Indian Financial System

Introduction to Financial System

• Financial system is a mechanism that works
for investors and people who want finance.
• It is an interaction of various intermediaries,
market instruments, policy makers, and
various regulations to aid the flow of savings
from savers to investors and managing the
proper functioning of the system.
 Financial System
• Financial System is a mechanism that works for
investors and people who want finance. Financial
system is an interaction of various intermediaries,
market instruments, policy makers, and various
regulations to aid the flow of savings from savers to
investors and managing the proper functioning of the
system.

• According to Gurusamy financial system is "a set of

complex and closely interconnected financial
institutions, markets, instruments, services, practices,
and transactions."
Financial System

a
Pre-planned period -
• Close character of entrepreneurship
• Absence of financial intermediaries
• Low industrial growth rate.

Mixed economy based planned period -

• Public/Govt. ownership of financial institutions -
RBI, Nationalized banks, Special purpose financial
institutions
• Investors' protection - Companies act, Securities
contract act
 Money Market Meaning
• Money Market is that area of market that
deals in short term capital.
• Market for funds and assets that are close
substitutes for money
• Focuses on providing means by which
government and institutions are able to
rapidly adjust their actual liquidity position.
 Instruments of Money Market
• Call money instruments- one day loan
• Treasury bills- meeting short term deficits of govt.
• Commercial papers- short term instruments issued
by corporate- introduced in Jan 1990
• Certificate of deposits- issues by banks to the
depositor, introduced in June 989- lowest period
15 days for 5 lakhs
• Repo transactions- maturity of 1 day to six months
• Money market mutual funds-introduced by RBI in
April 1992 and regulated by SEBI
 Capital Market Meaning
Market where long term and medium term
financial instruments are traded.

This market consists of two parts:

• Primary market
• Secondary Market
 Primary Market

• By Prospectus
• Offer for sale
• Private placement
• Right issue
• Preferential issue
• Employees stock option
• Sweat equity
 Secondary Market

• Located at a fixed place

• Securities of listed companies are traded
• Purpose is to transfer ownership
 Instruments of Capital Market
• Equity shares
• Preference shares
• Debentures/ bonds
• Innovative debt instruments - Convertible
debentures / bonds, Warrants, Zero interest
bond, Secured premium notes, Floating rate
bond
• Forward contract - Not standardized, regulated
through trading, margin is required
• Futures - Standardized , traded at over the
counter market, involves counter party risk
 Financial Intermediaries
• Banking - RBI, Commercial banks, Co-operative
banks, Post office savings banks
• Non-banking - LIC, GIC, UTI, Housing
development finance companies-HDFC, HUDCO
• Developmental - ICICI, IDBI, IFCI, NABARD, SIDBI,
Tourism finance corporation SFCs
• Regulatory Institutions - SEBI, RBI, IRDA-
insurance regulatory and development authority,
Board of regulatory and development authority-
BIFR