Indian financial system

Indian financial system

1. INDIAN FINANCIAL SYSTEM PREPARED BY: -VANSHIKA AGRAWAL -SHIKHA AGRAWAL -PRACHI DUA -PRIYANKA SHARMA -PRINCE GUPTA GROUP 1,BBA 5 TH SEM

2. FINANCIAL SYSTEM An institutional framework existing in a country to enable financial transactions Three main parts -Financial assets (loans, deposits, bonds, equities, etc.) - Financial institutions (banks, mutual funds, insurance companies, etc.) -Financial markets (money market, capital market, forex market, etc.) Regulation is another aspect of the financial system (RBI, SEBI, IRDA,)

3. FUNCTIONS OF FINANCIAL SYSTEM The financial system transfer resources across time, sectors, and regions. The financial system manages risks for the economy-(Fire Insurance) The financial system pools and subdivides funds depending upon the need of the individual saver or investor. Performs an important clearinghouse function, which facilitates transactions between payers and payees.

4. DIAGRAMMATIC REPRESENTATION OF INDIAN FINANCIAL SYSTEM

5. FINANCIAL INSTITUTIONS Includes institutions and mechanisms which -Affect generation of savings by the community - Mobilisation of savings -Effective distribution of savings Institutions are banks, insurance companies, mutual funds- promote/mobilise savings Individual investors, industrial and trading companies- borrowers

6. Financial institutions classified as:- a) Regulatory and financial institutions : The two major Regulatory and Promotional Institutions in India are Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI). Both RBI and SEBI administer, legislate, supervise, monitor, control and discipline the entire financial system. RBI is the ap e x o f a ll fi n an c i al in s titutions in India. All financial institutions are under the control of RBI . The financial markets are under the control of SEBI.

7. b) Banking institutions :- - Banking institutions mobilize the savings of the people. - They provide a mechanism for the smooth exchange of goods and services. -Basic categories of banking institutions are commercial banks, co-operative banks, developmental banks

8. c) Non banking financial institutions:- - Nonbanking financial institutions also mobilize financial resources directly or indirectly from the people. -They lend funds but not create credit -Companies like LIC, GIC, UTI, Development Financial Institutions, Organisation o Funds etc. fall in this category. -Nonbanking financial institutions can be categorized as investment companies, housing companies, leasing companies, hire purchase companies, specialized financial institutions (EXIM Bank etc.) investment institutions, state level institutions etc

9. FINANCIAL ASSETS/INSTRUMENTS Enable channelising funds from surplus units to deficit units There are instruments for savers such as deposits, equities, mutual fund units, etc. There are instruments for borrowers such as loans, overdrafts, etc. Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc. Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government

10. MAJOR FINANCIAL INSTRUMENTS Money Savings account Credit market Instruments-bonds, mortgages Common Stocks Money market funds and mutual funds Pension funds Financial Derivatives

11. FINANCIAL INTERMEDIARIES Mutual Funds- Promote savings and mobilise funds which are invested in the stock market and bond market Indirect source of finance to companies Pool funds of savers and invest in the stock market/ bond market Their instruments at saver’s end are called units Offer many types of schemes: growth fund, income fund, balanced fund Regulated by SEBI

12. Merchant banking- manage and underwrite new issues, undertake syndication of credit, advise corporate clients on fund raising Subject to regulation by SEBI and RBI SEBI regulates them on issue activity and portfolio management of their business. RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks Have to adopt stipulated capital adequacy norms and abide by a code of conduct

13. There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and Leasing Companies, etc. India’s financial system is quite huge and cat ers to every kind of demand for funds Banks are at the core of our financial system and therefore, there is greater expectation from them in terms of reaching out to the vast populace as well as being competitive.

14. FINANCIAL MARKET Financial market deals in financial securities (or financial instruments) and financial services. Financial markets are the centers or arrangements that provide facilities for buying and selling of financial claims and services. These are the markets in which money as well as monetary claims is traded in. Financial markets exist wherever financial transactions take place. Financial transactions include issue of equity stock by a company, purchase of bonds in the secondary market, deposit of money in a bank account, transfer of funds from a current account to a savings account etc.

