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A financial system is an Integral Part of a Modern Economy. Indian Financial System The Financial System : The Financial System The word system in the term ‘financial system’ represents a set of closely held financial institutions, financial services and financial instruments or Claims. The financial system of a country can be defined as a set of organizations, instruments, markets, services and methods of operations, procedures that are closely interrelated with each other. Indian Financial System Nature and Evolution of the Financial System : Nature and Evolution of the Financial System The basic requirements for any financial system to be efficient are; Efficient Monetary System- indicates an efficiency medium of exchange for goods and services. Facilities for the creation of the capital- to meet the demands of the economy. The capital will be necessary to undertake the production activities. The financial system helps to meet such demands by mobilizing the savings of the surplus units to the demanding units. Efficient financial markets- and methodologies, which facilitate the process of transfer of resources and the conversion of financial claims into money. Indian Financial System Nature and Evolution of the Financial System : Nature and Evolution of the Financial System Complexities in the functions of the financial system, especially when the requirements of the savers and those of the borrowers did not match, created a need to enhance the financial system. The growth of an economy indicates the growth of the Financial System The evolution or the growth of the financial system in any economy can be classified into three major phase, namely; Active government intervention- soon after independence Partial liberalization Total liberalization-1990’s Indian Financial System Segments of the Financial System : Segments of the Financial System The Financial System is Segmented into two Parts namely, the Organized and the Un Organized. The Organized system represents the Structure or nationalized banking, Co-operative banks and development banks set by the government through various enactments and regulations. This includes the private sector also. The Government/RBI controls this sector. The Unorganized sector comprises of individual money lenders, bankers, pawn brokers and traders, etc. Indian Financial System Structure of the Financial System : Structure of the Financial System Indian Financial System Functions of Financial Intermediaries : Functions of Financial Intermediaries Offering professional and individually tailored support and advising their clients on a variety like taxation, money matters etc., with the help of specialists. Extending global expertise to their clients in various countries. Having access to sophisticated technologies and resources to undertake their functions and offering a range of comprehensive and integrated products and services. Pro-active support and assistance at all stages of their client’s financial requirements. Having an active presence on all the world’s key financial markets. Providing security, discretion and high service quality. Indian Financial System Types of Financial Intermediaries : Types of Financial Intermediaries Financial Intermediaries are Classified into two types namely, Depository and Non-Depository Institutions. Depository Institutions Depository Institutions include Commercial banks, Savings & loans institutions and credit unions. Depository institutions directly lend these funds to consumers and businesses for a full range of purposes. They also lend them indirectly by investing in securities. Indian Financial System Slide 11: Depository Financial Institutions that is legally allowed to accept monetary deposits from consumers such as a savings bank. A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. Slide 12: Non-depository Institutions Non-depository institutions include Finance Companies, Mutual Funds, Security firms Investment bankers, Brokers and Dealers, Pension funds and Insurance companies. Finance companies cater to the wide and varied segments of society. They cater in multiple ways to both the business as well as to the consumer communities. In a way they are called as department stores of consumer and business credit. Finance companies handle a range of business, which include, automobile finance, purchase of business equipment, home appliances, etc. Slide 13: Mutual funds can be described as single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors. The investment company (AMC) is responsible for the management of the fund, and it sells shares in the fund to individual investors. When an individual invests in a mutual fund, he or she becomes a part owner of a large investment portfolio, along with other shareholders of the fund. The fund managers’ job is to regularly look into the performance of the investments made and bring about changes and invest new funds collected from investors. Slide 14: Insurance companies play an important role in the financial markets as non-depository institutions. Insurance companies basically make payment for a price (premium) if certain events occurs to the policy holders or their dependents. There are two types of insurance companies-life insurance companies and property and casualty insurance or general insurance companies. Investment bankers are financial institutions and individuals who assist companies in raising capital, often through a private placement or public offering of company stock. Sometimes they are referred to as brokers or dealmakers. They market large amounts of new securities on behalf of governments, governments agencies and companies. Slide 15: Security brokers or dealers are intermediaries who help companies and investors find one another. Many entrepreneurs hire brokers to help them raise money in the hope, that by doing so, they will reduce the amount of time they will have to spend in fund raising. In some cases, brokers can provide companies with valuable introductions that lead to financing. Leasing represents a specialized financial institution that provides the access to productive assets such as airplanes, automobiles, machinery, etc. The leased assets allow the businesses to use them at a lower cost than borrowing or owing them. Both the parties involved in the lease agreement will benefit through the arrangement. Slide 16: Mortgage bankers commit themselves to take on new mortgage loans used to fund the construction of homes, offices, buildings and other structures. They carry these loans for a short time until the mortgages can be sold to a long-term lender such as an insurance company or savings bank. Pension funds that are dedicated to protect the individuals and families against loss of income in the retirement years by allowing them to set aside and invest a portion of their current income are called as pension funds. They are long-term investments with limited need for liquidity. Financial Instruments : Financial Instruments Financial assets/instruments represent the financial obligations that arise when the borrower raises funds in the financial market. The Types of financial Assets used world wide are in the form of deposits, stocks and Debt. Deposits: can be made either with banking or non-banking firm. In return, the lender will receive a certificate in case of a fixed deposit and a checking account in case of a saving/current deposit. These serve