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Indian financial system

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Chap1-1

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  1. Indian Financial System Markets, Institutions and Services

  2. Chapter 1Financial system: An Introduction

  3. Figure 1.1

  4. To understand: • Meaning of Financial system. • Components of the Financial system. • Functions of the Financial System. • Key elements of the Financial System. • Key elements of a well functioning financial system. • Bank- based and Market- based financial systems. • Nature and role of Financial Institutions and Markets. • Link between Money market and Capital market. • Link between Primary market and Secondary market • Functions and Characteristics of Financial markets. Chapter Objectives

  5. Meaning of Financial System • A set of sub systems of financial institutions, markets, instruments and services. • Intermediates with the flow of funds between savers and borrowers. • Facilitates transfer and allocation of scarce resources efficiently and effectively.

  6. Types of Financial System • Formal financial system • Organized, institutional and regulated • Informal financial system • Advantages: Low transaction costs, Minimum default risk and Transparency of procedures • Disadvantages: Wide range of interest rates, Higher rates of interest and Unregulated

  7. Financial Institutions • Financial Markets • Financial Instruments • Financial Services Components of the Financial System

  8. Types of Financial Institutions • Banking and Non–Banking • Banking: creators and purveyors of credit. • Types: Commercial Banks & Cooperative Banks • Non-Banking: purveyors of credit • Types: Developmental financial institutions; Mutual Funds; Insurance companies and NBFCs

  9. Functions of Financial Institutions • Provide three transformation services: Liability, asset and size transformation Maturity transformation Risk transformation

  10. Financial Markets Types: Money Market – A market for short –term debt instruments. Capital Market - A market for long -term equity and debt instruments Segments: Primary Market – A market for new issues Secondary Market – A market for tradin outstanding issues

  11. Link Between Primary and Secondary Capital Market • A buoyant secondary market indispensable for the presence of a vibrant primary market • Secondary market provides a basis for the determination of prices of new issues • Depth of the secondary market depends on the primary market • Bunching of new issues affects prices in the secondary market

  12. Financial Instruments Types : Primary & Secondary Distinct Features : Marketable, Tradeable, Tailor-made

  13. Financial Services Major categories : Funds Intermediation Payments Mechanism Provision of liquidity Risk Management Financial Engineering

  14. Functions of Financial System • Mobilise and allocate savings • Monitor corporate performance • Provide payment and settlement systems • Optimum allocation of risk bearing and reduction • Disseminate prize related information • Offer portfolio adjustment facility • Lower the cost of transactions • Promote the process of financial deepening and broadening

  15. Key Elements of a Well -functioning Financial System • A strong legal and regulatory environment • Stable money • Sound public finances and public debt management • A central bank • Sound banking system • Information system • Well -functioning securities market

  16. Financial System Designs Types: Bank–based & Market–based

  17. Market-based Financial System Advantages: • Provide attractive terms to both investors and borrowers • Facilitate diversification • Allow risk sharing • Allow financing of new technologies Drawbacks: • Prone to instability • Exposure to market risk • Free rider problem

  18. Bank–based Financial System Advantages: • Close relationships with parties • Provide tailor made contracts • Efficient inter-temporal risk sharing • No free rider problem Drawbacks: • Retards innovation and growth • Impedes competition

  19. Functions of Financial Markets • Enabling economic units to exercise their time preference • Seperation, distribution, diversification and reduction of risk • Efficient payment mechanism • Providing information • Enhancing liquidity • Providing portfolio management services.

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