Introduction

A financial system is a network of financial institutions,

financial markets, financial instruments and financial services to facilitate the transfer of funds.
The system consists of intermediaries, instruments and

the ultimate user of funds.

The level of economic growth largely depends upon and

is facilitated by the state of financial system prevailing in the economy.

The

financial system mobilizes the savings and channelizes them into the productive activity and thus influences the pace of economic development.
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Components of financial system:

Financial Institutions Financial Markets Financial Instruments Financial Services

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Functions of Financial System

Payment system for the exchange of goods and services. Pooling of funds for large scale enterprises.

Way for managing uncertainty and controlling risk.

Generates information helping in coordinating

decentralized decision making.

Helps in dealing with the incentive problem when one

party has an informational advantage.

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Financial institutions
The agencies which provide credit in the financial system

of a country are collectively known as financial Institutions. They provide all the financial and other facilities that are required for the industrial development of the country. Industrial development of the country by providing long term finance as well as administrative guidance to industrial entrepreneurs. Example IFCI, IDBI, State Financial Corporations.
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Financial Institution Functions

Financial institutions provide a service as intermediaries

of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitate the flow of cash through the economy.

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Types of Financial Institutions

A. Regulatory Institutions:
Reserve Bank of India (RBI) Securities and Exchange Board of India (SEBI) Central Board of Direct Taxes (CBDT)

Central Board of Excise & Customs

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Intermediaries Institutions:
Intermediaries that include the banking and non-banking

financial institutions. Some of the specialized Export - Import Bank of India (EXIM Bank) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture and Rural Development (NABARD) Life Insurance Corporation of India (LIC)

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 The banking institutions are the providers of depository

and transaction services. These activities are the major sources of creating money. The banking institutions are the major sources of providing loans and other credit facilities to the clients.

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Financial Markets
Financial Markets are generally known as a market where

financial securities or/and assets are bought and sold by the buyers and sellers respectively.

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Instruments of Financial Market

Shares

Debentures
Treasury bills Commodities Commercial Papers

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Difference Between Money Market & Capital Market

Maturity period: short term--- long term Credit instruments: call money, BOE ---shares,

debentures, etc. Institutions: RBI, commercial banks, NBFC, bill brokers, etc--- SEBI, Stock exchange, commercial banks, NBFC Purpose of loan: short term credit needs, provides working capital--- long term credit needs, provides fixed capital

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Structure of Capital Markets

Primary Markets
When companies need financial resources for its expansion, or for set up they borrow money from investors through issue of securities. Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a) High net-worth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities traded a) Stocks b) Commodities Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

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One time activity by the company.

Helps in mobilising the funds for the 11 October 2012 investors in the short run.

Functions of Financial Market

1. Transfer of resources: lender to ultimate borrower 2. Enhancing income: interest and dividend 3. Price determination through buyers and sellers 4. Provides liquidity through sale mechanism 5. Cost reduction: Search cost> advertising and locating customer
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Financial Instruments
Financial instruments are claims to the payment of sum of

money in future or a periodic interval. For example, the important financial instruments are shares, debentures, bonds, fixed deposits etc. Regular payment in the form of interest or dividend is paid by the company to the investors.

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 These instruments are classified as primary or secondary

instruments. Primary instruments are issued by the ultimate investors directly to the ultimate savers such as equity shares, debentures, Secondary instruments are issued by financial intermediaries to the ultimate savers as bank deposits, units and insurance policies,

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 Financial instruments help in borrowing and lending

money, the most liquid, short-term, debt obligations that are traded in the money market are called money market instruments. Commercial paper, certificate of deposits, Treasury bills, Bonds, etc.

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Financial Services
A financial service is any kind of service of a financial

nature offered by a financial service provider. All banking and insurance related services are included in this concept. These services are intangible and invisible. There should be proximity between the service provider and the consumer in order to complete a service transaction.

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 Banking and financial services: Advisory services Custody services Credit card services Insurance and insurance related services: Insurance brokerage Reinsurance etc.

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Financial Intermediaries:
This are the firms that provide services and products that

customers may not be able to get more efficiently by themselves in financial markets. Products and services of financial Intermediaries include checking accounts , savings accounts,loans ,mutual fund schemes ,insurance contract Example..RBI, Commercial Banks, Cooperative Banks, etc..

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 Financial intermediaries provide two important

advantages to savers. First, lending through an intermediary is usually less risky than lending directly. The major reason for reduced risk is that a financial intermediary can diversify. liquidity. Liquidity is the ability to convert assets into a spendable form--money--quickly. A house is an illiquid asset; selling one can take a great deal of time.

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 Financial intermediaries provide 2 major functions:

Maturity transformation Converting short-

term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs) Risk transformation Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to spread the risk)

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Regulatory Infrastructure

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 The regulators
RBI, SEBI The markets Commodities, equity, debt, foreign exchange The players Brokers, rms, banks, nancial institutions, foreign institutional investors, mutual fund managers, investors, exchanges, depositories, custodians, registrars.
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 RBI
Set up under the RBI Act, 1935. Regulator of deposit-taking agencies. Regulator for debt, foreign exchange markets. Securities infrastructure for debt, foreign exchange markets. Payments system. Investment banker for the government. Central bank.
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RESERVE BANK OF INDIA

It provides currency and operates the clearing system for

the banks.
It formulates and implements monetary and credit

policies.
It functions as a bankers bank.
It supervises the operations of credit institutions.

It regulates foreign exchange transactions.

It moderates the fluctuations in the exchange value of the
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rupee.

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 SEBI
Set up in 1988. Regulator of anything that is exchangetraded. SEBI can set regulatory policy, carry out implementation as well as has the power to enforce regulatory rules and impose punishment on wrong-doing. Grievances and appeals to SEBI rulings are heard by the Securities Appellate Tribunal.
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 SECURITIES AND EXCHANGE BOARD OF INDIA

Regulates the business in stock exchanges and any other

securities market. Register and regulate the capital market intermediaries and working of mutual funds. Prohibit fraudulent and unfair trade practices in the securities market. Promotes investors education and training of intermediaries of securities markets. Prohibit insider trading in securities. Regulate substantial acquisition of shares and takeovers of companies.
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