Professional Documents
Culture Documents
Kiran S Rao
Financial institutions,
Financial markets,
Financial instruments and
Financial services.
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instruments and markets. These financial services are vital for creation of firms,
industrial expansion, and economic growth.
Before investors lend money, they need to be reassured that it is safe to
exchange securities for funds. This reassurance is provided by the financial
regulator, who regulates the conduct of the market, and intermediaries to protect
the investors interests. The Reserve Bank of India regulates the money market
and Securities Exchange Board of India (SEBI) regulates capital market.
FUNCTIONS OF FINANCIAL SYSTEM
Good financial system search in the following ways :
1. Promotion of liquidity:
The major function of financial system is the provision of money and monetary
assets for the production of goods and services. There should not be any
shortage of money for productive ventures. In financial language, the money
and monetary assets are referred to as liquidity. The term liquidity refers to cash
or money and other assets which can be converted into cash readily without loss
of value and time.
2. Link between savers and investors:
One of the important functions of financial system is to link the savers and
investors and thereby help in mobilizing and allocating the savings effectively
and efficiently. By acting as an efficient medium for allocation of resources, it
permits continuous up gradation of technologies for promoting growth on a
sustained basis.
3. Information available:
It makes available price- related information which is a valuable assistance to
those who need economic and financial decision.
4. Helps in projects selection:
A financial system not only helps in selecting projects to be funded but also
inspires the operators to monitor the performance of the investment. It provides
a payment mechanism for the exchange of goods and services, and transfers
economic resources through time and across geographic regions and industries.
5. Allocation of risk:
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It is a market where short- term loans are given to corporate customers for
meeting their working capital requirements. Commercial banks play a
significant role in this market.
Capital market consists of:
Industrial securities market:
It is a market for industrial securities namely equity shares or ordinary shares,
preference shares & debentures or bonds. It is a market where industrial
concerns raise their capital or debt by issuing appropriate instruments. It can be
further subdivided into primary & secondary market.
Government securities market:
It is otherwise called gilt-edged securities market. It is a market where
government securities are traded. In India there are many kinds of govt
securities- short-term & long-term. Long-term securities are traded in this
market while short term securities are traded in the money market.
Long-term loans market:
Development banks & commercial banks play a significant role in this market
by supplying long term loans to corporate customers. Long-term loans market
may further be classified into:
Term loans market
Mortgages market
Financial guarantees market
3. Financial Instruments:
Financial instruments refers to those document which represents financial
claims on assets. As discussed earlier, financial assets refers to a claim to the
repayment of certain sum of money at the end of specified period together with
interest or dividend. Examples : bills of exchange, promissory notes, treasury
bills, government bonds, deposit receipts, shares debentures etc.
Financial instruments can also be called financial securities. Financial securities
can be classified into:
i. Primary or direct securities
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iv. Most of the securities posses security value, i.e., they can be given as
security for the purpose of raising loans.
v. Some securities enjoy tax status, i.e., investment in these securities are
exempted from income tax, wealth tax, etc., subject to certain limits. E.g. public
sector tax free bonds, magnum tax saving certificates.
vi. They carry risk in the sense that there is uncertainty with regard to the
payment of principle or interest or dividend as the case may be.
vii. These instruments facilitates future trading so as to cover risks due to price
fluctuations, interest rates, etc.
viii. These instruments involve less handling costs since expenses involved in
buying and selling these securities are generally much less.
ix. The return on these instruments is directly in proportion to the risk
undertaken.
x. These instruments may be short-term or medium term or long term depending
upon the maturity period of these instruments.
4. Financial Services:
Financial intermediaries provide key financial services such as merchant
banking, leasing hire purchases, credit-rating, and so on. Financial services
rendered by the financial intermediaries bridge the gap between lack of
knowledge on the part of investors and increasing sophistication of financial
instruments and markets. These financial services are vital for creation of firms,
industrial expansion, and economic growth.
Before investors lend money, they need to be reassured that it is safe to
exchange securities for funds. This reassurance is provided by the financial
regulator, who regulates the conduct of the market, and intermediaries to protect
the investors interests. The Reserve Bank of India regulates the money market
and Securities Exchange Board of India (SEBI) regulates capital market.
FUNCTIONS OF FINANCIAL SYSTEM
Good financial system search in the following ways :
1. Promotion of liquidity:
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The major function of financial system is the provision of money and monetary
assets for the production of goods and services. There should not be any
shortage of money for productive ventures. In financial language, the money
and monetary assets are referred to as liquidity. The term liquidity refers to cash
or money and other assets which can be converted into cash readily without loss
of value and time.
2. Link between savers and investors:
One of the important functions of financial system is to link the savers and
investors and thereby help in mobilizing and allocating the savings effectively
and efficiently. By acting as an efficient medium for allocation of resources, it
permits continuous up gradation of technologies for promoting growth on a
sustained basis.
3. Information available:
It makes available price- related information which is a valuable assistance to
those who need economic and financial decision.
4. Helps in projects selection:
A financial system not only helps in selecting projects to be funded but also
inspires the operators to monitor the performance of the investment. It provides
a payment mechanism for the exchange of goods and services, and transfers
economic resources through time and across geographic regions and industries.
5. Allocation of risk:
One of most important function of the financial system is to achieve optimum
allocation of risk bearing. It limits, pools, and trades the risks involved in
mobilizing savings and allocating credit. An effective financial system aims at
containing risk within acceptable limit and reducing cost of gathering and
analyzing information to assist operators in taking decisions carefully.
6. Minimizes situations of Asymmetric information:
A financial system minimizes situations where the information is Asymmetric
and likely to affect motivations among operators or when one party has the
information and the other party does not. It provides financial services such as
insurance and pension and offers portfolio adjustments facilities.
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