INDIAN FINANCIAL SYSTEM

FINANCIAL SYSTEM : It is collection of Markets, Institutions, Laws, Regulations, Methodologies through which financial claims are issued ,accepted & traded (e.g. deposits, bonds, stocks, debt and other securities) . Interest rates are determined and financial services are produced & delivered.

Financial System in India

Financial Sector consists of three main segments viz., 1) Financial institutions -banks, mutual funds, insurance companies, Finance Cos. 2) Financial markets -money market, debt market, capital market, forex market 3) Financial products -loans, deposits, bonds, equities

Financial Sector - Regulators

Regulators

Reserve Bank of India (RBI)

Securities Exchange Board of India (SEBI)

Insurance Regulatory and Development Authority (IRDA)

Insurance Companies

Banks

Capital Markets/ Mutual Funds

 CONCERNS OF FINANCIAL SYSTEM: Money: Medium of Exchange. Unit of Measurement in the economy. Must be effective(strong). Must be accepted in the market. Finance: Aggregate resource of economy in monetary terms (Equity, debt). Should be

 sufficient to undertake developmental activities as well as production. Credit: Chanelising the savings and extension of debt /Investment which is returned with interest/Income. NEED FOR INTERMEDIATION: In the economy there are (a) Saving units having surplus funds (b) borrowal units which require funds for consumption, production of goods and services. Main concerns of savers are safety, return, period, liquidity. Main concerns of borrowal units are cost, terms, period. The concerns of saving units may not match with the concerns of the borrowal units. Hence to balance the concerns of both the units, need for intermediary arises who will systematise the transfer of funds

 From Saving units to borrowing units. Further to regulate the working of these intermediaries, make them accountable and safeguarding the savings of the saving units, there arises the need for Regulators (Central Banks) and other Government organisations/Regulators (Sebi, IRDA, Pension Fund Regulatory Authority etc.). Keeping in view the requirements of both savers and borrowers different financial instruments have been created.

Type of Financial Intermeidiaries: (A) Deposit Raising Institutions: Commercial Banks Savings and Loan Institutions (Thrift societies) Credit unions (B) Non-Deposit Raising Institutions: Finance Companies (Consumer Finance cos,Sales Finance Cos., Commercial finance Cos). Mutual Funds Security firms Investment Bankers, Brokers & Dealers

Pension Funds Insurance Cos. (Life & Non-Life) FINANCIAL INSTRUMENTS: FINANCIAL Assets/Instruments represent Financial obligations when the borrower raises funds in the financial markets. Supplier will have claim on the income/wealth of the borrower. The claim will be represented in the form of certificate/receipt/any other legal document.

 Types of Financial Assets: Deposits (Both Fixed/Checking Account) Interest except on Current A/c Stocks Dividend/Sharing of profit Mutual Fund units Capital gain Debt Interest earning Designing of Financial Products: The financial products may be rated by the approved rating Companies to infer the safety level. Depending upon the requirements as well as risk-return trade off of individual supplier of funds, the investor can select the product.

Issuers considerations: Cash flows: Purpose, Period, minimize cost Taxation: Minimize Tax liability of issuer and investor Leverage: Avoid Debt trap, minimize interst cost in falling interest rate scenario Dilution of Control: Promoters control dilution on equity issue Transaction Costs: Investors cost while transacting are minimal Quantum of Funds Quantum, time, Maturity plan: Requirements, cash flows etc.

 Market Conditions: Enviornment (Economic, Political) Investor Profile: Target segment(e.g. low subscription Retail customers etc.) Past performance: Past performance of issue of the Company/Issue of any other Company in the industry Cost of funds: Cost of funds raised, Cost of issue Regulatory aspects: Rating (Debt instruments), Capital adequacy etc.

 INVESTORS CONSIDERATIONS: Risk : Safety of funds Liquidity: Channels available for liquidiy (Secondary Market etc.) Returns: Risk- return preference Tax Planning: Tax incentives Cash flows Simplicity

 Role of Financial Intermediaries: Process of transferring monetary resources of the Public into financial resources through direct and indirect investments. Maturity intermediation Risk reduction through diversification Reducing cost of transactions and information Providing payment mechanism: Cheques, Credit cards, debit cards, Electronic Transfer of funds, payment mechanism for international transactions.