INDIAN FINANCIAL SYSTEM

FINANCIAL SYSTEM
• “Financial system", implies a set of complex and closely connected or interlined
institutions, agents, practices, markets, transactions, claims, and liabilities in the
economy”.
• Is the system that allows the transfer of money between savers (and investors) and
borrowers.
• Is the set of Financial Intermediaries, Financial Markets and Financial Assets.
• Helps in the formation of capital.
• Meets the short term and long term capital needs of households, corporate houses, Govt.
and foreigners.
• Its responsibility is to mobilize the savings in the form of money and invest them in the
productive manner.
FLOW OF FUNDS IN THE FINANCIAL SYSTEM
FUNCTIONS OF THE FINANCIAL SYSTEM
• To link the savers & investors.
• To inspire the operators to monitor the performance of the
investment.
• To achieve optimum allocation of risk bearing.
• It makes available price - related information.
• It helps in promoting the process of financial deepening and
broadening
 ORGANISATION / STRUCTURE OF
FINANCIAL SYSTEM

Financial
system

Financial Financial Financial

Intermediaries Markets Assets
 FINANCIAL INTERMEDIARIES
• Come in between the ultimate borrowers and
ultimate lenders
• provide key financial services such as
merchant banking, leasing, credit rating,
factoring etc.
• Services provided by them are:
Convenience( maturity and divisibility),
Lower Risk(diversification), Expert
Management and Economies of Scale.
 TYPES OF FINANCIAL
INTERMEDIARIES

Financial
Intermediaries

Insurance
Banks NBFCs Mutual Funds Organizations
 TYPES OF FINANCIAL INTERMEDIARIES
1. Commercial banks
• Collect savings primarily in the form of deposits and traditionally
finance working capital requirement of corporate
• With the emerging needs of economic and financial system banks
have entered in to:
 Term lending business particularly in the infrastructure sector,
 Capital market directly and indirectly,
 Retail finance such as housing finance, consumer finance……
 Enlarged geographical and functional coverage
 2. NON BANKING FINANCE
COMPANIES(NBFC)
• A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of shares/stocks/
bonds/debentures/securities issued by Government or local
authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, etc.
• Provide variety of fund/asset-based and non-fund
based/advisory services.
• Their funds are raised in the form of public deposits ranging
between 1 to 7 years maturity.
• Depending upon the nature and type of service provided, they are
categorised into:
 Asset finance companies
 Housing finance companies
 Venture capital funds
 Merchant banking organisations
 Credit rating agencies
 Factoring and forfaiting organisations
 Housing finance companies
 Stock brokering firms
 Depositories
 3. MUTUAL FUNDS
• A mutual fund is a company that pools money from many investors
and invests in well diversified portfolio of sound investment.
• issues securities (units) to the investors (unit holders) in accordance
with the quantum of money invested by them.
• profit shared by the investors in proportion to their investments.
• set up in the form of trust and has a sponsor, trustee, asset
management company and custodian
• advantages in terms of convenience, lower risk, expert management
and reduced transaction cost.
MUTUAL FUND OPERATION FLOW
CHART
4. INSURANCE ORGANISATION

• They invest the savings of their policy

holders in exchange promise them a
specified sum at a later stage or upon the
happening of a certain event.
• Provide the combination of savings and
protection
• Through the contractual payment of
premium creates the desire in people to
save.
 FINANCIAL MARKET

• It is a place where funds from surplus units

are transferred to deficit units.
• It is a market for creation and exchange of
financial assets
• They are not the source of finance but link
between savers and investors.
• Corporations, financial institutions,
individuals and governments trade in
financial products on this market either
directly or indirectly.
COMPONENTS OF FINANCIAL
MARKET
Financial Market

Money Capital/ Securities

Market Market

Secondary/ Stock
Market

Primary Market
 MONEY MARKET
• A market for dealing in monetary assets of short term
nature, less than one year.
• enables raising up of short term funds for meeting
temporary shortage of fund and obligations and
temporary deployment of excess fund.
• Major participant are: RBI and Commercial Banks
• Major objectives:
 equilibrium mechanism for evening out short term
surpluses and deficits
 focal point for influencing liquidity in economy
COMPONENTS OF MONEY MARKET
Money
Market
Call T-bills Bills CP CD Repo
Marke Marke Marke Marke Marke Marke
t t t t t
t
 CAPITAL MARKET

• A market for long term funds

• focus on financing of fixed investments
• main participants are mutual funds,
insurance organizations, foreign
institutional investors, corporate and
individuals.
• two segments: Primary market and
secondary market
 PRIMARY/ NEW ISSUE
• A market for new issues i.e. a market for fresh
capital.
• provides the channel for sale of new securities,
not previously available.
• provides opportunity to issuers of securities;
government as well as corporate.
• to raise resources to meet their requirements of
investment and/or discharge some obligation.
• does not have any organizational setup
• performs triple-service function: origination,
underwriting and distribution.
 SECONDARY/ STOCK MARKET
• A market for old/existing securities.
• a place where buyers and sellers of securities can enter
into transactions to purchase and sell shares, bonds,
debentures etc.
• enables corporate, entrepreneurs to raise resources for
their companies and business ventures through public
issues.
• has physical existence
• vital functions are:
 nexus between savings and investments
 liquidity to investors
 continuous price formation
Financial instruments : the commodities
that are traded in financial market are
financial assets/securities
Financial Instrumentsor instruments

Primary Indirect
Derivatives
Securities Securities
 Derivatives

Forward Indirect
Options
Contract Securities
 SUMMARY
Therefore, Indian Financial System accelerates the rate and
volume of savings through the provision of
various financial instruments and efficient mobilization of
savings. It aids in increasing the national output of the country
by providing funds to corporate customers to expand their
respective business.

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 APPLICATIONS

• FINANCIAL MARKET

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 REFERENCES
• L.M. Bhole, Financial Institutions and Markets, Tata McGraw-
Hill Publishing Company Limited, New Delhi, 4th Edition, 2007.
www.sebi.gov.in

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THANK YOU