Financial Markets

and Institutions

Topics for Discussion:

Organizational structure of the Indian Financial

System
Major Components- Financial Markets; Financial
Institutions/ Intermediaries; Financial Instruments;
Financial Services
Role of Financial institutions in Economic
Development

Copyright 2002 Thomson Publishing. All rights reserved.

Objectives
Describe the meaning of the terms Financial
System and Financial Markets
Describe the types of financial markets
Describe the role of financial institutions with
financial markets
Identify the types of financial institutions that
facilitate transactions

Copyright 2002 Thomson Publishing. All rights reserved.

Meaning of Financial System

Finance + System = Financial System

Study of money, its

nature, creation,
behavior, regulations
and administration

All those activities dealing in

finance organized into a
system

Set of complex & closely connected or

intermixed instructions, agents,
practices, markets, transactions, claims
& liabilities in the economy
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4 major components of Financial System

Financial Institutions

Financial Markets
Financial Instruments
Financial Services

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Organizational Structure of Indian

Financial System
Financial System
Financial
Institutions

Financial
Markets

Financial
Instruments

Financial
Services

Primary
Regulatory

NonIntermediaries

Organized

Intermediaries

Primary

Capital
Banking

Non Banking

Unorganized

Short Term

Others

Secondary

Secondary

Equity

Long Term
Medium Term

Money

Debt
Derivatives
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Copyright
2002 Thomson

Financial Institutions

Meaning: business organizations that act as

mobilisers and depositors of savings, and as
purveyors of credit or finance
Mobilise and transfer the savings or funds from
surplus unit to deficit unit
Bifurcated into Regulatory and Intermediaries
The regulators are assigned with the job of
governing all the divisions of the Indian financial
system. Eg: RBI, SEBI, CBDT, Central Board of
Excise and Customs
Copyright 2002 Thomson Publishing. All rights reserved.

Also classified as intermediaries and nonintermediaries (All banking institutions are intermediaries)
Non banking institutions which act as
intermediary- UTI, LIC and GIC (called NBFI)
Non intermediary institutions: IDBI, IFC and
NABARD came into existence because of
governmental efforts (called as NBSFO)

Copyright 2002 Thomson Publishing. All rights reserved.

Overview of Financial Markets

Financial Market: a market in which financial
assets (securities) such as stocks and bonds
can be purchased or sold

Financial markets provide for financial intermediation-financial savings (Surplus Units) to investment (Deficit Units)
Financial markets provide payments system
Financial markets provide means to manage risk

Copyright 2002 Thomson Publishing. All rights reserved.

Copyright 2002 Thomson Publishing. All rights reserved.

Financial System & Economic

Development
Economic
Development
Saving & Investment or
Capital Formation
Surplus Spending
Economic Units

Deficit Spending Economic

Units

Income minus
(Consumption + Own
Investment)

Income minus
(Consumption + Own
Investment

Surplus or Saving

Deficit or Negative Saving

Financial System
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Functions of Financial Markets

Economic Functions

Financial Functions

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Classification of Financial Markets

Financial Market
Money Market
Primary

Call Money
Commercial
Bills

Capital Market
Secondary

Primary

Stock
Market

Treasury
Bills

Secondary

Debt
Market

Mutual
Funds

Short Term
Loan
Market
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Money Market

It is a place for large institutions & government to manage

their short-term cash needs
Specializes in very short term debt securities (<1 year)
Money Market Investments are also called CASH
INVESTMENTS (short maturities)
Lower rate than other securities (conservative & safe
investment)
To be eligible for classification as money market instrument, a
debt must be classified as:

Un-collateralized short term of an issuer with high credit rating

Highly liquid & readily transferable
Bear an annualized Discount Yield
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Primary vs. Secondary Markets

PRIMARY

SECONDARY

New Issue of Securities

Trading Previously Issued

Securities

Exchange of Funds for

Financial Claim

No New Funds for Issuer

Funds for Borrower

Provides Liquidity for

Seller

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Money vs. Capital Markets

Money

Short-Term, < 1 Year

Means of liquidity
adjustment
High Quality Issuers
Debt Only: low default
& low market risk
Primary Market Focus
Liquidity Market--Low
Returns

Capital

Long-Term, >1Yr
Principal fn: link b/w
long-term investors &
long term borrower
Range of Issuer Quality
Debt and Equity: both
risks are substantial
Secondary Market Focus
Financing Investment-Higher Returns
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Players in Money Market

Central Bank (Presiding Deity of Money
Market)-not only watchdog but also
promotional & development banker
Commercial Banks
Co-operative Banks
Discount & Acceptance Houses
Bills Market, Bullion Market etc.

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Organized vs. Over-the-Counter

Markets

Organized
Visible

Marketplace

Members

Trade

Securities

Listed

New York

Exchange

Stock

OTC
Wired

Network of
Dealers

No

Central, Physical
Location

All

Securities Traded
off the Exchanges
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Indian Money Market

Unorganized
indigenous bankers &
money lenders
They advance loan against
collateral security
Outside the control of the
central bank
Rate of interest differ from
the organized sector

Organized
Consist of RBI, SBI & its
subsidiaries, commercial
banks, finance corp, bill
market & bullion market
Mumbai, Kolkata & Delhi
are principal centres

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Banking System-Dominant force in the

Indian Money Market
Reserve Bank of India (RBI)

Non Scheduled Banks

Scheduled Banks
State Cooperative
Banks

Central Cooperative Banks

& Primary Credit
Societies

Commercial
Banks

Foreign Banks

Indian Banks

Pub-Sector Banks
SBI & its
associates

Nationalized
Banks

Non-Scheduled
Commercial
Banks

Pvt Sector Banks

Regional
Rural Banks
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Securities Traded in Financial Markets

Money Market Securities

Capital market securities

Debt securities Only

Debt and equity securities

Derivative Securities

Financial contracts whose value is derived from the values of

underlying assets
Used for hedging (risk reduction) and speculation (risk seeking)

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