UNIT 1 MFI

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UNIT 1UNIT 1

An Overview of IndianAn Overview of Indian

Financial SystemFinancial System

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The term "finance" in our simpleThe term "finance" in our simpleunderstanding it is perceived as equivalent tounderstanding it is perceived as equivalent to'Money'. We read about Money and banking in'Money'. We read about Money and banking in

Economics, about Monetary Theory andEconomics, about Monetary Theory andPractice and about "Public Finance". ButPractice and about "Public Finance". Butfinance exactly is not money, it is the source offinance exactly is not money, it is the source ofproviding funds for a particular activity.providing funds for a particular activity. ThusThuspublic finance does not mean the moneypublic finance does not mean the moneywith the Government, but it refers towith the Government, but it refers tosources of raising revenue for the activitiessources of raising revenue for the activities

and functions of a Government.and functions of a Government.

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The word "system", in the term "financialThe word "system", in the term "financial

system", implies a set of complex and closelysystem", implies a set of complex and closely

connected or interlined institutions, agents,connected or interlined institutions, agents,practices, markets, transactions, claims, andpractices, markets, transactions, claims, and

liabilities in the economy.liabilities in the economy. The financialThe financial

system is concerned about money, credit andsystem is concerned about money, credit and

finance. Indian financial system consists offinance. Indian financial system consists offinancial institutions, financial market,financial institutions, financial market,

financial instruments and financialfinancial instruments and financial

intermediation.intermediation.

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MeaningMeaning

The term Financial System is a set of interThe term Financial System is a set of inter--

related activities/ services working together torelated activities/ services working together to

achieve some preachieve some pre-- determined purpose or goal.determined purpose or goal.It includes different markets, the institutions,It includes different markets, the institutions,

instruments, services and mechanisms whichinstruments, services and mechanisms which

influence the generation of savings,influence the generation of savings,

investment, capital formation and growth.investment, capital formation and growth.

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INDIAN FINANCIAL SYSTEMINDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by theThe economic development of a nation is reflected by theprogress of the various economic units, broadly classified intoprogress of the various economic units, broadly classified intocorporate sector, government and household sector.corporate sector, government and household sector. WhileWhileperforming their activities these units will be placed in aperforming their activities these units will be placed in a

surplus/deficit/balanced budgetary situations.surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there areThere are areas or people with surplus funds and there are

those with a deficit.those with a deficit. A financial system or financial sectorA financial system or financial sectorfunctions as an intermediary and facilitates the flow of fundsfunctions as an intermediary and facilitates the flow of fundsfrom the areas of surplus to the areas of deficit.from the areas of surplus to the areas of deficit. A FinancialA Financial

System is a composition of various institutions, markets,System is a composition of various institutions, markets,regulations and laws, practices, money manager, analysts,regulations and laws, practices, money manager, analysts,transactions and claims and liabilities.transactions and claims and liabilities.

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Structure of Financial System in IndiaStructure of Financial System in India

Financial structure refers to the mix of financialFinancial structure refers to the mix of financial

institutions, instruments and markets that channel savingsinstitutions, instruments and markets that channel savings

and other funds to businesses and other borrowers. In aand other funds to businesses and other borrowers. In a

bankbank--based system, banks play the major role inbased system, banks play the major role inchanneling funds to businesses. In a marketchanneling funds to businesses. In a market--based system,based system,

capital marketscapital markets -- including the stock and bond marketsincluding the stock and bond markets --

are the more important source of funds.are the more important source of funds.

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Components of Financial System inComponents of Financial System in

IndiaIndia The financial system consists four components. These are financialThe financial system consists four components. These are financial

markets, financial services, financial instruments and financial institutions.markets, financial services, financial instruments and financial institutions.

Financial Institution:Financial Institution: -- Financial Institution can be classified as bankingFinancial Institution can be classified as bankingand non banking institutions. Banking Institutions are creators andand non banking institutions. Banking Institutions are creators andpurveyors of credit while non banking financial institutions are purveyorspurveyors of credit while non banking financial institutions are purveyors

of credit.of credit.

FinancialMarkets:FinancialMarkets: -- Financial Markets can be classified as primary andFinancial Markets can be classified as primary andsecondary markets. A Primary Market deals with new issues and secondarysecondary markets. A Primary Market deals with new issues and secondarymarkets is meant for trading in existing securities.markets is meant for trading in existing securities.

Financial Instruments:Financial Instruments: -- A financial instrument is a claim against anA financial instrument is a claim against aninstitution or a person for payment at a future date of a sum of money in theinstitution or a person for payment at a future date of a sum of money in theform of dividend.form of dividend.

