Introduction to Financial

System
Chandrika Marisetty, 72
Priyanka Jindal, 73
Subtopics
1. Introduction
2. Evolution
3. Objectives
4. Components
5. Advantages
6. Disadvantages
The system that allows the transfer of money between savers
(and investors) and borrowers.
A financial system can operate on a global, regional or firm
specific level.
Financial System
Evolution of Financial System
Barter
Money Lender
Chit Funds
Indigenous Banking
Cooperative Societies
Banks
Joint Stock Banks
Stock Exchanges
Investment Banks


Objectives
Financial System: System that allows the transfer of
money between savers (and investors) and borrowers.
To help in the formation of capital.
To meet the short term and long term capital needs of
households, corporate houses, Govt. and foreigners.
To mobilize the savings and invest them in the
productive manner.

Components of Financial System
Indian
Financial
System
Formal
(organized
Financial
system)
Regulators;
MoF, SEBI,
RBI, IRDA
Financial
Institutions
(Intermediaries)
Financial
Markets
Financial
Instrument
Financial
Services
Informal
(Unorganized
financial
system)
Money lenders,
Local bankers,
Traders
Financial Institutions

Channeling funds from and to particular firms,
industries, sectors, during the development process.
To reduce financial constraints faced by companies.
Converting themselves into universal banks. E.g.: ICICI
bank ,Muthoot (NBFS), HDFC life(Insurance)

Financial Markets

The market in which financial assets are created and/or
transferred.

Funds or savings are transferred from surplus unit to deficit
unit.

Players like dealers, investors, borrowers, depositors, etc.
are plays a vital role in driving demand and supply.

Financial markets help Individuals to get the benefits of time
preference, liquidity preference and portfolio management.



A. Capital Market
Market for securities (debt or equity), where business
enterprises and governments can raise long-term funds.
It is defined as a market in which money is provided for
periods longer than a Year.
B. Money Market
Its a wholesale debt market for low risk, highly liquid, short
term instrument. Period ranges from a day up to a year.
This market is dominated mostly by government, banks and
financial institutions.
C. Credit Market
It is a place where banks, Fis and NBFCs purvey short,
medium and long term loans to corporate and individuals



Financial Regulators
Main Objective:
a. To ensure investor protection from fraud
b. To enable flow of relevant and reliable
information
Securities and Exchange Board of India
(regulates stock markets)
Reserve Bank of India(regulates money market)
Ministry of Finance( Ex: Post office)


Financial Products
Intangible in nature
Claims on the issuers
Financial contract between issuer & investor

Money Market Instruments (short term and highly liquid)
T- Bills, CoD
Exchange Market Instruments
Forward, future, swap
Capital Market Instruments(long term)
Equity shares, Preference shares
Commodity Market Instruments
Gold, Silver
Financial Services
Services provided to consumers and Businesses by
financial institutions
Banking Services
Insurance Services
Stock Broking
Consumer Finance
Mutual Fund Services
Advantages of Financial System

1.Pooling of funds.
2.Capital formation.
3.Facilitates payments.
4.Provides liquidity.
5.Short & long term needs.
6.Risk functions.
7.Better decisions.
8.Finances Government needs.
9.Economic development.


Disadvantages
1. Lack of complete transparency
2. Variety of manipulative practices
3. Institutional deficiencies
4. Insider trading