Download - Unit 1 – Introduction to Financial System
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Introduction to Financial Systemand Financial Services.
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M eaning of Financial System:
It is the financial system that supplies the necessaryfinancial inputs for the production of goods and services
which in turn promote the well being and standard of
living of the people of the country.
Financial system is a broader term which brings under its
fold the financial markets (long term & short term)andthe financial institutions which support the system
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T he major assets traded in the financial system is to
mobilize the savings in the form of money and monetaryassets and invest them to productive ventures.
An efficient functioning of the financial system facilitates
the free flow of funds to more productive activities and
thus promotes investments.
T hus the financial system provided the intermediation between savers and investors and promotes faster
economic development.
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Functions of Financial System:
1. Provision of Liquidity.2. M obilization of Savings.
Financial Concepts:
Financial Assets
Financial Intermediaries
Financial M arkets
Financial rates and return
Financial instruments
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Financial Assets
A Financial asset is one which is used for production or
consumption or for future creation of assets.
T ypes of Financial assets
M arketable assets
Non marketable assets
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Financialassets
Financialassets
MarketableAssets
MarketableAssets
NonMarketableAssets
NonMarketableAssets
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MarketableAssets
Debentures
MF Units
GovtSecurities
Shares andBonds
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NonMarketableAssets
POCertificates
LICSchemes
PF
BankDeposits
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Financial intermediaries
Financial intermediaries includes all kinds of
organizations which intermediate and facilitate
financial transactions of both the Indivuals and
corporate customers.
It refers to all financial institutions and investing
institutions which facilitate financial transactions in
financial markets.
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Financial intermediaries in India
Organized Sector and Unorganized Sector
Organized Sector consists of Capital M arkets &
M oney M arkets intermediaries.
Capital M arket intermediaries consists of ----
Development banks, Insurance Cos, U T I, Govt (PF,
NSC), Exim Bank, NBFC (Leasing co, H.P Co,
Investment Co)
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Financial intermediaries in India
M oney M arket intermediaries are RBI, Commercial
banks, Co operative Banks, Post Office, Govt
(T reasury bills)
Unorganized Sector consists of M oney Lenders,
Indigenous bankers, Pawn Brokers, T raders and
Land lords
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Financial M arkets
Financial markets can be referred to as those centers
and arrangements which facilitate buying and selling
of financial assets, claims and services
Classification of Financial M arkets.
Financial markets are classified into Organized market
and Unorganized market
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Organized markets consists of Capital markets and
M oney markets.Capital market consists of Industrial securities
markets, Govt Securities markets and Long term
markets.
Industrial Securities markets consists of Primary
markets and Secondary M arkets. Long term marketconsists of T erm Loan market, M arket for M ortgage
and market for financial guarantees.
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Financial Risk and returns is guided by the risk
return trade off. Interest rate plays a important role
Financial Instruments
It refers to the documents that which represent financial
claims on assets.
It refers to a claim on to the repayment of a certain sum
at the end of a specified period together with interest
or dividend. Example --- Bill of exchange, Share,
debenture, government bond, treasury bill,etc,
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Features of Financial Instruments:
1. T hey are easily transferable.
2. T hey have a ready market
3.T
hey posses liquidity4. T hey can be used as a security for raising loans.
5. Some of them have tax savings.
6. T hey have specified maturity period.
7. T hey facilitate futures trading to cover risk (forex).
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History and Growth of Financial System in
India:
1. Nationalization of Financial institutions formation
of SBI, LIC and nationaliasation of commercial
banks.
2. Starting up of U T I
3. Establishment of development banks like IFCI,
ICICI, IDBI,SIDBI.
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4 Institution for Financing agriculture NABARD
5 Institution of Foreign trade (Exim Bank)
6 Institution for housing finance NHB
7 M utual Fund Industry.
8 Venture capital Institutions.
9 Credit Rating Agencies.
10 Legislative Support M R T P Act , New Economic
Policy, Negotiable instrument Act,Banking Regulation
Act andT
he Stamp Act
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W eaknesses of Indian Financial System:
1. Lack of Co-ordination between different Financial
institutions.
2. M onopolistic M arket Structure
3. Dominance of development Banks in Industrial
Financing
4. Inactive and erractic capital market
5. Imprudent Financial Practices
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M eaning of Financial Services:
In general all types of activities which are of financial
nature could be brought under the term financial
services.
Classification of Financial Services Industry.
1. Capital M arket intermediaries
2. M oney M arket intermediaries.
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Scope of Financial Services:
It is categorized into T raditional activities and M odern
activities.
T he traditional activities are Fund based and non fund
based activities.
Fund Based activities are.,
1. Underwriting activities
2. Dealing in secondary markets.
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3. Participating in money market instruments
4. Involving in equipment leasing, H.P , venture capitaland seed capital.
5. Dealing in forex markets.
Non fund based activities are,
1. M anaging the Capital issues.
2. M aking arrangements for private placements.
3. M aking arrangement of funds for project finance and
working capital requirements.
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M odern activities are,
1. Providing project advisory / consultancy.
2. Planning for M erger and Acquisition.
3. Guiding Corporates in capital restructuring.
4. M anaging portfolio of large PSU.
5. Assisting in establishing the right debt-equity mix.
6. Restructuring the sick companies.
7. Hedging of risk due to forex / interest rates variations
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Causes of Financial Innovation:
1. Low profitability.
2. Keen Competition
3. Economic liberalization4. Improved Communication technology.
5. Customer Service / delight.
6. Global impact
7. Investor awareness.
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New Financial Services and Products:
1. M erchant Banking.2. Loan Syndication3. Leasing4. M utual Funds5. Factoring6. Forfaiting7. Venture Capital8. Corporate advisory services.9. Securitization10. Forwards, Futures, Swaps, Options.
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Challenges facing financial sector:
1. Lack of Qualified personnel.
2. Lack of investor awareness.
3. Lack of transparency.4. Lack of specialization
5. Lack of recent data
6. Lack of efficient risk management system.
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