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BankersAdda:BankingAwareness:TheIndianFinancialSystem

BankingAwareness:TheIndianFinancialSystem
The term "finance" in our simple understanding it is perceived as equivalent
to 'Money'.Finance exactly is not money, But it is the source of providing
funds for a particular activity.The word "system", in the term "financial
system", implies a set of complex and closely connected or interlined
institutions,agents,practices,markets,transactions,claims,andliabilitiesin
the economy. The financial system is concerned about money, credit and
financethethreetermsareintimatelyrelatedyetaresomewhatdifferentfrom
eachother.
Components/ConstituentsofIndianFinancialsystem:

FINANCIALINSTRUMENTS
MoneyMarketInstruments
The money market can be defined as a market for shortterm money and
financial assets that are near substitutes for money.The term shortterm
means generally a period upto one year and near substitutes to money is
used to denote any financial asset which can be quickly converted into
moneywithminimumtransactioncost.
Some of the important money market instruments are briefly discussed
below:
1.Call/NoticeMoneyMarket
Call/Noticemoneyisthemoneyborrowedorlentondemandforaveryshort
period. When money is borrowed or lent for a day, it is known as Call
(Overnight) Money. Intervening holidays and/or Sunday are excluded for this
purpose.Thusmoney,borrowedonadayandrepaidonthenextworkingday,
(irrespective of the number of intervening holidays) is "Call Money". When
money
is borrowed or lent for more than a day and up to 14 days, it is "Notice
Money".Nocollateralsecurityisrequiredtocoverthesetransactions.
2.InterBankTermMoney
Interbank market for deposits of maturity beyond 14 days is referred to as
the term money market. The entry restrictions are the same as those for
Call/Notice Money except that, as per existing regulations, the specified
entitiesarenotallowedtolendbeyond14days.
3.TreasuryBills.
Treasury Bills are short term (up to one year) borrowing instruments of the
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union government. It is an IOU of the Government. It is a promise by the

Government to pay a stated sum after expiry of the stated period from the
dateofissue(91/182/364daysi.e.lessthanoneyear).Theyareissuedata
discount to the face value, and on maturity the face value is paid to the
holder.Therateofdiscountandthecorrespondingissuepricearedetermined
ateachauction.
4.CertificateofDeposits
Certificates of Deposit (CDs) is a negotiable money market instrument and
issued in dematerialised form or as a Usance Promissory Note, for funds
deposited at a bank or other eligible financial institution for a specified time
period.
5.CommercialPaper
CP is a note in evidence of the debt obligation of the issuer. On issuing
commercialpaperthedebtobligationistransformedintoaninstrument.CPis
thus an unsecured promissory note privately placed with investors at a
discountratetofacevaluedeterminedbymarketforces.
CapitalMarketInstruments
The capital market generally consists of the following long term period i.e.,
more than one year period, financial instruments In the equity segment
Equity shares, preference shares, convertible preference shares, non
convertible preference shares etc and in the debt segment debentures, zero
couponbonds,deepdiscountbondsetc.
HybridInstruments
Hybridinstrumentshaveboththefeaturesofequityanddebenture.Thiskind
of instruments is called as hybrid instruments.Examples are convertible
debentures,warrantsetc.
FINANCIALMARKETS
Financial market is a market where financial instruments are exchanged or
tradedandhelpsindeterminingthepricesoftheassetsthataretradedinand
isalsocalledthepricediscoveryprocess.
TYPESOFFINANCIALMARKETS
ForexMarketTheForexmarketdealswiththemulticurrencyrequirements,
which are met by the exchange of currencies. Depending on the exchange
ratethatisapplicable,thetransferoffundstakesplaceinthismarket.This
isoneofthemostdevelopedandintegratedmarketacrosstheglobe
MONEYMARKET:
The money market is a market for shortterm funds, which deals in financial
assetswhose
period of maturity is upto one year. It should be noted that money market
doesnotdealin
cash or money as such but simply provides a market for credit instruments
suchasbillsof
exchange,promissorynotes,commercialpaper,treasurybills,etc.
CAPITALMARKET
CapitalMarketmaybedefinedasamarketdealinginmediumandlongterm
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funds. It is an institutional arrangement for borrowing medium and longterm

fundsandwhichprovidesfacilitiesformarketingandtradingofsecurities.So
it constitutes all longterm borrowings from banks and financial institutions,
borrowings from foreign markets and raising of capital by issue various
securities such as shares debentures, bonds, etc.The market where
securitiesaretradedknownasSecuritiesmarket.Itconsistsoftwodifferent
segments namely primary and secondary market The primary market deals
with new or fresh issue of securities and is, therefore, also known as new
issue marketwhereas the secondary market provides a place for purchase
and sale of existing securities and is often termed as stock market or stock
exchange.
CREDITMARKET
Creditmarketisaplacewherebanks,FIsandNBFCspurveyshort,medium
andlongtermloanstocorporateandindividuals.

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