Financial Services:Financial Services: -- Financial services are those , which help withFinancial services are those , which help withborrowing and funding, buying and selling securities, lending andborrowing and funding, buying and selling securities, lending and

investing, making and enabling payments and settlements and managinginvesting, making and enabling payments and settlements and managingrisk exposures in financial markets.risk exposures in financial markets.

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Constituents of a Financial SystemConstituents of a Financial System

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IntermediaryIntermediary MarketMarket RoleRole

Stock ExchangeStock Exchange Capital MarketCapital Market Secondary Market toSecondary Market tosecuritiessecurities

Investment BankersInvestment Bankers Capital Market, CreditCapital Market, Credit

MarketMarket

Corporate advisoryCorporate advisory

services, Issue of securitiesservices, Issue of securities

UnderwritersUnderwriters Capital Market, MoneyCapital Market, Money

MarketMarket

Subscribe to unsubscribedSubscribe to unsubscribed

portion of securitiesportion of securities

Registrars, Depositories,Registrars, Depositories,

CustodiansCustodians

Capital MarketCapital Market Issue securities to theIssue securities to the

investors on behalf of theinvestors on behalf of the

company and handle sharecompany and handle share

transfer activitytransfer activity

Primary Dealers SatellitePrimary Dealers SatelliteDealersDealers

Money MarketMoney Market Market making inMarket making ingovernment securitiesgovernment securities

Forex DealersForex Dealers Forex MarketForex Market Ensure exchange inkEnsure exchange ink

currenciescurrencies

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The Financial System: Its FunctionsThe Financial System: Its Functions

To transfer economic resources across time,To transfer economic resources across time,

borders and among industriesborders and among industries

To provide ways of managing riskTo provide ways of managing risk To provide ways of clearing and settlingTo provide ways of clearing and settling

payments to facilitate tradepayments to facilitate trade

To provide a mechanism for the pooling ofTo provide a mechanism for the pooling ofresources and for the subdividing of ownershipresources and for the subdividing of ownership

in various enterprisesin various enterprises

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Contd..Contd..

To provide price information to helpTo provide price information to help

coordinate decentralized decision making incoordinate decentralized decision making in

various sectors of the economyvarious sectors of the economy

To provide ways of dealing with the incentiveTo provide ways of dealing with the incentive

problems created when one party to aproblems created when one party to a

transaction has information that the other partytransaction has information that the other party

does not or when one party acts as an agent fordoes not or when one party acts as an agent for

anotheranother

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Transferring Economic ResourcesTransferring Economic Resources

IntertemporalIntertemporal

Borrowing and lending are ways of transferring resourcesBorrowing and lending are ways of transferring resources

across timeacross time

Across spaceAcross space If you have money in your checking account and you canIf you have money in your checking account and you can

access this via your Debit Card at your local store, this isaccess this via your Debit Card at your local store, this is

transferring resources across spacetransferring resources across space

If investment banks collect financial resources in the USIf investment banks collect financial resources in the USand invest it in developing countries like China or India,and invest it in developing countries like China or India,

this is also a transfer of resources across spacethis is also a transfer of resources across space

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Role Of Financial Institutions

Role as a Financial Intermediary:

It provides the means and mechanism of

transferring command over resources from those

who have an excess of income over expenditure to

those who can make use of the same with a view to

adding to the volume of productive capital.

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Role as a Catalytic Agent:

It play the role of Catalytic agent to bring about

economic and social change in a country through

dynamism and innovativeness in their operations.

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Role as a Creator Of Money:

Through acceptance of public deposits and lending

money against it for funding transactions they

create further deposits. This role has assumed

greater importance in the present age of

consumerism with increased desire for goods and

services by all segment of society.

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Role as a Promoter:

Financial Institutions play the role of a promoter to

foster the economic growth in the country. These

institutions undertake comprehensive growth

potential survey of the esisting industrial structure

of the various parts of the country, analyze trends

in the demand, and supply position of the various

projects.

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Role as a Counsellor:

It advises the corporate enterprises on when to exit

a business and how to better manage their

portfolio.

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The Indian financial system can broadly classified into theThe Indian financial system can broadly classified into the

following groups:following groups:--

Organized sector; &Organized sector; &

Unorganized sector.Unorganized sector. TheThe organized financial systemorganized financial system comprises the: bankingcomprises the: banking

system, the cosystem, the co--operative system, development banking system,operative system, development banking system,

money markets, financial companies/institutions.money markets, financial companies/institutions.

TheThe unorganized financial systemunorganized financial system comprises ifcomprises ifmoneylenders, indigenous bankers, lending pawnbrokers,moneylenders, indigenous bankers, lending pawnbrokers,

landlords, traders, etc. investment companies, chit fund, etc.landlords, traders, etc. investment companies, chit fund, etc.

the central bank or govt. does not regulate these in athe central bank or govt. does not regulate these in a

systematic manner.systematic manner.

Documents

UNIT 1 MFI