THE FINANCIAL SYSTEM

Economic growth of the country Intermediary Flow of funds create & allocation Well integrated set of sub system of FI, FM, FS ,FIS Transfer & allocation of funds effectively & efficiently Cooperation informal & formal financial sectors coexistence- financial dualism

FUNCTIONS OF FINANCIAL SYSTEM

Mobilize & allocate savings Monitor corporate performance Provide payment & settlement system Optimum allocation of risk bearing Disseminate price related information Offer portfolio adjustment facility Lower cost of transaction Promote the process of financial deepening and broadening

INDIAN FINANCIAL SYSTEM

Formal organized , organized , Institutional , Regulated , Modern Regulated by Ministry of finance (MOF) RBI SEBI IRDA

Informal unorganized , Non- Institutional , Non regulated , Traditional Regulated by Individual Moneylenders Group of persons as Funds or Association Partnership firm Local brokers , pawn brokers ,Non bank financial intermediaries like Chit fund companies Features of Informal System : Flexibility in operation Interface relationship between debtor & creditor

INFORMAL FINANCIAL SYSTEM

Advantages Low transaction cost Minimum default risk Transference of procedures Disadvantages Wide range of interest rates Higher rate of interest unregulated

COMPONENTS OF FORMAL FINANCIAL SYSTEM

Financial Institutions Financial Markets Financial Instruments Financial Services

IFS.docx

CLASSIFICATION OF FINANCIAL INSTITUTIONS

Banking & non- Banking Term finance Specialized Sectorial Investment State level

FINANCIAL MARKETS
Type Money Market Capital Market

Segments Primary Market Secondary Market

FINANCIAL INSTRUMENT
Features Marketable Tradable Tailor made Financial Securities Type Primary Secondary

FINANCIAL SERVICES
Need Borrowing & funding Lending & Investing Buying & Selling securities Making & enabling Payment & settlement Managing risk

INTERACTION AMONG THE COMPONENTS

Interdependent Interactive Close links Competing with each other

KEY ELEMENTS OF WELL FUNCTIONING

FINANCIAL SYSTEM Strong , legal and regulatory environment Stable money Sound public finance & public debt mgmt Central bank Sound banking system Information system Well functioning security market

FINANCIAL SYSTEM DESIGN

Bank based Market based

BANK BASED FINANCIAL SYSTEM

Advantages Close relationship with parties Provide tailor made contracts Efficient inter temporal risk sharing No free rider problem Drawbacks Retards innovation & growth impedes competition