money & capital markets

8/8/2019 Money & Capital Markets

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oney ap a ar e soney ap a ar e sCh.1 Fin.Sys.In IndiaCh.1 Fin.Sys.In India

OutlineOutline Meaning of financial systemMeaning of financial system Its ComponentsIts Components Fin.Instn.Fin.Instn.Definition,Features,Classification.Definition,Features,Classification. Banking structure in IndiaBanking structure in India Financial Intermediaries Vs.Financial NonFinancial Intermediaries Vs.Financial Non--

intermediariesintermediaries Fin.marketsFin.markets------Definition,Features,classification.Definition,Features,classification.

Fin.InstrumentsFin.Instruments------Definition,CharacteristicsDefinition,Characteristics Equilibrium in Fin.Markts.Equilibrium in Fin.Markts. Functions & role of Financial systemFunctions & role of Financial system


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*** High Friends !*** High Friends !Welcome By Sunanda AsutiWelcome By Sunanda Asuti

FORFOR ENJOYABLEEXPERIENCE OFENJOYABLEEXPERIENCE OF

T

eachingT

eaching--LEARNINGLEARNING onon ------Money and Capital Markets***Money and Capital Markets***

Every TUESDAY 9.30amEvery TUESDAY 9.30am --12.45pm12.45pm


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Outline contd.Outline contd.

Different viewsDifferent views Different theoriesDifferent theories Financial system should it be regulated orFinancial system should it be regulated or

liberalised ?liberalised ? What is financial development ?How does itWhat is financial development ?How does it

contribute to economic development ?contribute to economic development ? Is financial development influenced by economicIs financial development influenced by economic

development ?development ? Indian Financial SystemIndian Financial System------Historical PerspectiveHistorical Perspective

a)On the eve of planninga)On the eve of planning b)Post 1950b)Post 1950 c)In the light of reforms (1991c)In the light of reforms (1991--1997)1997)


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Meaning of Fin.systemMeaning of Fin.system

Afinancial system is a set of complex &Afinancial system is a set of complex &closely related institutions , agents,closely related institutions , agents,

practices,markets, transactions,claimspractices,markets, transactions,claims&liabilities in the monetary economy.&liabilities in the monetary economy.

Money, credit , finance are closely relatedMoney, credit , finance are closely relatedbut different terms.but different terms.

Money is currency or medium of exchangeMoney is currency or medium of exchange;Credit is debts or loans;Finance is monetary;Credit is debts or loans;Finance is monetaryresources.resources.


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Components of FinancialComponents of FinancialSystemSystem:Refer flow chart 1:Refer flow chart 1 There are 4 componentsThere are 4 components------

1) Financial institutions1) Financial institutions 2)Financial Markets2)Financial Markets

3)Financial Instruments3)Financial Instruments

4)Financial services4)Financial services


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nanc a ns u onsnanc a ns u ons--Definition,Features &Definition,Features &

ClassificationClassification--Refer flowRefer flowchartchart --22 It is an organisationwhich mobilises,accepts savingsIt is an organisationwhich mobilises,accepts savings

&purveys finance.&purveys finance. It differs from nonIt differs from non--financial intermediaries.Formerfinancial intermediaries.Former

deals in financial assets;later in real .deals in financial assets;later in real . Fin .instns.may be generalised or specialised.Fin .instns.may be generalised or specialised. These are classified as a)banking &nonThese are classified as a)banking &non--banking;banking;

b) intermediaries &nonb) intermediaries &non--intermediaries.intermediaries. Banks are creators of credit ;nonBanks are creators of credit ;non-- banks lend onlybanks lend only

out of resourcesput forth by creators.out of resourcesput forth by creators. As per ICRA,PSBs hold 75% of fin assets,pvt.sectorAs per ICRA,PSBs hold 75% of fin assets,pvt.sector

banks hold 18.2% of assets & residual 6,8% assetsbanks hold 18.2% of assets & residual 6,8% assetsare held by foreign banks.are held by foreign banks.


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Intermediaries &nonIntermediaries &non--intermediariesintermediaries

INTERMEDIARIES :necessarily link theINTERMEDIARIES :necessarily link thesavers &investors;borrowers &lenderssavers &investors;borrowers &lenders

NonNon--intermediaries indulge in lendingintermediaries indulge in lendingbut do not raise funds from savers.but do not raise funds from savers.

eg. of former:banks,NBFIs such aseg. of former:banks,NBFIs such as

LIC,GIC UTI etc.LIC,GIC UTI etc.

eg .of later:IDBI,NABARD etc.eg .of later:IDBI,NABARD etc.


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The fin.mkt.The fin.mkt.------Meaning,Features &typesMeaning,Features &types

The fin .mkt .facilitates or arranges settlement ofThe fin .mkt .facilitates or arranges settlement offinancial claims.The trade is through dealersfinancial claims.The trade is through dealers,brokers or direct.,brokers or direct.

