MODULE 1 OVERVIEW OF FINANCIAL SYSTEM.pptx

 INDIAN FINANCIAL SYSTEM
 FEATURES
 CONSTITUENTS OF FINANCIAL SYSTEM
 FINANCIAL INSTITUTIONS
 FINANCIAL SERVICES
 FINANCIAL MARKETS AND FINANCIAL
INSTRUMENTS
 OVERVIEW OF GLOBAL FINANCIAL SYSTEM
MODULE 1: OVERVIEW OF
FINANCIAL SYSTEM

Introduction to Indian Financial System
The financial system of a country is an important tool for economic
development of the country, as it helps in creation of wealth by linking
savings with investments. It facilitates the flow of funds from the
households (savers) to business firms (investors) to aid in wealth
creation and development of both the parties.

The financial system of a country is
concerned with:
 Allocation and Mobilization of savings
 Provision of funds
 Facilitating the Financial Transactions
 Developing financial markets
 Provision of legal financial framework
 Provision of financial and advisory services

Meaning of Indian Financial System
According to Robinson, the primary function of a
financial system is “to provide a link between savings and
investment for creation of wealth and to permit portfolio
adjustment in the composition of existing wealth”
A Financial System consists of various financial
Institutions, Financial Markets, Financial Transactions, rules
and regulations, liabilities and claims etc.

Features of Financial System:
It plays a vital role in economic development of a country
It encourages both savings and investment
It links savers and investors
It helps in capital formation
It helps in allocation of risk
It facilitates expansion of financial markets
It aids in Financial Deepening and Broadening

Importance of Indian Financial System
 It accelerates the rate and volume of savings through provision of
various financial instruments and efficient mobilization of savings
 It aids in increasing the national output of the country by providing
funds to corporate customers to expand their respective business
 It protects the interests of investors and ensures smooth financial
transactions through regulatory bodies such as RBI, SEBI etc.
 It helps economic development and raising the standard of living of
people

Importance of Indian Financial System
(cont.…)
 It helps to promote the development of weaker section of the
society through rural development banks and co-operative
societies
 It helps corporate customers to make better financial decisions
by providing effective financial as well as advisory services
 It aids in Financial Deepening and Broadening:
 Financial Deepening – It refers to the increase in financial assets as a
percentage of GDP
 Financial Broadening – It refers to increasing number of participants in the
financial system.

Constituents of Financial System

There can be two types of financial
institutions:
Banking Institutions or Depository institutions – These are
banks and credit unions that collect money from the public in
return for interest on money deposits and use that money to
advance loans to financial customers.
 Commercial Banks
 Cooperative Banks
 Regional Rural Banks
 Development Banks
 Foreign Banks

There can be two types of financial
institutions: (cont.…)
Non- Banking Institutions or Non-Depository
institutions –These are brokeragefirms, insurance and
mutual funds companies that cannot collect money deposits
but can sell financial products to financial customers.
 Mutual Fund companies
 Insurance Companies

Financial Institutions may be classified
into three categories:
Regulatory – It includes institutions like SEBI, RBI, IRDA etc.
which regulate the financial markets and protect the interests of
investors.
Intermediaries – It includes commercial banks such as SBI,
PNB etc. that provide short term loans and other financial
services to individuals and corporate customers.
Non–Intermediaries – It includes financial institutions like
NABARD, IDBI etc. that provide long-term loans to corporate
customers.

Financial Markets
It refers to any marketplace where buyers and
sellers participate in trading of assets such as shares, bonds,
currencies and other financial instruments. A financial market
may be further divided into capital market and money
market. While the capital market deals in long term securities
having maturity period of more than one year, the money
market deals with short-term debt instruments having
maturity period of less than one year.

Financial Markets (cont.…)
Financial market deals in financial securities (or
financial instruments) and financial services. Financial markets are
the centers or arrangements that provide facilities for buying and
selling of financial claims and services. These are the markets in
which money as well as monetary claims is traded in. Financial
markets exist wherever financial transactions take place. Financial
transactions include issue of equity stock by a company, purchase of
bonds in the secondary market, deposit of money in a bank account,
transfer of funds from a current account to a savings account etc.

