UNIT-1

INDIAN FINANCIAL SYSTEM

 The term financial system is a set of inter-related
activities/services working together to achieve
some pre-determined purpose or goal.
 It includes different markets, the institutions,
instruments and services which influence the
generation of savings, investment, capital
formation and growth.
 It can be categorised in two parts:
1. Finance, and
2. System

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1. The term "finance" in our simple understanding it
is perceived as equivalent to 'Money'.
 But finance exactly is not money, it is the source of
providing funds for a particular activity.
 Thus finance does not mean the money with the
Government, but it refers to sources of raising
revenue for the activities and functions of a
Government.
2. The word "system", in the term "financial system",
implies a set of complex and closely connected or
interlined 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

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 It is a system that allows the exchange of funds
between lenders, investors, and borrowers.
 It operates at national, global, and firm-specific
levels.
 Money and credit are used as media of exchange in
this system.
 It serve as a medium of known value for
which goods and services can be exchanged as an
alternative to barter system.
A modern financial system may
include banks (operated by the government or private
sector), financial markets, financial instruments
and financial services.
 It allows funds to be allocated, invested, or moved
between economic sectors.
Dr. Mayank Malviya
Dr. Mayank Malviya
Financial Assets/Financial Instruments:
 It is a tradable asset which can be in terms of cash,
agreement, evidence of an ownership in an entity; or
a contractual right which has the right to deliver cash
or any kind of asset.
 The types of financial instrument or assets used
worldwide are as follows:
a. Deposits:
 Deposit in a layman’s term, means to save or to keep
safely.
 Deposits can be made either with banking or non-
banking firm.
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b. Stock:
 Stocks represents the ownership of the issuing
company.
 It is a form of corporate equity ownership where
in the total stock of the company is divided into
shares.
c. Debts:
 Unlike the stocks, financial assets which are in
the form of debts create an obligation on the
borrower of the fund to repay the amount
borrowed.
 Example- Debentures, bonds, etc.

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Financial Markets:
 It is a market that allows people to involve themselves in
the buying and selling of financial securities i.e. shares,
debentures and bonds at prices that reflect the market’s
effectiveness.
 Following are the types of financial market:
a. Capital Market:
 Market where business enterprises or government
entities raise fund for long term using the weapon of
securities or debts.
 It includes the Stock market (equities) and Bond Market
(debt) for fund raising.

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b. Money Market:
 Deals with the assets involved in short-
term borrowing and lending with original
maturities ranging from a period of one
year or even lesser time frames.
 Example- Treasury bills, Certificate of
deposits, Commercial papers, etc.

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c. Foreign Exchange (FOREX) Market:
 It is a global, worldwide decentralized financial
market meant only for the trading of currencies.
 It is the largest market in the world and includes
all of the currencies in the world.
d. Credit Market:
 It is a market through which companies and
Government issue debts to investors.
 It is also called as bond or debt market.
 Example- Bills of exchange, promissory notes,
cheques, drafts, etc.

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Financial Intermediaries:
 Institutions that borrow funds from people who have
saved and make loans to other people.
 Example- broker agencies, banks, mutual funds,
pension funds, etc.
 It facilitates the channeling of funds between savers
and loan takers indirectly.
Role of Financial System:
1. Saving
2. Investment
3. National Growth
4. Entrepreneurship Growth
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Difference between saving and investment:
 Saving means keeping aside a part of
income.
 Example: Emergency fund keeping in
saving account or in home.
 Investment means putting the saved
money in various products to earn return
and growth of money.
 Example: Retirement plan
Dr. Mayank Malviya
Dr. Mayank Malviya
Functions of the Financial System:
1. Link between savers and investors.
2. Allocation of risk.
3. Price-related information available.
4. Minimizes unequal situations.
5. Reduce cost of transaction and
borrowing.
6. Financial expansion and development.

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Functions of the Financial Markets:
1. Creation and allocation of credit and
liquidity.
2. Utilization of savings.
3. Balanced economic growth.
4. Provide financial convenience.

Dr. Mayank Malviya