3rd semester b.

com

INDIAN FINANCIAL
SYSTEM
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FINANCIAL SYSTEM
a set of complex and closely
interconnected financial
institutions, markets,
instruments, services, practices,
and transactions.

Financial concepts

Financial assets
Financial
intermediaries/Institutions
Financial markets
Financial rate of return
Financial instruments
Financial services

FINANCIAL INSTITUTIONS
It include all organisations which
intermediate
or
facilitate
financial transactions between
individuals
and
corporate
entities.
They
mobilise savings from
those have it and make it
available for investment.

TYPES OF FINANCIAL
INTERMEDIARIES

Capital market intermediary

Capital market intermediaries are mainly
institutions which provide long term funds to
individuals and corporate customers.
They include term lending institutions like
ICICI and investing institutions like LIC and
GIC.
Money market intermediary
Money market intermediaries supply only
short term funds to individuals and corporate
entities. E.g. commercial banks
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FINANCIAL MARKETS

Financial markets can be referred to as those

centres and arrangements which facilitate
buying and selling of financial assets, claims
and services.
Financial markets may have a geographical
location
Wherever a financial transaction takes place,
it is deemed to have taken place in financial
market.

CLASSIFICATION OF FINANCIAL MARKETS:

Un Organised Market
consists of number of money lenders,
indigenous bankers and private finance
companies, chit funds whose activities are
not fully controlled by RBI.
Organised Market
In the organised market there are
standardised rules and regulations governing
their dealings. In organised market there is
also a high degree of institutionalisation and
instrumentalisation.
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CAPITAL MARKET
The

capital market is a market for financial

assets or financial instruments having a long
maturity period.
It deals with securities which have a maturity
period of more than a year. E.g. equity
shares, debentures.
It mobilises long term capital for the
companies

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CLASSIFICATION OF CAPITAL
MARKETS
o Industrial

securities Market
o Government securities
Market
o Long term loans Market

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INDUSTRIAL SECURITIES
MARKET
It is market which deals the
securities issued by industrial
companies.
It is a market where industrial
companies raise their capital or
long term debt in the form of
shares and debentures

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CLASSIFICATION OF INDUSTRIAL
SECURITIES MARKET

Primary market or New issue

Market
Secondary market or Stock
exchanges

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PRIMARY MARKETS

It deals with securities which are issued to

the public for the first time.
New issue market helps in capital formation.
There is no specific location where these
transactions take place.
it is an arrangement where companies issue
their shares and debentures to the public for
long term funds

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15

Stock Exchanges

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SECONDARY MARKET

securities which have already passed though

the primary market are bought and sold in
this market.
The securities are listed in stock exchanges
and are continuously bought and sold.
This market provides continuous and regular
market for securities.

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GOVERNMENT SECURITIES MARKETS

It is a market where securities issued by the

government are traded.
Otherwise known as Gilt-Edged securities
market.
Securities issued by Central and state
Governments, Semi-government authorities
like City Corporations, Port Trusts, State
Electricity boards, All India and state
financial institutions and public sector
enterprises are dealt in this market.

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LONG TERM LOANS MARKET

It is the collection of institutional lenders

and borrowers of long term loans.
Development banks and commercial banks
play a significant role in this market.
This market includes term loans market,
mortgages market, and financial guarantee
market.

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MONEY MARKET

Money market deals with securities which

have a maturity period of up to one year.
Short term financial requirements of
corporate entities and government are raised
in this market.

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FINANCIAL INSTRUMENTS

it refers to a claim to the repayment of a

certain sum of money at the end of a
specified period together with interest or
dividend
Classification:
Primary

securities:- issued directly by the

ultimate investors to the ultimate savers. E.g.
shares
Secondary securities:-issued by some
intermediaries called financial intermediaries to
the ultimate savers. E.g. mutual fund units
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FINANCIAL SERVICES

Financial servicescan be defined as the

products and services offered by
institutions like banks of various kinds for
the facilitation of various financial
transactions.
It also includesother related activities in
the world of finance like loans, insurance,
credit cards, investment opportunities
and money management as well as
providing information on the stock market
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FINANCIAL SERVICES
The organizations involved are
banks, credit card companies,
insurance companies, consumer
finance companies, stock
brokerages, investment funds and
some government sponsored
enterprises.

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FUNCTIONS OF FINANCIAL
SERVICES

Facilitating financial transactions in the

economy.
Mobilizing savings
Allocating capital funds
Monitoring managers (so that the funds
allocated will be spent as envisaged).
Transforming risk (reducing it through
aggregation and enabling it to be carried by
those more willing to bear it).

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CHARACTERISTICS AND
FEATURES
Customer-Specific
Intangibility
Tendency

to Perish

Dynamic

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SCOPE OF FINANCIAL SERVICES

Traditional Activities
Fund

based activities and

Non-fund based activities

Modern activities.

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TRADITIONAL ACTIVITIES FUND

BASED

Underwriting or investment in shares,

debentures, bonds, etc. of new issues.
Dealing in secondary market activities.
Participating in money market instruments
like commercial Papers, certificate of
deposits, treasury bills, discounting of bills
etc.
Involving in equipment leasing, hire
purchase, venture capital, seed capital,
Dealing in foreign exchange market
activities.
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NON FUND BASED ACTIVITIES/

FEE BASED ACTIVITIES

Managing the capital issue i.e.

management of pre-issue and post-issue
activities
Making arrangements for the placement of
capital and debt instruments with
investment institutions.
Loan syndication for clients
Assisting in the process of getting all
Government and other clearances.

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MODERN ACTIVITIES

Rendering project advisory services

Planning for M&A
Guiding corporate customers in capital
restructuring.
Acting as trustees to the debenture holders.
Structuring the financial collaborations /
joint ventures.
Rehabilitating and restructuring sick
companies

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MODERN ACTIVITIES
Hedging of risks
Undertaking risk management services like
insurance services
Consultancy on capital structure and cost of
capital
Providing credit rating services.
Undertaking services relating to the capital
market, such as
1)Clearing services
2)Registration and transfers
3)Safe custody of securities

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DEVELOPMENT OF FINANCIAL
SYSTEM IN INDIA

Nationalisation of financial
institution
RBI

in 1948
Imperial bank of India to SBI in 1956
14 banks in 1969 and 6 more in 1980

Start of UTI
Started

in 1964
UTI bank 1994
UTI investor services ltd
UTI security exchange ltd
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Establishment of development banks

IFCI

1948, ICICI 1955, IDBI 1964

Institution for financing agriculture

NABARD

Institution for foreign trade

EXIM

Bank 1982

Institution for housing finance

NHB

1982

1988

SHCIL 1987
MF Industry
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VC institutions
IDBI

venture capital fund 1986

IFCIs The Risk Capital and Technology
Finance Corporation

Credit rating agencies

CRISIL,

ICRA and CARE

Legislative support
Financial sector legislative reforms
commission

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FINANCIAL SYSTEM AND

ECONOMIC DEVELOPMENT

Mobilising savings
Promoting investments
Encouraging investment in financial assets
Allocating savings on the basis of national
priorities
Creating credit
Providing a spectrum of financial assets
Financing trade, industry and agriculture
Encouraging entrepreneurial talents
Developing backward areas
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WEAKNESSES OF INDIAN
FINANCIAL SYSTEM

Lack of coordination between different

financial institutions
Monopolistic market structure
Dominance of development banks in
industrial financing
Inactive and erratic capital market
Imprudent financial practices

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