Participants in market are :Fin. Instns. AgentsParticipants in market are :Fin. Instns. Agents,brokers,dealers,borrowers,lenders,savers etc.,brokers,dealers,borrowers,lenders,savers etc.

Types:1)primary or direct and secondary or indirect.Types:1)primary or direct and secondary or indirect.2)money mkt. and capital mkt.2)money mkt. and capital mkt.Other classifications:* 1 organised/ unorganisedOther classifications:* 1 organised/ unorganised

*2 formal/informal ;*3 official/unofficial;*4*2 formal/informal ;*3 official/unofficial;*4domestic/foreign.domestic/foreign.


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Financial instrumentsFinancial instruments:Definition,Features:Definition,Features

It is a claim to payment of sum in future.It is a claim to payment of sum in future.

The more varied,diversified the instru.areThe more varied,diversified the instru.are

the more developed the system is.the more developed the system is.

Investment features vary:these are:Investment features vary:these are:

1.liquidity,2.marketability,3.transferability,4.1.liquidity,2.marketability,3.transferability,4.transaction costs,5.risk of default,6.taxtransaction costs,5.risk of default,6.taxstatus ,7.options &volatility of prices;status ,7.options &volatility of prices;


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Equilibrium in fin.mktEquilibrium in fin.mktDefinitionDefinition--Refer Dia.1Refer Dia.1

As in other markets, here too demandAs in other markets, here too demandsupply & price are imp.supply & price are imp.

EQUI.is said to be established whenEQUI.is said to be established whenexpected Dd for funds matches withexpected Dd for funds matches withplanned Ss.planned Ss.

Saving is + Function;Investment isSaving is + Function;Investment is Function.Function.

Shift in either causes disequilibrium.Shift in either causes disequilibrium.


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Functions and role of fin.sys.Functions and role of fin.sys.FunctionsFunctions--

Separates,distributes,trades,hedges,diversifiSeparates,distributes,trades,hedges,diversifies,pools & reduces riskes,pools & reduces risk

allocates resources.allocates resources. monitors control on corporates.monitors control on corporates.

facilitates exchangefacilitates exchange

enables eco. Units to exercise their timeenables eco. Units to exercise their time

preference.preference. enhances liquidity.enhances liquidity.

facilitates better portfolio mment.facilitates better portfolio mment.


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eren v ews: v ewseren v ews: v ews--1.fin.is not imp. At all.1.fin.is not imp. At all.

2.fin.is very imp.2.fin.is very imp. 3.cautious view3.cautious view Advanced fin. Sys.contributes eco.growthAdvanced fin. Sys.contributes eco.growth

through3

routes.through3

routes. a) higher saving & investment enablinga) higher saving & investment enabling

technical progress.technical progress. b) enhancing capital formaton by makingb) enhancing capital formaton by making

available fin.at right time , qty.and onavailable fin.at right time , qty.and on

favourable terms.favourable terms. c) making currency efficient by wideningc) making currency efficient by widening

and deepening of mkts.and deepening of mkts.


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TheoriesTheories33

Prior savings theoryPrior savings theory

Credit creation theoryCredit creation theory

Theory of forced savings.Theory of forced savings.

Should Fin.Sys.be regulated orShould Fin.Sys.be regulated orliberalised ?liberalised ?

Two ApproachesTwo Approaches--Stiglitzs regulationStiglitzs regulationapproach and McKinnon &Shawsapproach and McKinnon &Shawsliberalisation approachliberalisation approach


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How does it contribute eco.How does it contribute eco.Devpt ? ( Refer concernedDevpt ? ( Refer concernedpage & flow chart)page & flow chart) FR ,FIR , NIR &IR are imp. 4 indicators of financialFR ,FIR , NIR &IR are imp. 4 indicators of financial

development.development. More the ratio of money to income , larger the size ofMore the ratio of money to income , larger the size of

exchange economy.exchange economy. Full integration of domestic & international sectors.Full integration of domestic & international sectors. In a developed fin.sys.there is a strong and effective methodIn a developed fin.sys.there is a strong and effective method

of supervision,inspection auditing and regulation .of supervision,inspection auditing and regulation . In developed fin. Sys. Transaction &financial costs are low.In developed fin. Sys. Transaction &financial costs are low. A developed fin.Structure is characterised by presence ofA developed fin.Structure is characterised by presence of

strong ,active,large NBF sector comprising stock mkt , debtstrong ,active,large NBF sector comprising stock mkt , debtmkt,mkt,


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ContinuedContinued--------

The greater the fin.devpt.more the openness ofThe greater the fin.devpt.more the openness ofeco. reflected by full convertibility on capital &eco. reflected by full convertibility on capital &current A/c of BOP.current A/c of BOP.

