Financial System - An Introduction

8/6/2019 Financial System - An Introduction

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Financial SystemFinancial System ± ± An Overview An Overview

IntroductionIntroduction

ComponentsComponents

FunctionsFunctions DesignsDesigns

Nature and Role of Financial InstitutionsNature and Role of Financial Institutions

and Financial Marketsand Financial Markets



IntroductionIntroduction

³ Financial System is composition of ³ Financial System is composition of

various Regulators, Financial Institutions,various Regulators, Financial Institutions,

markets, Financial Instruments andmarkets, Financial Instruments and

Financial services which facilitates theFinancial services which facilitates the

transfer and allocation of funds, efficientlytransfer and allocation of funds, efficiently

and effectively.ánd effectively.´

It intermediates with the flow of fundsIt intermediates with the flow of fundsbetween those who save a part of their between those who save a part of their

income to those who invest in productiveincome to those who invest in productive

assets.assets.



Seeker of

FundsSupplier of

Funds

Flow of services from left to rightFlow of services from left to right

Flow of funds (savings) from right to leftFlow of funds (savings) from right to left



Components of Financial SystemComponents of Financial System

A. Organized

Markets

Regulators

B. Unorganized Market-Local Bankers

-Private Money Lenders

-Pawn Brokers

-Landlords

Financial

Institutions

Financial

Markets

Financial

Instruments

Financial

Services



A. Organized Financial System A. Organized Financial System

³A system which is established to³A system which is established to

operate & control within specific legal rulesoperate & control within specific legal rulesand regulations is organized system.ánd regulations is organized system.´



1. Regulatory Bodies1. Regulatory Bodies

RBI

IRDA

Ministry

Of

Finance

SEBIRegulators



2. Financial Institutions2. Financial Institutions

³«are intermediaries that mobilize savings³«are intermediaries that mobilize savings

and facilitate the allocation of funds in efficientand facilitate the allocation of funds in efficient

manner.´manner.´

FinancialInstitutions

Banking

Non-banking

-NBFCs

-DevelopmentInstitutions

Mutual Funds

-Public

-Private

Insurance

-Life

- General

Housing

-Public

- Private

Commercial

Banks

Co-operative

Banks



3. Financial Markets3. Financial Markets

³«are a mechanism enabling participants to³«are a mechanism enabling participants todeal in financial claims.´deal in financial claims.´

Financial

Markets

CapitalMarket

Equity

Money Market

-Treasury-bills

- Call Money Mkt.

- Comm. Bills- Comm. Papers

- Certificate of

Deposits

Primary

-New Public Issue

-Right Issue

-Bonus Issue

Secondary

-NSE

-BSE

-OTC

Derivatives

-Options

-Futures

Debt



4. Financial Instruments4. Financial Instruments

:«is a claim against a person or an:«is a claim against a person or aninstitution for the payment at a future date a suminstitution for the payment at a future date a sumof money and/or periodic payment.óf money and/or periodic payment.´

FinancialInstruments

Primary

Security

-Equity

-Preference

-Debt

TypeTime

-Short

-Medium

-LongSecondary

Security

-Insurance

-Mutual

Funds



5. Financial Services5. Financial Services

³...bridge the gap between lack of knowledge &³...bridge the gap between lack of knowledge &

increasing superiority of financial instruments andincreasing superiority of financial instruments and

markets.´markets.´

-- DepositoriesDepositories -- UnderwritingUnderwriting

-- Credit RatingCredit Rating -- Portfolio ManagementPortfolio Management

-- FactoringFactoring -- Lease and HireLease and Hire-- ForfeitingForfeiting PurchasePurchase

-- Merchant BankingMerchant Banking



Functions of the Financial SystemFunctions of the Financial System

It links the savers and investors andIt links the savers and investors andthereby help in mobilizing and allocatingthereby help in mobilizing and allocatingthe savings efficiently and effectively.the savings efficiently and effectively.

It provides payment mechanism for theIt provides payment mechanism for theexchange of goods and services.exchange of goods and services.

