Financial System An Overview

 Introduction  Components  Functions  Designs  Nature and Role of Financial Institutions

and Financial Markets

Introduction
 Financial System is composition of
various Regulators, Financial Institutions, markets, Financial Instruments and Financial services which facilitates the transfer and allocation of funds, efficiently and effectively.  It intermediates with the flow of funds between those who save a part of their income to those who invest in productive assets.

Seeker of Funds

Supplier of Funds

 Flow of services from left to right  Flow of funds (savings) from right to left

Components of Financial System

A. Organized Markets

Regulators

Financial Institutions

Financial Markets

Financial Instruments

Financial Services

B. Unorganized Market
-Local Bankers -Private Money Lenders -Pawn Brokers -Landlords

A. Organized Financial System

A system which is established to operate & control within specific legal rules and regulations is organized system.

1. Regulatory Bodies
Ministry Of Finance

RBI

Regulators

SEBI

IRDA

2. Financial Institutions
are intermediaries that mobilize savings and facilitate the allocation of funds in efficient manner.
Financial Institutions

Banking

Non-banking -NBFCs -Development Institutions

Mutual Funds -Public -Private

Insurance -Life - General

Housing -Public - Private

Commercial Banks

Co-operative Banks

3. Financial Markets
are a mechanism enabling participants to deal in financial claims.
Financial Markets
Capital Market Money Market Equity Debt -Treasury-bills - Call Money Mkt. - Comm. Bills - Comm. Papers - Certificate of Deposits

Primary -New Public Issue -Right Issue -Bonus Issue

Secondary -NSE -BSE -OTC

Derivatives -Options -Futures

4. Financial Instruments
:is a claim against a person or an institution for the payment at a future date a sum of money and/or periodic payment.
Financial Instruments
Time -Short -Medium -Long Type

Primary Security -Equity -Preference -Debt

Secondary Security -Insurance -Mutual Funds

5. Financial Services
...bridge the gap between lack of knowledge & increasing superiority of financial instruments and markets. - Depositories - Credit Rating - Factoring - Forfeiting - Merchant Banking - Underwriting - Portfolio Management - Lease and Hire Purchase

Functions of the Financial System

It links the savers and investors and
thereby help in mobilizing and allocating the savings efficiently and effectively.

It provides payment mechanism for the

exchange of goods and services.

Most important function is to achieve

optimum allocation of risk by pooling and trading the risks involved in mobilizing savings and allocating credit.

Other Functions
 A financial system minimizes situations
of asymmetric information.  It makes available the price-related priceinformation to those who need to take economic and financial decisions.  Helps in creation of a financial structure that lowers the cost of transactions.

Financial System Designs

Types of Financial System Designs: 1. Bank-based Bankfew large banks play a dominant role and financial markets are less important. 2. Market-based Marketfinancial markets play an important role while banking industry is much less concentrated.

In India, nationalization of banks, an

administered interest rate regime and the government policy of favoring banks led to the predominance of a bank-based bankfinancial system in India.

Extent of Development Developed

BankBank-based Japan, Germany, Italy, France Argentina, Pakistan, Sri Lanka, Bangladesh

MarketMarket-based US, UK, Singapore, Malaysia, Korea Brazil, Mexico, Philippines, Turkey

UnderUnderdeveloped

Certain Conclusions

 The more the country is richer, the more

the economy is market-oriented. market When,
-Problem relating to information persists, -Banks are competent & -Learn through experience to become productive, Then, bank-based financial system. bank In market-based, investors are exposed to marketmarket risks.

Nature & Role of Financial Institutions

 Mobilization & allocation of funds  Offer claim against themselves  Expanded role to provide services  Offers the savers tailor-made services tailoraccording to their level of risk tolerance.  Risk transformation by reducing the risk involved in direct lending.

Characteristics of Financial Markets

 Characterized by large volume of
transactions and a speed with which resources move from one market to another.  Various segments of financial markets such as stock markets and bond markets (primary and Secondary) where savers themselves decides where to invest.

 There is a scope of arbitrage among

various markets and types of instruments.  Markets are dominated by financial intermediaries which take investment decisions and risks on behalf of their depositors.  Highly volatile and susceptible to panic and distress selling.  Domestic markets are affected by the problems in external markets

Functions of Financial Markets

 Separation, distribution, diversification and    
reduction of risk. Portfolio Management. Providing information about companies. Enhancing liquidity of financial claims through trading in securities. Efficient payment mechanism.

