THE FINANCIAL

SYSTEM

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 System

System is a set of inter-related components working

together to achieve some purpose

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 Financial System
Financial System

Financial Financial Financial Financial

Institutions Markets Instruments Services

Shares
Commercial
Banks Merchant
Money Banking
Market Debentures /
Industrial Bonds
Banks Project
Commercial
Consultancy
Paper (CPs)
Provident Capital
Funds Market Certificate of
Deposits (CDs)
Mutual Public DepositS
Funds PDs)

Mutual Fund
NBFCs
Units

Insurance
Policies
Government
Bonds
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 Functions of Financial System
• Payment system
• Mobilisation of savings
• Size transformation
• Maturity transformation
• Risk transformation
• Provision of liquidity
• Cost reduction
• Price information
• Financial advice

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 Evolution of
Indian Financial System

Phase I: Transition (1950 to 1960)

Phase II: Expansion and Diversification (1969 to 1985)

Phase III: Consolidation, Innovation and Liberalisation

(after 1985 )

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 Savers / Lenders
Flow of Funds
Funds  Householders Securities:
Business Firms Shares/Bonds
Government
Deposits/Policies/Uni Foreigners Funds
ts

S
e
Financial Institutions c Financial
Banks Funds u Markets
F
Provident Funds r Money Market
u
Insurance Companies i Private Capital Market
n
Mutual Funds t Placement Forex Market
d
NBFCs i Mode
s
Securities e
s

Investors/Borrowers

Householders
Loans Business Firms Funds
Government
Foreigners Securities:
Funds Shares/Bonds
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 Assets and Financial Assets

• Assets are the rights of owners

• Fixed assets can be seen and can be touched
(Tangible)

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 Classification of Financial Assets
Financial Assets

Non- Marketable
Marketable

Post Shares Govt. Debe MF

Bank Insurance
Office Securities -ntures Units
Deposits Schemes
Certifica
tes

Equity Preference
Shares Shares

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 Return on Financial Assets

}
Bonds
Debentures Interest
Debt

}
Preference share
Equity share
Dividend

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 Functions of Financial Markets

• Price information

• Marketability/Liquidity

• Reduction of Transaction cost

• Promotes savings and investments

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 Distinguish between Money Market and Capital Market
Points of Difference Money Market Capital Market

Maturity of Funds Less than one year Above one year

Instruments Call Money market, Treasury Equity Shares,
Bills (TBs) Market, Commercialpreference shares,
Bills (CBs) market, Commercialdebentures, Government
Papers (CPs) market, Certificatesecurities and loans
of Deposits (CDs), Banker’s
Acceptances (Bas), Repurchase
Agreements (Repos), Money
Market Mutual Funds (MMMF),
etc.

Existence ofNo Yes

Secondary market
Place of Market No specific place Stock Exchanges

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 Financial Instruments
• Securities issued to public to raise funds
• Example
– Equity Share
– Reference Share
– Debenturers
– Commercial papers
– Certificate of Deposits etc.,

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 Financial Intermediaries
• FIs that act as bridge between savers and investors
and provides needed funds to investors

• FIs include: Banks and NBFCs

Banks : RRBs, DBs (Industrial Banks), Cooperative

Banks, Investment Banks, Commercial Banks.
NBFCs: Insurance companies (life as well as
General); Mutual funds etc

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 Structure of Indian Financial Intermediaries
Structure of Financial Intermediaries in India

RBI SEBI IRDA

Public and Pvt.

Commercial Banks
Mutual Funds Private Sector
All India Insurance Companies
Development Banks

Specialised FIs
Venture
Exim Bank, IFCI Public Sector
Capital Funds
Insurance Companies
Refinance
Institutions
NABARD, NHB
NBFCs 15
Regulatory Institutions

• RBI
• SEBI
• IRDA
• NABARD
• NHB

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