INDIAN FINANACIAL

SYSTEM
Introduction
� Financial system of any country consist of:
1.FINANCIAL MARKET
2.FINANCIAL INTERMEDIARIES
3.FINANCIAL INSTRUTMENTS & PRODUCTS

❑ An ecosystem consists of various

economic agents like households,
producers, government & consumers.
� It play a very important role in economic
growth of a country.
� They undertake various economic
activities like production, exchange &
consumption for the purpose of sustaining
themselves resulting into allocation,
utilization, & generation of funds.
Defination
� As we know-
”Need is the mother of all invention”
So there is a need of mechanism that can
facilitate the flow of funds between surplus
& deficit units in an economic system
known as ‘FINANCIAL SYSTEM’
Functions
� Facilitate Savings

� Provide Liquidity

� Facilitate Exchange

� Risk management

� Regulates market
� Facilitates Savings:
It helps in the mobilization of savings
from households, public & private sectors
units & make them available to the
producers.
❑ Provides Liquidity:
 Financial System
� An institutional framework existing in a country to
enable financial transactions

� Three main parts

■ Financial assets / Instruments (loans, deposits, bonds,
equities, etc.)
■ Financial institutions (banks, mutual funds, insurance
companies, etc.)
■ Financial markets (money market, capital market, forex
market, etc.)
 Financial assets/instruments
� Enable channelising funds from surplus units to deficit units

� There are instruments for savers such as deposits, equities,

mutual fund units, etc.

� There are instruments for borrowers such as loans, overdrafts,

etc.

� Like businesses, governments too raise funds through issuing

of bonds, Treasury bills, etc.

� Instruments like PPF, etc. are available to savers who wish to

lend money to the government
� Transformation from savings to investments
can be done efficiently if there are a variety
of financial assets available to the savers
� Saving surplus units will be attracted to
purchase these units
� FI are distinguished through the various
benefits they offer through specific features
relating to
1.Liquidity
2.Marketability
3.Maturity period
4.Interest tax & dividends
 Financial Institutions
■ Effective distribution of savings

� Institutions are banks, insurance companies, mutual

funds- promote/mobilise savings
� Financial Institutions in India are
divided in two categories.
� The first type refers to the Regulatory
institutions and the second type refers to
the Intermediaries.
� The regulators are assigned with the job of
governing all the divisions of the Indian
financial system.
� These regulatory institutions are
responsible for maintaining the
transparency and the national interest in
the operations of the institutions under
their supervision.
Continue…
The regulatory bodies of the financial
institutions in India are as follows:
•Reserve Bank of India (RBI)
•Securities and Exchange Board of India (SEBI)
•Central Board of Direct Taxes (CBDT)
•Central Board of Excise & Customs
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� Apart from the Regulatory bodies, there
are the Intermediaries that include the
banking and non-banking financial
institutions.
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� Some of the specialized financial
institutions in India are as follows:
Unit Trust of India (UTI)
Securities Trading Corporation of India
Ltd. (STCI)
Industrial Development Bank of India
(IDBI)
Industrial Reconstruction Bank of India
(IRBI), now (Industrial Investment Bank
of India)
� Export – Import Bank of India (EXIM
Bank)
Small Industries Development Bank of
India (SIDBI)
National Bank for Agriculture and Rural
Development (NABARD)
Life Insurance Corporation of India (LIC)
General Insurance Corporation of India
(GIC)
Shipping Credit and Investment Company
of India Ltd. (SCICI)
Housing and Urban Development
Corporation Ltd. (HUDCO)
National Housing Bank (NHB)
Continue…
� The banking institutions of India play a
major role in the economy of the country.
� The banking institutions are the providers
of depository and transaction services.
� These activities are the major sources of
creating money.
� The banking institutions are the major
sources of providing loans and other credit
facilities to the clients.
� Apart from the banking financial
institutions, there are a number of
specialized financial institutions in
India that have been incorporated for a
definite purpose.
� These institutions include the insurance
companies, the housing finance
companies, mutual funds, merchant
banks, credit reporting and debt collection
companies and many more.
Continue..
� Apart from these, there are several other
financial institutions that are existing in
the country. These are the stock brokers
and sub-brokers, portfolio managers,
investment advisors, underwriters, 
foreign institutional investors and many
more.
 FINANCIAL
MARKETS

• Market where entities

can trade financial securities, commodities, at low transaction
costs and at prices that reflect supply and demand.

