Chapter 1 Introduction

A couple arrives at a hotel in a small village and
asks how much is a room for the weekend. The

receptionist replies, "$100 for 2 days", "Very well",
replied the couple "But we would like to check the
premises, the pool and the restaurant before
booking the room".
"No problem", says the receptionist. "But you need
to leave a deposit of $100, take the key and then
visit our premises at will. If you do not like it we will
refund the money".
The couple left the $100 and visited the hotel.

.
It turns out that:

The receptionist owed $100 to the grocer so he left
running to repay the debt.
The grocer owed $100 to a shoemaker so he left running
to repay the debt.
The shoemaker owed $100 to the butcher so he left
The butcher owed $100 to the travel agency so he left
The owner of the agency owed $100 to the hotel so he left
After some time couple completed the visit and informed

that ultimately will not stay at the hotel.
- "No problem. As I said, here's your money" - the
receptionist returned the $100
Conclusion:
Everyone paid.....
In the end the couple left the village and took the $100
that paid all debts totalling $500.
$0 paid $500 in debt.
....... and we could continue indefinitely.
Introduction
THE FINANCIAL SYSTEM
Suppliers of Funds
Demanders of Funds
Individuals
Businesses
Governments
Individuals
Businesses
Governments
Transferring Capital
Direct Transfer of Funds
saver
saver
firm
Cash
saver
firm
Cash
firm
saver
Securities
Suppliers of Funds
Individuals
Businesses
Governments
Demanders of Funds
Funds
Private Placement
Securities
Individuals
Businesses
Governments
Indirect Transfer using a Financial
Intermediary
saver
Intermediary
saver
financial
intermediary
Intermediary
Funds
saver
financial
intermediary
Intermediary
Funds
saver
financial
intermediary
firm
Intermediary
Funds
saver
Funds
financial
intermediary
firm
Intermediary
Funds
saver
Funds
financial
intermediary
Firm
Securities
firm
Intermediary
Funds
saver
Funds
financial
intermediary
Intermediary
Securities
Firm
Securities
firm

Financial Institutions
Funds
Deposits/shares
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Non Banking Financial
Institutions
Funds
Securities
Suppliers of Funds
Individuals
Businesses
Governments
Demanders of Funds
Funds
Private Placement
Securities
Individuals
Businesses
Governments
Direct Transfer using Financial
Market
saver
Direct Transfer through Financial
Markets
saver
Financial Markets
firm
Markets
Funds
saver
Financial Markets
firm
Markets
Funds
Funds
saver
Financial Markets
firm
Markets
Funds
Funds
saver
Financial Markets
Securities
firm
Markets
Funds
Funds
saver
Financial Markets
Securities
Securities
firm

Funds
Deposits/shares
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Institutions
Funds
Loans
Suppliers of Funds
Demanders of Funds
Funds
Individuals
Businesses
Governments
Private Placement
Securities
Funds
Financial Markets
Securities
Money Market
Capital Market
Funds
Securities
Individuals
Businesses
Governments

Funds
Deposits/shares
Funds
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Institutions
Funds
Loans
Securities
Suppliers of Funds
Demanders of Funds
Funds
Individuals
Businesses
Governments
Private Placement
Securities
Funds
Financial Markets
Securities
Money Market
Capital Market
Funds
Securities
Individuals
Businesses
Governments
The Indian Financial System
Types of Financial System

Formal financial system organized,
institutional and regulated
Informal financial system

Advantages
Low transaction costs
Minimum default risk
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated
Components of the Financial System

Financial Markets
Financial Instruments
Financial Services
Copyright 2008 Dorling Kindersley India Pvt. Ltd
Banking
Non-banking
The Indian Financial System, 2e -- Pathak
Financial Markets
Types
Money Market A market for short-term debt
instruments
Capital Market A market for long-term equity and debt
instruments
Segments
Primary Market A market for new issues
Secondary Market A market for trading outstanding

issues
Financial Instruments
Types
Primary
Secondary
Distinct Features
Marketable
Tradable
Tailor-made
Financial Services
Major Categories
Funds intermediation
Payments mechanism
Provision of liquidity
Risk management
Financial engineering- Financial engineers use various
mathematical tools in order to create new investment strategies. The
new products created by financial engineers can serve as solutions
to problems or as ways to maximize returns from potential
investment opportunities.
Functions of Financial System

Mobilise and allocate savings
Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and reduction
Disseminate price related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening and
broadening
Key Elements of a Well-functioning

Financial System
A strong legal and regulatory environment
Stable money
Sound public finances and public debt
management
A central bank
Sound banking system
Information system
Well-functioning securities market

Chapter 1 Introduction

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Chapter 1 Introduction

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A couple arrives at a hotel in a small village and

asks how much is a room for the weekend. The

The couple left the $100 and visited the hotel.

It turns out that:

After some time couple completed the visit and informed

$0 paid $500 in debt.

....... and we could continue indefinitely.

THE FINANCIAL SYSTEM

THE FINANCIAL SYSTEM

THE FINANCIAL SYSTEM

THE FINANCIAL SYSTEM

THE FINANCIAL SYSTEM

The Indian Financial System

Types of Financial System

Informal financial system

Components of the Financial System

Copyright 2008 Dorling Kindersley India Pvt. Ltd

The Indian Financial System, 2e -- Pathak

Secondary Market A market for trading outstanding

Functions of Financial System

Key Elements of a Well-functioning

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