Finance Vs Financial System

“while finance is the lifeblood --- financial

system is the network of arteries and veins
carrying blood to various parts of the body”
Financial System
The financial system is characterized by the
presence of integrated, organized and
regulated financial markets, and institutions
that meet the short term and long term
financial needs of both the household and
corporate sector
Financial System
Financial system is the system that allows the
transfer of money between savers and
borrowers.
Continues---
 India has a financial system that is regulated
by independent regulators in the sectors of
banking, insurance, capital markets,
competition and various services sectors.
 In a number of sectors Government plays the
role of a regulator.
Financial System
Constituents of a financial system
Indian Financial System
Components/ Constituents of Indian Financial
system

1. Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.
Financial institutions
 Intermediaries who facilitates smooth functioning of
the financial system by making investors and
borrowers meet. They mobilize savings of the
surplus units and allocate them in productive
activities promising a better rate of return. Financial
institutions also provide services to entities seeking
advises on various issues ranging from restructuring
to diversification plans.
 Financial institutions act as financial intermediaries
List of FIs
 Central Bank
 Commercial bank
 Credit rating agencies ( crisil and ikra)
 Credit reporting and debt collection
 Financial authorities
 Insurance companies
 Merchant banks
 Mutual fund
 Venture capitalists
Financial Markets

1. facilitate creation and allocation of credit  and

liquidity

2. serve as intermediaries for mobilization of savings

3. assist process of balanced economic growth

4. provide financial convenience

Forex Market
 The Forex market deals with the
multicurrency requirements, which are met by
the exchange of currencies.  Depending on the
exchange rate that is applicable, the transfer
of funds takes place in this market.  This is
one of the most developed and integrated
market across the globe.
Credit Market
 Credit market is a place where banks, FIs and
NBFCs purvey short, medium and long-term
loans to corporate and individuals.

Non-bank financial companies (NBFCs) are financial institutions that

provide banking services without meeting the legal definition of a bank,
i.e. one that does not hold a banking license
Money market
 The money market ifs 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.
Money market instruments

1. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers
Capital Market

 The capital market is designed to finance the

long-term investments.  The transactions
taking place in this market will be for periods
over a year.
Capital Market Instruments
 The capital market generally consists of the
following long term period i.e., more than one
year period, financial instruments;
 In the equity segment Equity shares,
preference shares, convertible preference
shares, non-convertible preference shares etc
and in the debt segment debentures, zero
coupon bonds, deep discount bonds etc.
Primary market
 A market is primary if the proceeds of
sales go to the issuer of the securities sold.
Secondary market

 The market where securities are traded after

they are initially offered in the primary
market.
Financial Instruments
 They represent a claim against the future
income and wealth of others. It will be a
claim against a person or an institutions, for
the payment of the some of the money at a
specified future date.
Type of financial Instruments
 Money Market Instruments,Capital
market Instruments & Hibrid Instruments
 cash instruments -whose value is
determined directly by markets.
 Derivative instruments:
exchange-traded derivatives and
over-the-counter (OTC) derivatives.
Hybrid Instruments
Hybrid instruments have both the features of
equity and debenture. This kind of
instruments is called as hybrid instruments.
Examples are convertible debentures,
warrants etc.
Financial Services
 Efficiency of emerging financial system
largely depends upon the quality and variety
of financial services provided by financial
intermediaries.
 The term financial services can be defined as
"activites, benefits and satisfaction connected
with sale of money, that offers to users and
customers, financial related value
Financial system divided-----
 Function
 Financial Assets
 Financial Markets
 Financial Market Returns
 Financial Intermediaries
 Regulatory Infrastructure
 Trends in the Indian Financial System
Function
 Payment System
 Pooling Funds
 Transfer of Resources
 Managing uncertainty
 Decentralized Decision Making
Financial Assets
 Are intangible assets as they represent claims
to future cash flows
 Issuer And Investor
 Debt Vs Equity claim
Physical assets Vs financial Assets
 Physical Assets
 Real Estate ,Gold/jewellery
 Requires huge capital
 Financial Assets
 Savings Bank Account
 Fixed Deposits
 Post office
 Government Bonds
 Provident Funds
FINANCIAL MARKETS
Financial Market can be defined as the
market in which financial assets are
created or transferred.
Functions:-
 Facilitate prise discovery

