Indian Financial System

A financial system is well integrated set of sub-systems of financial institutions, markets, instruments and services which facilitates the transfer and allocation of funds efficiently and effectively.

Plays a vital role in the economic growth of a country. Indian financial system

Formal financial system Ministry of Finance, Reserve Bank of India, Security Exchange Board of India and other bodies Informal financial system Individual money lenders like neighbours, relatives, landlords, store owners, traders, groups like chit funds, associations etc.

Financial System consists of two groups:

Institutions that promotes savings among the

public, collects and transfers the same to the

investors. Includes banking system, insurance companies, mutual funds and investment funds.

Borrowers Individual investors, companies and

government

Importance and Functions of Financial System:

Plays a significant role in bringing about economic development of any country.

Function of a financial system is to establish a

bridge between the savers and investors and

facilitate the transformation of savings into investments.

Structure of the Indian Financial System

Financial markets

Financial institutions
Financial instruments

Financial services

Financial Markets

A financial market is place where financial assets are

created or transferred.

Financial assets A claim to a payment of a sum of

money some time in future.

Classified as Primary and Secondary or Money

Market, Capital Market, Government Securities Market &

Foreign Exchange Market

Money Market

Deals in short-term funds Collective name given to

various firms and institutions that deal in the various

grades of near money

Players Reserve Bank of India, Commercial Banks, Financial Institutions, Business Houses & Governments

Its sub-markets Call money market, Short-term government securities market Treasury bill market

Capital Market

Market for long term funds Defined as organized mechanism meant for effective and smooth transfer of financial resources from the investors to the entrepreneurs Classified Primary market (deals with issue of new capital) & Secondary market (deals with trading of old securities) These two markets have interdependence Primary market Public issue, Rights issue, Bonus issue, Private placement

Government Securities Market

Market where government securities are traded also known as Gilt-edged market

Government securities are classified as Short-term (Money market) & Long-term (Government securities market)

Categorised into three based on the maturity period

Long-dated (>10 yrs), Medium-dated (5-10 yrs) & shortdated (<5 yrs)

Categorised based on the issuing body

Central Government Securities State Government Securities Securities guaranteed by Central government for all India financial institutions like IDBI, IFCI etc. Securities guaranteed by State governments for state institutions like state electricity boards, housing boards etc.

Treasury bills issued by RBI

Government securities can be held in many forms namely:

Stock certificates or inscribed stock Promissory notes Bearer bonds which can be discounted

Foreign Exchange Market

A place where foreign exchange is bought and sold Players Dealers & banks

Financial Institutions (Intermediaries)

Intermediaries that mobilise savings and facilitate the allocation of funds in an efficient manner Provide maximum financial convenience to the public Classified:

Banking institutions creators and purveyors of credit Non-banking institutions (DFIs, NBFCs, HFCs and specialised financial institutions) purveyors of credit

Term finance institutions IDBI, ICICI, IFCI, SIDBI, IIBI (Industrial Investment Bank of India) Specialised financial institutions EXIM Bank, TFCI, IDFC (Infrastructure Development Finance Company) Sectoral financial institutions NABARD (National Bank for Agricultural and Rural Development , NHB (National Housing Bank) Mutual fund companies

Insurance companies
State level financial institutions

Financial Instruments

Categorised Capital market instruments & Money market instruments

Capital market instruments Equity shares, Preference shares, Debentures, Long-term gilt-edged securities

Money market instruments Treasury bills, Bills of

exchange or trade bills, Finance bills or Usance promissory notes, Commercial papers, Certificates of deposits

Some new instruments have also been introduced Zero interest convertible debentures, Deep discount bonds etc.

Financial Services

Development of a sophisticated and a matured financial system in the country, especially after the early nineties led to the emergence of a new sector called Financial Service Sector Before that commercial banks and other financial institutions

dominated the field and they catered to the financial need of

the Indian industry

Indian capital market was playing only a secondary role in

the finance of the Indian industries

After the economic liberlisation that the financial services sector gained prominence and developed into an industry

Defined as collection of organisations that intermediate and facilitate financial transaction of individual and institutional investors resulting from their resources Very vital for

industrial development

Also defined as services those are financial in nature

include all activities involved in the transformation of savings

into investments i.e. financial services term means mobilising and allocating savings

Very vast and dynamic field New methods, new products and new players emerge everyday

Classification of Financial Services Industry

Capital market intermediaries for the corporate term lending institutions, investing institutions

Money market intermediaries for the individuals commercial banks, co-operative banks, other agencies

which supply only short-term funds

Another Classification of Financial Services Industry

Classified Fund-based financial service and Feebased financial service Fund-based financial service Leasing, Hirepurchase, Consumer credit, Factoring, Forfaiting, Bills discounting, Housing finance, Insurance service, Venture Capital financing Fee-based financial services Merchant banking, Corporate advisory services, Credit rating, Stock broking