Indian finanancial system unit one notes for bba students

Indian financial system ppt

1. Indian Financial System Unit -1 Introduction to Indian Financial Systems Prof Viraja R Kanawally Visiting Faculty of Law.

2. Chapter Overview Indian financial system Introduction to Financial system - meaning, definition Financial system . R ole and functions of a financial system, . Organized and unorganized financial system. Components: a) Financial Assets, b) Financial Intermediaries c) Financial Markets (money and capital markets in India) . Relevance of various interest/return rates, . Regulatory framework . Financial Instruments.

3. Learning Objective Indian financial system Understand the  key terms, definitions, and concepts of FINANCIAL management. Session 1

4. Introduction iNDIAN FINANCIAL system SYSTEM: A system is a set of interrelated parts working together to acheive soe purpose. Financial System is a mechanism that works for investors and people who want finance. Introduction of Financial system: Financial system is a mechanism that works for investors and people who want finance. It is an interaction of various intermediaries, market instruments, policy makers, and various regulations to aid the flow of savings from savers to investors and managing the proper functioning of the system.

5. Importance of financial system The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments. It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties. The financial system of a country is concerned with: Allocation and Mobilization of savings Provision of funds Facilitating the Financial Transactions Developing financial markets Provision of legal financial framework Provision of financial and advisory services

6. Definition of Financial system: A ccording to Robinson, the primary function of a financial system is “to provide a link between savings and investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth”

7. Features of financial system: A Financial System consists of various financial Institutions, Financial Markets, Financial Transactions, rules and regulations, liabilities and claims etc. Features of Financial System: It plays a vital role in economic development of a country It encourages both savings and investment It links savers and investors It helps in capital formation It helps in allocation of risk It facilitates expansion of financial markets It aids in Financial Deepening and Broadening

8. Structure of Indian Financial System/Components of Indian Financial System:

9. (1) Financial Institutions Financial institutions are intermediaries of financial markets which facilitate financial transactions between individuals and financial customers. There can be two types of financial institutions: • Banking Institutions or Depository institutions • Non- Banking Institutions or Non-Depository institutions Financial Institutions may be classified into three categories: • Regulatory • Intermediaries • Non – Intermediaries

10. (2) Financial Markets  It refers to any marketplace where buyers and sellers participate in trading of assets such as shares, bonds, currencies and other financial instruments. (3) Financial Assets/Instruments Financial assets include cash deposits, checks, loans, accounts receivable, letter of credit, bank notes and all other financial instruments that provide a claim against a person/financial institution to pay either a specific amount on a certain future date or to pay the principal amount along with interest.

11. (4) Financial Services Financial Services are concerned with the design and delivery of financial instruments and advisory services to individuals and businesses within the area of banking and related institutions, personal financial planning, leasing, investment, assets, insurance etc.

12. Functions of Indian Financial System  It bridges the gap between savings and investment through efficient mobilization and allocation of surplus funds  It helps a business in capital formation  It helps in minimising risk and allocating risk efficiently  It helps a business to liquidate tied up funds  It facilitates financial transactions through provision of various financial instruments  It facilitate trading of financial assets/instruments by developing and regulating financial markets

13. Importance of Indian Financial System Importance of Indian Financial System:  It accelerates the rate and volume of savings through provision of various financial instruments and efficient mobilization of savings  It aids in increasing the national output of the country by providing funds to corporate customers to expand their respective business  It protects the interests of investors and ensures smooth financial transactions throughregulatory bodies such as RBI, SEBI etc.  It helps economic development and raising the standard of living of people  It helps to promote the development of weaker section of the society through rural development banks and co-operative societies  It helps corporate customers to make better financial decisions by providing effective financial as well as advisory services  It aids in Financial Deepening and Broadening: Financial Deepening – It refers to the increase in financial assets as a percentage of GDP Financial Broadening – It refers to increasing number of participants in the financial system.