 Provide liquidity

 Reduce cost of transaction

What does the Indian Financial market
comprise of?
 It talks about the primary market, FDIs,
alternative investment options, banking and
insurance and the pension sectors, asset
management segment as well.
Types of financial markets

 The financial markets can be divided into different

subtypes:
 Capital markets which consist of:
 Stock markets, which provide financing through the
issuance of shares or common stock, and enable the
subsequent trading thereof.
 Bond markets, which provide financing through the
issuance of bonds, and enable the subsequent trading
thereof.
 Commodity markets, which facilitate the trading of
commodities.
Types of financial markets

 Money markets, which provide short term debt financing and

investment.
 Derivatives markets, which provide instruments for the management
of financial risk.
 Futures markets, which provide standardized forward contracts for
trading products at some future date; see also forward market.
 Insurance markets, which facilitate the redistribution of various risks.
 Foreign exchange markets, which facilitate the trading of
foreign exchange.
 The capital markets consist of primary markets and secondary
markets. Newly formed (issued) securities are bought or sold in
primary markets. Secondary markets allow investors to sell securities
that they hold or buy existing securities.
Financial market returns

 Interest rate
 EX;- Mr.Alex buy a share of company’s
equity stock at a price of Rs.200. After one
year the dividend earned is Rs.10a and the
share price raises to Rs.230 .What is the rate
of return?
FINANCIAL INTERMEDIATION
Intermediary Market Role
Stock Exchange Capital Market Secondary Market to securities

Investment Bankers Capital Market, Corporate advisory services,

Credit Market Issue of securities

Registrars, Depositories, Capital Market Issue securities to the investors

Custodians on behalf of the company and
handle share transfer activity
Primary Dealers Satellite Money Market Market making in government
Dealers securities

Forex Dealers Forex Market Ensure exchange of currencies

Underwriters Capital Market, Subscribe to unsubscribed

Money Market portion of securities
Regulatory Infrastructure
 RBI – Reserve Bank of India
 Established in 1935
 Bankers Bank
 Regulates Indian Financial Markets
 SEBI –Securities and Exchange Board of India
 Incorporated in 1992
 Regulation of Securities Market
 Protecting the interests of Investors
Foreign Exchange Regulations
 India has liberalized its foreign exchange
controls. Rupee is freely convertible on
current account. Rupee is also almost fully
convertible on capital account for non-
residents. Profits earned, dividends and
proceeds out of the sale of investments are
fully repatriable for FDI.
Growth and trend in the Indian
Financial system
 Wide array of FI will provide variety of
Services
 Network between Banks and operations of the
financial institutions
 Variety of schemes and instruments
 Remarkable growth in the primary and
secondary capital market
General permission of RBI under
FEMA
 Indian companies having foreign investment
approval through FIPB( foreign investment
promotion board) route do no require any
further clearance from RBI for receiving
inward remittance and issue of shares to the
foreign investors.
List of Banks in India, other than co-
operative banks

 Indian banks
 Public Sector Banks
 Nationalised Banks
 SBI & associates
 Private Banks
 Scheduled Urban Co-operative Banks
 Indian Banks Abroad
 Foreign banks
 Loan Companies
Non-bank financial institution
(NBFI)
 is a financial institution that does not have a
full banking license or is not supervised by a
national or international banking regulatory
agency. NBFIs facilitate bank-related
financial services, such as investment, risk
pooling, contractual savings, and market
brokering.[
The People in Charge of Forex Regulation

