Introduction to Financial System

Chandrika Marisetty, 72Priyanka Jindal, 73

Subtopics1. Introduction2. Evolution3. Objectives4. Components5. Advantages 6. Disadvantages

The system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level.

Financial System

Evolution of Financial System• Barter• Money Lender • Chit Funds

• Indigenous Banking• Cooperative Societies

• Banks• Joint Stock Banks• Stock Exchanges• Investment Banks

Objectives• Financial System: System that allows the transfer of

money between savers (and investors) and borrowers.• To help in the formation of capital.• To meet the short term and long term capital needs of

households, corporate houses, Govt. and foreigners.• To mobilize the savings and invest them in the

productive manner.

Components of Financial System

Indian Financial System

Formal (organized Financial system)

Regulators;MoF, SEBI, RBI, IRDA

Financial Institutions

(Intermediaries)

Financial Markets

FinancialInstrument

Financial Services

Informal(Unorganized

financial system)

Money lenders,Local bankers,

Traders

Financial Institutions

• Channeling funds from and to particular firms, industries, sectors, during the development process.

• To reduce financial constraints faced by companies.

• Converting themselves into universal banks. E.g.: ICICI bank ,Muthoot (NBFS), HDFC life(Insurance)

Financial Markets• The market in which financial assets are created

and/or transferred.

• Funds or savings are transferred from surplus unit to deficit unit.

• Players like dealers, investors, borrowers, depositors, etc. are plays a vital role in driving demand and supply.

• Financial markets help Individuals to get the benefits of time preference, liquidity preference and portfolio management.

A. Capital Market• Market for securities (debt or equity), where

business enterprises and governments can raise long-term funds.

• It is defined as a market in which money is provided for periods longer than a Year.

B. Money Market • It’s a wholesale debt market for low risk, highly

liquid, short term instrument. Period ranges from a day up to a year.

• This market is dominated mostly by government, banks and financial institutions.

C. Credit Market• It is a place where banks, Fis and NBFCs purvey

short, medium and long term loans to corporate and individuals

Financial Regulators• Main Objective:a. To ensure investor protection from

fraudb. To enable flow of relevant and reliable

information• Securities and Exchange Board of

India (regulates stock markets)• Reserve Bank of India(regulates money

market)• Ministry of Finance( Ex: Post office)

Financial Products• Intangible in nature• Claims on the issuers• Financial contract between issuer & investor

Money Market Instruments (short term and highly liquid) T- Bills, CoD Exchange Market Instruments Forward, future, swapCapital Market Instruments(long term) Equity shares, Preference sharesCommodity Market Instruments Gold, Silver

Financial ServicesServices provided to consumers and Businesses by financial institutions• Banking Services• Insurance Services• Stock Broking• Consumer Finance• Mutual Fund Services

Advantages of Financial System

• 1.Pooling of funds.• 2.Capital formation.• 3.Facilitates payments.• 4.Provides liquidity.• 5.Short & long term needs.• 6.Risk functions.• 7.Better decisions.• 8.Finances Government needs.• 9.Economic development.

Disadvantages

1. Lack of complete transparency2. Variety of manipulative practices3. Institutional deficiencies4. Insider trading

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