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Constituents of the financial system: The three main constituents of the financial
system are:
1. Financial Assets
2. Financial Intermediaries
3. Financial markets
1. Financial Assets: Financial assets are intangible assets such as bank deposits,
bonds, and stocks, whose values are derived from a contractual claim of what they
represent. Unlike property or commodities, they are not physical (apart from the
documents’ paper).Financial assets are more liquid than tangible assets, i.e. they
can be turned into cash more rapidly.
While land or some other tangible asset has physical value, a financial document
does not until it is converted into cash.
Every financial asset has a corresponding financial liability; it’s that financial liability that
gives financial asset its value.
CURRENT ASSETS: Assets which are easily convertible into cash like stock,
inventory, marketable securities, short-term investments, fixed deposits, accrued
incomes, bank balances, debtors, prepaid expenses etc. are classified as current
assets. Current assets are generally of a shorter life span as compared to fixed
assets which last for a longer period. Current assets can also be termed as liquid
assets.
FIXED ASSETS: Fixed assets are of a fixed nature in the context that they are not
readily convertible into cash. They require elaborate procedure and time for their
sale and converted into cash. Land, building, plant, machinery, equipment and
furniture are some examples of fixed assets. Other names used for fixed assets
are non-current assets, long-term assets or hard assets. Generally, the value of
fixed assets generally reduces over a period of time (known as depreciation).
TANGIBLE ASSETS: Tangible assets are those assets which we can touch, see
and feel. All fixed assets are tangible. Tangible assets are depreciated. Moreover,
some current assets like inventory and cash fall under the category of tangible
assets too. Few examples of such assets include furniture, stock, computers,
buildings, machines, etc.
OPERATING ASSETS: All assets required for the current day-to-day transaction
of business are known as operating assets. In simple words, the assets that a
company uses for producing a product or service are operating assets. These
include cash, bank balance, inventory, plant, equipment etc.
NON-OPERATING ASSETS: All assets which are of no use for daily business
operations but are essential for the establishment of business and for its future
needs are termed as non-operational. This could include some real estate
purchased to earn from its appreciation or excess cash in business, which is not
used in an operation.
A. (i) Marketable Assets : Marketable assets are those which can be easily transferred
from one person to another without much hindrance. E.g.Equity shares of listed
companies, Bonds of PSUs, Government Securities.
(ii) Non-marketable Assets : Non-marketable assets are those assets which cannot be
transferred easily. E.g. FDRs, PF, Pension Funds, NSC, Insurance policy etc.
B. (i) Cash Assets : Cash assets are those assets that may readily be converted to
cash. These assets often retain high levels of liquidity and may be used to ensure the
financial ability of a company or individual to conduct daily operations. E.g. cash, money
market funds, commercial papers.
(ii) Debt Asset : Debt asset is issued by a variety of organizations for the purpose of
raising their debt capital. There are different ways of raising debt capital. E.g.- issue of
debentures, raising of term loans, working capital advances etc.
(iii) Stock Asset : Stock asset is issued by business organizations for the purpose of
raising their fixed capital. There are two types of stock namely equity shares and
preference shares.
Mission RBI 2018 - Financial System
(i) Capital Market Intermediaries: These intermediaries mainly provide long term
funds to individuals and corporate customers. They consist of term lending institutions
like financial corporations and investment institutions like Life Insurance Corporation of
India (LIC), mutual funds, investment banks, pension funds etc.
(ii) Money Market Intermediaries: Money market intermediaries supply only short term
funds to individuals and corporate customers. They consist of commercial banks,
cooperative bank, NBFCs etc.
(b) Organized Markets: In the organized markets, there are standardized rules and
regulations governing their financial dealings. There is also a high degree of
institutionalization and instrumentalization. These markets are subject to strict
supervision and control by the RBI or other regulatory bodies. These organized markets
can be further classified into two types. They are:
(i) Capital Market and
(ii) Money Market.
Mission RBI 2018 - Financial System
(i) Capital Market: The capital market is a market for financial assets which have a long
or indefinite maturity. Generally, it deals with long term securities which have a maturity
period of more than one year.
1. Industrial Securities Market: As the very name implies, it is a market for industrial
securities, namely : (i) equity shares (ii) Preference shares and (iii) Debentures or
bonds. It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments. It can be further subdivided into two types. They are
(a) Primary market or New Issue Market,
(b) Secondary market or Stock Exchange.
Gilt-edged securities are a high-grade investment with very low risk. Typically, these
are issued by blue chip companies that dependably meet dividend or interest payments
because they are well-established and financially stable.
Following features of government securities earned them the name of gilt edged
securities.
1. They have zero income default.
2. There is high rate of return.
3. There is cent per cent liquidity.
(ii) Money Market: Money market is a very important segment of a financial system. It
is the market for dealing in monetary assets of short-term nature. Short-term funds up to
one year and financial assets that are close substitutes for money are dealt in the
money market. Money market provides access to providers and users of short-term
funds to fulfill their investments and borrowings requirements respectively at an efficient
market clearing price.
It performs the crucial role of providing an equilibrating mechanism to even out short-
term liquidity, surpluses and deficits and in the process, facilitates the conduct of
monetary policy. The money market is one of the primary mechanism through which the
Central Bank influences liquidity and the general level of interest rates in an economy.
The Bank’s interventions to influence liquidity serve as signaling device for other
segments of the financial system. The money market functions as a wholesale debt
market for low-risk, highly liquid, short term instruments. Funds are available in this
market for periods ranging from a single day upto a year. Mostly government, banks
and financial institutions dominate this market. It is a formal financial market that deals
with short-term fund management.