FUNCTIONS OF FINANCIAL MARKETS
 To facilitate creation and allocation of credit and liquidity.
 To serve as intermediaries for mobilization of savings
 To help in the process of balanced economic growth
 To provide financial convenience
 To cater to the various credits needs of the business
organizations.
 To provide information and facilitate transactions at low cost

Classification of Financial Markets (cont.…)
Organized Market – The organized financial markets are
governed by the rules and regulations of the government and
is supervised and controlled by the central bank(RBI in India)
or other regulatory body.
There are two types of organized financial markets –
 Money Market
 Capital Market

Unorganized market – An unorganized market is not controlled and
supervised by the central bank. It generally consists of money lenders,
traders, indigenous bankers who lend money to the public.
 Money Lenders: Money Lenders lend money to individuals at a
high rate of interest.
 Indigenous Bankers: They operate like money lenders. They also
accept deposits from public.
 Chit Funds: These collect funds from members and provide loans
to members and others.
Classification of Financial Markets (cont.…)

 MONEY MARKET
 CAPITAL MARKET
Types of Financial Markets

Money Market
A money market is a financial market where financial instruments with high
liquidity and a short maturity period are traded. The money market is used by its
participants to carry out lending or borrowing activities through short term
financial instruments which have a maturity period of less than a year.
A money market consists of the following institutions –
 Commercial bank
 Central Bank
 Acceptance houses
 Non-banking Financial Companies
 Bill Brokers

Features of Money Market
 Few general money market features are:
 It is fund-term market funds.
 It’s maturity period up to one year.
 It trades with assets that can be transformed into cash easily.
 All the transactions take place through phone, email, text, etc.
 Broker not required for the transaction
 The components of a money market are the Commercial Banks,
Non-banking financial companies, and Central Bank etc.

Functions of Money Market –
 Mobilization and liquidation of funds
 Profitable Investment
 Borrowing by the government
 Economic Development
Instruments of Money Market –
 Commercial Paper
 Commercial Bill
 Certificate of Deposit
 Treasury Bills
 Call Money

Instruments of Money Market
Commercial Paper – It is a short term unsecured promissory note, negotiable and
transferable by endorsement and delivery with a fixed maturity period. A commercial paper is
issued by large credit worthy financial institutions to raise short-term funds at market
prevailing interest rates. It usually has a maturity period of 15days to 1 year.
Commercial Bill – It is a bill of exchange used to finance the working capital requirements
of a business. It is a short term, negotiable and self-liquidating instrument which is used to
finance the credit sales of firms where the seller is the drawer and the buyer is the drawee.
Certificate of deposit – These a marketable receipts in bearer form for funds deposited in a
bank for a specified period of time and at a specified rate of interest. It is a form of fixed
deposit which is transferable in nature i.e. it can be sold to someone and can be traded in the
secondary market. A certificate of Deposit can be issued for a minimum amount of Rs. 5
Lakhs up to Rs. 1 crore in India.

Instruments of Money Market (cont.…)
Treasury bill – It is a short term government security, usually for a time
period of 91days, sold by the central bank, RBI in India, on behalf of the
government. A treasury bill does not carry a fixed rate of interest and is
secured because of the guarantee of repayment provided by the Reserve
bank of India (RBI).
Call Money – It refer to funds provided for a short period of time,
usually less than a week. Generally banks are the borrowers and lenders
of call money. Commercial banks and other financial institutions give
their surplus funds to small banks, it may be taken for a day or even few
hours.

Capital Market
Capital market is one of the most significant aspect of the finance
industry. It consists of financial institutions like IDBI, ICICI, LIC etc.
A Capital market may be broadly defined as a financial market for
trading of long-term financial assets. Capital markets are concerned
with raising of capital for a business through buying and selling of
shares, bonds and other long-term debt and equity instruments.
It simply refers to an institutional arrangement between
the business and financial institutions to deal in long term debt and
equity backed securities.

Nature of Capital Market
 It deals in long term securities
 It creates dispersion in business ownership
 It helps in capital formation
 It helps in creating liquidity
Functions of Capital Market
 Capital Formation
 Mobilization of Savings
 Provision and Regulation of funds
 Aid in economic growth and development

Features of Capital Market
 Important features of the capital market are:
 Unites entrepreneurial borrowers and savers
 Deals long-term investments.
 Agents are required.
 It is controlled by government rules and regulations.
 Deals in both commercial and non-commercial securities.
 Foreign Investors.

Types of Capital Market
Primary Market: The primary capital market is concerned with issue of new securities and
listing of new shares on the stock exchange. In a primary market private and public
companies obtain funds through issue of new debt or equity securities.
Primary markets are facilitated by many financial institutions and investment banks which
are responsible for underwriting, setting initial share prices and selling securities directly to
prospective investors.
Secondary Market: In a secondary market those securities are traded which have already
been initially offered to the public in the primary market or listed in the stock exchange. A
secondary market can also be categorized into equity market and debt market on the basis of
the nature of security being traded.