as a payment mechanism for the supplier of funds. Interest will be earned on such deposits except current deposits. Indian Financial System Slide 18: Stock they represent ownership of the issuing company. Due to this right to ownership, the holder of the stocks will have a share in the firms’ profits. Unlike the stocks, financial assets in the form of debt create an obligation on the borrower to repay the amount borrowed. The debt instrument will be a contract entered into by the borrowed after a predetermined period and at a certain rate of interest. If an asset serves as collateral to the borrowing, then the holder of the debt instrument will have a priority claim on the asset. Issuer’s Considerations : Issuer’s Considerations Indian Financial System ISSUER’S CONSIDERATIONS Past performance Cost of funds Regulatory aspects Investor’s Considerations : Investor’s Considerations Indian Financial System TAX PLANNING CASH FLOWS INVESTOR’S CONSIDERATIONS RETURN Issuer’s Considerations : Issuer’s Considerations Cash Flows: Issuers may consider the period for which the funds are required and try to spread the borrowings in a way to minimize the costs. Generally, the need for funds will depend on the purpose for which the funds are raised. Taxation: Issuers may have to assess the tax liability of the company and try to design the instrument in order to grant certain tax incentives to the company and the investors. The attempt would be to minimize the tax liability of the issuer. Leverage: Issuers may assess the debt to equity ratio of the company since excess of debt may burden the company with debt servicing. Further, in a falling interest rate scenario a debt contracted for a long-term will increase the cost of funds for the company. Slide 22: Maturity Plan: Depending upon the future requirement of funds and their availability to repay the lenders, the repayment schedule of the instrument has to be designed. Market conditions: One of the important considerations for the issuer will be the environment, both economic and political. Notwithstanding the credibility of an issuer, it is important that the market is conducive to facilitate raising of funds. Investor Profile: Instrument design should necessarily suit the target investors for the issuer. Past Performance: The performance of the previous issues of the same company or performance of the previous issues of companies in the same industry will have to be considered before designing the instrument. Cost of funds: Raising funds is a costly affair, so based in the above factors the company should ensure to choose an option which minimizes its cost of funds. Regulatory Aspects: Finally, the instrument needs to be created after considering all the possible factors in the light of the regulatory aspects. Investor’s Consideration: : Investor’s Consideration: Risk: The primary consideration for the investor will be the safety of the funds lent. Every investment option will have an element of risk. Liquidity: The Investor will also give due consideration to the liquidity of the instrument, which depends mainly on the secondary market. Returns: The investor generally expects to earn a return that compensates for the risk exposure taken by investing in the security. Slide 24: Tax Planning: Investors can invest in those securities that offer tax incentives, as the post-tax returns are significant to them. Cash flows: The investment decision of the investor will also depend on the period for which the surplus funds are available for investment. Simplicity: The salient features of the instrument should be easily understood by the investor in order to take the investment decision. Role of Financial System in Economic Development : Role of Financial System in Economic Development The financial system of a country is of immense use in its economic development. The volume and growth of the capital in the country very much depends upon the efficiency and intensity of the operations and activities in the financial markets. An immature financial system hinders the growth of the economy. Indian Financial System Slide 26: Financial intermediaries enhance the investment in the economy through direct and indirect investments. The process of transferring the monetary resources of the public into the financial resources by the financial intermediaries involves Maturity intermediation, Risk reduction through diversification, Reducing costs of transaction & information and Providing a payments mechanism. Indian Financial System The Indian Financial System : The Indian Financial System The Indian Financial System before independence closely resembled the model given by RL Benne in his theory of financial organization in a traditional economy. According to him in a traditional economy the per capita output is low and constant. Some principal features of the Indian Financial system before independence were: closed-circle character of industrial entrepreneurship; a narrow industrial securities market, absence of issuing institutions and no intermediaries in the long-term financing of the industry. Outside savings could not be invested in industry. That is, the savings of the financial system could not be channeled to investment opportunities in industrial sector. Indian Financial System to supply finance and credit was greatly strengthened in the post-1950. Significant diversification and innovations in the structure of the financial institutions, have accompanied the growth of Indian Financial System Indian Financial System Slide 28: In the past 50 years the Indian financial system has shown tremendous growth in terms of quantity, diversity, sophistication, innovations and complexity of operation. Indicators like money supply, deposits and credit of banks, primary and secondary issues, and so on, have increased rapidly. India has witnessed all types of financial innovations like diversification, disintermediation, securitization, liberalization, and globalization etc. As a result, today the financial institutions and a large number of new financial instruments lead a fairly diversified portfolio of financial claims. Indian Financial System at present Summary : Summary The word system in the term ‘financial system’ represents a set of closely held financial institutions, financial services and financial instruments or claims. These varied requirements of the lenders and the borrowers led to a mismatch in periods. These factors created a need to develop the financial system in such a way that it matched the requirements of the borrowers and lenders. The financial system can be segmented into two parts namely, the organized and the unorganized sector. Financial assets / instruments represents the financial obligation that arises when the borrower raises funds in the financial market. Indian Financial System Slide 30: The financial system of a country is of immense use in its economic development, adequate capital formation is indispensable to economic development and financial markets are of crucial importance for capital formation. An immature financial system hinders the growth of the economy. Indian Financial System Summary : Summary Financial System-Nature, Evolution and Structure. Functions of Financial Intermediaries. Financial Instruments. Role of Financial System in Economic Development. Indian Financial System. Indian Financial System Slide 32: Thank you Indian Financial System You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.