FS enables the eco.to reach targeted level of PPF.FS enables the eco.to reach targeted level of PPF.It promotes interest of both savers &investors.It promotes interest of both savers &investors. FIs promote devpt by offering 4 kinds ofFIs promote devpt by offering 4 kinds of

Transformation services.Transformation services. LiabilityLiability-- Asset tranformationAsset tranformation

SizeSize ----dodo RiskRisk ----dodo MaturityMaturity ----dodo----..


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Is fin.devpt. Influenced byIs fin.devpt. Influenced byeco.devpt.?eco.devpt.?3 Approaches.3 Approaches.

1.Passive or Dd .following fin.devpt.1.Passive or Dd .following fin.devpt.

2.Ss. Leading fin.devpt.2.Ss. Leading fin.devpt.

3. Causality bet.the two does not remain in all3. Causality bet.the two does not remain in allstages of eco. Devpt, rather the relationship isstages of eco. Devpt, rather the relationship is

mutually reinforcing.mutually reinforcing.

While FS.accelerates eco. growth ;it itself growsWhile FS.accelerates eco. growth ;it itself growswith eco. Advancement.with eco. Advancement.

MM IS ALWAYS HQ of capitalist systemMM IS ALWAYS HQ of capitalist system saidsaidSchumpeter.Devpt creates &nourishes this mkt. AsSchumpeter.Devpt creates &nourishes this mkt. Asit continues to grow it becomes mkt for sources ofit continues to grow it becomes mkt for sources ofincome.income.


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on e eve o ann ngon e eve o ann ng

(Refer page 3.11(Refer page 3.11--3.12 ) The3.12 ) Themain featuresmain features---- The industrial entrepreneurship wasThe industrial entrepreneurship was

closedclosed--circle in character;industrialcircle in character;industrial

securities mkt. was semisecurities mkt. was semi--organisedorganised&narrow devoid of issuing&narrow devoid of issuinginstns.;virtual absence of participationinstns.;virtual absence of participation

by intermediary fin. Instns.in the longby intermediary fin. Instns.in the longterm fin.of industry. Such a systemterm fin.of industry. Such a systemwas not responsive to opportunities.was not responsive to opportunities.


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IFS in postIFS in post--19511951------

(Refer Pages4.42 to 4.44 )(Refer Pages4.42 to 4.44 ) It was in response to the imperatives of planned eco. Devpt.It was in response to the imperatives of planned eco. Devpt. Public/Govt.ownership of FIs; fortification of institutionalPublic/Govt.ownership of FIs; fortification of institutional

structure; protection to investors &participation of FIs instructure; protection to investors &participation of FIs incorporate mment.corporate mment.

SBI,LIC & GIC WERE NATIONALISED;SBI,LIC & GIC WERE NATIONALISED; 14 commercial banks were nationalised in 1969 & anther 6 in14 commercial banks were nationalised in 1969 & anther 6 in

1980.1980. DBs or special purpose instns.were createdDBs or special purpose instns.were created eg.UTI.; banks were encouraged to lend to priority sectors.eg.UTI.; banks were encouraged to lend to priority sectors.

extensive legal reforms were carried to protect interest ofextensive legal reforms were carried to protect interest ofinvestors.investors.


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n posn pos Decline in role of Govt.inDecline in role of Govt.in

eco .mmenteco .mmentRefer Pages 5.13Refer Pages 5.13--5.145.14 Capital mkt. emerged as main agency for allocationCapital mkt. emerged as main agency for allocation

of resources.of resources. major transformations in FS are: privatisation ofmajor transformations in FS are: privatisation of

FIs;FIs; reorganisation of institutional structure &reorganisation of institutional structure &

introduction of investor protection framework.introduction of investor protection framework. Liquidation of most DBs ;conversion of ICICI &Liquidation of most DBs ;conversion of ICICI &

IDBI into banks.IDBI into banks.

NCRNCR--1 Reforms tried to arrest qualitative1 Reforms tried to arrest qualitativedeterioration in functioning of bankingdeterioration in functioning of banking NCRNCR--2 Reforms helped make banking system2 Reforms helped make banking system

internationally competitive.internationally competitive.


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ContinuedContinued------

With privatisation of InsuranceWith privatisation of Insurancesector,monopoly of public sectorsector,monopoly of public sector

vanished.vanished. MFs have become most preferredMFs have become most preferred

route of investment for smallroute of investment for smallinvestors.investors.

A sophisticated & articulate MM hasA sophisticated & articulate MM hasnow emerged.now emerged.


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References:References:

Indian Financial System By M.Y. KhanIndian Financial System By M.Y. Khan

Financial Markets And Institution By Dr. SFinancial Markets And Institution By Dr. S

.Guruswamy.Guruswamy Financial Institutions & Markets by L. M.Financial Institutions & Markets by L. M.

BholeBhole

R.B.I. Annual ReportR.B.I. Annual Report--2005,2006.2005,2006.

Economic Survey ;GOI;2003Economic Survey ;GOI;2003--0404 ****Thanks.********Thanks.****

QuestionsQuestions If Any ? Go Ahead!!!!If Any ? Go Ahead!!!!


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