Financial System comprises , a set of sub-systems of financial institutions, financial markets, financial instruments and services which help in formation of capital. It provides a mechanism by which savings are transformed into investment. The financial system is characterized by the presence of an integrated, organized and regulated financial markets and institutions that meet the short term and long term financial needs of both the household and corporate sector.
DEFINITION
A FINANCIAL SYSTEM MAY BE DEFINED AS A
SET OF INSTITUTIONS, INSTRUMENTS AND MARKET WHICH FOSTER SAVINGS AND CHANNELS THEM TO MOST EFFICIENT USE. THE SYSTEM CONSISTS OF INDIVIDUALS ( SAVERS), INTERMEDIARIES, MARKET AND USERS OF SAVINGS _ H.R MACHIRAJU
organisation & assemblage of facts , principles or components relating to particular field or for specified purpose.
A Financial System is an integral part of
Modern Economy.
Functions: Link between savers and investors. Selection of the projects to be financed and review the performance of such projects. Payment mechanism for exchange of goods & services Mechanism for the transfer of resources across
geographic boundaries. provide mechanism for Managing and control risk Promotes capital formation by bringing together the supply of savings & demand for investable funds.
Lowering the cost of transactions and increase returns.Reduced cost motivate people to save more. Provides information to the operators/ players in the market(indivisuals, govt,business houses.
Structure:
Components of Indian Financial System
Financial Institutions
Financial Markets
Financial Instruments
Financial Services
Commercial Cooperative Banks Banks Public Sector Pvt. Sector RRBs Foreign Banks DFIs a) Developments Banks -All India - State Level b)Invt Institutions (LIC,GIC,UTI) c) Specialized Institution
-Call Money Market -Treasury Bills -Commercial Bills -Commercial Papers -CDs Primary Market
Secondary Market
Asset/Fund Based -Leasing -Hire Purchase -Consumer Credit -Bill Discounting -Venture Capital -Housing Finance -Insurance -Factoring
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Financial Institutions
Financial institutions are the intermediaries who facilitate smooth functioning of the financial system by making investors and buyers meet.
Financial institutions mobilize saving of the surplus units & allocate them in productive activities promising a better rate of return.
Banking Institutions
Indian banking industry is subject to the control of the Central Bank (RBI).Indian banking system can be classified in two categories. 1. Organized Sector 2. Unorganized Sector
a) b) c) d)
Commercial Banks Co-operative Banks Regional Rural Banks (RRBs) Foreign Banks
Commercial Banks :
Commercial banking system in India consisted of 297 scheduled banks (including foreign banks) and one non-scheduled bank at the end of Dec. 2000.
Scheduled bank
Scheduled commercial Banks constitute those banks
which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
Co-operative Banks :
This segment is represented by a group of societies registered under the Acts of the States relating to co-operative societies. These are classified into two broad categories:a) Rural credit societies which are primarily agricultural. b) Urban credit societies which are primarily nonagricultural.
Foreign Banks :
1 Barclays Bank 2 Bank of Ceylon 3 Bank Indonesia International 4 Development Bank of Singapore 5 Fuji Bank
Unorganised Sector
a) Indigenous Bankers
b) Money Lenders (Seths and Sahukars)
Indigenous Bankers :
Indigenous bankers are the forefathers of modern commercial banks. As the term indigenous indicates, they are the local bankers.
Indigenous bankers provide finance for productive purposes directly to trade , industries,& indirectly through money lenders & traders to agriculture.
Money Lenders :
Money lenders depend entirely on their own funds for the working capital. Money lenders may be rural or urban, professional or non-professional. They enjoy monopoly in their areas of operation. Money lenders are not bankers,their business is money lending only.
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Own funds. Weaker sections of the society. High rates of interest. Unregulated Operations Prompt and flexible.
Non-Banking Institutions
The non-banking institutions may be broadly categorised broadly into two groups:a) Organised Financial Institutions b) Unorganised Financial Institutions
Investment Institutions :- It includes those financial institutions which mobilize savings of the public at large through various schemes and invest these funds in corporate and government securities. These include LIC, GIC, UTI, and mutual funds.
Money Market
Money Market refers to the institutional arrangements facilitating borrowing and lending of short-term funds. The RBI describes money market as, the centre for dealings, mainly of a short-term character, in monetary assets, it meets the short-term requirements of borrowers and provides liquidity or cash to the lenders.
Commercial Bills
In the global money market, Commercial Paper is an
unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued (sold) by large banks and corporations to get money to meet short term debt obligations .
Treasury Bills
Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. Treasury bill market refers to the market where treasury bills are brought and sold. Treasury bills are very popular and enjoy higher degree of liquidity since they are issued by the government.
satisfy their credit needs, either to finance their own inventory of securities .
Commercial papers.
promissory note (issued by financial institutions or large firms) with very-short to short maturity period (usually, 2 to 30 days, and not more than 270 days), and secured only by the reputation of the issuer. Rated, bought, sold, and traded like other negotiable instruments, commercial paper is a popular means of raising cash,
Certificate of Deposit
A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks . The term of a CD generally ranges from one month to five years.
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Adjustment of liquidity position of commercial banks. Provides short-term funds Short-term funds to the government institutions. Helpful to businessmen Proper flow of funds. Provide outlets to various borrowers such as businessman, traders, Industrialists. Mechanism for credit control.
Capital Market
The term capital market refers to the institutional arrangements for facilitating the borrowing and lending of long-term funds. Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities
Debentures
Banks and Financial Institutions House Building Societies Insurance Companies Credit Card Issuer Companies Investment Trusts and Mutual Funds Stock Exchanges Leasing Companies/Equipment Finance/Consumer Finance Companies Unit Trusts
Intangible Direct Sale Heterogeneity Fluctuation in demand Protect Consumers interest Labour Intensive Geographical dispersion Lack of special identity Information based Require quality labour
Equipment Leasing/Lease Financing Hire Purchase and Consumer Credit Bill Discounting Venture Capital Housing Finance Insurance Services Factoring
Equipment leasing
Leasing is an arrangement that provides a firm with
the use & control over assets without buying them.it is the form of renting assests.
Hire purchase
Hire purchase means transaction where goods are
purchased & sold on the terms that payment will be made in instalments. the possession of the goods given to buyer. The ownership right remains with the vendor till the last instalment is paid. The seller can repossess the goods in case of default in payment of any instalment.
Bill discounting
According to negotiable instrument act 1881
The bill of exchange is an instrument in writing
containing an unconditional order,signed by maker ,directing a certain person to pay a certain sum of money only to,or to order of,a certain person,or to the bearer of that instrument.
Venture capital
The term venture capital represents financial
investment in a highly risky project with the objective of earning high rate of return.
Housing finance
Housing finance emerged as a fund based financial
service in the country with the setting up of national housing bank by RBI IN 1998.
INSURANCE SERVICES
With setting up of the IRDA Act 1999,the monopoly of
LIC & GIC has been dismantled & new players entered in the field.
Factoring
A factor is a financial institution which offers services
After 1990
Unorgainsed system Few industrial securities in securities market No separate issuing institution Outside savings were restricted.
Privatization in banking and insurance sector. Development of Finance Institutions Emergence of Non-Banking Financial Companies Growth of Mutual Funds. Establishment of SEBI Act in 1992.