14. Financial Intermediaries/Intermediaries  Commercial Banks  Cooperative Banks  Regional Rural Banks  Development Banks  Non-banking Financial Companies  Mutual Fund companies  Insurance Companies

15. Definition: The interest rate is the cost of borrowing money or the reward for saving money, expressed as a percentage of the principal amount. It’s typically set by financial institutions (like banks) or central banks. Types:  Nominal Interest Rate: The stated rate without adjustment for inflation.  Real Interest Rate: The nominal rate adjusted for inflation, reflecting the true cost of borrowing or the true return on savings. Fixed Interest Rate: Remains constant over the life of the loan or investment.  Variable Interest Rate: Can fluctuate based on market conditions or benchmarks. Interest Rate

16. Importance of Interest rate in IFS 1. Cost of Borrowing: Determines how expensive or cheap it is to borrow money. Lower rates encourage borrowing and spending, while higher rates can discourage them. 2. Savings and Investment: Influences the return on savings accounts and fixed-income investments. Higher rates lead to better returns for savers and investors in bonds. 3. Monetary Policy: Central banks use interest rates to control inflation and stabilize the economy. Lowering rates can stimulate economic growth, while raising rates can help control inflation. 4. Economic Activity: Affects consumer and business behavior. Lower rates can spur investment and consumer spending, while higher rates can slow down these activities.

17. Return Rate Definition: The return rate is the gain or loss on an investment over a specific period, expressed as a percentage of the initial investment. It encompasses both income (like dividends or interest) and capital gains or losses. Types: 1) Absolute Return: The total return, including interest, dividends, and capital gains, without reference to the investment's original value. 2) Relative Return: The return compared to a benchmark or index.  3) Annualized Return: The average return per year over a specified period, adjusted to reflect the compounding effect.

18. Importance in Financial Markets: 1. Investment Performance: Measures how well an investment is performing. High return rates attract investors, while low return rates may deter investment. 2. Risk Assessment: Higher potential returns are often associated with higher risk. Investors assess return rates to balance their risk tolerance with potential gains. 3. Investment Decisions: Guides investors in choosing among different assets (stocks, bonds, real estate) based on their return expectations. 4. Portfolio Management: Helps in evaluating the effectiveness of investment strategies and in making adjustments to optimize overall

19. Regulatory framework Financial Regulators In India : The market regulator in the Indian capital market is the Securities and Exchange Board of India (SEBI). The Insurance Regulatory and Development Authority (IRDA) does the same for the insurance sector. Reserve Bank of India (RBI) conducts the country’s monetary policy. Pension Funds Regulatory and Development Authority (PFRDA) regulates pensions. Ministry of Corporate Affairs (MCA) regulates the corporate sector. We will look at the role of these financial regulators in detail and some bodies that ar

20. RBI - Reserve Bank of India: The RBI’s primary responsibility is to ensure price stability in the economy and control credit flow in the various sectors of the economy. Commercial banks and the non-banking financial sector are most affected by the RBI’s pronouncements since they are at the forefront of lending credit. The RBI is the money market and the banking regulator in India. Its functions include: Printing and circulating currency throughout the country Maintaining banking sector reserves by setting reserve ratios Inspecting bank financial statements to keep an eye on any stresses in the financial sector Regulating payments and settlements as well as their infrastructure Instrumental in deciding interest rates and maintaining inflation rates in the country Managing the country’s foreign exchange (FX) reserves Regulating and controlling interest rates, which affects money market liquidity

21. SEBI Established in 1992, SEBI was a response to increasing malpractices in the capital markets that eroded investors’ confidence in the market back then. As a statutory body, its functions include protective as well as regulatory ones. Protection: To protect investors and other participants by preventing insider trading, price rigging, and other malfeasances Regulation: To implement codes of conduct and guidelines for the various market participants; auditing various exchanges, registering brokers, and investment bankers; deciding on the various fees and fines SEBI has the power to supervise the stock exchanges’ functioning : It regulates the business of exchanges. It has complete access to the exchanges’ financial records and the companies listed on the exchange. It oversees the listing and delisting process of companies from any exchange in the country. It can take disciplinary action, including fines and penalties against malpractices. It also promotes investor education. It undertakes inspections, and conducts audits and inquiries when it spots any wrongdoing.

22. IRDA Set up in 1999, the IRDA regulates the insurance industry and protects the interests of insurance policyholders. Since the insurance sector is a constantly changing scene, IRDA advisories are critical for insurance companies to keep up with changes in rules and regulations. The IRDA has strict control over insurance rates, beyond which no insurer can go. The IRDA specifies the qualifications and training required for insurance agents and other intermediaries, which then have to be followed by the insurer. It can levy fees and modify them as well, as per the IRDA Act. It regulates and controls premium rates and terms and conditions that insurers are allowed to provide. Any benefit provided by an insurer has to be ratified by the IRDA. This regulator also provides the critical function of grievance redressal in an industry where claims can be disputed endlessly.