15. FUNCTIONS OF FINANCIAL MARKETS T o f acil i t a t e c r e a t i o n a n d allo c a t i o n of c r ed i t a n d liquidity. To serve as intermediaries for mobilization of savings To help in the process of balanced economic growth To provide financial convenience To cater to the various credits needs of the business organizations. To provide information and facilitate transactions at low cost

16. Financial market can be classified in 2 on basis of maturity of claims Money Market and Capital Market Money Market: A market where short term funds are borrowed and lend is called money market. It deals in short term monetary assets with a maturity period of one year or less. Liquid funds as well as highly liquid securities are traded in the money market. Examples of money market are Treasury bill market, call money market, commercial bill market etc. Capital Market: Capital market is the market for long term funds. This market deals in the long term claims, securities and stocks with a maturity period of more than one year. The stock market, the government bond market and derivatives market are examples of capital market.

17. Financial market can be classified in 2 on basis of seasoning of claim Primary Market and Secondary Market Primary Market: Primary markets are those markets which deal in the new securities. Therefore, they are also known as new issue markets. These are markets where securities are issued for the first time. In other words, these are the markets for the securities issued directly by the companies. Secondary Market: Secondary markets are those markets which deal in existing securities. Existing securities are those securities that have already been issued and are already outstanding. Secondary market consists of stock exchanges.

18. Financial market can be classified in 2 on basis of timing of delivery: Cash / Spot market Forward/Future market Cash / Spot market: This is the market where the buying and selling of commodities happens or stocks are sold for cash and delivered immediately after the purchase or sale of commodities or securities. Forward/Future market: This is the market where participants buy and sell stocks/commodities, contracts and the delivery of commodities or securities occurs at a pre-determined time in future.

19. Financial Market is further classified into 2. 1. Foreign exchange market: Foreign exchange market is simply defined as a market in which one country’s currency is traded for another country’s currency. It is a market for the purchase and sale of foreign currencies. 2. Derivatives market: The derivatives are most modern financial instruments in hedging risk. The individuals and firms who wish to avoid or reduce risk can deal with the others who are willing to accept the risk for a price. A common place where such transactions take place is called the derivative market. The important types of derivatives are forwards, futures, options, swaps, etc.

20. FINANCIAL INSTRUMENTS Financial instruments are the financial assets, securities and claims. They may be viewed as financial assets and financial liabilities. Financial assets: represent claims for the payment of a sum of money sometime in the future (repayment of principal) and/or a periodic payment in the form of interest or dividend. Financial liabilities: are the counterparts of financial assets. They represent promise to pay some portion of prospective income and wealth to others.

21. TYPES OF FINANCIAL INSTRUMENTS The financial instruments may be capital market instruments or money market instruments or hybrid instruments. Capital Market Instruments: Financial instruments that are used for raising capital through the capital market. It includes include equity shares, preference shares, warrants, debentures and bonds. Money Market Instruments: Financial instruments that are used for raising and supplying money in a short period not exceeding one year through money market are called money market instruments. It includes treasury bills, commercial paper, call money, short notice money, certificates of deposits, commercial bills, money market mutual funds.

22. MONEY MARKET INSTRUMENTS Call and Short Notice Money These are short term loans. Their maturity varies between one day to fourteen days. If money is borrowed or lent for a day it is called call money or overnight money. When money is borrowed or lent for more than a day and up to fourteen days, it is called short notice money. Commercial Bills A bill of exchange contains a written order from the creditor (seller) to the debtor (buyer) to pay a certain sum, to a certain person after a certain period. According to Negotiable instruments Act, 1881, a bill of exchange is ‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument’.

23. Treasury Bill Treasury bills are credit instruments used by the Govt. to raise short term funds to meet the budgetary deficit. Treasury bills are popularly called Tbills. These are negotiable instruments. Hence, these are freely transferable. Certificate Of Deposit CD is a certificate in the form of promissory note issued by banks against the short term deposits of companies and institutions, received by the bank. It is payable on a fixed date. It has a maturity period ranging from three to twelve months.

24. 5. Commercial Paper It is a finance paper like Treasury bill. It is an unsecured, negotiable promissory note. It has a fixed maturity period ranging from three to six months. It is generally issued by leading, nationally reputed credit worthy and highly rated corporations. It is quite safe and highly liquid. It is issued in bearer form and on discount. It is also known as industrial paper or corporate paper.

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