FINANCIAL

SYSTEM AND
FINANCIAL
MARKETS
 INTRODUCTION
A 'financial system' is a system that allows the
exchange of funds between lenders, investors
and borrowers. They consist of complex, closely
related services , markets, and institutions
intended to provide an efficient and regular
linkage between investors and depositors.
financial system of an economy provides the way
to collect money from the people who have it
and distribute it to those who can use it best.
Financial systems operate at national and global
levels.
 OBJECTIVES OF FINANCIAL SYSTEM
To provide a payment system;
 To give time value to money;
 To offer products and services to reduce
financial risk or to compensate risk-taking for
desirable objectives;
 To collect and disperse information that
allows the most efficient allocation of
economic resources;
To create and maintain financial markets
COMPONENTS OF FINANCIAL SYSTEM

 FINANACIAL ASSETS

FINANCIAL MARKET

FINANCIAL INTERMEDIARIES

BORROWERS

INVESTORS
 INDIAN FINANCIAL SYSTEM
• The Indian financial system can be broadly
classified into formal (organized) and informal
( unorgd.) financial system.
• The informal system comprises of individual
money lenders, group of persons operating as
funds or associations, partnerships firms
consisting of local brokers, pawn brokers and
indigenous money lenders.
STRUCTURE OF INDIAN FINANCIAL
SYSTEM
 FINANCIAL INSTITUTIONS

Financial intermediaries/ institutions are the

key players of the financial system which
ensures smooth working of the financial
system by making investors and borrowers
meet.
 CLASSIFICATION OF FINANCIAL INSTITUTIONS

The financial intermediaries in India are

classified as:
 Two major regulatory and promotional institutions:
RBI & SEBI;
 All India level financial institutions: IDBI, SIDBI,
NABARD;
 State level financial institutions: Delhi financial
corporation, Haryana financial corporation;
 CLASSIFICATION OF FINANCIAL INSTITUTIONS
cond…
 The commercial banks: BOB, Allahabad bank,
SBI etc
The insurance companies: LIC, GIC, UTI;
The mutual fund companies : Aditya Birla Sun
Life AMC Ltd., Baroda Asset
Management India Ltd.;
 Non banking financial companies:
investment Co. , Housing Co., Leasing Co., Hire
purchase Co. , Chit funds etc.
 ROLE OF FINANCIAL INSTITUTIONS
• Mobilize the savings of investors via financial
markets by making use of different financial
instruments;
• Offer services to organizations looking for
advises on different problems including
restructuring to diversification strategies;
• Offer complete series of services to the
organizations who want to raise funds from
the markets and take care of financial assets,
for example deposits, securities, loans, etc.
 FINANCIAL MARKETS
Financial Market are the market where
financial assets are created or transferred.
(market for financial assets)

As against a real transaction that involves

exchange of money for real goods or services,
a financial transaction involves creation or
transfer of a financial asset.
 FINANCIAL TRANSACTIONS
• Few egs.
 Issue of shares/ debentures;
 Issue of mutual funds;
 working capital loans by commercial banks;
 long term financial assistance by financial
institutions;
 Transfer of funds from current a/c. to saving a/c.
CLASSIFICATION OF FINANCIAL MARKET

• MONEY MARKET & CAPITAL MARKET

• PRIMARY & SECONDARY MARKET

• GOVERNEMNET SECURITIES MARKET & FOREIGN

EXCHANGE
 MONEY MARKET AND CAPITAL MARKET
• Money Market: ( short term debt market)
The money market is a wholesale debt market for
low-risk, highly-liquid, short-term
instrument. Funds are available in this market for
periods ranging from a single day up to a year. This
market is dominated mostly by government, banks
and financial institutions.
• Capital Market: ( long term financial assets market)
The capital market is designed to finance the long-
term investments such as shares, debentures,
mutual funds etc. capital market is classified into
primary & secondary market.
 PRIMARY & SECONDARY MARKET

• Primary Market : deal with new securities &

therefore also called as new issue market. In
the primary capital market, investors buy directly
from the issuing company. In India the primary
market is well regulated by SEBI
• Secondary Market: market for subsequent sale &
purchase of securities. investors trade securities
among themselves, when a company goes public.
The market is provided by stock exchange.
 GOVERNMENT SECURITIES MARKET &
FOREIGN EXCHANGE
• Government securities market: where the
securities/ loans of central govt. sate govt. &
other Govt. authorities are traded. These
securities are known as Gill-edged securities, The
main participants in this market are the
commercial banks, Provident funds, etc.

• Foreign exchange market: deals with the

multicurrency requirements. Consists of network
of dealers of foreign currencies. This is one of the
most developed and integrated markets across
the globe.
 FINANCIAL INSTRUMENTS
• Financial instruments are assets, securities
and claims. It is a monetary contract between
two parties, which can be traded and settled.
• The contract represents a financial asset to
one party (the buyer) and a financial liability
to the other party (the seller).
• Equity shares, debentures, bonds, etc. are
some examples.
 TYPES OF FINANCIAL INSTRUMENTS
 Capital market instruments: financial
instruments that are used to raise capital through
capital markets- equity shares, preference shares,
debentures & bonds.

 Money market instruments: financial

instruments that are used for raising & supplying
money in short period for through money
market- treasury bills, commercial paper, short
notice money, commercial deposits.
 FINANCIAL ASSETS
• Financial Assets represent a claim over the issuer
to the payment of a sum of money sometime in
the future and /or periodic payment in the form
of interest or dividend.
• Includes:
 Currency issued by RBI/ GOI
 Shares
 Debentures
 Mutual funds
 FINANCIAL SERVIVES
Financial services are the economic
services provided by the finance industry,
which encompasses a broad range
of business that manage money-
including credit unions, banks, credit- card
companies, insurance companies, consumer-
finance companies, stock- brokerage,
investment funds etc.
 FINANCIAL SERVICES
Financial Services refer to the services provided by
the finance market.
 They help to get the required funds and also
make sure that they are efficiently invested.
 They assist to determine the financing
combination and extend their professional
services up to the stage of servicing of lenders.
 They help with borrowing, selling and purchasing
securities, lending and investing, in financial
markets.
 SEVRVICES OFFERED
• Banking and Advisory
• Credit rating,
• Venture capital financing,
• Mutual funds,
• Merchant banking,
• Depository services,
• Insurance
• Wealth management
 PROVIDERS OF FINANCIAL SERVICES
• Commercial banks
• leasing companies,
• Mutual fund houses,
• Merchant bankers,
• Portfolio managers,
• Insurance companies;
• Credit-card companies
• Bill discounting and acceptance houses.
 REGULATORS OF FINANCIAL SYSTEM
The main elements of the regulatory
framework for controlling & supervising the
financial system includes:
 The Companies Act, 2013
 The Securities Contracts( Regulation) Act , 1956
 The Income Tax Act, 1961
 The Banking Regulation Act, 1949
 SEBI & RBI guidelines