Indian Financial

System
 Financial System?

Financial System encompasses a group of

intermediaries which facilitates the flow of funds from
the areas of surplus to the areas of deficit.
It is a composition of various institutions, markets and
laws, practices, money managers, analysts, transactions
and claims and liabilities.
This facilitates the exchange of financial instruments
like deposits and loans, corporate stocks and bonds,
government bonds etc.
Financial System
Financial System
 Financial Institutions

These are intermediaries that mobilize savings and facilitate

the allocation of funds in an effective manner.

Banking Institutions: Scheduled Banks-Private, public,

Foreign and Regional Banks. Schedule Co-operative Banks

Non Banking Institutions: Non Banking Finance Companies

and Development Financial Institutions

Mutual Funds

Insurance and Housing Finance Companies

 Financial Market

A financial market can be defined as the market in which

financial assets are created or transferred.

As against a real transaction that involves exchange of

money for real goods or services, a financial transaction
involves creation or transfer of a financial asset.
 Financial Instruments
Financial instruments are tradable assets of any kind.
A real or virtual document representing a legal agreement involving
some sort of monetary value.
In today's financial marketplace, financial instruments can be
classified generally as equity based, representing ownership of the
asset, or debt based, representing a loan made by an investor to the
owner of the asset.
Foreign exchange instruments comprise a third, unique type of
instrument.
 Financial Services
Services and products provided to consumers
and businesses by financial institutions such as
banks, insurance companies, brokerage firms,
consumer finance companies, and investment
companies all of which comprise the financial
services industry.
Banking Under this an individual can deposit his or her
money and can get return in the form of interest and also
borrowers can get loan by paying interest to bank
periodically.
Insurance By using this one can get peace of mind as
one can buy insurance policies like life insurance, fire,
marine, health and general insurance which ensures that
person in the event of any mishap can get his or her
money back from insurance company.
Stock Market One can invest his or her funds into
stock market also where one gets dividends and also
capital appreciation, if one makes right investment
decision than return from equity markets are much
greater than that of fixed deposits parked in banks.
Treasury or Debt instruments Under this one can
invest his or her money into government bonds and also
debt instruments of private and public firms.
 Wealth Management There are many firms where one can jus
park their money and then these companies invest money across
different assets classes like commodity, derivatives, money market,
currency etc in order to generated superior returns for their clients.
Mutual Funds These funds track asset class and generate returns
accordingly so a debt fund will track returns of debt and money
market, an equity mutual fund would give returns according to
performance of stock market and so on.
Tax consultants and audit firms These organizations help people
in determining their tax liability, advising their clients on how to save
tax and also filing of their tax returns on time.
Credit Rating
Hire Purchase
Merchant Banking
Leasing
Underwriting
Factoring
Factoring

This is a process where Factoring cos pre-pays against the

credit invoices that companies regularly raise on your
established clients. In settlement of this obligation, company
clients pay Factoring company on the respective due dates
directly.
How it
Works
Factor will complete its due diligence on the client and
the customers.
Factor and the client will enter into a Factoring and Security
Agreement, as well as some additional documentation.
Factor will notify the customers of the change of address for
remittance of payments.
The client will submit an advance request for $10,000 to MP
Star along with the invoices, the supporting documentation and
assignment.
The factor will verify the advance to ensure that the invoices are
complete and that the accounts receivable are due and payable.
Factor will multiply the advance request of $10,000 times
the advance rate of 80% or $8,000 and subtract the initial
fee of 3.5% or $350 for a total funding to
the client of $7,650.
The invoices are then mailed to the customers.
When the customer sends payment to the lockbox in 30
days.
The factor will take from the payment the amount
advanced and the initial fee. The factor would then remit to
the client the balance left over when the reserve
settlement is released.
Merchant Banking Meaning
Merchant Banking is a combination of Banking and consultancy
services.
It helps a businessman to start a business.
It helps to raise (collect) finance.
It helps to expand and modernize the business.
It helps in restructuring of a business.
It helps to revive sick business units.
It also helps companies to register, buy and sell shares at the
stock exchange.
Project Management
Advice on Expansion and Modernization
Managing Public Issue of Companies
Handling Government Consent for Industrial Projects
Special Assistance to Small Companies and
Entrepreneurs
Services to Public Sector Units\
Portfolio Management
Management of Interest and Dividend
Role of Financial System
Functions and Role of financial system, market are given
below.
1. Pooling of Funds: In a financial system, the Savings of
people are transferred from households to business
organizations. With these production increases and better
goods are manufactured, which increases the standard of
living of people.
2. Capital Formation Business require finance. These are
made available through banks, households and different
financial institutions. They mobilize savings which leads to
Capital Formation.
3. Facilitates Payment: The financial system offers convenient
modes of payment for goods and services. New methods of
payments like credit cards, debit cards, cheques, etc. facilitates quick
and easy transactions.
4. Provides Liquidity: In financial system, liquidity means the
ability to convert into cash. The financial market provides the
investors the opportunity to liquidate their investments, which are in
instruments like shares, debentures, bonds, etc. Price is determined
on the daily basis according to the operations of the market force of
demand and supply.
5. Short and Long Term Needs: The financial market takes into
account the various needs of different individuals and
organizations. This facilitates optimum use of finances for
productive purposes.
6. Risk Function: The financial markets provide protection
against life, health and income risks. Risk Management is an
essential component of a growing economy.
7. Better Decisions: Financial Markets provide information about
the market and various financial assets. This helps the investors to
compare different investment options and choose the best one. It
helps in decision making in choosing portfolio allocations of their
wealth.
8. Finances Government Needs: Government needs huge
amount of money for the development of defense infrastructure.
It also requires finance for social welfare activities, public
health, education, etc. This is supplied to them by financial
markets.
9. Economic Development: India is a mixed economy. The
Government intervenes in the financial system to influence
macro-economic variables like interest rate or inflation. Thus,
credits can be made available to corporate at a cheaper rate.
This leads to economic development of the nation.