Most important function is to achieveMost important function is to achieveoptimum allocation of risk by pooling andoptimum allocation of risk by pooling andtrading the risks involved in mobilizingtrading the risks involved in mobilizing

savings and allocating credit.savings and allocating credit.



Other FunctionsOther Functions

A financial system minimizes situations A financial system minimizes situations

of asymmetric information.of asymmetric information.

It makes available the priceIt makes available the price--relatedrelatedinformation to those who need to takeinformation to those who need to take

economic and financial decisions.economic and financial decisions.

Helps in creation of a financial structureHelps in creation of a financial structure

that lowers the cost of transactions.that lowers the cost of transactions.



Financial System DesignsFinancial System Designs

Types of Financial System Designs:Types of Financial System Designs:1.1. BankBank--basedbased

few large banks play a dominant rolefew large banks play a dominant role

and financial markets are lessand financial markets are lessimportant.important.

2.2. MarketMarket--basedbased

financial markets play an importantfinancial markets play an importantrole while banking industry is muchrole while banking industry is much

less concentrated.less concentrated.



In India, nationalization of banks, anIn India, nationalization of banks, an

administered interest rate regime and theadministered interest rate regime and the

government policy of favoring banks led togovernment policy of favoring banks led to

the predominance of a bankthe predominance of a bank--basedbased

financial system in India.financial system in India.



Extent of Extent of

DevelopmentDevelopment

BankBank--basedbased MarketMarket--basedbased

DevelopedDeveloped Japan,Japan,Germany, Italy,Germany, Italy,

FranceFrance

US, UK,US, UK,Singapore,Singapore,

Malaysia, KoreaMalaysia, Korea

Under Under--

developeddeveloped

Argentina, Argentina,

Pakistan, SriPakistan, SriLanka,Lanka,

BangladeshBangladesh

Brazil, Mexico,Brazil, Mexico,

Philippines,Philippines,TurkeyTurkey



Certain ConclusionsCertain Conclusions

The more the country is richer, the moreThe more the country is richer, the morethe economy is marketthe economy is market--oriented.oriented.

When,When,

--Problem relating to information persists,Problem relating to information persists,--Banks are competent &Banks are competent &

--Learn through experience to becomeLearn through experience to becomeproductive,productive,

Then, bankThen, bank--based financial system.based financial system.

In marketIn market--based, investors are exposed tobased, investors are exposed tomarket risks.market risks.



Nature & Role of FinancialNature & Role of Financial

InstitutionsInstitutions Mobilization & allocation of fundsMobilization & allocation of funds

Offer claim against themselvesOffer claim against themselves

Expanded role to provide servicesExpanded role to provide services

Offers the savers tailor Offers the savers tailor--made servicesmade services

according to their level of risk tolerance.according to their level of risk tolerance.

Risk transformation by reducing the riskRisk transformation by reducing the risk

involved in direct lending.involved in direct lending.



Characteristics of FinancialCharacteristics of Financial

MarketsMarkets

Characterized by large volume of Characterized by large volume of

transactions and a speed with whichtransactions and a speed with which

resources move from one market toresources move from one market toanother.another.

Various segments of financial marketsVarious segments of financial markets

such as stock markets and bond marketssuch as stock markets and bond markets(primary and Secondary) where savers(primary and Secondary) where savers

themselves decides where to invest.themselves decides where to invest.



There is a scope of arbitrage amongThere is a scope of arbitrage among

various markets and types of instruments.various markets and types of instruments.

Markets are dominated by financialMarkets are dominated by financial

intermediaries which take investmentintermediaries which take investment

decisions and risks on behalf of their decisions and risks on behalf of their depositors.depositors.

Highly volatile and susceptible to panicHighly volatile and susceptible to panic

and distress selling.and distress selling. Domestic markets are affected by theDomestic markets are affected by the

problems in external marketsproblems in external markets



Functions of Financial MarketsFunctions of Financial Markets

Separation, distribution, diversification andSeparation, distribution, diversification and

reduction of risk.reduction of risk.

Portfolio Management.Portfolio Management.

Providing information about companies.Providing information about companies.

