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Indian Financial System

Indian Financial System


Introduction

Composition

Functions
Saving Function
Liquidity Function
Payment Function
Risk Function
Policy Function
Financial Markets
Defined as the market in which financial assets
are created or transferred.

These assets represent a claim to the payment of a


sum of money sometime in the future and/or
periodic payment in the form of interest or
dividend.
Classification

Money market
(Short term instrument)

Capital markets
(Long term instrument)

The most important distinction between the


two:
The difference in the period of maturity.
Money Market
Main Function
To channelize savings into short term productive
investments like working capital .

Instruments in Money Market


Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note
Call Money Market
Part of the national money market

Day-to day surplus funds mainly of banks are traded

Short term in nature

Maturity of these loans vary from 1 to 15 days

Lent for 1 day: Call money

Lent for more than 1 day but less than 15 days: Notice money

Convenient interest rate

Highly liquid loan repayable on demand


Commercial Papers
Unsecured Promissory note.

Issued by well known companies with strong and high


credit rating.

Sold directly by the issuers to investors or through agents


like merchant banks and security houses.

Flexible Maturity

Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.


Promissory Note
Referred as note payable in accounting

It is a contract detailing the terms of a promise by


one party (the maker) to pay a sum of money to the
other (the payee).

The obligation may arise from the repayment of a


loan or from another form of debt.

For example, in the sale of a business, the purchase


price might be a combination of an immediate cash
payment and one or more promissory notes for the
balance.
Certificates of deposits
Defined as short term deposit by way of usance
promissory notes.

Greater flexibility to investors in the deployment of


surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Transferable in nature

Free negotiability and limited flexibility


Money market mutual funds

Invest primarily in money market instruments of very


high quality.

RBI and public financial institution can set it either


directly or through its existing subsidiaries.

MMMF
Open Ended
Close Ended
Capital Markets
Provided resources needed by medium and large
scale industries.

Purpose for these resources


Expansion
Capacity Expansion
Investments
Mergers and Acquisitions

Deals in long term instruments and sources of


funds
Main Activity

Functioning as an institutional mechanism to


channelize funds from those who save to those who
needed for productive purpose.

Provides opportunities to various class of


individuals and entities.
Structure of Capital Markets
Primary Markets Secondary Markets
When companies need financial resources The place where such securities are traded
for its expansion, they borrow money from by these investors is known as the secondary
investors through issue of securities. market.

Securities issued Securities like Preference Shares and


a) Preference Shares Debentures cannot be traded in the
b) Equity Shares secondary market.
c) Debentures
Equity shares is issued by the under writers Equity shares are tradable through a private
and merchant bankers on behalf of the broker or a brokerage house.
company.
People who apply for these securities are: Securities that are traded are traded by the
a) High networth individual retail investors.
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks

One time activity by the company. Helps in mobilising the funds for the
investors in the short run.
Thank-You

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