THE NATURE AND ROLE OF

FINANCIAL SYSTEM
FINANICIAL MARKETS, INSTITUTES,
SERVICES
SESSION – 1/PGPM/2009-2011.
INSTRUCTOR : PROF. SSP CHAGANTY
FINANCAIL SYSTEM IS A SET OF

• Complex and closely intermixed :

• FINANCIAL INSTITUTIONS
• FINANCIAL MARKETSS
• FINANCIAL INSTRUMENTS
• FINANCIAL SERVICES
• FINANCIAL PRACTICES
• FINANCIAL PROCEDURES .ETC.
 Financial Institutions can be
classified as

• BANKING AND NON BANKING

INSITUTIONS. OR
• AS INTERMEDIARIES AND NON
INTERMEDIARIES
 FINANCIAL MARKETS ARE
VARIOUSLY CLASSFIED AS

• A) MONEY MARKETS
• B) CAPITAL MARKETS
• C) ORGANISED & UNORGANISED
• D) PRIMARY & SECONDARY
• E) FORMAL AND INFORMAL MARKETS
• F) OFFICAL AND PARALLES MARKETS
• G) DOMESTIC AND FOREIGN MARKETS,
 FINANCIAL MARKETS DEAL IN

• Financial securities or instruments and financial services.

• Financial instruments differ in their investment

characteristics such as
• A) Liquidity
• B) risk
• C) maturity
• D) tax status
• E) rate of return.
 PRICE OR RATE OF INTEREST

• The price in financial markets is known as

the rate of interest.
• Under conditions of perfect competition ,
the equality between expected demand for
funds and total planned supply of funds
determines the equilibrium rate of interest.
The intervention by the authorities

• In the form of administering interest rates

results in excess demand or excess
supply of funds, which , in turn, requires
the official policy of direct allocation of
financial resources.
The supply of funds depends upon

• aggregate savings
• credit creation by the banking system.

• While the need for funds depends upon

demand for investment , consumer
durables , housing and so on.
 The function of a financial system
are

• To establish a bridge between savers, and

investors, and thereby to encourage saving and
investment, to provide finance in anticipation of
savings, to enlarge markets over space and time
• To allocate financial resources efficiently for
socially desirable and productive purposes.
• The ultimate goal of the financial system is to
accelerate the rate of economic development.
 While financial markets

• May accelerate development, they

themselves in turn, develop with economic
development.
• The relation ship between economic
development and financial development is
thus symbotic.
The efficient financial markets are

• Characterized by the absence of

information –based gain, by correct
evaluation of assets, by maximization of
convenience and minimization of
transaction costs, and by maximization of
marginal efficiency of capital.
 In reality the contribution of
financial system,

• To growth is highly constrained because it

does not work efficiently and capital is not
the most important barrier to growth.
• The role of finance in development is
believed to be secondary by many
experts.
 A frame work to evaluate

• The working of any financial sector must

include economic , commercial, as well as
social and ethical criteria.
 FINANCIAL INNOVATION

• It refer to wide ranging changes in

financial system .
• The introduction of new financial
institutions, markets, instruments,
services, technology , organization and so
on are parts of financial innovation.
 FINANCIAL ENGINEERING

• It connotes skillful development and use of new

financial technology, creative solutions, and
tools to cope with financial changes.
• It involves , construction, designing,
deconstruction of innovative financial
instruments , Institutions, and process to reduce
risk and to maximize profits quickly.
 FINANCIAL REVOLUTION

• IT MEANS THAT THE MAGNITUDE ,

SPEED, AND SPREAD OF CHANGES IN
THE FINANCIAL SECTOR, ARE SIMPLY
PHENOMENAL.
 Broad financial markets
• the markets which attract funds in
• Large volume, and from all types of
investors, are known as, Broad financial
markets.
 DEEP FINANCIAL MAREKTS

• The markets which provide opportunities

for sufficient order at fine rates below and
above the market prices are called deep
financial markets.
SHALLOW FINANCIAL MARKETS

• The underdeveloped markets due to

governmental regulations and controls are
termed as shallow financial markets.
 FINANCIAL REPRESSION

• Financial repression exists when the

regulatory policies of the government
distort interest rates, discourage savings
reduce investment , and misallocate
resources.
FINANCIAL REFORMS OR
LIBERALIZATION AIM AT CREATING A
MARKET ORIENTED, COMPETITIVE
FINANCIAL SYSTEM BY REMOVING
PHYSICAL, ADMINISTRATIVE, AND
DIRECT CONTROL.
 FINANCIAL INTEGRATION

• It refers to the establishment of close and

effective inter linkages between various
parts and sub parts of financial system, so
that interest rates differentials in the
system are minimized.
 SECURITIZATION

• It refers to a fast growth of direct ( primary)

financial instruments, and to a
collateralized financing through the sale of
existing assets of financial institutions.
 DIS-INTERMEDIATION

• IT REFERS TO THE SWITH OUT OF

THE LIABILITIES OF FINANCIAL
INTERMEDIARIES BY THE INVESTORS.
 INTERNATIONALIZATION OR
GLOBALIZATION

• Globalization or Internationalization of
financial markets occurs when the national
and foreign markets become integrated.