Financial System

 Ss- financial i/p- for the production of g&s –

turn promote – std of living
 It is the combination of 2 concept- financial
market & financial institutions
 It creates r/s bet savers & investors –
promote faster economic development.

1
 Functions of Financial system

(i) Provision of liquidity

* cash
(ii) Mobilization of savings
* play domestic activity

2
 Financial Market
 Place were buying & selling –
financial assets
 It relates – stock exchanges
 Financial assets- production &
creation y- in future(eg- equity ss)

3
 Financial assets
Financial assets- production &
creation y- in future(eg- equity ss)
Classification of Financial Assets
Financial Assets

Marketable Assets Non- Marketable Assets

* Transferred from one person to another- hindrance * Not easily transferred

4
 Classification of Financial
Market
Classification of Financial Market

Unorganized Organized

Capital Market Money Market

5
 Unorganized Market
 Lenders , bankers
 Collect deposit money from the
public- lend to them
 Activity ^ RBI

6
 Organized Market
 R& R- deals financial dealings
Organized Market

Capital Market •Money Market

7
 Capital Market

Deals with long term securities-

maturity period
Classification of Capital Market
* Industrial Securities Market
* Gvt Securities market
* Long term loans market

8
Industrial Securities Market
 Deals – equity , Preference and
Debentures

9
 Importance of capital
market
 Source – production
 Creates incentives to saving & facilitates
capital formation
 Economic savings
 It gives quantitative & qualitative – direction –
fund flows
 Important – source for technological use –
industrial sectors
 Advantages of Capital
Market
(i) Capital
• Expansion within existing markets or into new markets
• Research and development
• Mergers and acquisitions
(ii) Profile
• Improving your commercial position with existing and
potential
* customers and suppliers
• Accessing the prestige and status that result from being on
 a leading global exchange

(iii) Liquidity
• Valuation, benchmarking, ranking and indices
• Enhancing shareholder and brand value
 Disadvantages of capital
market

 Prices for shares in capital markets

can be very volatile.
 Different shares can have different
levels of liquidity, i.e. demand from
buyers and sellers.
 Money Market
 Deals- financial assets & securities-
maturity period- 1
Classification of Money Market

Call Money Market Commercial Bills Market Treasury Bills Market

Short – term Loan Market

 Composition /Classification of
Money Market
(i) Call Money Market
 Use- short term transaction- (1- 14 days)
 High liquidity
 Int rate – vary from day to day, hours to
hours, center to center
(ii) Commercial Bills Market
* Bills of Exchanges
* Crs sales
* Buyer accepts bills- pay amt on later date
* Seller get amt- by discounting bill
 Classification of Money
Market
(iii) Treasury Bills Market
 short term maturity (91- 182- 364

days)
 Or promissory note or financial bill –

issued by gvt
Classification Treasury Bills Market

Ordinary treasury bills Ad hoc treasury bills

 Classification Treasury Bills
Market
(i) Ordinary treasury bills
*issued to the public, banks& other financial
institution
* cental gvt – meet short term financial needs
(ii) Ad hoc Treasury bills
 Issued in favour of RBI
 Pur or sales- RBI
 Classification of Money
Market
(iv) Short –Term Loan Market
Given to corporate customers – meeting WCR
Commercial banks- provide loan in the form – cash
credit & OD
OD -
►given to business people
►temporary
► given current a/c
Cash credit-
► industrialists
►1 yr
Given separate a/c
 Features of Money Market
 Short term funds
 Deals – financial assets- 1 maturity
period
 Deals – easy liquidity
 No brokers – transactions
 Combination of markets
 Characteristics of Money
Market
(i) Highly Organised Banking System
►short term
►commercial banks
(ii) Presence of a Central Bank
►Cash reserve & provide financial accommodation
(iii) Availability of Proper Credit Instruments
(iv) Existence of Secondary Market
(v) Ample Resources
►amount within country & foreign country( London,
New York, Paris)
 Importance of Money
Market
(i) Development of Trade and Industry
Finance- wcr & development of
industry
(ii) Development of capital market
(iii) Smooth Functioning of Commercial
Banks
(iv) Effective Central Bank Control
 Advantages of Money
Market
 High Liquidity
 High Profitability
 Safe & Cheap
 Disadvantages of Money
Market
 Lack of Integration (hrs,days,center)
 Volatility in Call Money Rates
 Structure of Indian Money Market

