Meaning of Financial Systems:

The word "system", in the term "financial system", implies a set of complex and closely connected or interlinked institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediaries.
A,

FINANCIAL MARKETS

Financial markets perform the crucial function in the saving-investment process as Facilitating Orgs. They are not sources of finance, but are a link between the savers and investors, both individual as well as Institutional. They are classified into MONEY MARKET AND CAPITAL MARKET.
[a]. MONEY MARKET

Money Market is a market for dealing in Monetary Assets of a short term nature generally less than one year. It refers to the segement of the financial market which enables the raising of short term funds For meeting temporary shortages of cash and obligations and the temporary deployment of excess funds to earn returns. The major participants in the money market are Commercial Banks and the R.B.I.
MONEY MARKET& INSTRUMENTS

a) Commercial Paper: It is a short term money market instrument ideally suited for investors as well corporate borrowers issued by companies either directly or through banks. It is an unsecured promissory note privately placed with investors at a discount rate. It is freely negotiable by endorsement & delivery. b) Treasury Bill: These are issued by the government for periods ranging from 14,28,91,182,364 days. They are highly liquid and are largely demanded by banks, financial institutions & corporations and are issued by the R.B.I. on behalf of the govt. c) Guilt Edged Securities: Govt. Security bonds are known as guilt edged securities as there is almost no risk. d) Certificate Of deposit: Scheduled commercial banks issue Certificates of deposit for a period of not less than 3 months & not more than 1 year. Financial institutions on authorisation of the R.B.I. can issue these for 13year periods. e) Inter Bank Participation: It is a short term instrument by which banks can raise money or deploy short term surplus f) Bank Deposits: Banks are allowed to keep deposits with other bank for a period of 15 days and above. Deposits are not transferable, interest rates are freely decided and the evidence of such deposits are deposit receipts. g) Commercial Bills:

It is a bill of exchange. It is a negotiable self liquidating instrument with low risk. Purchase and discounting of bills is a way of providing working capital to business.

[b].

CAPITAL MARKET

Capital Market is a Market for long term funds. Its focus is on financing fixed investments in contrast to Money Market which is an Institutional Source of working capital finance. The main participants are Mutual Funds, Insurance Organisations, Foreign Institutional Investors, Corporates and Individuals. It has two segements: Primary or New Issues and Secondary or Stock Exchanges. New Issue Market/Primary Market New issue market deals with new securities i..e. securities which are not previously available and are offered to the Investors for the first time. Capital formulation happens in the new Issues market as it supplies additional funds to Corporates directly. It does not have any organisational set up at a particular place but it is recognised by specialist Institutional services that cater to lenders of borrowers of Capital Funds. It performs there functions: [a] Origination : i.e. Investigation Analysis and processing new issue proposals. [b] Underwriting: In terms of guarantee ; and Ic] Distribution : Distribution of Securities to Investors Secondary Market/Stock Exchange It is a market for old securities already issued and granted listing. It plays an indirect role in industrial financing by providing liquidity to investments already made. It has three vital functions :[a] Link between savings and investment [b] Provides liquidity to Investors [c] Continuous price formation INTERMEDIARIES Of THE FINANCIAL MARKET: [a] Commercial Banks: They Collect savings primarily in the form of deposits and traditionally finance working capital requirements of corporates. The traditionally function is to supply short term funds for financing the working capital need of an industry based on deposit banking.

[b] Mutual Funds Organisations A Mutual Fund Organisation is a type of Investment Institution which acts as an Investment conduit which pools the savings of relatively small investors and invests them in well defined portfolios of sound investment. It is set up in the form of a Trust. [c] Insurance Organisation Insurance Organisation/Companies essentially invest the savings of their Policy Holders and in exchange promise them/or their beneficiaries, a specified sum at a later stage [ on maturity], or upon happening of a certain event. They differ from mutual funds in that while the main business of mutual funds [the only reason for existence], is investment in securities. Such investments are only incidental to the main business of insurance organisations whose main business is to provide protection against risk.

[d]

Non Banking Financial Companies They provide a variety of fund based & non fund based services. Most of their funds are raised in the form of public deposits ranging from 1-7 years of maturity. NBFCs are Organisations/Institutions that function as Banks with certain limitations i.e. (i) a NBFC cannot accept demand deposits; (ii) a NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and (iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

3.

