Download - Principles of Investment Management
Introduction to Financial System
Chandrika Marisetty, 72Priyanka Jindal, 73
Subtopics1. Introduction2. Evolution3. Objectives4. Components5. Advantages 6. Disadvantages
The system that allows the transfer of money between savers (and investors) and borrowers. A financial system can operate on a global, regional or firm specific level.
Financial System
Evolution of Financial System• Barter• Money Lender • Chit Funds
• Indigenous Banking• Cooperative Societies
• Banks• Joint Stock Banks• Stock Exchanges• Investment Banks
Objectives• Financial System: System that allows the transfer of
money between savers (and investors) and borrowers.• To help in the formation of capital.• To meet the short term and long term capital needs of
households, corporate houses, Govt. and foreigners.• To mobilize the savings and invest them in the
productive manner.
Components of Financial System
Indian Financial System
Formal (organized Financial system)
Regulators;MoF, SEBI, RBI, IRDA
Financial Institutions
(Intermediaries)
Financial Markets
FinancialInstrument
Financial Services
Informal(Unorganized
financial system)
Money lenders,Local bankers,
Traders
Financial Institutions
• Channeling funds from and to particular firms, industries, sectors, during the development process.
• To reduce financial constraints faced by companies.
• Converting themselves into universal banks. E.g.: ICICI bank ,Muthoot (NBFS), HDFC life(Insurance)
Financial Markets• The market in which financial assets are created
and/or transferred.
• Funds or savings are transferred from surplus unit to deficit unit.
• Players like dealers, investors, borrowers, depositors, etc. are plays a vital role in driving demand and supply.
• Financial markets help Individuals to get the benefits of time preference, liquidity preference and portfolio management.
A. Capital Market• Market for securities (debt or equity), where
business enterprises and governments can raise long-term funds.
• It is defined as a market in which money is provided for periods longer than a Year.
B. Money Market • It’s a wholesale debt market for low risk, highly
liquid, short term instrument. Period ranges from a day up to a year.
• This market is dominated mostly by government, banks and financial institutions.
C. Credit Market• It is a place where banks, Fis and NBFCs purvey
short, medium and long term loans to corporate and individuals
Financial Regulators• Main Objective:a. To ensure investor protection from
fraudb. To enable flow of relevant and reliable
information• Securities and Exchange Board of
India (regulates stock markets)• Reserve Bank of India(regulates money
market)• Ministry of Finance( Ex: Post office)
Financial Products• Intangible in nature• Claims on the issuers• Financial contract between issuer & investor
Money Market Instruments (short term and highly liquid) T- Bills, CoD Exchange Market Instruments Forward, future, swapCapital Market Instruments(long term) Equity shares, Preference sharesCommodity Market Instruments Gold, Silver
Financial ServicesServices provided to consumers and Businesses by financial institutions• Banking Services• Insurance Services• Stock Broking• Consumer Finance• Mutual Fund Services
Advantages of Financial System
• 1.Pooling of funds.• 2.Capital formation.• 3.Facilitates payments.• 4.Provides liquidity.• 5.Short & long term needs.• 6.Risk functions.• 7.Better decisions.• 8.Finances Government needs.• 9.Economic development.
Disadvantages
1. Lack of complete transparency2. Variety of manipulative practices3. Institutional deficiencies4. Insider trading
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