An individual has a surplus of Rs.1 lac, what he can do with it ? What does a bank do? Where all the insurance premium collected by Insurance company goes? How do government raise funds? A company is need of funds, what options it has got?
Financial System
An institutional framework existing in a country to enable financial transactions Three main parts
Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance companies, etc.) Financial markets (money market, capital market, forex market, etc.)
Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)
Regulatory system for governance Diversified instruments/assets Free market system with less intervention of government Developed capital and money markets Financial engineering Financial innovation
Funds Loans
Demand of Funds
Individuals Businesses Governments
Financial Markets
Funds Securities
Funds Securities
Definitions
Financial Inst : FI are business organizations that act as mobilisers and depositories of savings and as purveyors of credit or finance. A typical FI deals in deposits, loans, securities etc Financial Market : A FM is an institution or arrangement that facilitates the exchange of financial instruments, including deposits and loans, corporate stocks and bonds, govt securities
Non- Organized Organized Money lenders Regulators Financial Institutions Financial Markets Financial services Local bankers Traders Landlords Pawn brokers Chit Funds
Nidhi's/Chit Funds
Indigenous Banking
Cooperative Movement
Societies
Banks
Joint-Stock Banks
Merchant Banking
Universal Banking
Intermediaries and Non-intermediaries Eg : PSU Banks, Pvt Sector Banks, LIC, GIC, UTI
Commercial banks
Insurance companies
Mutual funds
POSB
NABARD
Equity shares issued by TCS to the general investing public through an initial public offering.
ESOP granted by WIPRO to its employees.
Institutions are banks, insurance companies, mutual funds- promote/mobilise savings Individual investors, industrial and trading companies- borrowers
Financial markets and intermediaries facilitate the pooling of the household savings for financing business.
Transfer of Resources The financial system facilitates the efficient life-cycle allocations of household consumption, the efficient allocation of physical capital to its most productive use, and the efficient separation of ownership from management. Provision of Liquidity A well-developed financial system offers necessary liquidity to market to ensure that there is no shortage of financial resources for productive ventures Eg: RBI ensures liquidity in Indian Financial System
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Mobilizing Savings Promoting and encouraging investments in diversified financial assets Allocation on economical basis as well as on priority of national importance Creating credit Providing a spectrum of assets Financing trade and agriculture and priority sector Entrepreneurial development Equitable development of industry as well as regions(geographies)
Exercise
To assess various business/corporate or entities and understand how finance is sourced by them