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

Financial Markets

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

Money Market • Call money Market • Commercial Bill Market • T- Bill Market • Short-term loan Market