Module: New to Banking & Financial Services

Module Overview
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized and well-regulated.
The financial and economic conditions in the country are far superior to any other country in the world.
Indian banking industry has recently witnessed the roll out of innovative banking models like payments
and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the
domestic banking industry.
This module will aim at helping you to understand Financial Market, Financial Intermediaries and
Structure of Financial Market.

Module Objective

At the end of the module, you will be able to,

 To understand the meaning of Financial Market
 To know the role of Financial Intermediary
 To know the structure of Financial Market

Financial Market

Before we understand Money and Bank which is a part of Financial Market … We need to understand the
basics of Financial Marketing System
Financial Market is a mechanism that allows people to easily buy and sell Financial securities (stocks and
bonds), Commodities (precious metals/agricultural goods), Currency & Derivatives.
A place where individuals are involved in any kind of financial transaction refers to financial market. Financial
market is a platform where buyers and sellers are involved in sale and purchase of financial products like
shares, mutual funds, bonds and so on.

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 Who can be Financial Intermediary?

Financial Intermediaries, who play a significant role in transfer of funds from Individual having excess of
funds to Individuals who are in need of funds. Financial Intermediary can be:
 Banks
 Government
 Building Societies
 Credit Union
 Financial adviser or sub broker
 Insurance Companies
 Mutual Funds or Pension funds

Role of Financial Intermediary

Financial Intermediaries, play a significant role in transfer of funds from Individual who has excess of funds
to Individuals who are in need of funds.

A financial intermediary is a financial institution such as bank, building society, insurance company, and
investment bank or pension fund.

A financial intermediary offers a service to help an individual/ firm to save or borrow money. A financial
intermediary helps to facilitate the different needs of lenders and borrowers.

Benefits of Financial Intermediaries

 You don’t have to find the right lenders, you leave that to a specialist.
 Rather than lending to just one individual, you can deposit money with a financial intermediary
who lends to a variety of borrowers – if one fails, you won’t lose all your funds.
 A bank can become efficient in collecting deposits, and lending. This enables economies of scale
– lower average costs. If you had to seek out your own saving, you might have to spend a lot of
time and effort to investigate best ways to save and borrow.
 Convenience of Amounts. If you want to borrow Rs.10, 000 – it would be difficult to find someone
who wanted to lend exactly Rs.10, 000. But, a bank may have 1,000 people depositing Rs.1000
each. Therefore, the bank raises funds from people looking to deposit money, and so can afford
to lend out to those individuals who need it.

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Financial Intermediaries role in Economic Development
1. Self-employment programme: Financial Intermediaries, by providing finance for starting self-
employment programmes are generating more production and income in the country. In India, after
the nationalization of commercial banks, a number of programmes have been initiated by banks for self-
employment schemes.
2. Entrepreneurial Development Programmes (EDPs): have been successfully launched by various banks.
In 1978 by which certain specific areas were allotted to the banks for launching different economic
programmes for the development of such areas.
3. Integrated Rural development scheme: Under this scheme, financial intermediaries were financing
socially and economically depressed people by providing loans to them for various economic activities.
One third of the loan will be a subsidy and the remaining two-thirds of the loan will carry a lower rate
of interest under the interest subsidy scheme of RBI. In this way, various economic programmes aimed
at improving rural economic conditions were undertaken.
4. Housing Finance: As a part of improving dwelling houses, financial intermediaries are providing housing
loans. They are also providing refinancing facility to agencies such as HUDCO (Housing and Urban
Development Corporation). This has enabled many fixed income group people to avail the housing loan.
5. Priority Sector: As per RBI guidelines, commercial banks have to provide certain percentage of their
lending to priority sector which consists of agriculture and its allied activities, such as poultry, dairy, etc.,
cottage industries, small scale industries, small industry and business.

Financial Market

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

• Organized (Banks)
• Unorganized (money lenders, chit funds, etc.)
Capital Market- for long-term funds

• Primary Issues Market

• Stock Market
• Bond Market

Capital Market

• A market where individuals invest for a longer duration i.e. more than a year is called as capital
market.
• In a capital market various financial institutions raise money from individuals and invest it for a
longer period.
• Capital Market is further divided into:
 Primary Market: Primary Market is a form of capital market where various companies issue new stock,
shares and bonds to investors in the form of IPO’s (Initial Public Offering). Primary Market is a form of
market where stocks and securities are issued for the first time by organizations.
 Secondary Market: Secondary market is a form of capital market where stocks and securities which
have been previously issued are bought and sold. Money Market
Money Market is the market for short term funds i.e. for a period up to one year.

The money market is divided into two: Unorganized and Organized Money Market.

Unorganized Market: Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc.
 Money Lenders: Money Lenders lend money to individuals at a high rate of interest.
 Indigenous Bankers: They operate like money lenders. They also accept deposits from public.
 Chit Funds: These collect funds from members and provide loans to members and others.
Organized Money Market: Organized Markets work as per the rules and regulations of the RBI. RBI keeps a
strict control over the Organized Financial Market in India. Organized Market consists of: Treasury Bills,
Commercial Paper (CP), Certificate Of Deposit (CD), Call Money Market, and Commercial Bill Market.

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whether or not transiently or incidentally to some other use of this document) without the prior written permission of EduBri dge Learning Pvt. Ltd. Application for
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  Treasury Bills: To raise short term funds treasury bills are issued by Government. It is purchased by
Commercial Banks. At present, Government issues 91 days and 364 days treasury bills.
 Commercial Paper (CP): Commercial paper is issued by companies who are listed on Stock Exchange.
CP is issued at discount and repaid at face value.
 Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial Institutions to raise
finance from the market. The maturity period for CD's is between 7 days to 1 year.
 Call Money Market: A loan which is taken or given for a very short period that is for one day is called
Call Money Market.
 Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawer of the bill can
get the bills discounted with Commercial Banks. The Commercial Banks can get the bills rediscounted
with Financial Institutions.

Structure of Financial Market

Note: SEBI, RBI, FMC, DCA, DEA, IRDA are regulatory bodies/ Public Authority.

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No part of this document may be reproduced in any material form (including printing and photocopying or storing it in any medium by electronic or other means and
whether or not transiently or incidentally to some other use of this document) without the prior written permission of EduBri dge Learning Pvt. Ltd. Application for
written permission to reproduce any part of this document should be addressed to the CEO of EduBridge Learning Pvt. Ltd