Financial Market and Institution

UNIT-II

 Working Mechanism of Financial Market and Institute create Financial System

Function of Financial System

• It serves as a link between savers and investor
• It helps in utilizing the mobilized saving of the scattered savers in more efficient and effective manner
• It assists in the selection of the projects to be financed and also reviews the performance of such project periodically
• It provides a payment mechanism for exchange of goods and services
• It provide a mechanism for the transfer of resources across geographic boundaries
• It provides a mechanism for managing and controlling the risk involved in mobilizing saving and allocating credit.
• It promote the process of capital formation by bringing to gather all small amount
• It help in lowering the cost of transection, increases return, reduced cost and motivates people to save more
• It provide detailed information to the operator or players in the market such as Individuals, Business House and
Government etc.
 Component of Indian Financial System

Financial Financial Financial Financial

Institution Market Instruments services
 Financial Institution

Banking Institution
Non-Banking Institution

Commercial Banks Cooperative banks= DFIs Non- Banking Financial

Entities

Examples of Co-operative • Development • NBFCs

• Public sector=12
• Private sector=21 banks are: Andhra Pradesh Banks –All India • MBFCs
State Co-operative Bank Ltd, • Investment • MNBCs
• RRBs= 43 The Bihar State Co-operative
• Foreign Banks=49 Bank Ltd, Chhatisgarh Rajya
Institution (LICs, • RNBCs
Sahakari Bank Maryadit,The GICs, UTI etc.) • Equipment leasing
Goa State Co-operative • Specialized Company
Bank Ltd, The Gujarat Institution • Hire purchase Cs
State Co-operative Bank Ltd,
Haryana Rajya Agricultural Development Banks: It includes, • Investment Cs
for example, National Bank for Agriculture &
Sahakari Bank Ltd etc Rural Development (NABARD). Export- • etc
Import Development Banks: It includes,
for example, Export-Import Bank of India
(EXIM Bank). Housing Development Banks: It
includes, for example, the National
Housing Bank (NHB)
 Financial Market

Money Market =3 to Capital Market

1year

• Call Money Market • Primary Market

• Treasury Bill • Secondary Market
• Commercial Paper • Derivative Market
• CDS
 Financial Instruments

On the basis of term Type securities

• Short term • Primary securities

• Medium term • Secondary securities
• Long term • Innovative securities
 Financial services

Asset/Fund Basis Fee Based

• Leasing • Merchant Banking

• Higher Purchase • Credit Rating
• Consumer Credit • Stock Broking
• Bill Discounting • Mergers
• Venture Capital
• Housing Finance
• Factoring
 Banking Institute

Organized unorganized
Sector Sector

Non -Banking Institute

 Types of Financial Market

Financial Money Capital

Market Market Market
Function of Money Market
• The Basic function of money market is to facilitate adjustment of liquidity position of commercial bank, business
corporation and other non banking financial institutes
• It provide outlets to commercial banks, business corporation,non banking financial concern and other investor for
there surplus funds
• It provide short term funds to the various borrower such as business men, industrialist and trades etc
• Money Market provide short-term funds even to the government institute
• The money market constitute a highly official mechanism for credit control. It serve as a medium through which the
central bank of the country exercise control on the creation of the credit

Function of Capital Market

• Mobilization of financial resources on a nation –wide scale
• Securing the foreign capital know-how to fill-up the deficit in the required resources for economic growth at faster
rate
• Effective allocation of the mobilized financial resources by directing the same to projects highest yielding or the
project need to promote balance economic development
 Difference between Capital Market and Money Market
Capital Market Money market
1. It provide finance or money capital for long-term 1. It provide finance or money for short-term investment
investment
2. The finance provided by capital market may be used both 2. The finance provided by money market is utilized, usually
for fixed and working capital for working capital
3. Mobilization of resources and effective utilization of 3. Lending and borrowing are its principal function to
resources through lending are its main function facilitate adjustment of liquidity position
4. It is one of the constituents, stock exchange act as an 4. It does not provide such facilities. The main components
investment market for buyers and sellers of securities include call loan market, collateral loan market, bill market
and acceptance houses
5. It act as a middle man b/w the investor and the 5. It act as a link between the depositor and the borrower
entrepreneur
6. Under writing is one of the primary activities 6. Under writing is a secondary function
7. Its invest in institution and raise capital from public and 7. It provides outlets to commercial banks business
invest in selected securities so as to give the highest possible corporation, non banking financial concern and other for their
return the owner risk short term surplus funds
8. It provides long term funds to central and state 8. It provide short term funds to government by purchasing
Government public and local bodies for development treasury bills and to other by discounting bills of exchange
purpose etc.
 More New Innovative Instruments

