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Introduction To Financial Management & Financial system of India

Financial Management
Financial Management represents the bridge between the firms real assets and financial assets

(Financing) (Capital budgeting) Real assets Financial Management Loans Equity shares

Objectives of Financial Management

Primary

- Profit maximization - Maximize the wealth of the owners (share holders)

Others

Ensure financial stability

The Financial manager

Functions of a Finance manager

Mobilization of funds
From where ? At what cost ? In what time ?

Deployment of funds
Fixed assets Current assets Investments Repayment of debts

Control end Use of funds


Ascertaining facts & figures through reports Monitor day to day financial activities

Risk-return Trade-off
Investment (Risk-return) Financing (debt-equity)

The interface

Marketing
Credit to Customers F G holding in anticipation of high sales

Production
Equipment (buy/ lease) RM (Zero inventory)

HR
Staffing Promotions

R &D
Cost Monitor the developments

Top Management
Short / long term goals Overall effectiveness

Financial Function

Anticipation Acquire the funds Of funds needed needed

Utilization Of the funds

Increase profitability

Maximize Firms value

For financing the assets / projects

Long term Short Term Local External At least cost

Most profitable manner.

Reducing the costs Efficient allocation

Proper planning Effective monitoring

The challenges of F M

Treasury operations
Short term funds Management Speculative gains by anticipating interest rate movements

Foreign exchange
Currency fluctuation Hedging / Forward Contract .

Financial structuring
Debt- equity Arbitrage Pricing of new issue

Maintaining share price


Dividend policy Bonus policy

Different forms of organization


Point of difference Sole proprietary concern
Not necessary

Partnership

Co-Operative society

Company

Registration

Registered firms can sue No guidelines Not specified

Necessary

Compulsory

Name Capital

No guidelines Not specified

End with society Not specified

Ltd / Pvt ltd Pvt Ltd - Rs 1 L Public Ltd- Rs 5 L Pvt - 2 to 5 Public 7 to no limit Separate legal entity Limited to the capital Difficult/ lengthy procedure

Members

Single individual

2 to 20

10- no limit

Legal status

Not a separate legal entity Unlimited for owner No procedure

Not a separate legal entity Unlimited for partners Simple & related procedure

Not a separate legal entity Limited to capital

Liability

Dissolution

Simple & related procedure

Financial System of India

Financial system

25/02/2012 5/02/2012

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Indian Financial system


Stage-1 Underdeveloped economy- Low per capita income Self financing as the development is at low level. Non existence of financial intermediaries.

Stage-2 Increase in per capita income Bilateral borrowings & higher financial intermediation Birth of financial intermediaries Financial intermediaries become large Big banks, investments, Mutual funds, NBFC, stock markets  Financial system becomes more market oriented.

Indian Financial system


Well integrated set of subsystems which facilitates the flow of funds from area of surplus to the areas of deficit in efficient & effective way.

Formal

Informal

Financial Institutions

Financial markets

Financial instruments

Financial services

Regulators

Money lenders Local bankers Traders Land lords Pawn brokers

Banks NBFC s Insurance & pensions Mutual funds

Capital markets Money markets Forex Markets

Equity shares Preference shares Debts Time deposits MF units Insurance policies

Depositories Credit rating Factoring Merchant banking Lease & hire purchase Underwriting

RBI SEBI IRDA PDRA

Financial Institutions

Banking Institutions

Non Banking Fin. Companies

Mutual funds

Insurance & Pension

SCB

Sch Co op Banks

NBFC

DFI

Public MF s Private MF s

Public sector Pvt sector

P.S.Banks Pvt S. Banks Foreign Banks RRB

National State IFCI, IDBI,SIDBI, NABARD, HDFC SFC Exim bank, NHB SIDC

others ECGC DICGC

Financial Markets

Capital market

Money market
Treasury Bills Call money Commercial paper Certificate of Deposit

Forex market
Banks & other s

Equity Market

Debt Market

Primary Domestic international

Secondary Stock exchanges

Derivatives Financial commodities

Private debt market PSU Bond market Government securities market

International Financial Markets

Bond market

Equity market

Euro notes market

Renewable Euro notes

Foreign bonds

Euro bonds

Foreign equity ADR


Freely traded in America

Euro equity GDR


Tapping financial resources in the whole world

Euro commercial paper Euro medium notes

Characteristics / Functions of Fin Mkts


Characteristics
    

Larger volume Speed of resource movement from one market to other Saver decides the place to invest Scope for instant arbitrage among various instruments in the market High volatility ( Failure of one segment affects others )

Functions
Efficient payment mechanism Providing information's to the company Gives sufficient indications to investors to track their portfolio.

Money markets
Short term markets Large volume of transactions CP/CD/TB/Call money are the instruments

Capital markets
Long term markets (equity /Debt) Large volume of transaction Equity shares / debt /debentures

Functions
Equilibrium force
(redistributes cash balance as per needs & liquidity )

Functions
Provides liquidity by selling financial assets in the markets Mobilizes long term savings for long term investments Improves efficiency of capital allocation through competitive pricing mechanism

Basis for management of liquidity & money in the economy Meeting short term requirement

Link between primary secondary markets.


1. 2. 3. 4. 5. A buoyant secondary market will help the growth of primary market Secondary market provides basis for determining the price of primary market The depth of secondary market depends on primary market Larger the primary market- larger the secondary market Bunching of primary markets affects secondary market

Financial system & economy

Surplus spending Units

Deficit spending Units


Consumption & planned investments exceeds income -ve savings to be met by borrowings No such options .

Consumption less than production Surplus savings held in the form of financial assets Lending to productive investments

The surplus savings from households are transferred to deficit spending. This factor links Financial System to economy

Financial system & economy


Fin System
Primary securities Primary/secondary securities Financial markets Financial institutions

Lenders Households Rest of the world Surplus Spending Economic Units Y > (C+I)

Borrowers Government

Capital formation

corporates Deficit Spending Economic Units

Economic growth

Y< (C+I)

Y=Income, C = consumption, I- planned investments

Role of F. S. in economy
         

Most important institution

& vehicle for economic transformation.

The achievements of national objectives depends on the financial system The country which wants to grow economically needs a vibrant F S. The existence of efficient financial system facilitates economic activities The growth of financial structure will lead to economic growth. Diverts the savings towards more productive use & increase the output of the economy. Markets & Institutions are prime movers for economic growth. Deeper the system, greater the stability & resilience. Accelerates the rate of savings through various financial instruments. Monetary policies are effective if financial markets are well developed.

Assignment

A discussion on Regulatory environment in India ( FEMA, Companies act, Industrial policy, MRTP act, SEBI & RBI)

Unit-1 concluded

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