23. PFRDA The PFRDA was set up in 2013 as the sole regulator of India’s pension sector. Its services extend to all citizens, including non-resident Indians (NRIs). Its main objective is to ensure income security for senior citizens. To this end, it regulates pension funds and protects pension scheme subscribers. PFRDA regulates the pension schemes: NPS and Atal Pension Yojana. PFRDA Act is applicable to these schemes. The PFRDA scope includes: Setting up guidelines for investing in pension funds Settling disputes between intermediaries and pension fund subscribers Increasing awareness about retirement and pension schemes Investigating intermediaries and other participants for malpractice

24. Ministry of Corporate Affairs (MCA) The MCA concerns itself with administering the Companies Act and its various iterations. It sets up the rules and regulations for the lawful functioning of the corporate sector. Apart from the Companies Act, MCA also administered the Limited Liability Partnership Act 2008. It oversees all Acts and rules that regulate the functioning of the corporate sector in India. Its objective is to help the growth of companies. The MCA’s Registrar of Companies authorizes company registrations as well as their functioning as per law.

25. Financial Instrument - Meaning, Types and Importance A financial instrument is an agreement between two parties with monetary value. In other words, any asset that holds capital and which can be traded is a financial instrument. It is noteworthy that financial instruments can be palpable or virtual documents representing a legal agreement of any monetary value. Some examples of financial instruments include life insurance policies, shares, bonds, stocks, SIPs, etc. Now, let us understand more about the different types of financial instruments that are popular in India.

26. 1. Life Insurance Policies 2. Small Savings Schemes 3. Fixed Deposits (FDs) 4. Certificate of Deposits (CDs) 5. Equity Stocks 6. Bonds Examples of financial Insturments

27. 1. Life Insurance Policies These are financial instruments offering you protection against different types of financial risks, such as – sudden death and old age. As the untimely demise of a breadwinner places the family members in economic instability, life insurance plans become critical. Secondly, they are also helpful during retirement, as the income-generating ability of individuals recede. Few popular life insurance plans include: a) Term Life Insurance: Acts as long-term financial protection for family b) Savings Plans: Safe long-term investments with guaranteed returns. c) Pension Plans or Annuities: Helps you turn your retirement corpus into a reliable and lifetime income. d) ULIPs (Unit-linked Investment Plans): ULIPs are insurance instruments with investment benefits. In other words, ULIPs allow you to build wealth over time and protect your loved ones and yourself.

28. 2. Small Savings Schemes Small Savings Schemes aim to encourage citizens to save regularly as they are generally government-backed. They are popular as they come with a sovereign guarantee of returns and tax benefits. Few saving schemes that you can consider are listed below: a) Post office recurring deposits b) Public Provident Fund (PPF) c) Kisan Vikas Patra d) National Savings Certificate (NSC)

29. 3. Fixed Deposits (FDs) They entail cash investments in banks or post-office and are highly popular. FDs come with a zero risk factor, and you are guaranteed returns. However, the annual returns on FDs can range from 6 to 9 per cent. 4. Certificate of Deposits (CDs) A certificate of deposits is a negotiable money market instrument issued in dematerialized form and used as a promissory note for funds deposited at a bank for a stipulated period. a) Financial institutions to raise large sums of money issue CDs. b) They are available in denominations of INR 1 lakh and multiples.

30. Financial instruments 5. Equity Stocks It is a type of security that represents the ownership of a company and is traded in stock markets. a) It represents the money you can return to shareholders of a company if all the assets are liquidated and the entire company debt is paid off. b) Equity is one of the most typical financial indicators investors use to determine a company's health. 6. Bonds They are fixed-income instruments you can issue to raise working capital. Private entities and government ventures, including the central and state governments, issue bonds to raise funds Bonds that the government issues have a lower risk rate but ensure returns; on the other hand, bonds raised by private entities have high risks.

31. T HANK YOU VIRAJA K ANAWALLY Faculty of Law