Unit 1 – Introduction to Financial System

8/8/2019 Unit 1 Introduction to Financial System

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Introduction to Financial Systemand Financial Services.


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M eaning of Financial System:

It is the financial system that supplies the necessaryfinancial inputs for the production of goods and services

which in turn promote the well being and standard of

living of the people of the country.

Financial system is a broader term which brings under its

fold the financial markets (long term & short term)andthe financial institutions which support the system


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T he major assets traded in the financial system is to

mobilize the savings in the form of money and monetaryassets and invest them to productive ventures.

An efficient functioning of the financial system facilitates

the free flow of funds to more productive activities and

thus promotes investments.

T hus the financial system provided the intermediation between savers and investors and promotes faster

economic development.


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Functions of Financial System:

1. Provision of Liquidity.2. M obilization of Savings.

Financial Concepts:

Financial Assets

Financial Intermediaries

Financial M arkets

Financial rates and return

Financial instruments


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Financial Assets

A Financial asset is one which is used for production or

consumption or for future creation of assets.

T ypes of Financial assets

M arketable assets

Non marketable assets


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Financialassets

Financialassets

MarketableAssets

MarketableAssets

NonMarketableAssets

NonMarketableAssets


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MarketableAssets

Debentures

MF Units

GovtSecurities

Shares andBonds


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NonMarketableAssets

POCertificates

LICSchemes

PF

BankDeposits


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Financial intermediaries

Financial intermediaries includes all kinds of

organizations which intermediate and facilitate

financial transactions of both the Indivuals and

corporate customers.

It refers to all financial institutions and investing

institutions which facilitate financial transactions in

financial markets.


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Financial intermediaries in India

Organized Sector and Unorganized Sector

Organized Sector consists of Capital M arkets &

M oney M arkets intermediaries.

Capital M arket intermediaries consists of ----

Development banks, Insurance Cos, U T I, Govt (PF,

NSC), Exim Bank, NBFC (Leasing co, H.P Co,

Investment Co)


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Financial intermediaries in India

M oney M arket intermediaries are RBI, Commercial

banks, Co operative Banks, Post Office, Govt

(T reasury bills)

Unorganized Sector consists of M oney Lenders,

Indigenous bankers, Pawn Brokers, T raders and

Land lords


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Financial M arkets

Financial markets can be referred to as those centers

and arrangements which facilitate buying and selling

of financial assets, claims and services

Classification of Financial M arkets.

Financial markets are classified into Organized market

and Unorganized market


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Organized markets consists of Capital markets and

M oney markets.Capital market consists of Industrial securities

markets, Govt Securities markets and Long term

markets.

Industrial Securities markets consists of Primary

markets and Secondary M arkets. Long term marketconsists of T erm Loan market, M arket for M ortgage

and market for financial guarantees.


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Financial Risk and returns is guided by the risk

return trade off. Interest rate plays a important role

Financial Instruments

It refers to the documents that which represent financial

claims on assets.

It refers to a claim on to the repayment of a certain sum

at the end of a specified period together with interest

or dividend. Example --- Bill of exchange, Share,

debenture, government bond, treasury bill,etc,


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Features of Financial Instruments:

1. T hey are easily transferable.

2. T hey have a ready market

3.T

hey posses liquidity4. T hey can be used as a security for raising loans.

5. Some of them have tax savings.

6. T hey have specified maturity period.

7. T hey facilitate futures trading to cover risk (forex).


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History and Growth of Financial System in

India:

1. Nationalization of Financial institutions formation

of SBI, LIC and nationaliasation of commercial

banks.

2. Starting up of U T I

3. Establishment of development banks like IFCI,

ICICI, IDBI,SIDBI.


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4 Institution for Financing agriculture NABARD

5 Institution of Foreign trade (Exim Bank)

6 Institution for housing finance NHB

7 M utual Fund Industry.

8 Venture capital Institutions.

9 Credit Rating Agencies.

10 Legislative Support M R T P Act , New Economic

Policy, Negotiable instrument Act,Banking Regulation

Act andT

he Stamp Act


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W eaknesses of Indian Financial System:

1. Lack of Co-ordination between different Financial

institutions.

2. M onopolistic M arket Structure

3. Dominance of development Banks in Industrial

Financing

4. Inactive and erractic capital market

5. Imprudent Financial Practices


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M eaning of Financial Services:

In general all types of activities which are of financial

nature could be brought under the term financial

services.

Classification of Financial Services Industry.

1. Capital M arket intermediaries

2. M oney M arket intermediaries.


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Scope of Financial Services:

It is categorized into T raditional activities and M odern

activities.

T he traditional activities are Fund based and non fund

based activities.

Fund Based activities are.,

1. Underwriting activities

2. Dealing in secondary markets.


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3. Participating in money market instruments

4. Involving in equipment leasing, H.P , venture capitaland seed capital.

5. Dealing in forex markets.

Non fund based activities are,

1. M anaging the Capital issues.

2. M aking arrangements for private placements.

3. M aking arrangement of funds for project finance and

working capital requirements.


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M odern activities are,

1. Providing project advisory / consultancy.

2. Planning for M erger and Acquisition.

3. Guiding Corporates in capital restructuring.

4. M anaging portfolio of large PSU.

5. Assisting in establishing the right debt-equity mix.

6. Restructuring the sick companies.

7. Hedging of risk due to forex / interest rates variations


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Causes of Financial Innovation:

1. Low profitability.

2. Keen Competition

3. Economic liberalization4. Improved Communication technology.

5. Customer Service / delight.

6. Global impact

7. Investor awareness.


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New Financial Services and Products:

1. M erchant Banking.2. Loan Syndication3. Leasing4. M utual Funds5. Factoring6. Forfaiting7. Venture Capital8. Corporate advisory services.9. Securitization10. Forwards, Futures, Swaps, Options.


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Challenges facing financial sector:

1. Lack of Qualified personnel.

2. Lack of investor awareness.

3. Lack of transparency.4. Lack of specialization

5. Lack of recent data

6. Lack of efficient risk management system.


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Documents

Unit 1 – Introduction to Financial System