Financial System

Meaning
• Financial system refers to a set of activities,
which facilitate transfer of resources from
savers to borrowers. This system provides for
regular, smooth, efficient and cost effective
linkage between depositors and investors
 Classification of financial system
• Financial market
• Financial institutions
• Financial instruments
• Financial services
 Financial Instuments

• Financial instruments are the intermediaries

that facilitate transactions on financial claims.
Financial instruments are broadly classified
into money market instruments and capital
market instruments
• Financial Asset Claims
• Securities
 Financial Institution
• Financial institutions are organizations that
mobilize savings and provide finance or credit
to individuals and organizations. Financial
institutions are classified into three;
• Monetary institutions
• Non-monetary institutions
• Specialized institutions
 Financial Markets
• A financial market is an institution or
arrangement that facilitates the exchange of
financial assets including deposits and loans,
stocks and bonds, options and futures.
Financial market consist of money market and
capital market.
 Financial Services
• Financial services are activities, benefits and
satisfactions connected with sale of money or
moneys worth. It covers a wide range of
activities including insurance, banking and
credit services such as merchant banking,
mutual funds, leasing etc.
Classification of Financial Services
• Fund based activities
• Non-fund based activities
 Fund based activities
• Lease financing
• Hire purchasing
• Bill discounting
• Venture capital
• Factoring and forfeiting
 Non- fund based activities
• Debenture Trusteeship :
Execution of Trust Deed on behalf of the
Debenture Holders
• Letters of Credit (LC) :
The scheme involves offering counter
guarantee to bankers for opening LCs for capital
goods provided.
• Buying/Selling  & Business Opportunities
related Services
• Identification of Entities and Marketing for asset
sales/mergers & Acquisitions/ Business
Partnerships etc.
 SEBI
• Objectives of SEBI
Transparency in work
Investors protection
Steady flow of saving
Fair practices by the issuers
Promote efficient services
 SEBI Goals
• Introduction of insider trading
• Internet trading practices by brokers
• Promotion of trading debt market
• Healthy corporate governance
 Board
• Chairman
• Two members appointed by ministries of
CG
• One members appointed by RBI
• Two or three members appointed by CG
 Powers and functions of SEBI
• Promoting and regulating self- regulatory
organization
• Prohibiting fraudulent and unfair trade practices
relating to securities market
• Prohibiting insider trading in securities
• Promoting investors education and training
intermediaries of securities market.
• Calling for information form , undertaking
inspection, conducting enquiries and audit of the
SE and intermediaries
 Investors problem and protection
• New issues
• Regulation of insider trading
• Price manipulation
• Investors education
• Grievance cell
 MUTUAL FUNDS
• Mutual funds are corporations that accept
money from savers and then use these
funds to buy stocks, long term funds or
short term debt instruments issued by
firms or governments.
 DEFINITION
• According to Mutual Fund Fact Book
(published by the Investment Company
Institute of USA), “a mutual fund is a financial
service organization that receives money from
shareholders, invests it, earns return on it,
attempts to make it grow and agrees to pay the
shareholder cash demand for the current value
of his investment ”
 FEATURES
• Mobilize funds
• Provide opportunity to small investors for investment.
• Investors can enjoy the benefit of professional and
expert management of their funds.
• Maximize return and minimize risk for the benefit of
investors.
• Provides tax benefit to the investors.
• In India mutual funds are regulated by agencies like
SEBI.
• The cost of purchase and sale of mutual fund units is
low.
• Contribute to the economic development of a country.
 OBJECTIVES
• To mobilize savings of people.
• Offer a convenient way to the capital and money
market.
• To tap domestic saving and channelise them for the
profitable investment.
• To enable the investors to share the prosperity of the
capital market.
• To act as agents for growth and stability of the capital
market.
• To attract investment from the risk.
• To facilitate the orderly development of the capital
market.
 IMPORTANCE
• Mobilize small savings.
• Diversified investment
• Provide better returns
• Better liquidity
• Low transaction costs
• Reduce risk
• Professional management
• Offer tax benefits
• Support capital market
• Promote industrial development
• Keep the money market active