JAIIB

FINANCIAL SYSTEM

Financial System
Financial System means,
A structure available in an economy
To mobilise capital from various sector
And allocate and distribute to various needy
sector

Financial System
Active Role in Financial System is,
Transformation of savings into
Investments and consumption

Financial System
The process of transformation of savings
Is aided by various financial assets
Suiting the needs demands of both
Investors and spenders

Financial System
The various types of Financial Assets
Offered by Financial Intermediaries
Who intermediates between investors and
spenders

Financial System
Banks, financial institutions, mutual funds
etc. are examples for FINANCIAL
INTERMEDIARIES.

Financial System
Financial Market is a place
Where the activities of
Financial Intermediaries
Take place

Financial System
Financial Market broadly consists of
Money Market
Debt Market
Forex Market
Capital Market

Financial System
Two distinct roles of Central Banking
Authority are
Monetary control including control of inflation
Bank supervision

Financial System
Central Banking Authority is
Reserve Bank of India

Financial System
The Central Banking Authority
Ensures that the overall financial health of
banks is not impaired.
Through on-site and off-site surveillance of
banks

Financial System
Monetary Control is exercised through
CRR (Cash Reserve Ratio)
SLR ( Statutory Liquidity Ratio)
Bank and Repo rates
Instruments used by RBI for controlling the
prime rates of lending banks.

Financial System
Functions of RBI are
Monetary control
Supervision financial system
Management of Govt. Debt.
Banker to Govt.
Lender of last resort to Banks
Regulating money market through monetary
instruments.

Financial System
RBI supervises over the functioning of
Commercial Banks
NBFCs
Primary Dealers
Financial Institutions
Cooperative Banks
Clearing and settlement system

Financial System
The monetary instruments used by RBI
for regulating money markets are ::
CRR
SLR
Bank Rate
Repo Rate

Financial System
Broad categories of Financial System are
Central Banking

Authority (RBI)

Capital Market Regulatory Authority (SEBI)

(Stock Exchange Board of India)
Insurance and Pension Regulators (IRDA)
(Insurance Regulatory and Development
Authority)

Financial System
SEBI SUPERVISES AND CONTROLS
Equity market and Debt market
Stock exchanges, brokers, equity and debt
raisers, investment bankers, foreign
institutional investors, custodians,
depositories, mutual funds, listed companies,
registrars

Financial System
IRDA functions ::
Regulatory framework insurance business
Supervising both life and general insurance
business
Regulating pricing, investments and cost
structure of insurance companies
Regulating insurance brokers including
agencies both individuals and banks

Financial System
IRDA function also includes
Framing rules for pension funds
Regulating all pension funds

Financial System
Commercial Bank
Acceptance of deposit from public
For the purpose of lending or investment
Include Public Sector, Private Sector and
Foreign Banks

Financial System
Non-Banking Financial Companies
(NBFCs)
Allowed to raise monies as deposits from
public
Lend monies
Includes hire purchase, leasing, bills
discounting etc.
Licensed and supervised by RBI

Financial System
Primary Dealers (PDs)
Deals in Govt. securities
Both primary and secondary markets
Strengthen the Govt. securities market

Financial System
Financial Institutions (FIs)
Development Financial Instituions
Provide long term funds
For industry and agriculture
Falling under on-site and off-site surveillance
of RBI
Raises resources through long term bonds /
borrowings from international finanacial
institutions.

Financial System
Cooperative Banks
Raises deposits and lends from and to public
Except Certain exemptions in paying higher
Rate of Interest, Urban Cooperative banks
regulatory framework is same.
Urban co-op banks controlled by State
Govts. and RBI
Other co-op banks controlled by NABARD
and State Govts.

Financial System
Payment and Settlement system
Vital activity of RBI for effective financial
system
Maintenance of clearing house
Creation of Currency Chest
Creation of mechanism of electronic funds
transfer

Financial System
. Management of Govt. Debt
Function of RBI
Manage the issue and servicing of Govt. debt
Involves price discovery, volumes to be
raised, tenure of debt and matching with
overall cash management of debt.

Financial System
Bankers to Govt.
Function of RBI
Maintains an account, Govt. deposit
Carry out their cash management
Through issue of bonds and treasury bills

Financial System
Lender of last resort to banks
Central Bank provides liquidity support
On a temporary basis
Through repo (repurchase of securities)
facility to banks
To meet the short-term liquidity requirements

Financial System
Cash Reserve Ratio ( CRR )
Mandatory deposit to be maintained by banks
With requisite monetary authority
As a percentage to demand & time liabilities
RBI can control the liquidity in the banking
system
By increasing / decreasing the percentage

Financial System
Statutory Liquidity Ratio (SLR)
Prescribed percentage of demand and time
liabilities
To be held in prescribed securities, mostly
Govt. securities
The increase / decrease in CRR & SLR
contracts and enhances credit creation.

Financial System
Equity and Debt Market
Marketability of corporate securities
Like bonds, debentures and convertible
debentures
Enables corporate to raise debt
Debenture holders enjoy high liquidity

Financial System
Corporate securities
Issued only after obtaining approval from
SEBI
Securities quoted in stock exchanges
Freely bought and sold in the stock
exchanges

Financial System
Stock Exchange
Duly approved by the regulator (SEBI)
To provide sale and purchase of securities on
behalf of investors
Provides clearing house facilities
For netting of payment and delivery of
securities
Securities include equities, debt and
derivatives

Financial System
Clearing houses in stock exchange
Guarantees all payments and deliveries
With regard to purchase and sale of
securities

Financial System
Brokers stock exchange
Approved by the capital market regulator
Job of intermediating between
Buyers and sellers of securities

Financial System
Responsibility of brokers
Build up an order book
Carry out price discovery
Responsible for honouring brokers contracts
Service charges are subject to brokerage

Financial System
Equity and Debt raisers
Companies has to approach SEBI
Through stock exchange for permission
In the prescribed application with
prospectus
For raising equity or debt
Get them listed in stock exchange

Financial System
Investment Bankers ( merchant bankers)
Licensed by capital market regulator
Undertakes number of activities
Issue of stocks, fund raising and management
Also provides advisory services
Counsel on mergers and acquisition

Financial System
Foreign Institutional Investors (FII)
Foreign based funds
Authorised by SEBI
To invest in Indian equity and debt market
Through stock exchanges

Financial System
Depositories
Hold securities in demat form ( as opposed to
physical form)
Maintain accounts in depository participants
Who, in turn, maintain sub accounts of their
customers

Financial System
Depositories function
On instruction from stock exchange clearing
house
Supported by documentation
Transfers securities in electronic form

Financial System
Mutual Funds
Form of collective investment
Pools the money from the investors
Invests in stocks, debts and other securities
Less risky option for individual investor
Requires approval asset management
company (fund)
Each scheme has to be approved by regulator

Financial System
Registrar
Maintain register of shares and debenture
holders
Process shares and debenture allocation
Needs approval from regulator

Financial System
Insurance Regulatory and Development
Authority (IRDA)
Regulator for insurance business
For both life and general insurance
Regulates insurance business
Including licensing of insurance companies
Framing and supervising framework and
activities