Financial System | Capital Markets |

FINANCIAL MARKETS Money Markets | Financial Services |

Merchant Banking | Insurance |
& SERVICES SEBI regulation
FINANCIAL SYSTEM
Specialised & Non Specialised Financial Institutions ❶
Organised & Unorganised Financial Markets❷
Financial instruments & Services which facilitate transfer of funds ❸

Financial System “ Implies a set of complex and closely connected or

intermixed institutions, agents, practices, markets, transaction, claims,
and liabilities in the economy.
FINANCE SYSTEM CONCERNED ABOUT?

MONEY CREDIT / LOAN FINANCE

Current Medium of Sum of money to be Monetary resources

exchange or Means returned normally comprising Debt &
of payment with interest Ownership funds of
the state, company
or person
 Indian Financial System

Financial
Institutions Financial
Markets
Regulatory Organised

Primary
Intermediaries
Un organised
Banking Secondary

Money
Non Banking Market

Non Capital
Intermediaries Market
Equity

Financial Debt
Instruments
Derivatives
Primary

Short term

Secondary
Medium term
Financial Services

Long term
FINANCIAL INSTITUTIONS
A financial institution (FI) is a company engaged in the business of
dealing with financial and monetary transactions, such as deposits,
loans, investments and currency exchange.

The activities of different financial institutions quite often overlap.

They are classified on the basis of ‘banking and non banking
institution’.
The banking institutions have quite a few things in common with
the non banking ones, but their distinguishing character lies in
the fact that, unlike other institutions,.
•they participate in economy’s payment mechanism (i.e.)
they provide transaction services.
•Their deposit liabilities constitute a major part in the
nations money supply.
•They can as a whole create deposit or credit, which is MONEY.
Subject to legal reserve requirements, can advance credit by
creating claim against themselves, while other institutions can lend
only out of resources put at their disposal by the savers.
•Banking system consists of commercial banks & co operative banks.
•The examples of Non Banking Finance Companies - NBFC includes
LIC, UTI, IDBI etc.
Intermediaries: Banks & NBFCs.
Non Intermediaries:
Industrial development bank of India (IDBI),
Industrial finance corporation o India (IFC)
National Bank for Agricultural and rural development
(NABARD), etc.
These institutions have come ins to existence because of the
government efforts to provide assistance for specific purposes ,
sectors and regions.
Since they have been set up by government, they are also
called as Non Banking Statutory Financial Organisation
(NBSFO).
Regulatory: Central Bank –RBI.
AS PER RBI DATA

26 – Nationalised Banks 20 + 6 State Bank groups

20 – Private sector banks 13 Old + 7 New Pvt Banks

155
64 – Regional Rural Banks
45 – Foreign Banks
Banking Institutions
 Primary Capital Market SEBI Doc
FINANCIAL MARKETS Secondary Money Market

Financial markets are the centres or Financial institutions

arrangements that provide facilities Agents or brokers
for buying and selling of financial Dealers
claims and services.
Borrowers
The participants on the demand and Lenders
supply sides of these markets are,.
Savers etc.
Primary market
Deals with new financial claims or new securities and
therefore there are also known as NEW ISSUE MARKETS.
Primary market mobilise savings and they supply additional
capital to business units.
Secondary Market
On the other hand secondary market deals with securities
already issued or existing or outstanding.
Secondary market provide liquidity to the securities issued in
the primary markets.
Capital Market & Money Market
Capital market and money both mobilise funds to the issuers.
This classification is primary based on the time period of
maturity of financial assets issued in this market.
Money market deals with short term claims (<1 year). Capital
Market deals with long term assets (>1 year)
FINANCIAL INSTRUMENTS
Financial Assets or securities:
Represents a claim to the payment of sum of money sometime
in future (principal) and or periodic payment in the form of
interest or dividend.
Among the investment characteristics of financial assets,
the following are important,.

