Assignment No.

FINANCIAL MANAGEMENT
TOPIC: OVERVIEW OF INDIAN FINANCIAL SYSTEM

Submitted to, Prof.Dhanya Alex RBS

Submitted by, Abhilash.K PGDM 2011-13 P11103

Indian FINANCIAL SYSTEM

INTRODUCTION Finance is regarded as the backbone of a business. The existence of any business depends on how well they acquire and utilise the finance. From production to day to day activities, Finance is required. It is here the relevance of Financial system arise Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. Indias financial system includes a host of institutions and the mechanisms which affects the generation of savings by the community. The Indian financial system performs a crucial role in economic development of India through saving investment process, also known as capital formation. The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these sectors will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws. The structure of Indian financial system is as follows, Components/ Constituents of Indian Financial system: 1. Financial institutions 2. Financial Markets 3. Financial Services.

Financial Institutions:
Financial institutions are those institutions that facilitate smooth flow of cash in the economy. These institutions accept funds from those who wish to save and lend it for productive activities. Financial institutions help to pool the small surplus funds in the economy and allocate them accordingly. Even though lending and accepting is their primary function, they also provide a variety of services to their customers. They act as an intermediary between the savers and borrowers. Financial institutions can be classified into two Banking Non-Banking Financial institutions

Financial Markets The Indian financial market or money market is an important part of our economy. Financial market is the backbone of financial system in India. The Indian Financial Market is classified into two viz,

INDIAN MONEY MARKET

INDIAN CAPITAL MARKET

INDIAN MONEY MARKEY

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument. This market is dominated mostly by government, banks and financial institutions. Some of the important money market instruments are. 1. Call Money 2. Treasury Bills 3. Certificate of Deposit 4. Commercial Papers

1. Call Money:This is the market for very short term funds, known as money on call. The rate at which funds are borrowed in this market is called `Call Money rate'. A short-term money market, which allows for large financial institutions, such as banks, mutual funds and corporations to borrow and lend money at interbank rates. The loans in the call money market are very short, usually lasting no longer than a week and are often used to help banks meet reserve requirements. Participants in call/notice money market currently include banks, Primary Dealers (PDs), development finance institutions, insurance companies and select mutual funds. Of these, banks and PDs can operate both as borrowers and lenders in the market.
Banks borrow in this money market for the following propose. To fill the gaps or temporary mismatches in funds To meet the CRR & SLR Mandatory requirements as stipulated by the Central bank (RBI)

 To meet sudden demand for funds arising out of large outflows Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

2. Treasury Bills:Treasury Bills are short term borrowing instruments of the union government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue. They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction. It is one of the safest money market instruments as it is void of market risks, though the return on investments is not that huge. Treasury bills are circulated by the primary as well as the secondary markets. The maturity periods for treasury bills are respectively 3-month, 6-month and 1-year. There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6 months and 12months Treasury bills etc. In India, at present, the Treasury Bills are issued for the following tenors 91-days, 182-days and 364-days Treasury bills.

3. Certificate of Deposit:Certificate of Deposit (CDs) is a negotiable money market instrument. Issued in the form of Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by the Reserve Bank of India. A certificate of deposit is a borrowing note for the short-term just similar to that of a promissory note. The bearer of a certificate of deposit receives interest. The maturity date, fixed rate of interest and a fixed value - are the three components of a certificate of deposit. The term is generally between 3 months to 5 years.

4. COMERCIAL PAPERS:Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Corporates, primary dealers and the All-India Financial Institutions are eligible to issue CP. CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. Commercial Paper is issued by large banks and corporations to get money to meet short term debt obligations. As Cps are

unsecured only corporates with good credit rating will be able to issue CP at reasonable price. It is one of the easy and convenient source for firms to raise short term capital.

INDIAN CAPITAL MARKET

Capital market is one of the most important segments of the Indian financial system. It is the market available to the companies for meeting their requirements of the long-term funds. It refers to all the facilities and the institutional arrangements for borrowing and lending funds. In other words, it is concerned with the raising of capital for purposes of making longterm investments. The market consists of a number of individuals and institutions including the Government that canalise the supply and demand for long-term capital. The Indian Capital Market is divided into two viz, Gilt-edged market Industrial securities market

1. Gilt-edged market:The gilt-edged market refers to the market for Government and semi-government securities, backed by the Reserve Bank of India (RBI). Government securities are tradable debt instruments issued by the Government for meeting its financial requirements. The term gilt-edged means 'of the best quality'. This is because the Government securities do not suffer from risk of default and are highly

2. Industrial securities market:This is another important market for long term capital requirement. The industrial securities market refers to the market which deals in equities and debentures of the corporates. It is further divided into two, A. Primary Market or New Issue Market B. Secondary Market or Stock Market

A) Primary Market:-

It is also called as new issue market. Primary market deals with new issue, that is, securities which are offered by the company to the public for subscribing for the very first time, it is also called as Initial Public Offer (IPO). It is the market through which companies can raise fresh capital for longer periods of time by issuing shares or debentures. It is a direct form of capital and is the best way for raising capital for starting a business or for expanding current business.

B) Secondary Market:It is also called as old issue market or Stock exchanges. It is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market or listed on the stock exchange. The stock exchanges are the exclusive centres for trading of securities. Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.

FINANCIAL SERVICES
Another Part of the Indian financial system is the Financial Service sector. With the service sector in India growing considerably in the last few years, the financial service sector has also developed to a great extent. Today there are a variety of services provided by the financial intermediaries such as banks. Corporates can raise fund with the help of such financial services. These services also provide more investment opportunities to the potential investors with improved rate of return. Some of the important financial services are, Leasing Hire-Purchase Factoring

1. Leasing : Leasing is one of the services provided by the financial intermediaries in India. Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of periodic, payments. Leasing helps firms to avoid investing huge amounts of capital in fixed assets such as machinery etc. This

prevents funds being locked up in assets. The person who receives the service is called the lessee and the person who provides the service is called lessor. The terms and conditions of the lease are mentioned in a document called the lease agreement.

2. HIRE-PURCHASE: It is a mode of financing the price of the goods to be sold on a future date. This is an agreement between the seller and purchaser whereby the goods are let on hire; the purchase price is to be paid in instalments. Here the ownership of the item purchased is passed on to the hirer only after paying the last instalment but the possession of the item is transferred to the hirer at the time of entering into contract. This provides organisations a way to avoid lump sum payment for purchasing a good, which enhances the cash position of the firm as they can utilise this fund productively.

3. FACTORING : Another service provided by the financial intermediaries is Factoring. It provides resources to finance receivables as well as facilitates collection of receivables. The intermediaries who provide this service are called Factors or Factoring agents. Factoring is an agreement in which accounts receivables arising out of sale of goods or service are sold by a firm to the factor, it is then the responsibility of the factor to collect the receivables. In case if any debt becomes bad, that loss is to be absorbed by the factor. In large organisations there will be huge amounts of receivables and funds will be locked up in them. With the help of Factoring, organisations can convert these receivables into cash before the actual maturity period that provides the firm with liquid cash. Factoring also helps organisations to get away with the tedious work of maintaining and collecting receivables.

Indian Financial System

Financial Institutions

Financial Markets

Financial Services

Banking

NonBanking

Money Market

Capital Market

Leasing

Hire Purchase

Factoring

STRUCTURE OF INDIAN FINANCIAL SYSTEM

REFERENCES

http://www.investopedia.com

http://www.shareyouressays.com/3185/631-words-essay-on-indian-financial-system-2

http://www.indianmba.com/Faculty_Column/FC177/fc177.html

http://www.rbi.org.in

http://www.business.gov.in

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