indian finance system

7/29/2019 INDIAN FINANCE SYSTEM

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FACULTY

JUGNU SHRIVASTAVA


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FINANCIAL SYSTEM SET OF COMPLEX AND CLOSELY CONNECTED

SUBSETS OF INSTITUTIONS , MARKETS ANDSERVICES/PRODUCTS


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FINANCIAL SYSTEM

INSTITUTIONS MARKETSSERVICES/

PRODUCTS


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FINANCIAL INSTITUTIONS

BANKING

NONBANKING


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DEVELOPMENT FINANCIAL INSTITUTION

All Indiainstitutions eg

IDBI

Regional/State

level institutions

OtherInstitutions like

DICGC etc


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Organisational Structure of

Financial Institution


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Asset/ Liability Management of

the Financial InstitutionsFI buy money by borrowing from depositors or othersources of funds. They sell money when they lend itto businesses or individuals

The objective of a depository institution is to earn apositive spread between the assets it invests in (what it

has sold the money for) and the costs of its funds(what it has purchased the money for).


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Intermediary services Brokerage function :

as represented by the activities of brokers and marketoperators.

Maturity Transformation: transforms a longer-term asset into a shorter-term one

Liability-Asset transformation: activity is provided by institutions issuing claims against

themselves, which differ, from the assets they acquire. Risk transformation services

Payments Mechanism

Reduction of transaction cost


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FINANCIAL MARKETSPRIMARY/SECONDARY

MONEY/CAPITAL

ORGANISED/UNORGANISED


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EQUILIBRIUM IN FINANCIAL

MARKETSD S

E

S D

VOLUME OF FUNDS

ROI

d S l


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Money Demand, Money Supply,

and the Equilibrium Interest Rate

Equilibrium in financial markets requiresthat money supply be equal to money demand,or thatMs =Md.

Money Supply = Money demand

This equilibrium relation is called the LMrelation.


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FINANCIAL PRODUCTS AND

SERVICES EQUITY

DEBT

SMALL SAVINGS ELECTRONIC FINANCIAL PRODUCTS

MUTUAL FUNDS

INSURANCE

ETC


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FINANCIAL SYSTEM AND

ECONOMIC DEVELOPMENT


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Financial system impact on saving

and investment processes. The following theories have analyzed this impact:

The Classical Prior Saving Theory,

Credit Creation or Forced Saving or InflationaryFinancing Theory,

Financial Repression Theory

Financial Liberalization Theory.


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PRIOR SAVINGS THEORYAll savings finds investment outlets

Need for appropriate monetary and fiscal policy

to promote savings Control inflation

Financial system affects both scale and structureof investment

It links Savers (surplus units) to the investors(deficit units)


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PRIOR SAVINGS THEORY

ECONOMIC DEVELOPMENT

SAVINGS AND INVESTMENT CREATE CAPITAL FORMATION

SURPLUS SPENDING

ECONOMIC UNITS

DEFICIT SPENDING

ECONOMIC UNITS

SURPLUS OR SAVINGS DEFICIT OR SAVINGS

FINANCIAL SYSTEM


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CREATION OF CREDIT IN ANTICIPATIONOF SAVINGS

INVESTMENT BY GOVT, BY CREDITCREATION

EX: INDIA FIVE YEARLY PLANNED

BUDGETS

Credit Creation Theory


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Theory Of Forced SavingsCreation of inflation leads to forced saving

Inflation enhances investment

It creates investment in real capital morelucrative creating Toblin effect or shift ofportfolio effect

Inflation changes distribution in favour of profit

earners increases savings and capital Incomedistribution effect

Transfers resource to govt., since its a hidden tax-Inflation Tax Effect


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Financial Regulation TheoryGovt. regulation is necessary in market to

prevent market failure

Specially applies to underdeveloped anddeveloping nations where imperfect

competition exists

Govt. regulates via direct credit

programmes, interest rate regulation, creditand monetary regulations etc.


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Financial Liberalization Theory

Govt. regulation creates market repression and leadsto market failure

Specially applies to underdeveloped and developingnations where intervention of govt. exists cratinglow volume , low quality and asymetric investment

Interest rate ceiling distort investment directionFinancial deregulation, liberalization and

privatization eliminates distortions and creates agrowth path

It increases the allocative efficiency of investments


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Financial Regulation VS

Liberalization Over enthusiasm and over of both can harm

Need for a balance between the two paths

IMF_WB guided imposed liberalization andderegulation has led to significant

Volatility, instability, and vulnerability of financialsystems accompanied by collapse of banks, national

currencies financial crisis . Lessons of liberalization of Asia, Soviet Union have

not been encouraging


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Causes for failure of Liberalisation

Lack of macro-economic stability

Inadequate banking supervision

Excessive risk exposure by banks

For making liberalization a success we need to

implement more prudential banking norms andcreate macro-economic stability.

Banking objective should be profit

maximization.

The govt. must not create discriminatory

taxes .

indian finance system

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