Enhancing liquidity of financial claimsEnhancing liquidity of financial claims

through trading in securities.through trading in securities. Efficient payment mechanism.Efficient payment mechanism.



SERVICES PROVIDED BY FINANCIALSERVICES PROVIDED BY FINANCIAL

INSTITUTION(INTERMEDIARIES)INSTITUTION(INTERMEDIARIES)

CONVENIENCECONVENIENCE(DIVISIBILITY,MATURITY)(DIVISIBILITY,MATURITY)

LOWER RISK (DIVERSIFICATION)LOWER RISK (DIVERSIFICATION)

EXPERT MANAGEMENTEXPERT MANAGEMENT

ECONOMIES OF SCALEECONOMIES OF SCALE



BANKING INSTITUTIONS(FUNCTION)BANKING INSTITUTIONS(FUNCTION)

DEPOSITDEPOSIT

CREDIT CREATIONCREDIT CREATION

LENDING OF MONEYLENDING OF MONEY

ANCILLARY FUNCTION ANCILLARY FUNCTION



Products For Bank MarketingProducts For Bank Marketing

PersonalPersonal

BankingBanking

NRI BankingNRI Banking

InternationalInternational

BankingBanking

Gold BankingGold Banking

AgricultureAgriculture

BankingBanking

CorporateCorporate

bankingbanking

SSI bankingSSI banking

Small businessSmall business

bankingbanking

GovernmentGovernmentbankingbanking



Services For Banking MarketingServices For Banking Marketing

PortfolioPortfolio

ManagementManagement

DematDematServicesServices

ATM ServicesATM Services

InternetInternetBankingBanking

Safe DepositSafe Deposit

Locker Locker

Rupee Traveler Rupee Traveler ChequesCheques

Gift ChequesGift Cheques





Classification

of banking

Retail bankingWhole sale banking



Retail banking productRetail banking product

Regular accountsRegular accounts

1.1. Saving bank a/cSaving bank a/c

2.2. Current a/cCurrent a/c

3.3

. Zero balance a/cZero balance a/c4.4. Senior citizen a/cSenior citizen a/c



� Deposit

1. Fixed deposits

2. Cumulative fixed deposit

3. Recurring deposit

4. Multiple unit deposit





�Other services Telephone bill payment

Safe deposit lockers Demand drafts

Bankers cheque

Mail transfer

Cash Demat a/c



Whole sale banking productsWhole sale banking products

Fund based servicesFund based services

Non fund based servicesNon fund based services

Value added servicesValue added services Internet banking servicesInternet banking services



Fund based servicesFund based services

Term lendingTerm lending

Short term financingShort term financing

Working capital financeWorking capital finance

Bills discountingBills discounting

Structured financeStructured finance

Export creditExport credit



� Non fund based services

� Bank guarantees

� Letter of credit

� Collection of bills and

documents



Value addedValue added

servicesservices

1.1. Cash managementCash management

servicesservices

2.2. RTGSRTGS

3.3. Corporate salary a/cCorporate salary a/c

4.4. Channel financingChannel financing

5.5. Forex deskForex desk

6.6. Money market deskMoney market desk

7.7. Employees trustEmployees trust

8.8. Tax collectionTax collection

9.9. Bankers to the right/Bankers to the right/

public issuepublic issue

Internet bankingInternet banking

servicesservices1.1. Corporate internetCorporate internet

bankingbanking

2.2. Payment gatewayPayment gateway

servicesservices

3.3. Supply chainSupply chain

managementmanagement



PricingPricing

Geographical pricingGeographical pricing

Psychological pricingPsychological pricing

Promotional pricingPromotional pricing Market skimming pricingMarket skimming pricing

