Introduction to Financial System

and Indian Financial System

Ch-1

Financial System
A financial system is a set of complex, well

integrated set of sub-systems of inter-related

financial institutions, markets, instruments and
services which facilitate the transfer and
allocation of funds, efficiently and effectively.

Indian Financial System

Organized/ Formal Non-organized/
Informal
Regulators
Money lenders
Institutions
Local bankers
Markets
Traders
Services
Pawn Brokers
Instruments
Chit funds
Most financial systems are characterized by
the co-existence and co-operation between
the formal and informal financial sectors
referred as Financial Dualism.

Financial Institutions/ Intermediaries

Those that mobilize savings and facilitate the

allocation of funds in an efficient manner.

Types: Banking/ Non-banking, Term finance
institutions (IDBI, IFCI, SIDBI), Specialized (EXIM
bank, NABARD), Investment institutions (MF,
Insurance companies) and State Level FI (SFCs).
Transmutation Effect: Ability of financial

institutions to convert contracts with a given set

of characteristics into contracts with very
different features- this helps meet the
preferences of both lenders and borrowers.

II. Financial Markets

Mechanism enabling participants to deal in

financial claims; demand and supply of claims

help in setting of prices for financial products.
Types:

On the basis of
maturity

On the Basis of
Issue

Money market
Capital Market

Primary/ New
Issues Market
(NIM)
Secondary

On the basis of
geographical
distribution
Domestic
Forex/Internatio
nal

Markets.
Money Market:
Market for short term debt instruments.
Highly liquid market where securities are
transacted in large denominations to reduce
transaction cost.
Functions of Money Market:
Equilibrating force that redistributes cash
balances according to the liquidity needs of
participants.
Forms basis of liquidity management by
monetary authorities.

Markets..
Capital Markets:
Mobilize long term savings to finance long
term investments.
Provide risk capital in the form of equity/quasi
equity to entrepreneurs.
Encourage broader ownership of productive
assets.
Lower the costs of transaction and information
and
Improve the efficiency of capital allocation
through a competitive pricing mechanism.

IPO Details (2007 to early

2014)
Year

No. of IPOs

Amount
Raised
(In Rs Crore)

Issue
Succeeded

Issue Failed

2007

108

33,946.22

104

2008

39

18,339.92

36

2009

22

19,306.58

21

2010

66

36,362.18

64

2011

40

6,043.57

37

2012

27

6,865.94

25

2013

39

1,645.87

37

2014 *

23

316.69

22

III. Financial Instruments/

Assets/ Products/ Securities
It is a claim against a person/institution for

payment, at a future date, of a sum of money

and/or a periodic payment in the form of
interest or dividend.
Many instruments are marketable as they are

denominated in small amounts and traded in

organized markets- hence enables individuals
to hold Portfolios.
Differ on: risk, returns, liquidity, type of

option, transaction cost, etc.

Types of Financial
Instruments
On the basis of period of Maturity:

a. Long Term (Capital Market instruments)

and
b. Short Term (Money Market Instruments).

On the basis of Issuer:

a. Primary/Direct Instruments
b. Secondary/ Indirect Instruments

IV. Financial Services

Financial services enable the smooth
functioning of Financial system and provide
for:
Fund Intermediation,
Payment mechanism,
Liquidity,
Risk Management

Hence, the components of a

Financial System:
Collaborate,
Interact,
Form close links and
Compete with each other to meet the

objectives of the economic policy to

achieve growth with social justice.

Functions of a Financial
System
Mobilize and allocate savings
Monitor corporate performance
Provide payment and settlement system
Disseminate price related information
Offer portfolio adjustment facility
Lower cost of transactions
Promote the process of financial deepening

and broadening.