FINANCIAL INSTRUMENTS

[a] Direct: i) Equity shares: Equity shares represent ownership capital as equity shareholders are legal owners of the company. They bear risk and are entitled to dividend [b] Indirect i) Preference shares: Preference shares are called hybrid shares as they have features of equity shares and debentures. Preference share holders have no control on the management, they are entitled to a fixed rate of dividend. ii) Debentures: Debentures are long term promissory note for raising long term capital. It is a fixed income financial security and is paid back after 10-15 years.

[c] Derivatives: Financial markets by their nature are marketed by a very high degree of volatility arising out of fluctuation in prices of financial securities. Through use of derivatives it is possible to partially/ fully transfer price risks by locking in asset prices. This makes investors averse to risk. i) Forward contracts: A forward contract is an agreement for exchange of assets for cash at a predetermined future date specified today. At the end one can enter into an of setting transaction by paying the difference in price. Futures: They are agreements between two counter parties to fix terms of an exchange/ lock in the price of an exchange that will take place between them at some future dae. Options: They are contracts that give the holder the right to buy or sell securities at a pre determined price within a specified period.

ii)

iii)

FINANCIAL SYSTEM

1.Financial Intermediaries

2. Financial Markets

3.Financial Instruments

1.Direct 1.Banks 2 .Mutual Funds 3. Insurance Orgs. 4. NBFCs 1. Equity 2. Preference 3. Debentures 4.Innovative Debt Instruments Asset Finance Co. Housing Finance Co. Venture Cap Funds Merchant Bank Orgs Factoring & Forfaiting Orgs. Stock Broking Firms Custodial services Depositories Acceptance market Call Money market Treasury bill market Certificate of deposit market Repo market Collateral Loan market

2.Indirect

3.Derivative

1. Mutual fund Units 2.security Receipts 3.Security Debt Instruments

1.Futures 2. Options 3. Forwards

1. Money Market 2 Capital market 3.Foreign Exchange Mkt. 4.Derivative market

1.Primary market 2. Secondary market

AGENCY FUNCTION: In an organisation owners are actively involved in management but in large public companies owners are not active managers & professionally qualified managers are appointed. Such managers have little or no equity stake in the firm. Therefore managers may act in a way that may not maximize wealth of the shareholders. ROLE & RESPONSIBILITY OF THE FINANCIAL MANAGER: Industrial licensing was relaxed, MRTP Act was abolished, FERA was liberalized and companies were given freedom to determine prices of equity shares. The rupee was devalued twice & made fully convertible on the current account, interest rate ceiling was removed. Investors became more demanding. No. Of investment opportunities in the money market emerged and the relative dependency on the capital market increased. This made the job of managers more complex. The finance manager is now part of the top level management and the owners view toward him has changed drastically. Finance as a function is not only maintaining book but it has become a mora creative and cerebral function and has now emerged as amainline function from a support function. The financial manager has to perform these responsibilities. Economic appraisal Protection of assets Provision of capital investor relations Government reporting Tax administration Reporting and interpreting Evaluation and consultancy Insurance Credit and collection investments Banking and custody Short term financing PROFIT MAXIMIZATION v/s WEALTH MAXIMIZATION: - Profit maximization and profitability concept is vague and narrow. - It doesnt consider risk factors and timing of returns. - Decisions taken may be at the cost of the long run stability of the org. It only emphasizes on short term profitability. - Wealth maximization on the other hand considers the long term survival of the firm. - It considers economic welfare - It includes regular dividend payments to shareholders - It considers risk factors and time value of money. -

REGULATORY INFRACTURE: R.B.I. The Reserve bank of India is the apex institution of the countrys financial system entrusted with the task of control, supervision, promotion and development & planning. It influences commercial banks management in more than one way through their policies directions and regulations. The R.B.I. performs management functions of planning, organising, directing and control. SEBI: SEBI was established by the government of India to control and regulate the stock exchanges in the country and to promote healthy and orderly growth of the stock market.the objectives are to create an environment which would facilitate mobilization of resources, to protect the interest of the investors. It also aims at havin effective control over the stock exchange. SEBI has three basic functions: Protection Function: this includes safety of investors through different means Regulatory Functions: this includes registering and regulating stock brokers & sub brokers along with mutual funds, regulating mergers, inspections etc. Developmental Function: this includes investor awareness, training of intermediaries, investor guidance etc.

BIBLIOGRAPHY: 1 . Chopde L.N. Choudhari D.H.Chopde L. Sandeep: Financial Management First Edition: September 2009 2.Kale.N.G, Ahmed M:Business Finance SECOND Edition: 3.Chandra Prasanna: FinancialManagement FIFTH Edition: 4.Upadhyay K.P: Financial Management 5.Desai Vipul: Indian Financial System SISTH Edition Websites: Wikipedia Answers.com