Liquidity | Marketability | Reversibility | Transferability |

Transaction cost | Risk of default | Maturity period | Tax status etc.
FACTORS AFFECTING THE STABILITY OF
FINANCIAL SYSTEM
Equilibrium in financial markets is
attained through perfect competition
Large number of savers and investors
operate in the market
Savers and investors are rational
Information are freely available to
everyone
There is no transaction cost
Financial assets are infinitely divisible
Participants in markets have homogenous expectations.
There are no taxes.
DETERMINANTS OF SUPPLY OR DEMAND FOR
FUNDS
Determinants of Supply of funds: a) Aggregate savings of the
household sector, business sector, and the government sector. The
Saving of the economic unit equals to the disposable income and
consumption expenditure in a given year.
Volume of savings depends on,.
Level of current and expected income
Age wise variations in income
Distribution of income in an economy
Degree of certainty of income
Wealth & Inflation
Desire to provide for old age
Family members
Rate of interest
Availability of saving media in preferred investment
characteristics, etc.
B) Another determinant of supply of funds is the development
of banks and other financial institution which in turn ,
determine CREDIT MULTIPLIER.
Demand of funds depends on:
Investment in fixed and circulating (working)
capital
Demand for consumer durables
Investment in housing.
Total investment demand is determined by
1. Current level of capital stock
2. Capacity utilisation
3. Prospectus regarding future demand for goods, prices,
government policies, profitability
4. Availability of internal funds
5. Cost of funds
Demand for consumer durables depends on
1. Changes in tastes and preferences
2. Fashion
3. Demonstration effect
4. Cost of funds
IN REALITY
Equilibrium refers to ’Ideal’ conditions in financial markets.
In reality financial markets in different countries vary differ
from ideal conditions in varying degrees.
Markets are characterised by many imperfections, restrictive
practices and externalities.
We witness existence of Transaction cost, lack of information,
limited no.of operators, direct and indirect intervention by
authorities.
Authorities determine
- the volume of supply of funds,
- allocation of funds,
- cost of funds administratively through
direct physical regulations and control.
EFFECTS OF FINANCIAL SYSTEM ON ECONOMIC
DEVELOPMENT
The production function is the link between
finance and economic development.
Men, Money and materials are crucial
inputs in production activities.
The human capital and physical capital
can be bought and developed with money.
In the sense Money, credit and finance are
life blood of economic development.
RESERVE BANK OF INDIA - RBI
The Reserve Bank of India was established in 1935 under the
provisions of the Reserve Bank of India Act, 1934 in Calcutta,
eventually moved permanently to Mumbai.
Though originally privately owned, since nationalisation in
1949, the Reserve Bank is fully owned by the Government of
India.
FUNCTIONS OF RBI
Bank of Issue: As per the provisions of the Section 22 of the
Reserve Bank of India Act 1934 the RBI has sole right or
authority to issue currency notes except one rupee note and
coins of smaller denomination.
Bankers to Government: The second important function
of the Reserve Bank of India is to act as Government
banker, agent and adviser.
Bankers’ Bank and Lender of the last resort: Every scheduled
bank was required to maintain with Reserve Bank a cash
balance.
The minimum cash requirements can be changed by the
Reserve Bank of India.
The scheduled banks can borrow from the Reserve Bank of
India on the basis of eligible securities or get financial
accommodation in times of need or stringency by re-
discounting bills of exchange.
Manager of Foreign Exchange: RBI manages forex under the
FEMA- Foreign Exchange Management Act, 1999. in order to
A) Facilitate external trade and payment *IMF News
B) Promote development of foreign exchange market in India.
Supervisory Function: RBI supervise the banking system in
India.
RBI has power to issue licence for setting up new banks, to
open new branches, to decide minimum reserves.
RBI inspects functioning of commercial banks in India and
abroad. RBI also guide and direct the commercial banks in
India.
RBI can conduct audit any of the bank.
Controller of credit:
The Reserve Bank of India is the controller of credit, i.e., it has
the power to influence the volume of credit created by banks
in India.