01nature of financial system

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Financial System

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Introduction

The economic development of any country

depends upon the existence of a well organized

financial system. FS plays a very crucial role in the

functioning of the economy because it allows

transfer of resources from savers to investors(S2I).


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FS is a broader term which brings under its fold the

financial markets and financial institutions which

support the system. The word system in the term

FS implies a set of closely connected practices &

transactions in the economy. Finance is the study

of money related to its circulation, regulation &

administration. The major assets traded in the FS

are money or monetary assets. So, the

responsibility of FS is to mobilize the savings in theform of money and invest them in to productive

venture.


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Thus FS provide the intermediation between savers

and investors and promotes faster economicdevelopment.

FS = FI + FM + FI + FS

The FS consists of Financial Institutions, Financial

Markets, Financial Instruments & Financial Services.


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Functions of the FS

Mobilization of saving

Promotion of liquidity


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Structure of Financial System

Financial Institutions

Financial Markets

Financial Instruments

Financial Services


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Financial Institutions

FI are the intermediaries who act as mobilizers and

depositories of savings and as providers of credit/finance.

FI is a mixture of Banking financial institutions(BFI) & Non

Banking financial institutions(NBFI).BFI = CB + CB + CB + RRB

BFI includes Central Bank, Commercial Banks, Co Operative

Banks, Regional Rural Banks.

NBFI = LIC + UTI + IDBI + NABARD

NBFI includes Life Insurance Corporation, Unit Trust of India,

Industrial Development Bank of India, National Agriculture

Bank for Rural Development.


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Financial Markets

FM is a Place/mechanism where funds/savings are transferred

from surplus units to deficit units. These markets can be

broadly classified into Capital & Money Market.

FM = CM + MM

CM deals with those financial assets which have maturity

period of more than one year whereas MM deals with shortterm financial assets which have maturity period of less than

one year.


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Financial Markets

Another classification could be Primary & Secondary Markets.

PM deals in new issue of securities whereas SM deals with

securities which are already issued and available in the

market. FM = PM + SM

PM mobilize the savings directly by issuing the new securities.

SM mobilizing the savings indirectly by providing liquidity to thesecurities.


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The commodities that are traded in a financial market are

financial assets/securities/instruments.

FI = CMI + MMI + FA

CMI: Capital Market Instruments:

1. Equity Shares

2. Preference Shares

3. Debentures/Bonds4. Zero Coupon Bonds

5. Deep Discount Bonds

6. Secured Premium Notes


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MMI: Money Market Instruments:

1. Commercial Bills

2. Commercial Papers

3. Certificate of DepositsFA: Financial Assets:

1. Gold/Silver

2. Real Estate

3. Buildings4. Insurance Policies,

5. NSS, NSC & FDs

6. PF, PPF, RPF, URPF


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Financial Services

FS include the services offered by both types of Cos.:

Asset Management Cos. and Liquidity Management Cos.

FS = AMC + LMC

AMC includes the leasing Cos., Mutual Funds, MerchantBankers, Issue/Portfolio Management.

LMC comprises the Bill discounting and Acceptance Houses.

This sector provides specialized services such as credit rating,

venture capital financing, lease financing, factoring, creditcards, housing finance, book building etc.

These services are regulated by SEBI, RBI, IRDA, Govt. of

India, DBI(Dept. of Banking & Insurance).


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Weaknesses of Indian FS

1. Lack of Co-ordination between Financial Institutions

2. Monopolistic Market Structures

3. Dominance of Development Banks in Industrial Financing

4. Imprudent Financial Practices5. Inactive Capital Market


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01nature of financial system

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