Market penetration pricingMarket penetration pricing



CostCost

Interest costInterest cost

Servicing costServicing cost



promotion mixpromotion mix

Advertising Advertising

Personal sellingPersonal selling

Sales promotionSales promotion Public relationPublic relation





placeplace

Distribution channelsDistribution channels

1.1. BranchBranch

2.2. Telephone banking/call centreTelephone banking/call centre3.3. ATM ATM

4.4. Internet bankingInternet banking

5.5. Plastic cardsPlastic cards DEBIT CARDSDEBIT CARDS

CREDIT CARDSCREDIT CARDS



PEOPLEPEOPLE

TrainingTraining

DiscretionDiscretion

CommitmentCommitment

Appearance Appearance

Interpersonal behavior Interpersonal behavior

Attitudes Attitudes

Customer contactsCustomer contacts

Customer interactionCustomer interaction



Physical evidencePhysical evidence

Refers toRefers to

The environmentThe environment

andandfurnishing atmospherefurnishing atmosphere







PROCESSPROCESS

INCLUDESINCLUDES

PoliciesPolicies

ProceduresProcedures Use of technologyUse of technology

Customer involvement etc.Customer involvement etc.



Internal MarketingInternal Marketing

Training centersTraining centers

Support systemSupport system

Employee benefitsEmployee benefits Financial benefitsFinancial benefits

Welfare facilitiesWelfare facilities



PRIVATE BANKPRIVATE BANKIMPORTANT GUIDELINE FOR PRIVATE BANKIMPORTANT GUIDELINE FOR PRIVATE BANK

BANK MAINTAIN NET WORTH OF RS 300CR AT ALL TIMES.BANK MAINTAIN NET WORTH OF RS 300CR AT ALL TIMES.

SHAREHOLDING OR CONTROL IN ANY BANK IN EXCESS OF 10% OF THESHAREHOLDING OR CONTROL IN ANY BANK IN EXCESS OF 10% OF THE

PAID CAPITAL BY ANY SINGLE ENTITY OR GROUP OF RELATED ENTITIESPAID CAPITAL BY ANY SINGLE ENTITY OR GROUP OF RELATED ENTITIES

REQUIRES THE RESERVE BANK PRIOR APPROVAL.REQUIRES THE RESERVE BANK PRIOR APPROVAL.

BANKS ( INCLUDING FOREIGN BANK HAVING BRANCH PRESENCE INBANKS ( INCLUDING FOREIGN BANK HAVING BRANCH PRESENCE IN

INDIA)/FINANCIAL INSTITUTION ARE NOT ALLOWED TO EXCEED EQUITYINDIA)/FINANCIAL INSTITUTION ARE NOT ALLOWED TO EXCEED EQUITY

HOLDING OF 5% OF THE EQUITY CAPITAL OF 5% OF THE EQUITYHOLDING OF 5% OF THE EQUITY CAPITAL OF 5% OF THE EQUITY

CAPITAL OF INVESTEE BANK.CAPITAL OF INVESTEE BANK.

THE AGGREGATE LIMIT FOR THE FII INVESTMENT IS RESTRICTED TO24% THE AGGREGATE LIMIT FOR THE FII INVESTMENT IS RESTRICTED TO24%

WHICH CAN BE RAISED TO 49% WITH THE APPROVAL OFWHICH CAN BE RAISED TO 49% WITH THE APPROVAL OF

SHAREHOLDERS.SHAREHOLDERS.



ALLAHABAD BANK ALLAHABAD BANK ING VYSYA BANKING VYSYA BANK

SYNDICATE BANKSYNDICATE BANK INDUSIND BANKINDUSIND BANK

YES BANKYES BANK UCO BANKUCO BANK

KOTAK MAHINDRA BANKKOTAK MAHINDRA BANK VIJAYA BANKVIJAYA BANK



RBI & FINANCIAL SYSTEMRBI & FINANCIAL SYSTEM

1.1. ISSUER OF CURRENCYISSUER OF CURRENCY2.2. GOVERNMENT BANKERGOVERNMENT BANKER

3.3. BANKERS BANKBANKERS BANK

4.4. SUPERVISORY AUTHORITYSUPERVISORY AUTHORITY5.5. EXCHANGE CONTROL AUTHORITYEXCHANGE CONTROL AUTHORITY

6.6. MONETARY AUTHORITYMONETARY AUTHORITY

(REPO/REVERSE REPO,SLR,CRR,BANK RATE,OMO)(REPO/REVERSE REPO,SLR,CRR,BANK RATE,OMO)

Documents

Financial System - An Introduction