Serves as a link between savers and investors

Mechanism for exchange of goods and services

Mechanism of transfer of resources

Promotes process of capital formation

Role of financial system

Structure of financial system

Financial system Financial Assets Financial Markets Financial Intermediaries

Financial assets
Perform significant role in transferring funds from lenders to borrowers Each asset differs from each other A financial asset is one which is used for production or consumption or for future creation of assets. Represent claim against future income and wealth of others. To suit different requirements, different securities are issued.

Financial assets/ securities

Primary assets/ securities

Secondary assets/ securities

Direct securities

Indirect securities

Primary securities
Issued directly by ultimate borrowers of the funds to the ultimate savers or investors. Example: Equity shares, preference shares and debentures.

Secondary securities
Not issued directly by ultimate borrowers
Issued by financial intermediaries to ultimate savers

Example: Insurance policy, Mutual funds

Financial Markets
Market normally refers to a group of traders carrying on business at a definite place, building or locality. A financial market is a market for the creation and exchange of financial assets. Once engaged in buying or selling the financial assets, indicates that you are participating in financial markets in one way or the other. Institutional arrangement for dealing in financial assets of different types

Functions of financial market

o To facilitate creation and allocation of credit o To serve as intermediary for mobilization of savings o To assist the process of balanced economic growth

o To provide financial convenience

o To cater to various credit needs of the business houses

Money Market

Capital Market

Financial Markets

Money Market
All transactions in near money Deal with short term funds in the economy Institutional arrangements for facilitating borrowing and lending of short term funds Funds borrowed for a short period (less than a year) Sub markets are:
o Call money market o Treasury bill market o Commercial paper market o Certificate of deposits market

Capital Market
Institutional arrangements for facilitating the borrowing and lending of long term funds Medium through which investor hand over money today in exchange for promise of money far in the future.

Financial Intermediaries
Facilitate smooth functioning of the financial system by making investors and borrowers meet

Mobilize savings of surplus units and allocate them in productive activities promising a better return
Act as a middlemen between savers and borrowers

Types of financial intermediaries

Banking Institutions Non banking financial institutions Unorganized sector

Organized sector

Organized financial institutions

Unorganized financial institutions

- Commercial banks - Co-operative banks -Regional rural banks -Foreign banks

- Indigenous bankers - Money lenders

- Development finance institutions - Investment Institutions

REGULATORY FRAMEWORK
Plays a critical role in ensuring the health, soundness, reliability and stability of the financial system

lays down the specific rules for behavior of participants in the financial system
necessary to generate, maintain and promote this trust of the participants.

RBI

NABARD

Regulatory Bodies

SEBI

IDBI

RBI
RBI seeks to regulate the volume and direction of the flow of bank credit Apex institution as the monetary authority of the country Acts as a guide, regulator, controller and promoter of the financial system.

1 2 3 4

Formulates and implements monetary and credit policies Functions as bankers bank Supervises the operations of credit institutions Controls the money supply and credit Considered as lender of last resort

Functions of RBI

RBI also performs several functions aimed at developing Indian financial system:

Integrate the unorganized financial sector with organized financial sector Encourages extension of commercial banking system in the rural areas Influences allocation of credit Promotes development of new institutions

Techniques of monetary control

1. Open Market Operations:
o Through the open market sale and purchase of government securities takes place. o RBI can affect the reserves position of banks, yields on government securities and the volume and cost of bank credit. 2. Bank Rate and Discretionary Control of Refinance: o Bank rate is the standard rate at which the RBI is prepared to buy or rediscount the B/E or other eligible commercial papers. o Used to regulate the cost and availability of refinance and to change the volume of lendable resources of banks and other financial institutions.

3. Cash Reserve Ratio(CRR): It refers to the cash which banks have to maintain with the RBI as a certain percentage of their demand and time liabilities. 4. Statutory Liquidity Ratio(SLR): It is the ratio of cash in hand balances in current account with SBI, its subsidiaries other nationalized banks and the RBI; gold and unencumbered approved securities to total demand and time liabilities of the banks.

5. Direct Credit Allocation and Credit Rationing: Through this the RBI has regulated the allocation/distribution of credit among different sectors, borrowers and users and it has facilitated in narrowing down the regional/geographical imbalances. 6. Moral Suasion: This is another most actively and consistently used technique of monetary control. It takes the form of writing letters and holding discussions between the RBI and the banks about trends in the economy in general and in money, credit and finance in particular, and about the measures which ought to be taken from time to time in the light of national objectives.

SEBI
SEBI has emerged as an important constituent of the system that now is actively engaged in regulating, controlling and monitoring the Indian Financial System. Through SEBI, the regulation model which is sought to be put in place in the country, is one in which every aspect of securities market regulation is entrusted to a single highly visible and independent organization, which is backed by a statute, and which is accountable to the Parliament and in which investors can have trust and confidence.

Functions of SEBI
Regulates business in stock exchanges Register and regulate working of mutual funds Prohibit insider trading in securities Register and regulate capital market intermediaries

IDBI
IDBI was set up to accelerate the development of the country

Was a wholly subsidiary of RBI

Was expected to coordinate the activities of the institutions engaged in financing, promoting or developing industry.

Functions of IDBI
Act as an apex institution Provide refinance for term loans granted by banks and financial institutions

Coordinate the activities of institutions providing term finance to industry

Provide technical and administrative assistance promotion, management and growth of industry Grant direct loans and advances to industrial concerns for

NABARD Apex institution for financing agricultural and

rural sectors Main objectives are: o To provide credit for development of agriculture, small scale industries and rural areas o To provide short term refinance assistance o To Sanction refinance assistance for government sponsored programs such as rozgar yojna etc.