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Indian Financial System

The Indian financial system includes various financial markets and intermediaries that facilitate the mobilization and allocation of savings and investments. It discusses the functions of the financial system in providing liquidity, trading liquidity, mobilizing savings, and converting risk-return profiles and maturities of investments. It also defines various financial concepts such as financial assets, intermediaries, markets and instruments and describes the different types and participants in the money and capital markets.

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Mohsin Khan
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92 views

Indian Financial System

The Indian financial system includes various financial markets and intermediaries that facilitate the mobilization and allocation of savings and investments. It discusses the functions of the financial system in providing liquidity, trading liquidity, mobilizing savings, and converting risk-return profiles and maturities of investments. It also defines various financial concepts such as financial assets, intermediaries, markets and instruments and describes the different types and participants in the money and capital markets.

Uploaded by

Mohsin Khan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Indian Financial System

Functions
• Provision of Liquidity
• Trading in Liquidity
• Mobilisation of Savings
• Conversion of Risk-Return profile of investments
• Conversion of maturity of credit

Financial Concepts:
• Financial Assets
• Financial Intermediaries
• Financial Market
• Financial Instruments
Financial Assets
Two Types: Marketable and Non-marketable

Marketable: Shares, Govt. securities, Bonds, MF units, etc.

Non-marketable: Bank deposits, Provident fund, LIC policies,


Co. deposits, P.O. certificates

Another Classification:
• Money or Cash Assets
• Debt Assets
• Stock Assets
Financial Intermediaries
Two Categories: Organised and Unorganised

Unorganised: Organised:
 Money Lender Capital Market
 Indigenous Bankers Intermediaries
 Traders & Landlords
– For Long Term Fund

Money Market
Intermediaries
– For Short Term Fund
Money Market Intermediaries:
• Reserve Bank of India
• Commercial Banks
• Co-operative Banks
• Post Office Savings Bank
• Government Treasury Bills

Capital Market Intermediaries:


• Development Banks
• Insurance Companies
• UTI
• Agriculture Finance Institutions
• Government Funds (Provident Fund, NSC etc.)
• EXIM Bank
• NBFCs
Financial Markets
Two Categories:Organised and Unorganised

Unorganised Markets: Money Lenders, Indigenous Banks etc.

Organised Markets

Money Market: Capital Market:


• Call Money Market • Industrial Securities
Market
• Commercial Bills
Market • Government Securities
Market
• Treasury Bills Market
• Long Term Loan Market
• Short Term Loan
Market
Money Market
Features
• A market for short term funds/ financial assets
• Deals with assets those can be converted into cash readily
• Generally operations take place over phone, No formal
place for exchange
• Transactions have to take place without the help of brokers

Objective:
• To provide a parking place for short term surplus fund
• To provide room for overcoming short-term deficit
• To enable the Central Bank to manage liquidity in the
system
Money Market Capital Market
Market for Short-term Funds Market for Long-term Funds

Funds for working capital, short Funds for long-term requirements


period requirements of Govt. of industry and Government

Market for bills of exchange, Market for shares, debentures and


treasury bills, commercial papers govt. bonds

Single instruments are of large Single instruments are of small


amount, eg. TB unit is of Rs. 1 amount, share units are of Rs.
lakh, CP or CD unit is of Rs. 25 lakh 10/-, debenture units are of Rs.
etc. 100/-
Instruments generally do not have Instruments generally have
secondary market secondary market

Transactions mostly takes place Transactions take place at stock


over phone and without broker exchanges through authorised
dealers
Central Bank and Commercial Development Banks and Insurance
Banks are the major players Companies are the major players
Structure
Money Market consists of a number of sub-markets
• Call Money Market
• Commercial Bills Market
• Short Term Loan Market
• Treasury Bills Market

Participants:
RBI, Commercial Banks, NBFCs, Discount Houses, DFHI,
Insurance Companies, public
Call Money Market
A Market for very short period loans ranging
between 1-14 days
These loans are repayable prematurely at the option of either
the lender or the borrower
Helps:
• Commercial Banks to meet large payments, large
remittances, to maintain stipulated CRR and SLR
• Stock Brokers to mobilise resources for speculating in the
stock market
• Bill market to meet payment of matured bills
• Central Bank to regulate liquidity in the system
Commercial Bills Market
A market for discounting bills of exchange emerging out of
genuine trade transaction and accommodation bills

Has two types:


• Discount Market
• Acceptance Market

Types of bills:
Demand, Usance, Documentary, Clean, Inland, Foreign,
Export, Accommodation, Supply
Commercial Bills Market
Advantages:
Liquidity, Certainty of Payments,
High yield investments scope for short term surpluses
A control mechanism for Central Bank through rediscounting
rates
Current situation: Underdeveloped Bills Market
• Absence of rediscounting among banks
• Difficulty in ascertaining genuine trade bills
• Limited Foreign Trade
• Absence of Acceptance Services
Treasury Bills Market
A market for short term borrowing of Government
Two types: Ordinary and Ad Hoc
Durations: 14 days, 91 days, 182 days, 364 days
Operations: Auction
Participants:
RBI, SBI, Commercial banks, State Govt., financial institutions,
Provident Funds, corporate, public
Distinctive features:
Safety, Investments qualify for SLR requirements,
non-inflationary monetary tool, Arbitraging facility with call
market
Short Term Loan Market
Two major instruments:
Commercial Papers and Certificate of Deposit

Commercial Papers:
• A usance corporate promissory note with short-term fixed
maturity
• Issued at a discount on face value
• Issuer pledges no asset but his liquidity and earning power
• Can be issued directly by a RBI listed company to the investors
or through merchant banks
Commercial Papers
• 75% of the working capital requirements can be financed
through commercial paper subject to a limit as prescribed by
BoD & CRA
• Minimum net worth of the company should be Rs. 4 crores
• Proposal to be submitted to the financing bank of the
company’s working capital
• To be issued in multiple of Rs. 5 lakh and minimum
investments by a single investor should be Rs. 5 lakh
• Maturity period between 15 days and 1 year
• Cannot be underwritten, however commercial banks can
provide standby facility at the time of the redemption on
maturity
• Investments can be made by any person, banks, corporate etc.
Certificate of Deposit
A market for short term deposit instruments issued by banks
and financial institutions
A usance promissory note with fixed maturity, CDs
• Can be issued to individuals, corporates, trust funds,
associations
• Freely transferable but only after 45 days of the date of issue
• Maturity period between 3 months to 1 year
• To be issued in multiple of Rs. 5 lakh and minimum investment
by an investor should be Rs. 25 lakh
• To be accounted for the purpose of calculations of reserve
requirements and SLR requirements of the issuing bank
• Limit on CDs – 10% of fortnightly aggregate deposit

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