FINANCIAL INSTITUTIONS,

MARKETS AND SERVICES

RAJIDI RAMMOHAN REDDY

Assistant Professor
Department of Management Studies
Trinity College of Engineering & Technology, Peddapalli
M: 7794885532, E-mail: dr.rajidi@gmail.com
Course Objectives:

To give an understanding about Indian Financial system with

respect to Markets, Institutions and Services.

Learning Outcome:

Students will be able to understand

a) Introduction to Indian Financial system

b) Banking and Non-Banking Institutions
c) Financial and Securities markets
d) Fund and Fee based services.
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Unit – I: Introduction
The structure of Indian financial system;
Equilibrium in financial markets;
Indicators of Financial Development,
Structure of Financial Institutions,
Financial system and economic development;
Financial Sector reforms after 1991
Recent Developments of Indian Financial System.

Regulatory and Promotional Institutions:

Function and Role of RBI,
Monetary Policy and techniques of monetary control of RBI,
Major Changes in Monetary Policy.
The role and functions of SEBI.
An update on the performance on Non-statutory Financial
organization like IFCI, IRBI, IDFC, NABARD, SIDBI, and SFCs.
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Unit - II: Banking and Non-Banking Institutions:
Commercial banks – Growth and structure of commercial Banks
Competition, interest rates, spreads, and NPAs.
Bank capital – adequacy norms and capital market support.
Banking Innovations- e-banking- Risk Management in Banking.
Cooperative banks- Features, Structure and Growth,
Government initiatives to strengthen the cooperative banks.

Non-banking financial Institutions:

Structure and functioning of Unit Trust of India and Mutual Funds.
Growth of Indian Mutual funds and its Regulation.
The Role of AMFI.
Insurance Companies – Structure and Investment Pattern of Public
and Private Sector insurance companies, Competition, innovation,
Role of IRDA,
Challenges of Insurance Sector in India.
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Unit - III: Financial and Securities Markets:

Structure and functions of Call Money Market,

Government Securities Market –
T-bills market, Commercial Bills market, Commercial paper and
certificate of deposits-
Securities markets – Organization and structure, Listing trading
and settlement.
SEBI and Regulation of Primary and Secondary Markets.
Role and functions of Clearing Corporation of India Ltd

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Unit - IV: Asset /Fund Based Financial Services –

Lease Finance- Conceptual and Regulatory Framework,

Classification and Financial leasing,
Hire Purchase and Consumer Credit,
Factoring and Forfeiting,
Housing finance,
Venture capital financing.

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Unit - V: Fee-based / Advisory services:

Investment Banking – Introduction, Functions and activities of

Merchant bankers, Lead Managers, underwriting, bankers to an
issue, debenture trustees, portfolio managers.

Challenges faced by investment bankers.

Stock broking,
Custodial
Services,
Depository system,
Credit rating – Role of agencies, Process, regulations.
CIBIL

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 Financial system

The word "system", in the term "financial system", implies a set of

complex and closely connected or interlined institutions, agents,
practices, markets, transactions, claims, and liabilities in the
economy.

The financial system comprises of a variety of intermediaries,

market, and instruments. It provide the principal means by
which savings are transformed into investments.

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 Financial system

The economic development of any country depends upon the well

organised financial system.

Financial system is a system which supplies the necessary financial

inputs for the production of goods and service to improve the
standard of life and well being of the nation

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Financial system are of crucial significance to capital formation.
The process of capital formation involves three distinct, although
inter-related activities.

 Saving : the ability by which claims to resources are set aside

and become available for the other purpose.

 Finance : The activity by which claims to resources are either

assembled from those released by domestic savings, obtained
from abroad etc.

 Investments : the activity by which resources are

actually committed to production.
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 Functions of Financial System

1. Payment system
2. Pooling of funds
3. Transfer resources
4. Risk management
5. Price information for decentralised decision making
6. Dealing with incentive problem
7. Reformatory function

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Financial institutions are the participants in a financial market.