•Securities include stocks and bonds, and commodities include

precious metals or agricultural goods.
KINDS OF FINANCIAL SYSTEM
MARKET
 MONEY MARKET

❖As per RBI “ A market for short terms financial

assets that are close substitute for money, facilitates
the exchange of money in primary and secondary
market”.

❖A mechanism that deals with the lending and

borrowing of short term funds.

❖A segment of the financial market in which

financial instruments with high liquidity and very
short maturities are traded.
 COMPOSITION OF MONEY MARKET

Money Market consists of a number of sub-markets

which collectively constitute the money market. They are:

❖Call Money:

•lending and borrowing transactions are carried out for one

day that may or may not be renewed the next day.

•Demand comes from commercial banks that need to meet

requirements of CRR and SLR,whereas supply comes from
commercial banks with excess funds, and FIs like IDBI, etc.
❖The Treasury Bill Market:

• It deals in Treasury Bills of short term duration: 14

days, 182 days ,91 days, and 364 days.

• They are issued by Government and largely held

by RBI.

• The treasury bills facilitate the financing of Central

Government temporary deficits.

• The rate of interest for treasury bills is determined

by the market, depending on the demand and
supply of funds in the money market.
❖The Commercial Bill Market:
• Deals in bills of exchange, a seller draws a bill of
exchange on the buyer to make payment within
a certain period of time.

• The bills can be domestic bills or foreign bills of

exchange.

• The commercial bills are purchased and

discounted by commercial banks, and
are rediscounted by FIs like EXIM Bank, SIDBI, IDBI,
etc.
❖The Commercial Paper Market:
• The scheme of Commercial Paper (CP) was introduced in
1990 for short term financing issue . They can be issued in
multiples of Rs. 5 lakhs and in multiples thereof

• As per RBI guidelines, CPs can be issued on the following

conditions:

a) The minimum tangible net worth of the company to be at

least Rs. 4 crores.

a) The working capital limit should have been sanctioned by

a bank or financial institution.
 STRUCTURE OF MONEY
MARKETS

❖ORGANISED MONEY STRUCTURE

❖UNORGANISED MONEY STRUCTURE

 ORGANISED MONEY STRUCTURE

PARTICIPANTS:

❖Reserve bank of India.

❖DFHI (discount and finance house of India)
❖Commercial banks:-
(i)Public sector banks
SBI with 7 subsidiaries Cooperative banks
20 nationalized banks
(ii)Private banks
Indian Banks Foreign banks
❖Development bank
-- IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
 UNORGANISD
SECTOR
❖ Indigenous

❖ Money lenders

❖ Unregulated Intermedi

aries
 INDEGENEOUS BANKS

❖Private firms that receive deposits and give loans and

thereby operate as banks

❖As activities are not regulated properly ,they are

unorganized segment

❖Broadly classified into 4 groups- GUJRATI

SHROFFS,MULTANI SHROFFS,CHETTIARS AND MARWARI
KAYAS
 MONEYLENDERS

Broadly classified into 3 categories:

❖PROFESSIONAL MONEYLENDERS

❖ITINERANT MONEYLENDERS

❖NON PROFESSIONAL MONEYLENDERS

 UNREGULATED
INTERMEDIARIES

A)FINANCE COMPANIES- gives loans to the

retailers,artisians and other self-employed
persons

B) CHIT FUNDS- are saving institutions

C) NIDHIS- operate in unregulated credit

market and provide kind of mutual benefit
funds
 Financial services
� It facilitate mobilizing of savings & their
transformation into investment
� When an economy is in the rudimentary stage there is
the absence of financial assets & services
� This is the reason for the slow movement of funds in
the economy
� The function of financial service are to provide help
in raising funds from surplus units like individual,
institution & corporate org.
Cont…
� The constituents of the financial services market
consists of market players like banks, financial
institution, mutual funds, merchant bankers, stock
brokers.
 Functions of Financial system

To link between savers and Investors and thereby

help in mobilizing & allocating the savings
efficiently & effectively.

Not only helps in selecting projects to be funded

but also inspires the operators to monitor the
performance of the investment.
It aims at containing risk within acceptable limits
& reducing the cost.

It makes available price related information.

Helps in creation of a financial structure that

lowers the cost of transactions.
The Indian financial system is regulated by five major regulatory bodies, they are:
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