Unorganized Sectors Organized Sectors Co-operative Secto

Chit Funds RBI Private Sectors Bank

Money Lenders

Public Sectors Bank

Development Banks & Other Financial Institutio

LIC, UTI,IDBI,IFC
Foreign Banks Indian Banks
 Difference between Money Markets Capital Market

Money Market Capital Market

It is a market for short-term funds It is a market for long-term funds

Supply funds for WC Supply funds for Fixed Capital

Money transaction- bills of exchange, cp Money transaction- SS, Deb

Not have secondary market It have secondary market

Central bank, commercial bank Development Bank & Insurance Companies

are involved are involved
 Participants In Financial
Markets
Insurance Companies
 Issue contracts to provide a future payment if a
certain event happens
 Use the fees from these contracts to invest in
equities, debt and property
Finance Companies
Get funds by issuing debentures and borrowing from
the general public
 Provide short-to-medium-term funds to business,
particularly leasing finance
 Participants In Financial
Markets
Banks
 Are the largest providers of funds to business

 Get most of their funds from deposits

 Provide a wide range of debt securities to business

Merchant Banks
 Get funds by short-term borrowing

 Lend mainly to corporations in such things as foreign

currency and commercial bills

 Participants In Financial
Markets
Companies
 Often have surplus funds from operations

 Invest funds on money market, commercial bills

and sometimes buy shares in businesses
Superannuation/Mutual Funds
 Get funds from the savings of people preparing for
retirement
 Invest funds on money market, commercial bills
and sometimes buy shares in businesses
Government
 Financial Services
 Mobilizing & allocating savings
 Used for industrial sectors
 Savings & allocation of investment
channels
 Promote industrial sectors
 Scope of Financial Services

Modern Activities
Traditional Activities
( It is – combitation of Capital money market)

Fund based activites Non-Fund based activites

 Fund Based Activities
 Primary market activities
 Secondary market activities

 Deals- instruments- cp,Tb

 Deals- Foreign exchange market activities

fund-based services
 a) Leasing and Hire Purchase

 b) Housing Finance

 c) Credit Cards

 d) Venture Capital
 Non-Fund Based Activities
 Managing the Capital Market- Pre
issue & post issue
 Making arrangement- placement of
Capital & debt instrument
 Assisting- process- getting- gvt &
other clearness
 Modern Activities
 Planning- mergers& acquisition
 Acting – as trustees- for deb holders
 Undertaking risk management
 Promoting credit rating agencies-
purpose-goodwill
 Determine optimum debt- equity
market
 CHARACTERISTICS OF
FINANCIAL SERVICES
Customer-Specific
* study the needs of -customers
* before deciding their financial strategy -regard to costs, liquidity
Intangibility :
* institutions -focus on the quality and innovativeness
* services to build up -credibility.
People based services
Market Dynamics
*socioeconomic changes
*educational changes
CHALLENGES BEFORE THE FINANCIAL
SERVICES SECTOR

 Lack of qualified personnel

 Lack of investors awareness
 Lack of Specialization (brokers)
 Lack of Recent data
 Risk in Financial Service
•Risk is exposure to uncertainty
 Risk in Financial Service

 Market risks
* financial risk  
*uncertainty in the future market
value
Liquidity risk : is financial risk from a
possible loss of liquidity.
Liquidity
Specific liquidity risk risk
Systemic liquidity risk