 The NFA – the National Futures Association. The

NFA is a self-regulatory organization for the US
futures industry.
 The CFTC – the Commodity Futures Trading
Committee. Created by congress, the Commodity
Futures Trading Commission (CFTC) was formed in
1974 as an independent agency with the mandate to
issue forex regulations for financial markets in the
United States.
 .
Continued----
 The FSA - The Financial Services Authority. This is
a UK based independent body, given statutory
powers by the Financial Services and Markets Act
2000.
 Various National Authorities – each country has its
own national body for regulating its financial service
industry. These are the bodies that decide on forex
regulations.
Financial system reforms
 Deregulation of interest rate
 Focus on risk mgt
 Enhancing competition
 Enhancing transparency and disclosure stds.
 Refining regulatory frame work and
supervising practices
Major reforms in Indian Capital
Market
 Setting up of SEBI
 Introduction of free pricing
 Standardization of disclosure in public issues
 Allowing FIIs to operate in Indian Market
 Introduction of electronic trading system
 Safety and integrity masseurs
 Clearing of transaction through the clearing
house
Continued-----
 Reconstitution of governing bodies of stock
exchange
 Introduction trading in equity derivative
products-a warrant is a security that entitles
the holder to buy stock of the issuing
company at a specified price, which is usually
higher than the stock price at time of issue.
Continued-----
 Indian corporates allowed to access international capital
market
 American depository receipts- A negotiable certificate
issued by a U.S. bank representing a specified number
of shares (or one share) in a foreign stock that is traded
on a U.S. exchange.
 Global depository receipts-A bank certificate issued in
more than one country for shares in a foreign company.
The shares trade as domestic shares, but are offered for
sale globally through the various bank branches.
Continued-----
Foreign currency convertible bonds-An instrument in debt
market where in which convertible bond is issued in a
currency which is different than issuer’s domestic
currency. For e.g. reliance industries issues a convertible
bond which is denominated in terms of dollars and not
rupees.

External commercial borrowings-Applicants will be free

to raise ECB from any internationally recognized source
like banks .Ex. Commercial bank loans
International Financial Market
 MNC raises funds from international financial
market to finance the asset.
 Funds can raise from the host country also
International money and capital
market
 International money market is deal with short
term funds( international banks and short term
securities)
 International capital deals with long term
funds
Players of International Financial
Market
 Official sources
 Multilateral agencies
 International development banks such as world bank ,IFC
 Regional development bank such as Asian Development Bank
 Bilateral agencies or the different govt.agencies
 Non –governmental agencies
 Euro currency market/International Banks
 International securities market
 Debt securities
 Equities
Multilateral Agencies
 World bank
International Bank for Reconstruction and
Development and (IBRD) and International
Development Association(IDA)
World Bank group
 International Finance Corporation( IFC),
 International Centre for Settlement of
Investment of disputes(ICSID)
 Multilateral Investment Guarantee
Agency( MIGA)
Main Financial Funding Agencies
 World bank and IFC
Bilateral Agencies
 First time in US to cover the deficit
 An official bilateral development or aid
agency is responsible to a single government.
It is usually a ministry or part of a
government ministry dedicated to advancing
foreign policy goals while contributing to the
economic and social development of recipient
countries.
International banks
 Euro Banks-The dollar deposits in London and other
European country based banks came to be known as
Euro dollars and the banks accepting such deposits
came to known as Euro banks.
 Domestic bank performing the functions of
International banks
 Operated in foreign countries accepting deposits
from and making loans to the residence of the host
countries.
Factors behind Emergence of Euro
banks
Trade surplus in USSR

Restrictions on the outflow of found from UK

Linkage between US dollar and European currencies

Euro Banks

Capital control Measures in USA

Restrictions on deposits by nonresidents in some

European countries

Interest rate ceiling in USA

Finance Diary 12-03-10
 Functions of RBI
 Functions Of SEBI
 Financial development measures

 Completion date 15-03-10

Finance Diary 15-03-10
 Standardization of disclosure in public issues

 Completion date 17-03-10

Prior Approval Not in the automatic
route
1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has an existing
financial/technical collaboration in India in the same field
4. Proposals for acquisitions of shares in an existing Indian
company in financial service sector and where SEBI
(substantial acquisition of shares and takeovers) regulations,
1997 is attracted
5. All proposals falling outside notified sectoral policy/CAPS
under sectors in which FDI is not permitted
In CHINA
 Under the new rules, banks should retain at least
40% of the funds budgeted for bonus payments
against possible future risks. they can then pay out
the retained funds after a lockup period of three
years, the china banking regulatory commission said
in a statement wednesday. If the banks have
significant losses, they will have the power to take
back previously paid bonuses and stop further
payments, the regulator said.
 The new rules also limit bonus payments for senior
managers to no more than three times their base
salary.
Portfolio Investment
 Foreign Institutional Investors (FIIs) are
allowed to invest in India in the securities
traded in both primary and secondary capital
markets. These securities include shares,
debentures, warrants, and units of mutual
funds, government securities and derivative
instruments