COMMERCIAL BANK MANAGEMENT

Assignment 1
Shubham Agrawal | PGP/24/4
Muskan Valbani | PGP/24/456

Introduction
A financial system contains 5 elements; Financial Institutions, Financial Markets, Instruments, Financial
Services, and Money and for a financial system to be balanced and/or developed, it must contain both well-
functioning financial intermediaries and market based institutions. The elementary channels for the same can
be broadly listed as: 1) information collection about firms (the key to monitor efficiency of the investments
and projects); 2) risk-reducing arrangements; 3) capital pooling; and (4) the ease with which transactions can
be completed.

Market-Based System (impersonal)

Financial markets play a significant part in the sophisticated balanced model. Financial markets that are
well-developed add to the economy's liquidity. In a market-based system, organized markets assume a
central role in mobilizing funds from the savers (atomistic households), either directly or indirectly through
PF, MFs etc., to the lenders; firms/government. This adds an impersonal touch to the lending/borrowing
activities and the markets could include stock markets, bond markets, money market and other markets
(futures, forex). This system has the embedded advantage of flexibility due to the entailing competition from
larger sources funds available. It thus also attractive terms to both the parties with better risk-sharing and/or
diversification. However the instability and excessive market exposure entails risk and thus this system is
majorly popular in advanced economies such as in the US (NYSE) where markets are more organized. This
isn't to say that banks don't exist in these countries. Despite their competitive nature, banks often only offer
short-term loans to potential lenders.

Bank-Based System (relationship-based)

Mobilization of funds takes place primarily through financial intermediaries under a Bank- Based system
and thus this system is prevalent in countries where banks are well-establishes and versed in the services like
corporate financing. Banks, savings and loan associations, mutual funds, and pension funds are examples of
intermediaries, with each intermediary playing a role in cultivating a culture wherein LT loans from savers
are welcomed and accepted and are used to lend to the borrowers with frequent dealing with clients who
have a good relationship and credit rating. This system is often practiced in more developing countries.
Credit controls and directed credit programs are common, and they are frequently offered at reduced rates.
Lending requirements and quotas for banks, refinance programs, loans at favourable interest rates, credit
guarantees, and lending by development finance organizations are the most common types of interventions.
This financial system has successfully worked in economies like South Korea as it offers the advantages of
closer relations and customized contracts with inter-temporal risk-sharing although it might curb and impede
competition.