1. Equity warrants
2. Secured Premium notes
3. Callable Bonds
4. Floating/variable Rate Bonds
5. Adjustable Rate Bonds
6. Deep discount Bonds
7. Inflation adjusted Bonds (IABS)
8. Easy exit bond with floating interest rate
9. Regular Income Bonds
10. Retirement bonds
11. Index Bond
12. En-cash Bonds
13. Growth Bonds
14. Capital Bond
Characteristic of Financial Services
• Intangible
• Direct sale
• Heterogeneity
• Fluctuation in Demand
• Protect Customer Interest
• Labor Intensive
• Geographical dispersion
• Lack of special identification
• Information based
• Required Quality labor

Supplier of Financial Services

• Banking and Financial Institute

• Housing Building Finance society
• Insurance Companies
• Credit card Issues Companies
• Investment Trust and Mutual Funds
• Stock Exchange
• Leasing Companies
• Equipment Finance Companies
• Consumer Finance Companies
 Money Market

Call Money Market Bill Market

Collateral Loan Market Acceptance Market

Characteristics of a Developed Money Market
1. Developed Commercial Banking System
2. Presence of a central Bank
3. Near Money Assets
4. Availability of ample resources
5. Integrated interest rate structure
6. Well set market structure

Significance Function of Money Market

7. Economic Development
8. Profitable Investment
9. Borrowing by the Government
10. Importance for central banks
11. Mobilization of funds
12. Self- sufficiency of commercial banks
13. Saving & investment
 Money Market Instrument

1. Commercial Bills
1952 (RBI)
Introduce in 1970
Issue by the director of company
For BIG Company money requirement
Negotiable instrument
period of 90 days
transferable in nature
use to finance the credit sale
Discountable in nature

2. Treasury Bill or T-Bills

Types
- Ad hoe
- Ordinary
- Regular
91/182/364 days
Sold by Central Bank on be half of Government on the basis of competitive bidding. Having no risk no fix rate of interest
-For 91 days not more then 100 Cr in total (Wednesday = Auction and Friday = Allotment)
- For 182 days Alternate Wednesday ( Non Reporting week 1 & 3)
- For 364 Reporting week 2 & 4 (Range up to 500 Cr)
3. CDs (Certificate of Deposit)

1989 introduce
Issued by Commercial Banks
Minimum Amount 5 L
Maximum limit depend on Financial Position of Bank
Marketable in Nature
Sale on Discount

4. Commercial Paper
High rated Companies

Minimum Condition
Net worth -4Cr
Working Capital -4Cr
Only Issue 75% of Working Capital
One investor not more than 25 L
Maturity period 30 days to 1 year (7 days -364)
Multiple of 5 L
Minimum 5 L
5. Repurchase Agreement (RA)

-Over the counter market

- Mutual Agreement between two parties
- Amount are depend upon mutual Agreement

6. Dated Govt. Securities Or (Dated G- Secs)

- Issue by Govt
- with mention date
- Interest rate is Fixed and Floating
- Tenure 5 y to 30 y
- Floating Interest rate is near about gold return
- Maximum Range 40 Y

7. Zero Coupon Bond Or No- Interest Bond

- Issue on discount
- Period 5 y to 7 y or may be 10 y also
- Govt or Companies
8. Deep Discount Bond (DDB)
- Introduce by IDBI in June 1994
- Issue by ICICI