Unit 1 – Introduction to Financial System

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Introduction to Financial System and Financial Services. : 

Introduction to Financial System and Financial Services.

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Meaning of Financial System: It is the financial system that supplies the necessary financial inputs for the production of goods and services which in turn promote the well being and standard of living of the people of the country. Financial system is a broader term which brings under its fold the financial markets (long term & short term)and the financial institutions which support the system

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The major assets traded in the financial system is to mobilize the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the free flow of funds to more productive activities and thus promotes investments. Thus the financial system provided the intermediation between savers and investors and promotes faster economic development.

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Functions of Financial System: Provision of Liquidity. Mobilization of Savings. Financial Concepts: Financial Assets Financial Intermediaries Financial Markets Financial rates and return Financial instruments

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Financial Assets A Financial asset is one which is used for production or consumption or for future creation of assets. Types of Financial assets Marketable assets Non marketable assets

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Financial intermediaries Financial intermediaries includes all kinds of organizations which intermediate and facilitate financial transactions of both the Indivuals and corporate customers. It refers to all financial institutions and investing institutions which facilitate financial transactions in financial markets.

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Financial intermediaries in India Organized Sector and Unorganized Sector Organized Sector consists of Capital Markets & Money Markets intermediaries. Capital Market intermediaries consists of ---- Development banks, Insurance Cos, UTI, Govt (PF, NSC), Exim Bank, NBFC (Leasing co, H.P Co, Investment Co)

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Financial intermediaries in India Money Market intermediaries are RBI, Commercial banks, Co operative Banks, Post Office, Govt (Treasury bills) Unorganized Sector consists of Money Lenders, Indigenous bankers, Pawn Brokers, Traders and Land lords

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Financial Markets Financial markets can be referred to as those centers and arrangements which facilitate buying and selling of financial assets, claims and services Classification of Financial Markets. Financial markets are classified into Organized market and Unorganized market

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Organized markets consists of Capital markets and Money markets. Capital market consists of Industrial securities markets, Govt Securities markets and Long term markets. Industrial Securities markets consists of Primary markets and Secondary Markets. Long term market consists of Term Loan market, Market for Mortgage and market for financial guarantees.

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Money market consists of …., Call money Market. Commercial Bill Market Treasury Bill Market Short term Loan Market.

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Financial Risk and returns is guided by the risk return trade off. Interest rate plays a important role Financial Instruments It refers to the documents that which represent financial claims on assets. It refers to a claim on to the repayment of a certain sum at the end of a specified period together with interest or dividend. Example --- Bill of exchange, Share, debenture, government bond, treasury bill,etc…,

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Features of Financial Instruments: They are easily transferable. They have a ready market They posses liquidity They can be used as a security for raising loans. Some of them have tax savings. They have specified maturity period. They facilitate futures trading to cover risk (forex).

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History and Growth of Financial System in India: Nationalization of Financial institutions – formation of SBI, LIC and nationaliasation of commercial banks. Starting up of UTI Establishment of development banks like – IFCI, ICICI, IDBI,SIDBI.

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Institution for Financing agriculture – NABARD Institution of Foreign trade – (Exim Bank) Institution for housing finance – NHB Mutual Fund Industry. Venture capital Institutions. Credit Rating Agencies. Legislative Support – MRTP Act , New Economic Policy, Negotiable instrument Act,Banking Regulation Act and The Stamp Act

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Weaknesses of Indian Financial System: Lack of Co-ordination between different Financial institutions. Monopolistic Market Structure Dominance of development Banks in Industrial Financing Inactive and erractic capital market Imprudent Financial Practices

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Meaning of Financial Services: In general all types of activities which are of financial nature could be brought under the term financial services. Classification of Financial Services Industry. Capital Market intermediaries Money Market intermediaries.

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Scope of Financial Services: It is categorized into Traditional activities and Modern activities. The traditional activities are Fund based and non fund based activities. Fund Based – activities are…., Underwriting activities Dealing in secondary markets.

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Participating in money market instruments Involving in equipment leasing, H.P , venture capital and seed capital. Dealing in forex markets. Non fund based activities are…, Managing the Capital issues. Making arrangements for private placements. Making arrangement of funds for project finance and working capital requirements.

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Modern activities are…, Providing project advisory / consultancy. Planning for Merger and Acquisition. Guiding Corporates in capital restructuring. Managing portfolio of large PSU. Assisting in establishing the right debt-equity mix. Restructuring the sick companies. Hedging of risk due to forex / interest rates variations

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Causes of Financial Innovation: Low profitability. Keen Competition Economic liberalization Improved Communication technology. Customer Service / delight. Global impact Investor awareness.

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New Financial Services and Products: Merchant Banking. Loan Syndication Leasing Mutual Funds Factoring Forfaiting Venture Capital Corporate advisory services. Securitization Forwards, Futures, Swaps, Options.

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Challenges facing financial sector: Lack of Qualified personnel. Lack of investor awareness. Lack of transparency. Lack of specialization Lack of recent data Lack of efficient risk management system.

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Present Scenario of financial sector: Conservatism to dynamism Emergence of primary Equity Market Concept of Credit rating Process of globalization Process of liberalization