Financial System

Van Horne defined a financial 5yStem as, "the system to allocate savings
efficiently in an economy to ultimate users either for investment in real assets
or for cDnsumptiDn”.
It is a complex, integrated set of subsystems. These subsystems are
Financial Institutions, Markets and Instruments.
 Definition
According tD Prasanna Chandra, ”financial system consists of a variety of
institutions, markets and instruments related in a systematic manner and
provide the principal means by which savings are transformed into
investments”.
• The system that allows the transfer of money between savers and
borrowers.
 • Financial system is a set of complex & closely connected with
financial
institution, financial markets, financial instrument, & financial services

• Process by which money flows from savers to users.

• Transfer of money between investors and borrowers.
• Helps in the formation of capital.
• Meets the short term and long term capital needs of
households, corporate houses, govt and foreigners.
• Itsresponsibility is to mobilize the savings in the form of money
and invest them in the productive manner.
 CONCEPTS OF FINANCIAL SYSTEM

• A financial system (within the- Scope of finance) is a

system that allows the exchange of
funds between lenders, investors, and borrowers.
• Financial systems operate at national, global, and
firm- specific levels.
• They consist of complex, closely related services,
markets, and institutions intended to provide an efficient
and regular linkage between investors and depositors.
 FUNCTIONS OF FINAXCIAL SYSTEM

• Saving mobilisation • Transfer function

• Reformatory functions
• Payment function • Other functions
• Capital formation
• Risk protection
 Financial Concept

Financial
Financial Rates
Of Return Markets
 (i) Financial Assets
A financial assets is one ’hich is used for production or consixnyt¡on or for
£unhcr

A non-yltysical assets, such as a security, ccrtificatc, or bank biilancc. opposite

or non-financial asset.
• For instance. A buys equity shares and these shares arc financial asscts since they
cam income in future.

ortant condltions must be met

• Something you can own
• Something of monetary value
• That monetary value is derived from a contractual claim
 Classification of Financial Assets

I. Marketable assets :- Assets which can be easily transferred from one person
to another without much constraints.
Examples:- Shares of listed companies, Government securities, bonds
of public sector undertakings etc.

II. Non-marketable assets :- On the other hand, if the assets cannot

be
transferred easily, they come under this category.
Examples are provident funds, pension funds, National Savings Certificates,
insurance policies etc.
 Another classification is as follows:

• Short Term Financial Assets

(Money Market Instruments)
• Long Term Financial Assets
(Capital Market Instruments)
 (II) Financial Intermediaries
The term financial intermediary includes all kinds of organizations which
intermediate and facilitate financial transactions of both individual and
corporate customers.

It refers to all kinds of financial institutions and investing institutions which

facilitate financial transactions in financial markets.

Savings and loan atso‹Iations

SaytngS banll
utual saylnqs ba
Credit unions
U(e insurance
companies
h\

1f
Pension
funds
 Types of Financial Intermediaries

ital Market Intermediaries : These intermediaries mainly provide long term

funds to individuals and corporate customers. They consist of term lending
institutions like financial corporations and investing institutions like LIC.

• Mone Market Intermediaries : Money market intermediaries supply only

short term funds to individuals and corporate customers. They consist
commercial banks, co-operative banks, etc.
 FINANCIAL M A R K E T
• Market entities market where entities can
trade financial securities, commodities, at low transaction costs
where
and at prices that reflect supply and demand.

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T f+ e e d g e i s e f f i c e n c
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• It is a place where funds from surplus units are transferred to deficit units.
• It is a market for creation and exchange Df financial assets
• They are not the source of finance but link between savers and investors.
• Corporations, financial institutions, individuals and governments trade
in
financial products on this market either directly or indirectly.

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 FUNCTIONS OF FINANCIAL MARKET

1. To facilitate creation and allocation of credit and liquidity.

• 2. Ta serve as intermediaries far mobilisation of savings.
3. To help in the process of balanced economic growth.
4. To provide financial convenience.
? 5. To provide information and facilitate transactions at low cost.
6. To cater to the various credits needs of the business organisations
 Classification of arket
Financial
• On the basis of maturity of claims
( Money

& capital matket}

• On the basis of seasoning of claim
( Primary market & secondary market)
• On the basis of structure or arrangements
(Organised markets & vnorgonised
markets)
• On the basis of the type of financial claim
(Dept market & Equity market)
• On the basis of timing of delivery
\Cosh/Spot market & Forward/Future
morket)

• Other Types
Foreign excha»9emarket
Derivatives market
 Financial Instruments

• A document that has a monetary value

or represents a
enforceable (binding) agreement between two or legally
more
regarding a right to payment of money
• Such as a check, draft,
bond, share, bill of
exchange, futures or
options contract
 TYPES:

• CAPITAL MARKET INSTRUMENTS

• MONEY MARKET INSTRUMENTS

 Capital Market Instrument

• Shares
Equity and Preference
Shares
° Debenture
• Bond
 EY MARKET ENT
INSTRU S
° Treasury Bills
• Certificates of
Deposits
• Commercial Paper
• Repurchase Agreement
• Banker's Acceptance
Structure of Indian Financial System

t•4ł4 Tezm Type Fund Bas‹<t

 Indian Financial System
• The financial system be broadly
(organised)
indian financial system and classified into formal the
system. informal (unorganised)
• The formal financial system comprises financial financial institutions,
financial markets, financial instruments and financial services.
The formal financial system comprises of Ministry of Finance, RBI, SEBI and other
regulatory bodies.
The informal financial system consists Df individual money leriders, groups of
pensons operating as funds or associations, partnership firms consisting of local
brokers, pawn brokers, and non-banking financial intermediaries such as finance,
investment and chlt fund companies.
 Growth and Development of Indian Financial System

1. Nationalisation of financial institutions

2. Establishment of Development Banks
3. Establishment of Institution for Agricultural Development
Establishment of institution for housing finance
5. Establishment of Stock Holding Corporation of India (SHCIL)
6. Establishment of mutual funds and venture capital Institutions
7. New Economic Policy of 1991
 Weaknesses of Indian Financial System

Lack of co-ordination among financial institutions

• Dominance of development banks in industrial finance
Inactive and erratic capital market
• Unhealthy financial practices
Monopolistic market structures
• Other factors
- Banks and Financial Institutions have high level of NPA.
— Government burdened with high level of domestic debt.
- Cooperative banks are labelled wilh scams.
- Investors confidence reduced in the public sector undertaking etc.,
- Financial illiteracy.
 Key Elements of a Well-functioning Financial System

= A strong legal and regulatory environment

Stable money
Sound pub)ic finances and public debt
management
= A central bank
Sound banking system
= Information system
= Well-functioning securities market