1-indian financial system

8/3/2019 1-Indian Financial System

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INDIAN FINANCIAL SYSTEMINDIAN FINANCIAL SYSTEM

PresentedPresented byby

Dr.S.C.BihariDr.S.C.Bihari


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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.


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The basic requirements for any

efficient financial system are:

1. Efficient monetary

system;

2. Facilities for creation of

capital; and

3. Efficient financial

markets.


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An efficient monetary

system

Indicates an efficient medium of exchange for

goods and services.

It is the unit of Measurement in the economy.

The system should have the facilities:The system should have the facilities:

To create capital to meet the demands of theeconomy---

By mobilizing the savings of the surplus units to

the demanding units.


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Structure of a Financial

System

Financial

ServicesFinancial

Markets

Financial

InstrumentsFinancial

Intermediaries

Organized Unorganized

Primary /

Secondary

Primary /

Secondary

Capital

Markets

Money

Markets

Primary /

Secondary

Short

Term

Medium

Term

Long

Term

Regulat

oryNon-Inter

mediariesOthers

BANKING

NON-

BANKING

Intermediaries


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Financial Services

Leasing

Stock

Holding

Refinancing

DiscountingRediscounting

Factoring

Merchant

Banking

Hire

Purchase

FinancialPerformance

Guarantees

Creditfunctions

AcceptanceOf Deposits

Financial

Services


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Financial Instruments

Enable movement of funds from surplusunits to deficit units

There are instruments for savers such asdeposits, equities, mutual fund units, etc.

There are instruments for borrowers suchas loans, overdrafts, etc.

Like businesses, governments too raisefunds through issuing of bonds, Treasury

bills, etc. Instruments like PPF, KVP, etc. are

available to savers who wish to park moneywith safe government avenues.


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Financial Instruments contdFinancial Instruments contd.Financial Instruments contdFinancial Instruments contd.

KVPs

Relief

Bonds

National

Savings

Certificate

Debt Equity

Swaps

Deposits

With

Companies

Capital

Gains Bonds

Preference

Shares

EquityShares

Financial

Instruments


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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 moneymarket 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 Repo


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Commercial Papers

Short-term borrowings by corporates, financialinstitutions, primary dealers from the moneymarket

Can be issued in the physical form (UsancePromissory Note) or demat form

Introduced in 1990 When issued in physical form are negotiable by

endorsement and delivery and hence, highlyflexible

Issued subject to minimum of Rs. 5 lacs and in themultiple of Rs. 5 lacs after that

Maturity is 7 days to 1 year

Unsecured and backed by credit rating of theissuing company


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Market Repos

Repo (repurchase agreement) instruments

enable collateralised short-term borrowingthrough the selling of debt instruments

A security is sold with an agreement torepurchase it at a pre-determined date and

rate Reverse repo is a mirror image of repo and

reflects the acquisition of a security with asimultaneous commitment to resell

These are transactions, other than thoserouted through Reserve Bank


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Capital Market

Market for long-term capital. Demandcomes 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 anddebentures of old and new companies

New Issues Market- also known as theprimary market- refers to raising of

new capital in the form of shares anddebentures

Stock Market- also known as the

secondary market deals withsecurities already issued bycompanies


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Types of Financial Intermediaries

Depository institutions and

Non-depository institutions.

DEPOSITORY INSTITUTIONS 1. Commercial Banks.

2. Saving and Loans

Institutions.

3. Credit Unions.

1. Finance Companies.

2. Mutual Funds. 3. Security Firms, Investment

Bankers, Brokers, and Dealers.

4. Pension Funds.

5. Insurance Companies.


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Depository institutions

provideFunds to serve the

interests of the society

Safeguard their monies and

Act as an important sourcefor the investment community.


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FINANCE COMPANIES

CONSUMERCONSUMER

SALESSALES

The consumer finance

companies (for example, GECountrywide) provide financeto individuals for purchase ofconsumer goods.

Sales finance companies

make direct loans to consumers-

by purchasing installment paperfrom dealers selling automobiles

and other consumer durables.

Sales finance companies

make direct loans to consumers-

by purchasing installment paperfrom dealers selling automobiles

and other consumer durables.


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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


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Non-life insurance do

Automobile insuranceFire insurance,

Home insurance,

Engineering insurance

Liability Insurance etc.

INSURANCE COMPANIES There are two types of insurance companies

life insurance companies, and Non-lifeinsurance companies.

The principal business of life insurance

companies is to insure the policyholder

against death


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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 ofgovernments, government agencies

and companies.


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LEASING COMPANIES

Leasing :Provides accessto productive assets.

A lessor :Gives assets on lease

: Gets regular inflow of lease rentals.

A lessee: Gets the asset at a lowercost without borrowing or owning it.


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MORTGAGE BANKS

Mortgage bankers :Fund the

construction of homes, offices,

buildings and other structures.

They sell their assets

to a long-term lendersuch as an insurance company

to get back liquidity


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PENSION FUNDS

Dedicated to protectingindividuals and families

against loss of income

Allow investors to investa portion of their current income

as pension funds.

Importance of pension funds :Due to increased life expectancy


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Types of Financial Institutions


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Financial System and Economic

Development Linkage


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nanc a ec or -

Regulators

Regulators

Reserve Bank ofIndia

(RBI)

Securities ExchangeBoard of India

(SEBI)

Insurance Regulatoand Development

Authority

(IRDA)

BanksCapital Markets/

Mutual Funds

Insurance

Companies


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A Glimpse of Indian Financial System

Regulatory

Bodies

Financial

Intermediaries

Developme

nt

Institutions

Financial

Services

Financial

Instruments

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

IRDA Societies SIDBI SolvenciesGovernmentSecurities

DICGCPost Office SavingsBanks TFCI Acceptances KVP

ECGC PF Organization Bill Discounting NSS

SHCI Pension Funds Merchant Banking NSC

FMCSmall savingsorganizations Factoring Bank Deposits

LIC of India Credit ratingDeposit withCompanies

GIC Credit information

UTIEconomicconsultancy

Mutual Funds Stock holding

Investment Trusts Refinancing

Underwriting

Leasing


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Thanks for your

attentionDr. S. C. Bihari

Tell:08417-236660 to 65(Extn: 6214) Mail:[email protected]

1-indian financial system

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