Indian Financial

System

Introduction
Composition
Functions
Saving Function
Liquidity Function
Payment Function
Risk Function
Policy Function

Financial Markets
Defined as the market in which financial assets
are created or transferred.
These assets represent a claim to the payment of
a sum of money sometime in the future and/or
periodic payment in the form of interest or
dividend.

Classification
Money market
(Short term instrument)
Capital markets
(Long term instrument)

The most important distinction between the

two:
The difference in the period of maturity.

Money Market
Main Function
To channelize savings into short term productive
investments like working capital .

Instruments in Money Market

Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note

Call Money Market

Part of the national money market
Day-to day surplus funds mainly of banks are traded
Short term in nature
Maturity of these loans vary from 1 to 15 days
Lent for 1 day: Call money
Lent for more than 1 day but less than 15 days: Notice money
Convenient interest rate
Highly liquid loan repayable on demand

Commercial Papers
Unsecured Promissory note.
Issued by well known companies with strong and high
credit rating.
Sold directly by the issuers to investors or through agents
like merchant banks and security houses.
Flexible Maturity
Low interest rates with compared to banks.
Imparts a degree of financial stability to the system.

Promissory Note
Referred as note payable in accounting
It is a contract detailing the terms of a promise
by one party (the maker) to pay a sum of money
to the other (the payee).
The obligation may arise from the repayment of
a loan or from another form of debt.
For example, in the sale of a business, the
purchase price might be a combination of an
immediate cash payment and one or more
promissory notes for the balance.

Certificates of deposits
Defined as short term deposit by way of usance
promissory notes.
Greater flexibility to investors in the deployment of
surplus funds.
Permitted by the RBI to banks
Maturity of not less than 3 months and upto 1 year.
Transferable in nature
Free negotiability and limited flexibility

Money market mutual funds

Invest primarily in money market instruments of very
high quality.
RBI and public financial institution can set it either
directly or through its existing subsidiaries.
MMMF
Open Ended
Close Ended

Capital Markets
Provided resources needed by medium and large
scale industries.
Purpose for these resources
Expansion
Capacity Expansion
Investments
Mergers and Acquisitions

Deals in long term instruments and sources of

funds

Main Activity
Functioning as an institutional mechanism to
channelize funds from those who save to those
who needed for productive purpose.
Provides opportunities to various class of
individuals and entities.

Structure of Capital Markets

Primary Markets

Secondary Markets

When companies need financial resources forThe place where such securities are traded by
its expansion, they borrow money from
these investors is known as the secondary
investors through issue of securities.
market.
Securities issued
a)Preference Shares
b)Equity Shares
c)Debentures
Equity shares is issued by the under writers
and merchant bankers on behalf of the
company.
People who apply for these securities are:
a)High networth individual
b)Retail investors
c)Employees
d)Financial Institutions
e)Mutual Fund Houses
f)Banks
One time activity by the company.

Securities like Preference Shares and

Debentures cannot be traded in the
secondary market.
Equity shares are tradable through a private
broker or a brokerage house.
Securities that are traded are traded by the
retail investors.

Helps in mobilising the funds for the investors

in the short run.

Thank-You