INDIAN FINANCIAL SYSTEM

Faculty Facilitator: Rajesh Sadhwani

Financial System

Financial system play vital role in the economic growth of a country It intermediates between who the saves to who invest in productive assets Formal and informal financial system (Arbitrage Opportunity) Major advantages are
Low

transaction cost More transparency Minimize the default risk

Organized/Formal financial system comes under the MOF, SEBI, RBI and other regulatory bodies While Unorganized/informal financial system consists of
Individual

moneylenders Local bankers Traders Landlords Pawn Brokers

Organized Financial System

Components of Financial System

Financial

Institutions Financial Markets Financial Instruments Financial Services

Major categories of Financial Institutes are

Development
IDBI,

financial institutes (DFIs)

IFCI, SIDBI, NABARD, EXIM Bank etc

Non

banking financial companies (NBFC) Regulatory Bodies

SEBI,

RBI, IRDA etc

Housing
NHB,

finance companies (HFCs)

HUDCO, LICHF, HDFC, etc

Difference Between Banks & NBFC

1. 2. 3. 4.

5.

6. 7.

NBFC cannot collect deposits in the manner of a bank NBFC cannot issue checks drawn on itself NBFC cannot issue Demand Drafts like banks NBFC cannot indulge primarily in agricultural or industrial activity NBFC cannot engage in construction of immovable property NBFC cannot accept demand deposits While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956

Financial Markets

Financial Markets are a mechanism enabling participant to deal in financial claim Financial Market provide a facility where demand and requirement interact to set the price Types of Financial Markets
Primary

Markets (Primary market deals in new

issues) Secondary Markets (deals in outstanding / existing securities)

(OTC

Markets & Exchange Traded Market)

Financial Instruments

Financial Instrument is the claim against a person or an institution for payment at a future date a sum of money as interest or dividend. Financial Instruments differ in term of
Risk
Return Marketability

& liquidity type of option & transaction cost

Financial Services

Financial Intermediaries provide the key services like Merchant banking, Credit rating Leasing, Hire purchase Underwriting Portfolio management Depositories

Interaction Among the components

Financial institutes/intermediaries mobilize saving by issuing different type of financial instruments which are traded in financial markets. Financial institutes makes financial markets more liquid, stable & diversified.

Function of the Financial System

It serves as a link between savers and investors It provides payment mechanism for exchange of goods and services It provides a mechanism for the transfer of resources across geographic boundaries Financial system generates information, helpful in taking financial & economic decision Developed financial system lower the transaction cost It provides information to the operators/ players in the market such as individuals, business houses, Governments etc

Role of Financial Institutions (Intermediaries)

Financial Institutions provides

Liability

& assets transformation consisting of mobilizing of fund Provides large amount of loan on the basis of small deposits Risk transformation by acquiring diversification portfolio

Role of Financial Markets (Money Market)

A Money market is a short term debt instrument highly liquid Lesser transaction cost due to large denomination Provide a reasonable access to user of short term money Satisfies the liquidity needs of participants Provide base for the monetary authority Types of Money market instrument are

Call money Commercial Paper CBLO Treasury Bills Certificate of Deposits Repo, reverse repos, Notice money etc

Role of Financial Markets (Capital Market)

Capital Market is a market for long term securities Purpose of Capital market is to
Mobilize

the long term investments Provide capital in form of equity & debt to entrepreneurs Lower the cost of transaction & information Improve the efficiency of capital allocation through a comparative pricing mechanism.

Primary market & secondary markets Link between money market & capital market

Functions of Financial Markets

Separation, distribution and diversification of risk Efficient payment mechanism Providing information & track record about companies Enhancing the liquidity of financial claim through trading in securities Portfolio Management

Thank You