Session I Financial Market and Financial Institutions

Instructor: Prof. (Dr.) Paresh Shah FCMA., Ph.D. (Finance)., F.D.P.(IIMA)

Prof. (Dr.) Paresh Shah

INTRODUCTION
System stands for a set of bodily organs like composition or concurring in function, a scheme of classification and a method of organisation. Finance holds the key to all human activities. Finance is the study of money its nature, creation, behaviour, regulation and administration.

Prof. (Dr.) Paresh Shah

FINANCIAL SYSTEM
A set of inter-related activities or services working together to achieve some predetermined purpose or goals. Includes indifferent markets, institutions, instruments, services and mechanism which influence the generation of savings, investment, capital formation and growth.

Prof. (Dr.) Paresh Shah

FINANCIAL SYSTEM
Van Horne : the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption. Robinson: To provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth.

Prof. (Dr.) Paresh Shah

FIs
Tailor made products Financial intermediaries
Accepting funds from one entity and lending to another entity Borrow from net savers and on lend the funds borrowed to the net borrowers

Prof. (Dr.) Paresh Shah

Securities
Primary securities securities issued by final users of funds to the fund giver Secondary securities securities issued by financial intermediaries to the fund giver

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Financial intermediation
Net borrowers create financial assets Net savers create financial liabilities BROKERS
Arranges for net saver and net borrowers Does not issue any securities nor receive any security Pocketing commission or brokerage for matchmaking
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Financial intermediary
Receive interest from net borrowers Pay interest to net savers Difference is Interest spread Also earns brokerage and underwriting commission

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Types of assets
Real assets
Tangible useful to generate future benefits for their owners

Financial assets
Securities and loans are contracts that promise future monetary benefits Financial assets dominates assets of the fund associated firm

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Role of financing
Equity is not an important Deposits are major source

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Rationale of Financial Intermediation

Help to overcome a market imperfections Reduce the transactions costs
Saver monitoring Borrower lower fund procurement costs

Diversification benefits
Small investment denomination Allow investors to invest in all the stocks of an index
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Rationale of Financial Intermediation

Maturity and liquidity transformation
Housing finance sector -Short maturities liabilities may be converted in to long term financial institutions Pension funds and Insurance companies long term liabilities with long term assets also invest in short term securities Liquidity savings accounts channel into investments
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Disintermediation
The trend of net borrowers and net savers in an economy bypassing intermediaries in their attempt to invest and borrow money

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Categories of Financial Institutions

Depository institutions
Commercial bank Cooperating banks Credit societies Fair proportion of these deposits are repayable on demand Fund accepted are invested by these institutions in loans and securities

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Categories of Financial Institutions

Non-depository Institutions
Finance companies
Primary business lending and investing Funds comes from borrowings or bond and debenture issues The Development financial institutions, HFCs and NBFCs covered in this category

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Categories of Financial Institutions

Contractual Institutions
Formal agreement with customers for long term use of funds Insurance companies and pension funds Risk protection and old age security Medium maturities

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Categories of Financial Institutions

Mutual funds
Vehicles Invest in equity and debt market on behalf of their unit holders Opportunities of diversified investments yielding low risks with returns that are closely linked to returns in the market in which they invest With higher returns and risks in compare to bank

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Regulations
FIs are heavily regulated Supervision Safety and soundness of individual firms and the industry as a whole and to protect the consumer PRUDENTIAL AND CONDUCT OF BUSINESS REGULATION

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FUNCTIONS
Mobilisation of savings Distribution for industrial investment Stimulating capital formation THE VERY OBJECTIVE IS ECONOMIC GROWTH.

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PROCESS
The process of savings, finance, and investment involves financial institutions, markets, instruments and services. Supervision, control and regulation are equally significant. FINANCIAL MANAGEMENT IS AN INTEGRAL PART OF THE FINANCIAL SYSTEM.

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FINANCIAL ASSETS AND INTERMEDIARIES

Financial assets with attractive yield, liquidity, and risk characteristics encourage savings in financial form. By evaluating alternative investments and monitoring the activities of borrowers, financial intermediaries increase the effciency of resource use. The efficient use of resources, saving and risk taking are the corner stones of a growing economy.

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USERS OF FIANCIAL SERVICES

House hold sector viz., unregulated firms and individuals. The seek convenience, liquidity, and security. Businesses complicated needs. Needs short term credit to finance inventories and long term funds to finance capital expansion. Government use payment services, net borrowers

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