Functions of Primary Market
 Origination- primary market facilitates all activities for
origination of shares.
 It provides Guarantee for issue through underwriting
 It facilitates distribution of shares to geographically dispersed
investors
 Aids in expansion/diversification/modernization of existing units
 To provides working avenues for major players of primary
market like merchant bankers, underwriting, brokers, advt
agencies etc

Methods of issue in primary market
Public through prospectus: Under this method, issuing company directly offers to
the general public/ institutions a fixed number of shares at a stated price through a
document called prospectus. This is the most common method followed by joint
stock companies to raise capital through the issue of securities it is also called as
IPO – Initial public offering/ FPO follow public offering
 Rights issue: under this method shares are offered to existing share holders.
 Bonus shares: share given to shareholders out of accumulated profit as a
substitute for dividend
 Private Placements: It is a way of selling securities privately to a small group of
investors. shares are offered to few group of customers under reservation method

Secondary market : Features
It is a market for secondary sale of securities, such shares quoted in the stock exchange
market. It provides continuous and regular market for buying and selling. It is also called as
stock market.
Market for securities: where securities of corporate bodies, government and semi-
government bodies are bought and sold.
Deals in second hand securities: It deals with shares, debentures bonds and such securities
already issued by the companies.
Regulates trade in securities. It regulates the trade activities so as to ensure free and fair
trade
Specific location : dealings happens in Stock exchange on the floor of market Continuous
and ready market for securities
It provides ready outlet for buying and selling of securities.

Functions of Secondary market
 Liquidity of securities as securities can be converted into cash readily
 Marketability of securities as it facilitates buying and selling of securities.
 Safety of funds belonging to investors
 Provides long term funds
 Flow of funds to profitable projects.
 Motivation for improved performance by companies to get competitive edge.
 Promotion of investment opportunities.
 Reflection of business cycle.
 Promotes marketing of new issues by companies.

Money Market Capital Market
Definition
A random course of financial institutions, bill
brokers, money dealers, banks, etc., wherein
dealing on short-term financial tools are being
settled is referred to as Money Market.
A kind of financial market where the company
or government securities are generated and
patronised for the intention of establishing long-
term finance to coincide with the capital
necessary is called as Capital Market.
Market Nature
Money markets are informal in nature. Capital markets are formal in nature.
Instruments involved
Commercial Papers, Treasury Certificate of
Deposit, Bills, Trade Credit, etc.
Bonds, Debentures, Shares, Asset
Secularization, Retained Earnings, Euro Issues,
etc.
Investor Types
Commercial banks, non-financial institutions,
central bank, chit funds etc.
Stockbrokers, insurance companies,
Commercial banks, underwriters etc.
Market Liquidity
Money markets are highly liquid. Capital markets are comparatively less liquid.

Money Market Capital Market
Risk Involved
Money markets have low risk. Capital markets are riskier in comparison to
money markets.
Maturity of Instruments
Instruments mature within a year. Instruments take longer time to attain
maturity
Purpose served
To achieve short term credit requirements
of the trade.
To achieve long term credit requirements of
the trade.
Functions served
Increasing liquidity of funds in the
economy
Stabilising economy by Increase in savings
Return on investment achieved
ROI is usually low in money market ROI is comparatively high in capital

Global Financial System
The global financial system is basically a broader regional system that encompasses
all financial institutions, borrowers, and lenders within the global economy. In a
global view, financial systems include the International Monetary Fund, central
banks, government treasuries and monetary authorities, the World Bank, and major
private international banks.
The global financial system is the worldwide framework of legal agreements,
institutions, and both formal and informal economic actors that together facilitate
international flows of financial capital for purposes of investment and trade
financing. Since emerging in the late 19th century during the first modern wave
of economic globalization, its evolution is marked by the establishment of central
banks, multilateral treaties, and intergovernmental organizations aimed at improving
the transparency, regulation, and effectiveness of international markets.

Features of Global financial system
 It refers to those financial institutions and regulations that act on the international level.
 It lies at the heart of the global credit and allocation process.
 The organization at the center of the international financial system is the international
monetary Fund (IMF),which has the mandate to ensure its effective running.
 It depends on the effective functioning and practical management of IMS and the ready
availability of currencies to support the payment system.
 The funds can more easily flow around the world to where they will earn the highest
return.
 It enables international payments to be made and funds to flow across borders.
 It allows individuals to invest in developed and emerging economies.

Financial Concepts(assignment )
An understanding of the financial system requires an
understanding of the following concepts
 Financial Assets
 Financial Intermediaries
 Financial markets
 Financial rates of returns
 Financial instruments

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