Introduction – Financial System

-For Production of Goods & Services

Why -For Value Addition
-For Better Standard of Living

Economic Development

Financial Markets
Financial System
Financial Institutions – Supporting System
Responsibility of Financial System – Mobilise the savings in the form of
money and monetary assets and invest them to productive ventures.

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 1

 Efficient & Effective Financial System
As Intermediation

Free Flow of fund

Savers Investors

Functions of Financial System

Provision for Mobilisation

Liquidity of Savings
-For Production of Goods & Services -In productive activities through incentives
-For Value Addition Savings – Investment - Consumption
-For Better Standard of Living

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 2

 Financial Concepts

Financial Financial Financial Financial Rate Financial

Assets Intermediaries Markets of Return Instruments

Further All kind of org. Financial Govt. Securities – Financial

creation of which Transactions i.e. Low risk – Less Securities
asset intermediate and buying and selling rate of return
facilitate financial FI refer to those
of financial assets
Physical Corporate documents which
transactions of
Assets Issue of equity, Securities – High represent financial
both individuals
Granting of Term risk – High rate of claims on assets
and corporate i.e.
loan by term return
all financial e.g. BOE,
lending
institution and Good interest rate Promissory Note,
institution, deposit
investing structure Treasury Bill,
of money into a
institution Share, Debenture,
bank, etc.
Govt. Bond etc.

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 3

 Classification of Financial Assets :

Marketable
Transferred from one person to
Another easily without much hindrance
Shares of listed companies, Govt. securities,
Bonds of Public sector undertaking, etc.
Non-Marketable
Can not be transferred easily from one person to
another
Bank deposits, Provident Funds, Pension Funds,
NSC, Insurance Policies, etc.

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 4

 Classification of Financial Market :
A. Organised Market

Capital Market Money Market

Call Money Market

Industrial Securities Govt. Securities Long Term Loans

Commercial Bill Market
Market Market Market

Treasury Bill Market

Primary Market Term Loan Market
Short Term Loan Market
Market for Mortgages
Secondary Market

Market for Financial

Guarantee

B. Unorganised Market – Money Lenders, Indigenous Bankers, etc.

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 5

 Industrial Government
Securities Market Securities Market

Market where industrial Market where Govt.

concerns raise their capital securities are traded.
or debt by issuing
appropriate instruments – Long Term – In this
Equity, Preference shares Market
& debentures/bonds Short Term – In Money
market
Primary/New issue Market Secondary
Market Issued by the :
First time issue to public Securities which have
by borrowers to exchange already passed through the Central Govt., State Govt.,
new financial securities in primary market. Buying Semi Govt. Authorities,
long term funds. and selling of quoted State Electricity Boards,
securities. Financial Institutions
i.e. capital formation by
new issue Stock Exchange – The Secondary market for
-Public issue Regulated under the above security is very
-Right issue Security Contracts narrow – tend to retain
-Private placement (Regulation) Act,1956 securities until maturity
6
Dr. Ratnesh Chaturvedi, FMS, Session – 1-2
 Long Term Loans
Market

Development Banks and Commercial Banks supplies

long term loan to Corporate Customers

Term Loans Mortgages Financial Guarantees

Market Market Market (Next Slide)

Long term & Medium Mortgage Loan mainly to individual customer

term loans By financial
It is a loan against against the security of immovable property i.e.
institutions
the transfer of interest in a specific immovable property to secure a
IDBI, IFCI, ICICI, etc. loan is called mortgage.
-identifying investment Equitable Mortgage – mere deposit of title deeds to properties as
opportunities
security
-Encourage new
entrepreneurs Legal mortgage – legal transfer of the title in the properties to the
-Support Modernisation lender by the borrower (less risky)
efforts

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 7

 Financial Guarantees Market

FGM is a centre where finance is provided against the guarantee of a reputed person in the
financial circle.
Guarantee is a contract to discharge the liability of a third party in case of his default.

Borrower Lender

Guarantor

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 8

 Importance of Capital Market

1. Important source for the productive use of the economy’s savings –

Mobilisation of savings into investment
2. Provides incentives to savings and suitable rate of interest for capital
formation
3. Avenue to investors to invest in financial assets rather than physical
assets
4. Enhance production and productivity of economy
5. Economic growth by rational allocation of scarce resources
6. Technological advancement in industrial sector by utilising the funds
invested by the public.

Capital
Those who market as Those who inspire
save to invest these
Link
savings
Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 9
 Money Market
Market for dealing with financial assets and securities which have a maturity
period within one year i.e. purely short term funds/securities
Money market helps in Liquidity Management

Functions

-It provides an equilibrium mechanism to even out demand and supply the short
term funds
-It provides a focal point for influencing liquidity and general level of interest
rates in the economy
-It provides reasonable access to the users and providers of short – term funds to
fulfill their investment and borrowing requirements at competitive market
determined rates/prices

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 10

 Money Market Instruments

Treasury Bills (T Bills) Bankers Acceptance

Term Money
Central Govt. Securities
(Gilt-edged Securities)
Commercial Bills
State Govt. & Public
Sector Instruments Bank Deposits

Municipal Bond Call Money Market

Commercial Paper Bills Rediscounting

Certificate Deposit Fringe Markets

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 11

 Foreign Exchange Market
Foreign Exchange – the process of converting home currencies into foreign
currencies and vice versa.
Foreign exchange market – Foreign exchange transaction takes place
Members – Dealers, Banks and brokers engaged in buying and selling foreign
exchange. It also includes the central bank of each country and the
treasury authorities who enter into this market as controlling authorities.
All above engaged in FE business are controlled by FERA

In India FE business has a three tired structure consisting of :

• Trading between banks and their commercial customers
• Trading between banks through authorised brokers/dealers
• Trading with banks abroad
Apart from authorised dealers, the RBI has permitted to Authorised Money
Changers to deal in FE business.
For smooth and regulation - FERA 12
Dr. Ratnesh Chaturvedi, FMS, Session – 1-2
 Financial Instruments / Securities

Financial instruments refer to those documents which represent financial claims on

assets
Financial asset - a claim to the repayment of a certain sum of money at the end of a
specified period together with interest/dividend

Primary Securities Secondary Securities

Directly issued Issued by

Intermediaries
Shares/Debentures
directly issued to UTI, Mutual Fund
Public
Short term securities – within one year – Money
Market Instruments
Medium Term securities – one to five years –
Debentures
Long Term Securities – more than five years –
Govt. Bonds
Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 13
 Characteristics of Financial
Instruments / Securities

Easily Transferable

Have ready market

Possess Liquidity

Use as Security

Tax Saving

Risk factor

Return in proportion to risk

Less handling cost

Dr. Ratnesh Chaturvedi, FMS, Session – 1-2 14