Financial Markets and Services

Financial System
• Financial System of any country consists of
financial markets, financial intermediation and
financial instruments or financial products.
• A Financial System is a composition of various
institutions, markets, regulations and laws,
practices, money manager, analysts,
transactions and claims and liabilities
• A financial system helps to mobilise the financial
surpluses of an economy and transfer them to
areas of financial deficit.
financial system
• The word "system", in the term "financial
system", implies a set of complex and closely
connected or interlined institutions, agents,
practices, markets, transactions, claims, and
liabilities in the economy.
• Indian financial system consists of financial
market, financial instruments and financial
intermediation.
• The Central Statistical Organisation (CSO)
classifies the savers in India as the household
sector, domestic private corporate sector, and
the public sector.
• household sector :
▫ Individuals, non-government, non-corporate
entities in agriculture, trade and industry, and
non-profit making organisations like trusts,
charitable and religious institutions.
• Public sector:
▫ Central and state governments,
▫ departmental and non-departmental
undertakings,
▫ RBI etc
• Domestic private corporate sector:
▫ non-government,
▫ public and private limited companies (whether
financial or non-financial)
▫ cooperative institutions.
Features of financial system
• Provide linkage between depositor and investor
thus encouraging both savings and investment
• Facilitate the expansion of financial markets
over the space and time
• Promote efficient allocation of financial
resources for socially desirable and economically
productive purpose
• Influence the quality and pace of economic
development.
Functions of a financial system
• Saving Function: to mobilize savings and channelize
them into productive activities and savings are
transformed into investments.
• Liquidity Function: to provide money and monetary
assets for the production of goods and services
• Payment Function: Offers a very convenient mode of
payment for goods and services ex: credit card,
cheque
▫ The cost and time of transactions is considerably
reduced.
• Risk Function: provide protection against life,
health and income risks.
• Information Function :disseminate information
for enabling participants to develop an informed
opinion about investment, disinvestment,
reinvestment or holding a particular asset.
• Transfer Function: mechanism for the transfer
of the resources across geographic boundaries.
• Reformatory Functions: A financial system
undertakes the functions of developing, introducing
innovative financial assets/instruments services and
practices and restructuring the existing assets,
services etc, to cater to the emerging needs of
borrowers and investors (financial engineering and
re-engineering).
• Other Functions: It assists in the selection of
projects to be financed and also reviews
performance of such projects periodically. It also
promotes the process of capital formation by
bringing together the supply of savings and the
demand for investible funds.
Role
 Functions
1. Provide liquidity : Provide money and
monitory assets for the production of goods
and services
2. Mobilisation of savings : savings mobilisation
and channelize them into productive activities
Structure of financial system
Financial Assets

Financial
assets

Non
Marketable
marketable
asset
asset

shares Govt.securities Bonds MF units debentures Bank deposit P.F LIC schemes
Marketable Assets
▫ Easily transferred from one person to other
Non Marketable Assets
Not Easily transferred from one person to other
Another Classification

• Cash / money asset

• Debt asset
• Stock asset
Financial Intermediaries
• Organisation which facilitate and facilitate the
financial transaction in financial markets
• 2 types
▫ Capital market intermediaries
 Provide Long term funds
 Ex: LIC, financial corporations, development banks
▫ Money market intermediaries
 Provide Short term funds
 Ex: commercial bank, corporative bank
Financial Markets
• Any marketplace where buyers and sellers
participate in the trade of financial securities,
commodities, and other tangible items of value
at low transaction costs and at prices that reflect
supply and demand.
• Securities include stocks and bonds, and
commodities include precious metals or
agricultural goods
• Financial market
▫ Capital market
 Capital market is a market for financial assets which
have a long or indefinite maturity.(>1 year)
▫ Money market
 As money became a commodity, the money market
became a component of the financial markets for
assets involved in short-term borrowing, lending,
buying and selling with original maturities of one
year or less.
 Capital market

• Industrial securities market

• Govt. securities market

• Long term loans market

Industrial securities market
Market for industrial securities like equity share or
ordinary share, preference share and
debentures/bond
Sub division
▫ Primary market
facilitate capital formation
Public issue
Right issue
Private placement

▫ Secondary market
Secondary sale of securities
 Govt. securities market

• Gilt edged securities market

• Govt. Securities are traded
• Long & short term securities are traded
• Securities issued in the denominations of 100
interest is payable half yearly and tax exception
is there
• Government securities are
▫ Promissory notes
▫ Stock certificates
▫ Bearer bonds
Long term loans market
• Long term loan to corporate
• Given by development bank and commercial
bank
• Classification
▫ Term loan market
▫ Mortgage market
▫ Financial guarantee market
Money market
• Market dealing with financial assets and
securities
• Maturity period up to 1 year
• Division
▫ Call money market
▫ Commercial bills market
▫ Treasury bills market
▫ Short term loans market
Financial instruments
• Documents which represent financial claims on
assets
• Also called financial securities
▫ Primary/direct securities
 Directly issues by ultimate investor to the ultimate saver
 Ex: share or debenture issued directly to public
▫ Secondary/indirect securities
 Issued by financial intermediaries to the ultimate saver
 Ex : mutual funds issue securities in the form of units and
the money pooled is invested in companies
Development of Financial System in
India
• without a financial system, the economy would
be subject to all the inefficiencies of a barter
system.
• finance is the linchpin of economy and a
financial system plays a key role in the smooth
and efficient functioning of the economy
• A financial system implies a set of complex and
closely connected or intermixed institutions,
agents, practices, markets, claims, and so on in
an economy.
Nationalisation of financial institutions
• 1948 – RBI
• 1956 – imperial bank of India(SBI) & LIC of
India
• 1969 - 14 commercial banks
• 1980 – 6 banks and GIC of India
• Unit Trust of India (UTI)
▫ Est. In 1964
▫ 1994 – approved by SEBI
Establishment of Development bank
• 1948 – industrial finance corporation of India(IFCI)
• 1955 – industrial credit and investment corporation
of India (ICICI)
• 1958 – Refinance corporation of India(RCI)
• 1964 – Industrial development bank of India(IDBI)
– subsidiary of RBI
• 1976 – ownership transferred to central govt.
▫ Apex institution of development bank
▫ Coordinate the activities of financial institutions
▫ State Industrial development corporations (SIDCO)
• 1971 – IDBI and LIC set up industrial
reconstruction corporation of India(IRCI)
• 1997 – industrial reconstruction bank of India
• Now it is converted to LTD company - industrial
investment bank of India (expansion,
modernisation, diversification of industries)
• 1990 – Small industries development bank of
India (SIDBI) – admin of small industries
development fund and National equity fund
Institution for financing Agriculture
• 1963- Agriculture refinance and development
corporation(ARDC)
• 1982 – NABARD (National Bank for Agriculture
and rural development)
Institution for foreign Trade
1982 – EXIM bank of India
Institution for housing finance
1988 – National Housing Bank(NHB)
Stock holding Corporation of India LTD(SHCIL)
1987 – tone up the stock and capital markets
• Mutual fund industry
▫ Provide investment avenue
• Venture capital institutions
▫ A method of financing in the form of equity participation
• Credit rating agencies
▫ To help the investors to make a decision of their investment
▫ Credit Rating Information Services of India Limited (CRISIL)
▫ ICRA Limited (investment information and credit rating agency
of India LTD)
▫ Credit Analysis and Research limited (CARE)
▫ Brickwork Ratings (BWR)
Legislative support
Weakness of Indian Financial System