIERS OF FUND
Individual Business

FUNDS

DEMANDERS OF FUND
Individual Business Govt

FUNDS

FINANCIAL MARKET
Money market Capital market

FUNDS

FUNCTION OF FINANCIAL SYSTEM


1.
2. 3. 4. 5. 6.

Provision of liquidity Mobilization of saving Liquidity function Payment function Risk function Policy function

Structure of Indian Financial System


FINANCIAL SYSTEM

FINANCIAL MARKET

FINANCIAL INSTITUTIONS

FINANCIAL INSTRUMENTS

FINANCIAL SERVICES

FINANCIAL MARKET

Are centres or arrangement that provide facilities for buying and selling of financial claim and services. FIs,Govt., Individuals trade in financial products in these markets either directly or through dealers on organized exchange or off-exchange.

CLASSIFICATION OF FINANCIAL MARKET

MONEY MARKET

CAPITAL MARKET

FOREX MARKET

PRIMARY MARKET SECONDARY MARKET

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a)Preference Shares b)Equity Shares

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market.

c)Debentures
Equity shares is issued by the under writers and merchant bankers on behalf of the company. Equity shares are tradable through a private broker or a brokerage house.

People who apply for these securities are:


a)High net worth individual b)Retail investors c)Employees d)Financial Institutions

Securities that are traded are traded by the retail investors.

e)Mutual Fund Houses


f)Banks One time activity by the company. Helps in mobilising the funds for the investors in the short run.

MONEY MARKET

Money market deals in short term financial claim generally. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions

CAPITAL MARKET

The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year

Example:- equity, preference,

FOREX MARKET

Foreign exchange refers to the process of converting the home currencies into foreign currencies & vice-versa. Where foreign exchange transaction takes place is called forex market. There are no of brokers engaged in buying & selling of foreign currencies.

FINANCIAL INSTITUTIONS

BANKING

INTERMEDIARIES NON BANKING FIs NON INTERMEDIARIES

FINANCIAL INSTRUMENTS
In financial transaction there is creation or transfer of

financial assets/instruments. These financial assets instruments should have certain characteristics i.e. marketability, liquidity, convertibility, transferability and transaction costs. Financial asset can be of various types:-

Cash Asset Debt Asset Stock Asset

Broadly they can be categorized as under:---

FINANCIAL INSTRUMENTS/ASSET

MONEY MARKET INSTRUMENTS

CAPITAL MARKET INSTRUMENTS

MONEY MARKET INSTRUMENTS:

1. Call/Notice Money 2. Treasury Bill

3. Certificate of Deposit
4. Commercial Papers

Capital Market Instruments


Equity shares

Preference shares Convertible preference shares Non-convertible preference shares Debentures

THEORIES OF IMPACT OF FINANCIAL DEVELOPMENT ON SAVING AND INVESTMENT

Prior saving theory

Credit creation theory Theory of forced saving

Prior Saving Theory:key points

Regard saving as prerequisite for investment


It stress the need for mobilization of saving Investment is alternative to consumption In an economy there are ultimate investors and ultimate savers.

Economic Development

Saving & Invest. OR CF


Deficit financing EU

Surplus Spending economic unit

Income(Consumption + Invest.)

Income(Consumption + Invest.)

Surplus or Saving

Deficit or ve saving

Financial System

Credit Creation Theory

Creation of credit

Independence of investment from saving


Credit created result in prompt income generation

Theory of forced saving

No prior saving , but forced saving Investment determines saving

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