 They are business organizations dealing in financial

resources.

 They collect resources by accepting deposits from

individuals and institutionsandlend them to trade, industry
and others.

 On the basis of the nature of activities, financial

institutions may be classified as:

(a) Regulatory and promotional institutions,

(b) Banking institutions, and
(c) Non-banking institutions

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 Financial institutions, financial markets, financial
instruments and financial services are all regulated by
regulators like Ministry of Finance, the Company Law
Board, RBI, SEBI, IRDA, Dept. of Economic Affairs,
Department of Company Affairs etc.

(b) Banking Institutions:

Banking institutions mobilise the savings of the people.
They provide a mechanism for the smooth exchange of goods
and services. They extend credit while lending money. They not
only supply credit but also create credit. There are three
basic categories of banking institutions.
They are commercial banks, co-operative banks and
developmental banks.
(c) Non-banking Institutions:
The non-banking financial institutions also mobilize
financial resources directly or indirectly from the people.
Companies like LIC, GIC, UTI,
Development Financial Institutions, Organisation of
Pension and Provident Funds etc. fall in this category. Non-
banking financial institutionscan be categorized as investment
companies, housing companies, leasing companies, hire
purchase companies, specialized financial institutions.
Financial Markets
 Classification of Financial Markets

Classification on the basis of the type of financial claim

Debt market
Equity Market

 Classification on the basis of maturity of claims

Money market
Capital market

 Classification on the basis of seasoning of claim

Primary market
Secondary market
 Financial Instruments
 Financial instruments are the financial assets,
securities and claims. They may be viewed as financial
assets and financial liabilities.

 Financial assets represent claims for the payment of a sum of

money sometime in the future (repayment of principal) and/or
a periodic payment in the form of interest or dividend.

 Financial assets like deposits with banks, companies and post

offices, insurance policies, NSCs, provident funds and pension
funds are not tradable.

 Securities (included in financial assets) like equity shares and

debentures, or government securities and bonds are tradable.
Hence they are transferable.
 The financial instruments may be capital market
instruments or money market instruments or hybrid
instruments.

 The financial instruments that are used for raising capital

through the capital market are known as capital market
instruments.

 The financial instruments that are used for raising and

supplying money in a short period not exceeding one year
through money market are called money market instruments.

 Hybrid instruments are those instruments which have

both the features of equity and debenture. Examples are
convertible debentures, warrants etc.
Its objective is to intermediate and facilitate financial
transactions of individuals and institutional investors

 The financial services include all activities

connected with the transformation of savings into
investment.

 Important financial services include lease financing, hire

purchase, instalment payment systems, Merchant banking,
factoring and forfaiting etc.
 Types of Financial Services
1. Hire purchase the legal term for a conditional sale contract
1.Hire Purchase Services
with
an
 ntention to finance
Hire purchase consumers
the legal term fortowards vehicles,
a conditional white goods
sale contract
etc. If with
a buyer cannot afford to pay the price as a lump sum but
can afford to pay a percentage as a deposit, the contract allows the
buyer to hire the goods for a monthly rent.

2.

Leasing Services: lease or tenancy is a contract that transfers
the right to possess specific property. Leasing service includes the
leasing of assets to other companies either on operating lease or
finance lease.
 3. Housing Finance Services means financial services related
to development and construction of residential and commercial
properties. An Housing Finance Company approved by the National
Housing Bank may undertake the services /activities such as
Providing long term finance for the purpose of constructing,
purchasing or renovating any property etc.

4. Asset Management Company is managing and investing

the pooled funds of retail investors in securities in line with the
stated investment objectives and provides more diversification,
liquidity, and professional management service to the individual
investors. Mutual Funds are comes under this category.

5. Venture capital Finance is a unique form of financing

activity that is undertaken on the belief of high-risk-high-return.
Venture capitalists invest in those risky projects or companies
(ventures) that have success potential and could promise sufficient
return to justify such gamble.