SERVICES PROVIDED BY FINANCIAL INSTITUTION(INTERMEDIARIES)

 CONVENIENCE
(DIVISIBILITY,MATURITY)  LOWER RISK (DIVERSIFICATION)  EXPERT MANAGEMENT  ECONOMIES OF SCALE

BANKING INSTITUTIONS(FUNCTION)

DEPOSIT CREDIT CREATION LENDING OF MONEY ANCILLARY FUNCTION

Products For Bank Marketing

 Personal    
Banking NRI Banking International Banking Gold Banking Agriculture Banking

 Corporate
banking  SSI banking  Small business banking  Government banking

Services For Banking Marketing

 Portfolio
Management  Demat Services  ATM Services  Internet Banking

 Safe Deposit
Locker  Rupee Traveler Cheques  Gift Cheques

Classification of banking

Retail banking

Whole sale banking

Retail banking product

 1. 2. 3. 4.
Regular accounts Saving bank a/c Current a/c Zero balance a/c Senior citizen a/c

 1. 2. 3. 4.

Deposit Fixed deposits Cumulative fixed deposit Recurring deposit Multiple unit deposit

 Loans
 Vehicle loan  Housing loan  personal loan  Credit cards  Festival loan  Holiday loan

 Other
      

services

Telephone bill payment Safe deposit lockers Demand drafts Bankers cheque Mail transfer Cash Demat a/c

Whole sale banking products

 Fund based services  Non fund based services  Value added services  Internet banking services

      

Fund based services Term lending Short term financing Working capital finance Bills discounting Structured finance Export credit

Non fund based services Bank guarantees Letter of credit Collection of bills and documents

Value added services

services RTGS Corporate salary a/c Channel financing Forex desk Money market desk Employees trust Tax collection Bankers to the right/ public issue

 Internet banking
services
1. Corporate internet
banking 2. Payment gateway services 3. Supply chain management

1. Cash management 2. 3. 4. 5. 6. 7. 8. 9.

Pricing
 Geographical pricing  Psychological pricing  Promotional pricing  Market skimming pricing  Market penetration pricing

Cost

 Interest cost  Servicing cost

promotion mix
 Advertising  Personal selling  Sales promotion  Public relation

place
 1. 2. 3. 4. 5.
Distribution channels Branch Telephone banking/call centre ATM Internet banking Plastic cards
 DEBIT CARDS  CREDIT CARDS

PEOPLE

 Training  Discretion  Commitment  Appearance  Interpersonal behavior  Attitudes  Customer contacts  Customer interaction

Physical evidence

 Refers to  The environment

and furnishing atmosphere

PROCESS
 INCLUDES  Policies  Procedures  Use of technology  Customer involvement etc.

Internal Marketing
 Training centers  Support system  Employee benefits  Financial benefits  Welfare facilities

PRIVATE BANK
IMPORTANT GUIDELINE FOR PRIVATE BANK
BANK MAINTAIN NET WORTH OF RS 300CR AT ALL TIMES. SHAREHOLDING OR CONTROL IN ANY BANK IN EXCESS OF 10% OF THE PAID CAPITAL BY ANY SINGLE ENTITY OR GROUP OF RELATED ENTITIES REQUIRES THE RESERVE BANK PRIOR APPROVAL. BANKS ( INCLUDING FOREIGN BANK HAVING BRANCH PRESENCE IN INDIA)/FINANCIAL INSTITUTION ARE NOT ALLOWED TO EXCEED EQUITY HOLDING OF 5% OF THE EQUITY CAPITAL OF 5% OF THE EQUITY CAPITAL OF INVESTEE BANK. THE AGGREGATE LIMIT FOR THE FII INVESTMENT IS RESTRICTED TO 24% WHICH CAN BE RAISED TO 49% WITH THE APPROVAL OF SHAREHOLDERS.

ALLAHABAD BANK SYNDICATE BANK YES BANK KOTAK MAHINDRA BANK

ING VYSYA BANK INDUSIND BANK UCO BANK VIJAYA BANK

RBI & FINANCIAL SYSTEM

1. ISSUER OF CURRENCY 2. GOVERNMENT BANKER 3. BANKERS BANK 4. SUPERVISORY AUTHORITY 5. EXCHANGE CONTROL AUTHORITY 6. MONETARY AUTHORITY
(REPO/REVERSE REPO,SLR,CRR,BANK RATE,OMO)