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Indian Financial System(4)

Indian Financial System(4)

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Published by Surender Singh

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Published by: Surender Singh on Nov 21, 2010
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09/17/2013

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Introduction

For the rapid growth of any country, an efficient and developed financial system is required. The evolution of the Indian financial system falls in three distinct phases:

1. 2. 3. 4. 5. 6.

Pre – 1951 ORGANISATION

Per capita output is low & constant Closed circle character of industrial org. Semi organized & narrow industrial securities market Absence of institutions participation in long term financing Restricted access to outside savings Financial system was not responsive to opportunities


1. 2. 3. 4. 5. 6.

1951 TO MID – EIGHTIES

Public/Govt ownership of financial ownership of financial institutions Fortification of the institutional structure Protection to investors Participation of financial inst. In corporate management Finance & credit facilities become strengthen Nationalization ( RBI, LIC, GIC)

AFTER EIGHTIES

AFTER EIGHTIES
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 modern financial system (RBI, SEBI, IRDA, FMC)

Financial assets/instruments
Enable channelising funds from surplus units to deficit units  There are instruments for savers such as deposits, equities, mutual fund units, etc.  There are instruments for borrowers such as loans, overdrafts, etc.  Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc.  Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government

Financial Institutions

Includes institutions and mechanisms which
• Affect generation of savings by the community • Mobilization of savings • Effective distribution of savings

 Institutions

are banks, insurance companies, mutual fundspromote/mobilize savings  Individual investors, industrial and trading companies- borrowers

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.
Money Market- for short-term funds (less than a year) • Organised (Banks) • Unorganised (money lenders, chit funds, etc.) Capital Market- for long-term funds • Primary Issues Market • Stock Market • Bond Market

Main

Function To channelize savings into short term productive investments like working capital in Money Market

Instruments

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

Money Market Instruments
Certificates of Deposit Commercial Paper Inter-bank participation certificates Inter-bank term money Treasury Bills Bill rediscounting Call/notice/term money CBLO Market Repo

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

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.

Primary Markets

Secondary Markets

When companies need financial The place where such securities are resources for its expansion, they borrow traded by these investors is known as the money from investors through issue of secondary market. securities. Securities issued a)Preference Shares b)Equity Shares c)Debentures Securities like Preference Shares and Debentures cannot be traded in the secondary market.

Equity shares is issued by the under Equity shares are tradable through a writers and merchant bankers on behalf private broker or a brokerage house. 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 that are traded are traded by the retail investors.

Helps in mobilising the funds for the investors in the short run.

Functions

of current financial

system
Saving Function Liquidity Function Payment Function Risk Function Policy Function

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