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Indian Financial System by SWARNA :

Indian Financial System by SWARNA

Indian Financial System:

Indian Financial System Introduction Composition Functions Saving Function Liquidity Function Payment Function Risk Function Policy Function

Financial Markets:

Financial Markets Defined as the market in which financial assets are created or transferred. These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

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Classification Money market (Short term instrument) Capital markets (Long term instrument) The most important distinction between the two: The difference in the period of maturity.

Money Market:

Money Market Main Function To channelize savings into short term productive investments like working capital . Instruments in Money Market Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note

Call Money Market:

Call Money Market Part of the national money market Day-to day surplus funds mainly of banks are traded Short term in nature Maturity of these loans vary from 1 to 15 days Lent for 1 day: Call money Lent for more than 1 day but less than 15 days: Notice money Convenient interest rate Highly liquid loan repayable on demand

Commercial Papers:

Commercial Papers Unsecured Promissory note. Issued by well known companies with strong and high credit rating. Sold directly by the issuers to investors or through agents like merchant banks and security houses. Flexible Maturity Low interest rates with compared to banks. Imparts a degree of financial stability to the system.

Promissory Note:

Promissory Note Referred as note payable in accounting It is a contract detailing the terms of a promise by one party (the maker ) to pay a sum of money to the other (the payee ). The obligation may arise from the repayment of a loan or from another form of debt . For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Certificates of deposits:

Certificates of deposits Defined as short term deposit by way of usance promissory notes. Greater flexibility to investors in the deployment of surplus funds. Permitted by the RBI to banks Maturity of not less than 3 months and upto 1 year. Transferable in nature Free negotiability and limited flexibility

Money market mutual funds:

Money market mutual funds Invest primarily in money market instruments of very high quality. RBI and public financial institution can set it either directly or through its existing subsidiaries. MMMF Open Ended Close Ended

Capital Markets:

Capital Markets Provided resources needed by medium and large scale industries. Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions Deals in long term instruments and sources of funds

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Main Activity Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose. Provides opportunities to various class of individuals and entities.

Structure of Capital Markets:

Structure of Capital Markets Primary Markets Secondary Markets When companies need financial resources for its expansion, they borrow money from investors through issue of securities. The place where such securities are traded by these investors is known as the secondary market. Securities issued Preference Shares Equity Shares Debentures Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares is issued by the under writers and merchant bankers on behalf of the company. Equity shares are tradable through a private broker or a brokerage house. People who apply for these securities are: High networth individual Retail investors Employees Financial Institutions Mutual Fund Houses Banks Securities that are traded are traded by the retail investors. One time activity by the company. Helps in mobilising the funds for the investors in the short run.

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financial system

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components of indian financial system

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