FINANCEFINANCE

DEFINITIONDEFINITION

As a Discipline:-As a Discipline:-

The study of money and other The study of money and other Financial assets.Financial assets.

Art & Science of managing money.Art & Science of managing money.

Financial SystemFinancial System

The Financial system in any economy The Financial system in any economy plays the crucial role in allocating plays the crucial role in allocating invest able resources to productive invest able resources to productive uses and thereby accelerates the rate uses and thereby accelerates the rate of economic development.of economic development.

This process is facilitated by a host of This process is facilitated by a host of financial intermediaries and supervised by financial intermediaries and supervised by Regulatory Bodies.Regulatory Bodies.

It refers to a set of complex It refers to a set of complex

and closely connected Markets, and closely connected Markets,

Institutions, claims, Institutions, claims,

transactions, agents and transactions, agents and

practices in an economy.practices in an economy.

Constituents of Financial SystemConstituents of Financial System

Financial MarketsFinancial Markets

Financial InstitutionsFinancial Institutions

Financial InstrumentsFinancial Instruments

Financial ServicesFinancial Services

Financial System

Financial Markets

Financial Instruments/

Assets/SecuritiesFinancial

Institutions/Intermediaries

Financial Services

Financial MarketsFinancial Markets

Not a source of finance. Not a source of finance.

Centers or arrangements that provide Centers or arrangements that provide facilities for creation and trading of facilities for creation and trading of financial claims. financial claims.

A link between the savers and investors A link between the savers and investors both individual and institutional.both individual and institutional.

Financial MarketsFinancial Markets

CapitalMarket

GovernmentSecurities Market

Money Market

Primary MarketSecondary

Market

Market PlayersMarket Players Money MarketMoney Market

RBIRBI Central and State GovernmentCentral and State Government Commercial BanksCommercial Banks Primary DealersPrimary Dealers Corporate EntitiesCorporate Entities General PublicGeneral Public

Market PlayersMarket Players Capital MarketCapital Market SEBISEBI Merchant BankersMerchant Bankers RegistrarsRegistrars Collecting & Coordinating BankersCollecting & Coordinating Bankers Underwriters & BrokersUnderwriters & Brokers Printers, Advertising Agencies & Printers, Advertising Agencies &

Mailing Agencies.Mailing Agencies. OTCEIOTCEI

Market PlayersMarket Players Government Securities MarketGovernment Securities Market

RBIRBI Central GovernmentCentral Government State GovernmentState Government Commercial BanksCommercial Banks Primary DealersPrimary Dealers General PublicGeneral Public

Financial Intermediation-DefinitionFinancial Intermediation-Definition

Financial Intermediation refers to Financial Intermediation refers to

mobilization of savings from the mobilization of savings from the

public and canalization of those public and canalization of those

savings in productive investmentsavings in productive investment

Types Of IntermediariesTypes Of Intermediaries

1)Intermediaries acting as agents of 1)Intermediaries acting as agents of issuing Authorities-issuing Authorities-

BrokersBrokers Merchant BankersMerchant Bankers Issue ManagersIssue Managers Underwriters etc.Underwriters etc.

2) Regulatory Institutions that 2) Regulatory Institutions that

monitor, regulate and control the monitor, regulate and control the

operations of the financial operations of the financial

intermediaries.intermediaries.

Eg:-Eg:-

RBIRBI

SEBISEBI

3) Financial Institutions/Intermediaries3) Financial Institutions/IntermediariesFI’sFI’s

An indirect, institutional source of An indirect, institutional source of finance to industry.finance to industry.

A link between the savers and the A link between the savers and the investors.investors.

Convert direct assets/ instruments/ Convert direct assets/ instruments/ securities issued by corporates into securities issued by corporates into indirect securities. indirect securities.

Financial IntermediariesFinancial Intermediaries

AgentsBrokersUnderwritersMerchant BankersRegistrarsSub-Brokers

Banking InstitutionsDevelopment BanksCommercial BanksCo-operative Banks

Non Banking FI’s1)Development FI’s- IDBI, IFCI, ICICI,IRBI2)Small savings & provident Fund3)Insurance Companies -LIC, GIC4) UTI & Mutual Funds

Regulatory Institutions1) RBI2) SEBI

Non Banking FI’s 1) Hire Purchase Co’s2) Lease Finance Co’s3) Housing Finance Co’s4) Merchant Banking

Financial InstrumentsFinancial Instruments

The financial asset represents a The financial asset represents a claim on a future stream of income claim on a future stream of income and/ or particular assets. and/ or particular assets.

Eg:-Eg:- Equity & preference sharesEquity & preference shares Bonds & DebenturesBonds & Debentures Mutual Fund SchemesMutual Fund Schemes UTI units etc.UTI units etc.

Financial AssetsFinancial Assets

MarketableAssets

Non- Marketable Assets

Corporate Shares, Bonds,

Debentures, Government SecuritiesMutual Fund Schemes,

UTI Units.

Cash, Bank DepositsLICPF

Pension Funds, Post Certificates

Financial SecuritiesFinancial Securities

Issuer

Primary securities

Secondary Securities

Maturity

Short-Term Securities

Medium-TermSecurities

Long-Term Securities

Directly Issued to Ultimate savers

as ordinary Shares

and debentures

Issued by Financial

IntermediariesAs

UTI,LIC Units,bank deposits,

Insurance Policies PF’s

Financial System & Economic Financial System & Economic DevelopmentDevelopment

Is it possible to influence the level of Is it possible to influence the level of national income, employment, standard national income, employment, standard of living and social welfare through of living and social welfare through variations in the supply of finance?variations in the supply of finance?

AnswerAnswer

YesYes

The rate of growth of an economy is a The rate of growth of an economy is a function of the rate of change in the function of the rate of change in the stock of capital.stock of capital.

(Rostow)(Rostow)

Stock of capital means productive Stock of capital means productive capacity of the economy.capacity of the economy.

Increase in productive capacity calls Increase in productive capacity calls for increase in means of production viz. for increase in means of production viz. Plant, Machinery, Technology, Plant, Machinery, Technology, Workforce, Infrastructure etc.Workforce, Infrastructure etc.

This increase is known as new capital This increase is known as new capital formation.formation.

Low level of National

income

Low level of savings

Low investment in capital goods

Low productive capacity of

the economy

Low economic activity

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