FINANCIAL SYSTEM

A financial system may be

defined as a set of institutions,
instruments and markets which
foster savings and channels them to
their most efficient use.

FEATURES OF FINANCIAL SYSTEM

Organized and un organized financial
markets are part of financial system.
It regulates transaction between various
economic units.
It provides a linkage between depositors
and financial investors.
Promotes efficient allocation of financial
resources.
Promotes economic development.
Facilitates expansion of financial markets.

FUNCTIONS OF FINANCIAL SYSTEM

1. Collect new savings and allocates them to
projects
2. Reallocate accumulated old savings to
projects and firms according to savers
preferences for risk and return
3. Organise the payment system
4. Provide liquidity of claims and securities
5. Provide a system of corporate governance
6. Generate information for decision making

FINANCIAL SYSTEM

INFORMAL(UN
ORGANISED) SYSTEM

FORMAL (ORGANISED)SYSTEM

FINANCIAL
MARKET

REGULATORS;
MOF, SEBI,
RBI, IRDA

FINANCIAL
INSTITUTIO
NS

FINANCIAL
INSTRUMENT
S

FINANCIAL
SERVICES

MONEY LENDERS,
LOCAL BANKERS,
TRADERS,LANDLO
RDS,PAWN
BROKERS.

COMPONENTS OF FINANCIAL
SYSTEM
1.
2.
3.
4.

FIANCIAL MARKET
FINANCIAL INSTITUTIONS
FINANCIAL INSTRUMENTS
FIANCIAL SERVICES

FINANCIAL MARKET
Financial markets are a
mechanism enabling participants to deal
in financial claims. The market also
provide a facility in which their demands
and requirements interact to set a price for
such claims. The main organized financial
market in India are the money market and
capital market.

FINANCIAL INSTITUTIONS
Financial
institutions are intermediaries that
mobilise savings and facilitate the
allocation of funds in an efficient manner.

FINANCIAL INSTITUTIONS

FINANCIAL INSTITUTIONS

Monetar
y or
Banking
institutio
RBI,
ns

Commercial
banks,
Regional rural
banks,
Cooperative
banks, post
office,
savings

Non
monetary or
non Banking
institutions
Pension
funds, LIC,
GIC, UTI,
Mutual funds,
Investments,
Companies,
Lease finance
companies

Specialise
d
financial
institution
s
IDBI,
NABARD,
IFCI,ICICI,
Industrial
corporation,
State
financial
corporation.

FINANCIAL INSTRUMENT
A financial instrument is a
claim against a person or institution for
the payment at a future date a sum of
money and/or a periodic payment in the
form of interest or dividend.

FINANCIAL INTERMEDIARIES
Financial
intermediaries provide financial services such
as merchant banking, leasing, hire purchase,
credit rating, and so on. They facilitate
financial transactions of individual and
institutional investors. Financial services
rendered by the financial intermediaries
bridge the gap between lack of knowledge on
the part of investors and increasing
sophistication of financial instruments and
markets.

ROLE OF FINANCIAL MARKET

1. Separation , distribution, diversification
and reduction of risk
2. Efficient payment mechanism
3. Transformation of financial claims to suit
the time preference of both savers and
borrowers
4. Portfolio managment

FINANCIAL MARKET
FINANCIAL MARKET

MONEY MARKET

CAPITAL MARKET

MONEY MARKET
A money market is a market
for short term debt instruments (maturity
below year). It is a highly liquid market
where in securities are bought and sold in
large denominations to reduce transaction
costs. It doesn't actually deal in cash or
money but deals on financial assets and
instruments like treasury bills, commercial
papers etc.

SUB MARKETS OF MONEY

MARKET
1.
2.
3.
4.

CALL MONEY MARKET

COMMERCIAL BILLS MARKET
DISCOUNT MARKET
SHORT TERM GOVT SECURITIES
MARKET

MONEY MARKET
INSTRUMENTS
1.
2.
3.
4.
5.
6.

TREASURY BILLS
BILL OF EXCHANGE OR TRADE BILL
FINANCE BILL OR PROMISORY NOTE
COMMERCIAL PAPER
CERTIFICATES OF DEPOSITS
REPURCHASE AGREEMENTS (REPOS)

CAPITAL MARKET
Capital market is a market for
long term funds. The capital market
is the market from where productive
capital is raised and made available
for industrial purposes.

FINANCIAL INSTRUMENTS IN
CAPITAL MARKET
1.
2.
3.
4.
5.
6.
7.
8.

EQUITY SHARES
PREFERENCE SHARES
DEBENTURES
ZERO INTEREST BOUNDS(ZERO COUPON
BONDS)
DEEP DISCOUNT BOND
OPTION BONDS
BONDS WITH WARRANTS
GOVERNMENT SECURITIES

REGULATION OF CAPITAL MARKET

Capital issues control Act was passed in 1947
Companies Act was passed in1956
Securities contract (Regulation) Act was
passed in 1956
Monopolies and restrictive trade practices Act
was passed in 1970
Foreign exchange regulation Act was passed
in 1973
Securities exchange board of India (SEBI) was
set up in India in 1988 as a non statutory
body ,but it was given statutory recognition in
1992 by passing SEBI Act.

DIFFERENCE BETWEEN CAPITAL

MARKET AND MONEY MARKET

CAPITAL MARKET

PRIMARY
MARKET

SECONDARY
MARKET

PRIMARY MARKET (NEW ISSUE MARKET)

AND SECONDARY MARKET (STOCK
EXCHANGE ) ARE THE TWO WINGS OF
CAPITAL MARKET

Primary market deals with the

issue of new capital and the
secondary market deals with buying
and selling of old securities. There is
a close link between primary market
and secondary market.

FUNCTIONS OF PRIMARY
MARKET
ORIGINATION
UNDERWRITING
DISTRIBUTION

METHODS OF FLOTATION OF
NEW ISSUES
1.
2.
3.
4.
5.

PUBLIC ISSUE
RIGHTS ISSUE
BONUS ISSUE
PRIVATE PLACEMENT
OFFER TO EMPLOYEES

STOCK EXCHANGE
Stock exchange
refers to an organised market in
which listed shares and debentures
of companies can be purchased and
sold. In which addition to the second
hand shares (already issued)and
debentures of public companies ,
stock exchange also deals with
government securities and bonds
and debentures issued by municipal

FUNCTIONS OF STOCK EXCHANGE

1. Central trading place
2. Settlement of transaction
3. Continuous market
4. Supply of long term funds
5. Setting up of rules regulations
6. Evaluation of securities
7. Control over company management
8. Helps capital formation
9. Facilitates speculation
10.Directs the flow of savings

STOCK EXCHANGES IN INDIA

BOMBAY STOCK EXCHANGE

NATIONAL STOCK EXCHANGE
OVER THE COUNTER EXCHANGE OF INDIA
INTERCONNECTED STOCK EXCHANGE OF
INDIA
REGIONAL STOCKEXCHANGE

INDIAN FINANCIAL SYSTEM

The Indian financial system consists of a
variety of institutions, markets and
instruments that facilitate the flow of fund.
RBI in India acts as the apex authority in
the Indian financial system.
SEBI regulates the securities market which
is a major component of Indian financial
system.