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INDIAN FINANCIAL SYSTEM

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FINANCIAL SYSTEM
y A Financial System is a composition of various

institutions, markets, regulations and laws, practices, money manager, analysts, transactions.
y A financial system functions as an intermediary and

facilitates the flow of funds from the areas of surplus to the areas of deficit.
y It helps in economic development of a nation by

proper allocation on funds to various economic units like corporate sector, government and household sector
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INTER-RELATIONSHIP OF FINANCIAL SYSTEM

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SAVINGS

POLICY FINANCIAL SYSTEM

LIQUIDITY

RISK
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PAYMENT
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Functions of financial system

Public saving are channelised whichpromise future income flows. result in production of goods and services to influence variables like interest rates or inflation through govt. intervention

Savings

Policy Liquidity Financial System

protection against life, health and income risks by sale of life and health insurance and property insurance policies. provide various instruments to reduce risk in investment
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provide the investor with the opportunity to liquidate investments like stocks bonds debentures whenever they need the fund.

Risk

Payment

offers convenient mode for payment of goods and services. E.g.Cheque system, credit card system etc

The cost and time of transactions are drastically Prepared by : P.S.Nithya , 7 Assistant Professor , RVSCET reduced.

Financial system in India

FOUR MAIN PARTS :
y Financial Markets (money market, capital market, forex

market, etc.) y Financial Institutions (banks, mutual funds, insurance companies, etc.) y Financial Instruments (loans, deposits, bonds, equities, etc.) y Financial Services

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Financial Institution
y Financial institutions help in channeling funds between surplus and deficit

agents
y A financial institution is an entity that connects surplus and deficit agents. y An example of a financial institution is a bank that transforms bank deposits

into bank loans.

y Through the financial institutions, y They channel funds from people who have extra money (savers) to those

who do not have enough money to carry out a desired activity (borrowers).

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BANKS

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rimary Functions of Banks Secondary

Accepting Deposits Granting Advances Agency Functions Utility Functions

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Non Banking Financial Companies

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by

government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance

business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable
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property.

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Non Banking Financial Companies

1) Loan company 2) Investment company 3) Hire purchase finance company 4) Equipment leasing company 5) Mutual benefit financial company

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FEW NBFC

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MUTUAL FUNDS

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INSURANCE COMPANIES

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REGULATOR BANKS ? INSURANCE ? MUTUAL FUND? NBFCs ?

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FINANCIAL MARKET

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Financial Markets
A Financial Market can be defined
y as the market in which financial instruments are

created or transferred.
y As against a real transaction that involves

exchange of money for real goods or services, a financial transaction involves creation or transfer of
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a financial asset. Professor , Prepared by : P.S.Nithya , Assistant

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y Financial Markets can be classified as:

1. Money Market: Deals with transactions related to shortterm instruments with maturity period less than one year.
Organized(Banks) Unorganized (money lenders, chit funds, etc.)

2. Capital Market: Deals with transactions related to longterm instruments with maturity period greater than one year.
Primary Market
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Primary Market
 Initial public offering;  Future public Offering;

(continued)

y Methods of Issuing securities in the primary market are:

 Rights issue (for existing companies);  Preferential issue;  Private placement ;  Qualified Institutions placement;  Offer for sale  Book Building
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Secondary Market
y The secondary market, also known as the aftermarket, is the financial

market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold
y Operates through stock exchanges y Functions it helps in providing liquidity to investments already made, by offering a

place of transaction in securities

Nexus between saving and investment
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REGULATOR
MONEY MARKET ? CAPITAL MARKET ?

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Financial Instruments
y A financial instrument is a contract that represents:

a financial asset of one party, And a financial liability/equity instrument of the other party.

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1.DIRECT 2.INDIRECT

3.DERIVATIVE
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INSTRUMENTS IN INTERNATIONAL MARKETS Debt Instruments -Euro Bonds -Foreign Bonds

Equity Instruments -Global Depository Receipts -American Depository Receipts

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INDIAN DEPOSITORY RECEIPTS

y The concept of the depository receipt mechanism which is used to

raise funds in foreign currency has been applied in the Indian capital market through the issue of Indian Depository Receipts (IDRs). Foreign companies can issue IDRs to raise funds from Indian market on the same lines as an Indian company uses ADRs/GDRs to raise foreign capital. The IDRs are listed and traded in India in the same way as other Indian securities are traded.
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Types of Foreign Bonds

y Yankee Bonds: Yankee bond is a dollar denominated

bond issued in U.S by a non-U.S. borrower in the U.S. market. y Sa urai bond: Samurai bonds are yen denominated bonds issued in Japan by a non-Japanese borrower. y Bulldog bonds: Bulldog bonds are pound denominated bonds issued in U.K. domestic market by a non U.K. borrower.
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