Capital Markets

Sessions 1: The Financial System in India

Introduction to Financial System

The term financial system is a set of inter-related activities/services working together to achieve
some predetermined purpose or goal. It includes different markets, the institutions,
instruments, services and mechanisms which influence the generation of savings, investment
capital formation and growth.

“Supply funds to various sectors and activities of the economy in ways that promote the
fullest possible utilization of resources without the destabilizing consequence of price
level changes or unnecessary interference with individual desires."

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Composition of Financial System in India
Organised Sector
1. Banking system
2. Cooperative system
3. Development Banking system
i. Public sector
ii. Private sector
4. Money markets and
5. Financial companies/institutions

Unorganised Sector
Comprises of relatively less controlled moneylenders, indigenous bankers, lending pawn
brokers, landlords, traders etc.

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Capital Market
1. Industrial Securities Market
i. Primary Market
ii. Secondary Market

2. Government Securities Market

3. Long-term Loan Market

1. Term-loan Market
2. Mortgage Market
3. Financial Guarantees Market

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Importance of Capital Market
The capital market is the place where the medium-term and long-term financial needs of
business and other undertakings are met by financial institutions which supply medium and
long-term resources to borrowers.

1. Important source of economy’s savings

2. Facilitates capital formation
3. Provides and avenue for investors to invest in financial assets
4. Facilitates increase in production and productivity
5. Serves as an important source of technologies upgradation

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Money Market
Money market is a market for dealing with financial assets and securities which have a maturity
period of up to one year. In other words, it is a market for purely short-term funds.

1. Call money market

2. Commercial bills market
3. Treasury bill market
4. Short-term loan market

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Foreign Exchange Market
Foreign exchange market is a system of converting one nations currency into another, and
transferring money from one country to another.

1. Transfers purchasing power from one country to another

2. Provides adequate credit facility for the promotion of foreign trade
3. To cover foreign exchange risks by providing hedging facilities

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Financial Instruments
1. Primary or direct securities
2. Secondary or indirect securities
i. Short term
ii. Medium term
iii. Long term

Features
1. Easily Transferable
2. They have a ready market for trading
3. Posses liquidity
4. They carry an uncertainty with regards to payment

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Weaknesses of Indian Financial System
1. Lack of co-ordination between different institutions
2. Monopolistic market structure
3. Dominance of development banks in industrial financing
4. Inactive and erratic capital market

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Thank You