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A Financial system is a complex , wellintegrated set of sub-systems of financial institutions, markets, instruments and services which facilitate the transfer and allocation of funds efficiently and effectively.
Formal financial sector is: 1. Organized 2. Institutional 3. Regulated 4. Caters to financial needs of the modern spheres of economy.
Informal financial sector is: 1. Unorganized 2. Non-Institutional 3. Non-regulated 4. Deals with the traditional and rural spheres of the economy.
Formal (organized) financial system regulated by: 1. MOF 2. RBI 3. SEBI 4. Other regulatory bodies
Informal financial system consists of: 1. Individual moneylenders 2. Groups of persons operating as funds or associations. 3. Partnership firms
It promotes the process of capital formation by providing a mechanism for transformation of savings in investments. It serves as a link between savers and investors. It mobilizes the saving of the scattered savers into productive investments. It provides an efficient mechanism of payment for the exchange of services and goods.
Financial Institutions
Banking Institutions
Commercial Banks
Co-operative Banks
Investment institutions
FINANCIAL MARKETS
CAPITAL MARKET
MONEY MARKET
EQUITY MARKET
DEBT MARKET
Deals with short-term funds. ( period of borrowing & lending is 1 year or less) Helps to adjust liquidity position. Provides outlet to short-term surplus funds. Provides funds to govt. also Helps in exercising control on credit creation.
Facilitates borrowing & lending of long-term funds Mobilizes national savings for eco. Development Securing foreign capital & know-how.
CAPITAL MARKET
Provides funds for long-term
MONEY MARKET
For short-term.
Funds can be used for both fixed & Used only for working capital working capital
It is secondary activity Provides short-term funds to govt. by purchasing treasury bills & discounting bills of exchange.
FINANCIAL INSTRUMENTS
TERM
TYPE
PRIMARY SECURITIES
1.EQUITY 2.PREFERENC E 3.DEBT 4.VARIOUS COMBINATIO NS
SECONDARY SECURITIES
FINANCIAL INSTRUMENTS/ASSETS:
It is a claim against a person or an institution, for the payment of a sum of money or a periodic payment in form of interest or dividend, at a specified future date.
PRIMARY SECURITIES: Issued directly by borrowers of funds to savers. SECONDARY SECURITIES: Issued by financial intermediaries to savers.
Financial Services
Fee Based
Assets/Fund Based
Merchant Banking
Leasing
Credit Rating
Hire Purchasing
Stock Broking
Venture Capital
Intangible Direct sale Heterogeneity Fluctuation in demand Labour intensive Protect customers interest Geographic dispersion
1.
LEASING: An arrangement that provides firm with the use & control over assets without buying & owning the same. Its a form of renting assets.
HIRE-PURCHASE: Goods are purchased & sold on following terms: Payment is made in installments.
2.
Possession is given immediately Ownership remains with owner, till last installment is paid. Seller can repossess goods, in case of default in payment. Each installment is treated as hire charges.
3. BILL DISCOUNTING: Seller draws B/E on buyer of goods on credit. Bank purchase the bill on demand, credits customers account with the amount of bill less discount
4. VENTURE CAPITAL: Involves high degree of risk Investment in highly risky projects with objective of earning high rate of return. 5. FACTORING: Financing of receivables . Factor offers services: related to management & financing of debts arising due to credit sales.
1.
MERCHANT BANKING: Offered by banks, financial institutions, NBFCS. Services offered are: portfolio management, project counseling, mergers, acquisitions.
CREDIT RATING: It is the opinion of rating agency on the ability & willingness of issuer of debt instrument to meet the debt service obligations, when they arise.
2.
3. STOCK-BROKING: A stock-broker is a member of stock exchange who buys, sells or deals in shares/securities.