The Financial Systems in India
Muruganandan. SAssistant Professor
Department of Commerce SDM College
Ujire
Financial Systems
The economic development of any country depends upon the well organised financial systemFinancial system is a system which supplies the necessary financial inputs for the production of goods and service to improve the standard of life and well being of the nation. It includes financial markets and financial institutions.It deals with Money and Monetary Assets.
Functions of Financial Systems
The responsibility of the financial system is to mobilise the savings and promote the investmentfacilitate the free-flow of funds for productive ventureProvide the liquidity
• To understand the financial system requires an understanding of the following concept
• Financial assets• Financial Intermediaries • Financial markets • Financial rate of return• Financial instruments
Financial Assets
• The basic products of any financial system is FINANCIAL ASSETS
• Unlike financial assets, Physical Assets are not used for further income.
• But, the objective of the investment decides the nature of the investment.
Eg: If a building is bought for residential purpose – physical assetsIf the same is used for hiring – Financial assets
Hence, financial assets means the asset which is bought for further creation of income or assets.
Classification of Financial Assets
Financial Assets Non-Marketable
Assets
Bank Deposite
Life Insurence
P.F.
Coy. Deposite
P.O. Certificate
Marketable Assets
Shares
Government Security
Bonds
Mutual fund unite
Bearer Debentures
Financial Intermediaries
The term financial intermediaries include all kinds of organisations which intermediate and facilitate financial transactions for both individual and corporate. Hence, it refers to all kinds of financial institutions which facilitate financial transaction in financial markets
Financial Intermediaries
Unorganised Sector
Money Lenders
Indigenous Banker
Pawn Brokers
Traders &Landlords
Organised Sectors
Capital Market Intermediaries
Money Market Intermediaries
Capital Market IntermediariesThese intermediaries provide the long term funds to the individuals and corporate. They consist term lending institution institutions like financial corporation and investing institutions like LIC.
Money Market IntermediariesMoney market intermediaries provide the short term funds to the individuals and corporateThey consist commercial banks, co-operative banks etc.
Capital market Intermediaries
Development Banks
UTI
Agri. Financing institutions
Govt.PF, NSC etc.
IDBI
EXIM Bank
Insurance Coys. (LIC&GIC)
NBFC
Hire purchase company
Investment company
Finance company
Leasing company
Money Market Intermediaries
RBI
Commercial Banks
Co-Op. Banks
Post Office Saving Banks
Government Treasury Bills
Unorganised Sectors
• Money lenders, traders etc.• Indigenous banker may get the deposits also • RBI can not control
Organised Sector
• Rules and regulations governing their activities.
• Subject to Strict supervision of RBI • Classified into two
capital market money market
Capital Market
• Capital market deals with long term security • It classified into three
• Industrial Securities Markets • Government Securities Markets • Long term loan markets
Industrial Securities Markets It is the market for industrial securities namely i) Equity sharesii) Preference shares iii) Debentures or bonds
• Industrial security market further classified into two:
Primary market or new issues market Secondary market
Primary market It deals with the securities which are issue to the public
for the first time in primary market Borrowers exchange the new
financial securities for long term funds It facilitates the capital formation
• Three ways to raise the capital in Primary market
Public issue
Raise the fund through the sale of securities to the common public
Rights issueSecurities offer to the existing shareholders.
Private placement Selling securities to the small group of investors
Secondary Market It is the market where the securities are exchanged between the investorsIt offers the liquidity to the investors
Government Security Market • Also called as Gilt-Edged securities Market. • Govt. issue both Short- and Long – term
securities • Long term securities are traded in this capital
market and short term securities are traded in money market
• Long term securities are sold through Public Debt Office (PDO) of RBI
• T-Bills (short-term) are sold through auctions.
Long-Term Loan Market
• Development banks and Commercial Banks play a major role
• Provide the long term loan to the corporate customers
Long Term Loan Market
Term Loan Market Mortgage Market Financial Guarantees markets
• Term Loan Market:Industrial financial institutions set up by both state and central govt. IDBI, ICICI etc.
• Mortgage Market A mortgage loan is a loan against the security of immovable property like real estate. Eg: Residential Mortgage The Housing and Urban Development Corporation (HUDCO)and LIC play a major role LDB provide the loan for development of land, purchase of equipment etc.
Financial Guarantee • Guarantee is a contract to discharge the liability of a
third party in case of his default. • Guarantee act as a security from the creditors point
of view.Two Forms of Guarantees
1. Performance Guarantee2. Financial GuaranteeInstitutions in this market
Export Credit Guarantee Corporation (ECGC)Deposit Insurance and Credit Guarantee Corporations (DICGC)
Importance of Capital Markets
• Important source for productive use of ECONOMIC SAVINGS
• It facilitates the capital formations • It provide the avenue for the investors • It helps to increase the production and
productivity of economy. • It induce the economic growth • It helps to provide Stability in the value of the
securities