indian financial system 1
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Aditya kumar
INDIAN FINANCIAL SYSTEM
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Introduction The experiences of the The economic scene in
the post independence period has seen a sea change; the end result being that the economy has made enormous progress in diverse fields. There has been a quantitative expansion as well as diversification of economic activities 1980s have led to the conclusion that to obtain all the benefits of greater reliance on voluntary, market-based decision-making, India needs efficient financial systems
Indian Financial System
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It is the financial system that supplies the necessary financial inputs for the production of goods and services which in tern promote the well being and standard of living of the country.
Financial system is a broader term which brings under its fold the financial markets (long term & short term.) and the financial institutions which support the system
MEANING OF THE FINANCIAL SYSTEM
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The major assets traded in the financial system is to mobilize the savings in the from money and monetary assets and invest them to productive ventures.
An efficient functioning of the financial system facilitates the three flow of funds to more productive activities and thus promotes investments.
Thus the financial system provided the intermediation between savers and investors and promotes faster economic development.
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To link the savers & investors.To inspire the operators to monitor the
performance of the investment.To achieve optimum allocation of risk
bearing.It makes available price - related information.It helps in promoting the process of financial
deepening and broadening
Functions of the Financial system
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FINANCIAL INSTITUTIONFINANCIAL MARKETFINANCIAL INSTRUMENTFINANCIAL SERVICES
COMPONENTS OF INDIAN FINANCIAL SYSTEM
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Banking Institutions: Participate in the economy's payment mechanism, deposit liabilities constitute a major part of national money supply.
Non-Banking Institutions: LIC, SIDBI, IIBI, IFCI ( All India Financial Institutions), SFCs & SIDCs
FINANCIAL INSTITUTION
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Defined as the market in which financial assets are created or transferred.
These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.
FINANCIAL MARKET
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Classification
Money market(Short term instrument)
Capital markets(Long term instrument)
The most important distinction between the two: The difference in the period of maturity.
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Main Function To channelize savings into short term productive
investments like working capital .
Instruments in Money Market Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note
Money Market
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Part of the national money market
Day-to day surplus funds mainly of banks are traded
Short term in nature
Maturity of these loans vary from 1 to 15 days
Lent for 1 day: Call money
Lent for more than 1 day but less than 15 days: Notice money
Convenient interest rate
Highly liquid loan repayable on demand
Call Money Market
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Unsecured Promissory note.
Issued by well known companies with strong and high credit rating.
Sold directly by the issuers to investors or through agents like merchant banks and security houses.
Flexible Maturity
Low interest rates with compared to banks.
Imparts a degree of financial stability to the system.
Commercial Papers
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Referred as note payable in accounting
It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee).
The obligation may arise from the repayment of a loan or from another form of debt.
For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.
Promissory Note
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Defined as short term deposit by way of usance promissory notes.
Greater flexibility to investors in the deployment of surplus funds.
Permitted by the RBI to banks
Maturity of not less than 3 months and upto 1 year.
Transferable in nature
Free negotiability and limited flexibility
Certificates of deposits
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Invest primarily in money market instruments of very high quality.
RBI and public financial institution can set it either directly or through its existing subsidiaries.
MMMF Open Ended Close Ended
Money market mutual funds
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Provided resources needed by medium and large scale industries.
Purpose for these resources Expansion Capacity Expansion Investments Mergers and Acquisitions
Deals in long term instruments and sources of funds
Capital Markets
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Main Activity
Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose.
Provides opportunities to various class of individuals and entities.
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Structure of Capital Markets
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Primary Markets Secondary MarketsWhen companies need financial resources for its expansion, they borrow money from investors through issue of securities.
The place where such securities are traded by these investors is known as the secondary market.
Securities issued a) Preference Sharesb) Equity Sharesc) Debentures
Securities like Preference Shares and Debentures cannot be traded in the secondary market.
Equity shares is issued by the under writers and merchant bankers on behalf of the company.
Equity shares are tradable through a private broker or a brokerage house.
People who apply for these securities are: a) High networth individualb) Retail investorsc) Employeesd) Financial Institutionse) Mutual Fund Housesf) Banks
Securities that are traded are traded by the retail investors.
One time activity by the company. Helps in mobilising the funds for the investors in the short run.
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Primary Securities: Equity, Preference, Debt and Various combinations.
Secondary Securities: Mutual Fund Units and Insurance Policies etc.
Financial Instruments
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DepositoriesCustodialCredit RatingLeasingPortfolio ManagementUnderwriting etc.
Financial Services
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Thank-You