INDIAN FINANCIAL SYSTEM

WHAT IS A FINANCIAL
SYSTEM
• Financial system: An integral part of
modern economy.
• The financial system of a country : A set of
• Organizations,
• Instruments,
• Markets,
• Services and
• Methods of operations, procedures -
• Closely interrelated with each other.
 Indian Financial System

Financial Financial Financial Financial

Markets Instruments Intermediaries
Services
Primary /
Organized Unorganized Secondary
Regulat Intermediar Non-Inter
Primary / Others
Primary / ory i es
Secondar
mediaries
Secondar y
y Short

Capital Term
Medium BANKING
Markets Term

Money
Markets Long NON-
BANKING
Ter
m
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 Financial Services

Acceptance
Of
Deposits Credit
Leasing functions

Financial
Stock
Performanc
Holding e
Guarantees
Financial

Services
Hire
Refinancing
Purchase

Discounting Merchant
Rediscounting
Factoring Banking

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Financial Instruments
• Enable movement of 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, KVP, etc. are
available to savers who wish to park money
with safe government avenues.
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 Financial
Financial Instruments
Instruments contd
contd..

Equity

Shares
Preference
KVPs
Shares

Relief Financial Capital

Instruments Gains Bonds
Bonds

National Deposits
Savings With
Certificate Companies
Debt Equity
Swaps

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Financial Markets
• Money Market-
for short-term funds (less than a year)
• Organised (Banks)
• Unorganised (money lenders, chit funds,
etc.)

• Capital Market-
for long-term funds
• Primary Issues Market
• Stock Market
• Bond Market
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Organised Money Market

• Call money market

• Bill Market
• Treasury bills
• Commercial bills
• Bank loans (short-term)
• Organised money market
comprises RBI, banks (commercial
and co- operative)

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Money Market Instruments
• Money market instruments are
those which have maturity period of
less than one year.
• The most active part of the money
market is the market for overnight call
and term money between banks and
institutions and repo transactions
• Call money/ repo are very short-
term money market products
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Money Market Instruments contd…

• Certificates of Deposit
• Commercial Paper
• Inter-bank participation
certificates
• Inter-bank term money
• Treasury Bills
• Bill rediscounting
• Call/notice/term money
• Market
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Repo
Capital Market
• Market for long-term capital.
Demand comes from the industrial,
service sector and government
• Supply comes from individuals,
corporates, banks, financial
institutions, etc.
• Can be classified into:
• Gilt-edged market
• Securities market (new issues and stock
market)
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Securities Market
It refers to the market for shares and
debentures of old and new
companies
• New Issues Market- also known as the
primary market- refers to raising of
new capital in the form of shares and
debentures
• Stock Market- also known as the
secondary market deals with
securities already issued by
companies
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Types of Financial Intermediaries
• Depository institutions and
• Non-depository institutions.

DEPOSITORY INSTITUTIONS
 1. Commercial Banks. NON-
O SITO RY
 2. Saving DEP
and Loans ITU TIO NS
INST
Institutions.
 3. Credit
Unions.
 1
.

F
i
n
a
Depository institutions
provide
Funds to serve the
interests of the society

Safeguard their monies and

Act as an important source

for the investment community.
FINANCE COMPANIES
•The consumer finance
companies (for example, GE
Countrywide) provide finance
CONSUMER to individuals for purchase of
consumer goods.

••Sales financecompanies
Sales finance companies
make direct
make direct loans
loans to
to consumers-
consumers-
by purchasing
by purchasing installment
installment paper
paper
from dealers
from dealers selling selling
SALES automobiles and other
automobiles
consumer
and other durables.
consumer durables.
MUTUAL FUNDS
Portfolio of stocks, bonds,
and/or cash managed by
an investment company
on behalf of many investors.

•When an individual
invests in a mutual fund:
Becomes a part owner of
a large investment portfolio
INSURANCE COMPANIES
• There are two types of insurance companies
– life insurance companies, and Non-life
insurance companies.
• The principal business of life insurance
companies is to insure the policyholder
against death

Non-life insurance do
Automobile insurance
Fire insurance,
Home insurance,
Engineering insurance
Liability Insurance etc.
INVESTMENT BANKING

Assist companies in raising capital,

through a private placement or
public offering of company stock.

• They market large amounts

of new securities on behalf
of
governments, government agencies
and companies.
LEASING COMPANIES
Leasing :Provides access
to productive assets.

• A lessor :Gives assets on

lease
: Gets regular inflow of
lease rentals.

•A lessee: Gets the asset at a lower

cost without borrowing or owning
it.
MORTGAGE BANKS

•Mortgage bankers :Fund the

construction of homes, offices,
buildings and other
structures.

• They sell their assets

to a long-term lender
such as an insurance company
to get back liquidity
PENSION FUNDS
Dedicated to protecting
individuals and
families against loss
of income

Allow investors to invest

a portion of their current income
as pension funds.
•Importance of pension funds :
Due to increased life expectancy
Types of Financial Institutions
Financial Sector -
Regulators
Regulators

Reserve Bank of Securities Exchange

Insurance Regulator
and Development
India Board of
Authority
(RBI) India
(IRDA)
(SEBI)

Capital Markets/ Insurance

Banks
Mutual Funds Companies
 A Glimpse of Indian Financial System
Regulatory Financial Developme Financial Financial
Bodies Intermediaries nt Instruments
Institutions Services
Reserve Bank
of India Reserve Bank of India EXIM Bank Hire Purchase Equity Shares

as a regulator as a banker NABARD Deposit Insurance Preference shares

SEBI Commercial Bnaks SCICI Insurance Debentures
BIFR Cooperative banks and IDBI Guarantees Bonds
Government
IRDA Societies SIDBI Solvencies Securities
Post Office Savings
DICGC Banks TFCI Acceptances KVP
ECGC PF Organization Bill Discounting NSS
SHCI Pension Funds Merchant Banking NSC
Small savings
FMC Factoring Bank Deposits
organizations
Deposit with
LIC of India Credit rating Companies
GIC Credit information
Economic
UTI consultancy
Mutual Funds Stock holding
Investment Trusts Refinancing
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Leasing