Prof.

Neelam Tandon

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Financial System is a complex system comprising of sub-systems of: financing institutions, markets, instruments, and services which facilitates the transfer and allocation of funds, efficiently and effectively.

Financial Dualism - Is co-existence of formal and informal financial sectors. Formal institution is institutionalized; organized and regulated system caters to the need of modern economy. It comes under the preview of Ministry of Finance, the Reserve bank of India, and Securities and exchange board of India. Informal Institution - Is non-institutionalized; unorganized and non-regulated system caters to the need of traditional and rural economy. Examples are friends, and relatives, groups of persons operating as funds or association under their own rules and use name as fixed fund, association, Partnership consisting of local brokers, chit fund companies, investment, and finance companies.

Financial institutions: 1. Banking Institutions are creators and purveyors of credit. 2. Non-banking institutions purveyors of credit. Example: (Development financial institutions DFI), non-banking financial companies (NBFCs), Housing finance companies (HFCs). 3. Term finance institutions : IDBI(industrial development bank of India), ICICI(industrial credit and investment corporation of India) ,IFCI(industrial financial corporation of India), SIDBI(small industrial development bank of India), IIBI(industrial investment bank of India).

4. Specialized finance institutions: Export Import Bank of India (EXIM) , Tourism finance corporation of India (TFCI), ICICI venture, the Infrastructure Development Finance Company(IDFC), National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB). 5. Investment Institutions in the business of mutual funds, UTI, public sector and private sector mutual funds and insurance activity of Life Insurance Corporation (LIC), (GIC) General Insurance Corporation and its subsidiaries are classified as financial institutions. 6. State level financial institutions: State financial corporation (SFCs), and State Industrial development corporation (SIDCs) which are owned and managed by the state governments.

Financial assets/instruments- Financial assets comprises of

loans, deposits, bonds, equities, etc. It Enable channelizing funds from surplus units to deficit units. There are instruments for savers such as deposits, equities, mutual fund units, etc. Also there are instruments for borrowers such as loans, overdrafts, etc. Just Like corporate, governments too raise funds through issuing of bonds, Treasury bills, etc. The Instruments like Public Provident Fund (PPF), KissanVikas Patra (KVP), etc. are available to savers who wish to lend money to the government

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Financial Markets facilitates the process of raising funds. Financial Markets are : Money Market- for short-term funds (less than a year) Organized (Banks) Unorganized (money lenders, chit funds, etc.) Capital Market- for long-term funds (maturity period one year or more than that) Primary Market deals with new issues Secondary market deals in trading in outstanding or existing securities. Over the counter (OTC) the government securities market is an OTC market. Spot trades are negotiated and traded for immediate delivery. Exchange traded market trading takes place over a trading cycle in stock exchanges. Derivatives (derived from underlying assets) market is exchange traded.

Money market instruments are those which have maturity period of less than one year. Some of the important money market instruments are: 1.Call Money 2. Treasury Bill 3. Commercial Paper 4. Certificate of Deposit 5. Trade Bill

Organized money market comprises RBI, banks (commercial and co-operative) . Organized Money Market is meant for short term securities, which include: Call money market Is an integral part of the Indian money market where dayto-day surplus funds (of banks) are traded? It is mainly used by the banks to meet their temporary requirement of cash. The loans are of short-term duration (1 to 14 days). Money lent for one day is called call money; if it exceeds 1 day but is less than 15 days it is called notice money. Money lent for more than 15 days is term money.

The borrowing is exclusively limited to banks, which are temporarily short of funds. Call loans are generally made on a clean basis- i.e. no collateral is required. The rate of interest paid on call money is known as call rate. The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds . The call market helps banks economize their cash and yet improve their liquidity. It is a highly competitive and sensitive market. It acts as a good indicator of the liquidity position

The Banks can borrow in the money market to: 1. To fill the gaps or temporary mismatch of funds. 2. To meet the CRR and SLR mandatory requirements as stipulated by the central bank. 3. To meet sudden demand for funds arising out of large outflows (like advance tax payments) 4. Call money market serves the role of equilibrating the short-term liquidity position of the banks

Bill Market - Treasury bill market- Also called the T-Bill market

These bills are short-term liabilities (91-day, 182-day and 364-day) of the Government of India It is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from the date of issue They are issued at discount to the face value and at the end of maturity the face value is paid The rate of discount and the corresponding issue price are determined at each auction RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364day T-Bills on a fortnightly basis on behalf of the central government

Treasury bills are highly liquid instruments , that means, at any time the holder of treasury bills can transfer of or get it discounted from RBI. These bills are normally issued at a price less than their face value , so the difference between the issue price and the face value of the treasury bill represents the interest on investment. Banks , financial institutions and corporations normally play major role in the Treasury Market.

It is a popular instrument for financing working capital requirements of companies. The CP is an unsecured instrument issued in the form of promissory note. This instrument was introduced in 1990 to enable the corporate borrowers to raise short term funds. It can be raised from period ranging from 15 days to one year.

CDs are short term instruments issued by Commercial Banks and Special Financial Institution(SFIs). CDs are transferable from one party to another. The maturity period of CDs ranges from 91 days to one year. These can be issued to individuals, cooperatives and companies.

Normally the traders buy goods from the wholesaler or manufacturers on credit. The sellers get payment after the end of the credit period. But if any seller does not want to wait or is in immediate need of money he /she can draw a bill of exchange in favour of the buyer. When buyer accepts the bill it becomes negotiable instrument and is termed as bill of exchange or trade bill.

Trade bill can now be discounted with a bank before its maturity. On maturity the bank gets the payment from the buyer of goods. When trade bills are accepted by commercial banks it is known as Commercial Bills. So trade bill is an instrument, which enables the drawer of the bill to get funds for short period to meet the working capital needs.