Copy of Indian Financial System(4)

7/31/2019 Copy of Indian Financial System(4)

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Introduction

For the rapid growth of any country, an efficient anddeveloped financial system is required. The evolution ofthe Indian financial system falls in three distinct phases:

Pre 1951 ORGANISATION1. Per capita output is low & constant2. Closed circle character of industrial org.3. Semi organized & narrow industrial securities market4. Absence of institutions participation in long term financing5. Restricted access to outside savings6. Financial system was not responsive to opportunities

1951 TO MID EIGHTIES1. Public/Govt ownership of financial ownership of financial

institutions2. Fortification of the institutional structure3. Protection to investors4. Participation of financial inst. In corporate management5. Finance & credit facilities become strengthen6. Nationalization ( RBI, LIC, GIC)

AFTER EIGHTIES


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AFTER EIGHTIES

An institutional framework existing in acountry to enable financial transactions

Three main parts

Financial assets (loans, deposits, bonds, equities,etc.)

Financial institutions (banks, mutual funds, insurancecompanies, etc.)

Financial markets (money market, capital market,forex market, etc.)

Regulation is another aspect of the modernfinancial system (RBI, SEBI, IRDA, FMC)


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Financialassets/instruments

Enable channelising funds from surplusunits to deficit units

There are instruments for savers such as

deposits, equities, mutual fund units, etc.There are instruments for borrowers suchas loans, overdrafts, etc.

Like businesses, governments too raisefunds through issuing of bonds, Treasurybills, etc.

Instruments like PPF, KVP, etc. areavailable to savers who wish to lendmoney to the government


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Financial Institutions

Includes institutions and mechanismswhich Affect generation of savings by the

community Mobilization of savings Effective distribution of savings

Institutions are banks, insurance

companies, mutual funds-promote/mobilize savings

Individual investors, industrial andtrading companies- borrowers


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Financial Markets Defined as the market in which financial assets are

created or transferred.

These assets represent a claim to the payment of asum of money sometime in the future and/orperiodic payment in the form of interest ordividend.

Money Market- for short-term funds (less than a year) Organised (Banks)

Unorganised (money lenders, chit funds, etc.)

Capital Market- for long-term funds Primary Issues Market Stock Market Bond Market


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Main FunctionTo channelize savings into short termproductive investments like workingcapital

Instruments in Money MarketCall money marketTreasury bills marketMarkets for commercial paperCertificate of depositsBills of ExchangeMoney market mutual funds

Promissory Note


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Money Market Instruments

Certificates of DepositCommercial PaperInter-bank participation certificatesInter-bank term moneyTreasury BillsBill rediscounting

Call/notice/term moneyCBLOMarket Repo


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Invest primarily in money marketinstruments of very high quality.

RBI and public financial institution can setit either directly or through its existingsubsidiaries.

MMMFOpen EndedClose Ended


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Provided resources needed by mediumand large scale industries.

Purpose for these resourcesExpansionCapacity ExpansionInvestmentsMergers and Acquisitions

Deals in long term instruments andsources of funds


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Main Activity

Functioning as an institutional mechanismto channelize funds from those who save tothose who needed for productive purpose.

Provides opportunities to various class ofindividuals and entities.


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Primary Markets Secondary MarketsWhen companies need financial resourcesfor its expansion, they borrow money from

investors through issue of securities.

The place where such securities aretraded by these investors is known as the

secondary market.

Securities issueda)Preference Sharesb)Equity Sharesc)Debentures

Securities like Preference Shares andDebentures cannot be traded in thesecondary market.

Equity shares is issued by the underwriters and merchant bankers on behalf ofthe company.

Equity shares are tradable through aprivate broker or a brokerage house.

People who apply for these securities are:a)High networth individualb)Retail investors

c)Employeesd)Financial Institutionse)Mutual Fund Housesf)Banks

Securities that are traded are traded bythe retail investors.

One time activity by the company. Helps in mobilising the funds for the

investors in the short run.


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Functions of current financialsystemSaving Function

Liquidity FunctionPayment FunctionRisk FunctionPolicy Function


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Copy of Indian Financial System(4)

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