Overview of Indian Financial System

1. INDIAN FINANCIAL
SYSTEM
Dr. Aparna Pavani Siddhabattula,
Associate Professor,
ASB, Alliance University.
Ph: 9550285905

2. FINANCIAL SYSTEM
An institutional framework existing in a
country to enable financial transactions.
Three main parts
Financial assets (loans, deposits, bonds,
equities, etc.)
Financial institutions (banks, mutual funds,
insurance companies, etc.)
Financial markets (money market, capital
market, forex market, etc.)
Regulation is another aspect of the
financial system (RBI, SEBI, IRDA,)

3. FUNCTIONS OF FINANCIAL
SYSTEM
The financial system transfer resources across time, sectors, and
regions.
The financial system manages risks for the economy.
The financial system pools and subdivides funds depending upon the
need of the individual saver or investor.
Performs an important clearinghouse function, which facilitates
transactions between payers and payees.

4. DIAGRAMMATIC
REPRESENTATIO
NOF
INDIAN
FINANCIALSYSTE
M

5. FINANCIAL INSTITUTIONS
Financial institutions encompass a broad range of business operations within the financial services sector
including banks, trust companies, insurance companies, brokerage firms, and investment dealers.
Includes institutions and mechanisms which Affect generation of savings by the community.
Mobilization of savings
Effective distribution of savings
Institutions are banks, insurance companies, mutual funds- promote/mobilise savings
Individual investors, industrial and trading companies- borrowers

6. Financial institutions classified as:-
a) Regulatory and financial institutions :
The two major Regulatory and Promotional Institutions in India are Reserve
Bank of India (RBI) and Securities Exchange Board of India (SEBI).
Both RBI and SEBI administer, legislate, supervise, monitor, control and
discipline the entire financial system.
RBI is the apex of all financial institutions in India.
All financial institutions are under the control of RBI.
The financial markets are under the control of SEBI

7. b) Banking institutions:-
Banking institutions mobilize the savings of the people.
They provide a mechanism for the smooth exchange of
goods and services.
Basic categories of banking institutions are commercial
banks, co-operative banks, developmental banks

8. c) Non banking financial institutions:-
Nonbanking financial institutions also mobilize financial
resources directly or indirectly from the people.
They lend funds but not create credit
Companies like LIC, GIC, UTI, Development Financial
Institutions, Organisation Funds etc. fall in this category.
Non banking financial institutions can be categorized as
Investment companies,
Housing companies,
leasing companies,
hire purchase companies,
Specialized financial institutions(EXIMBanketc.)
Investment institutions,state level institutionsetc

9. FINANCIAL ASSETS/INSTRUMENTS
Enable channelizing funds from surplus units to deficit
units
There are instruments for savers such as deposits,
equities, mutual fund units, etc.
There are instruments for borrowers such as loans,
overdrafts, etc.
Like businesses, governments too raise funds through
issuing of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to savers
who wish to lend money to the government

10. MAJOR FINANCIAL INSTRUMENTS
Money
Savings
account
Credit
market
Instrumen
ts-bonds,
mortgage
s
Commo
n
Stocks
Money
market
funds and
mutual
funds
Pension
funds
Financial
Derivative
s

11. FINANCIAL INTERMEDIARIES
Mutual Funds
Promote savings and mobilize funds which are
invested in the stock market and bond market
Indirect source of finance to companies
Pool funds of savers and invest in the stock
market/
Bond market
Their instruments at saver’s end are called units
Offer many types of schemes: growth fund,
income fund, balanced fund
Regulated by SEBI

12. Merchant banking- manage and underwrite new issues, undertake
syndication of credit, advise corporate clients on fund raising
Subject to regulation by SEBI and RBI
SEBI regulates them on issue activity and portfolio management of
their business.
RBI supervises those merchant banks which are subsidiaries or
affiliates of commercial banks
Have to adopt stipulated capital adequacy norms and abide by a code
of conduct

13. • There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and Leasing
Companies, etc.
• India’s financial system is quite huge and caters to every kind of demand for funds
• Banks are at the core of our financial system and therefore, there is greater expectation from them in
terms of reaching out to the vast populace as well as being competitive

14. FINANCIAL MARKET
Financial market deals in financial securities (or financial instruments) and
financial services.
Financial markets are the centers or arrangements that provide facilities for
buying and selling of financial claims and services.
These are the markets in which money as well as monetary claims is traded in.
Financial markets exist wherever financial transactions take place.
Financial transactions include issue of equity stock by a company, purchase of
bonds in the secondary market, deposit of money in a bank account, transfer of
funds from a current account to a savings account etc.

15. FUNCTIONS OF FINANCIAL
MARKETS
To facilitate creation and allocation of credit and liquidity.
To serve as intermediaries for mobilization of savings
To help in the process of balanced economic growth
To provide financial convenience
To cater to the various credits needs of the business organizations.
To provide information and facilitate transactions at low cost

16. Financial market can be classified on the basis of maturity of claims
1. Money Market and
2. Capital Market
1. Money Market:
A market where short-term funds are borrowed and lend is called money market. It deals in short
term monetary assets with a maturity period of one year or less. Liquid funds as well as highly
liquid securities are traded in the money market.
Examples of money market are Treasury bill market, call money market, commercial bill market
etc.

17. 2. Capital Market:
Capital market is the market for long term funds. This market deals in the
long term claims, securities and stocks with a maturity period of more than
one year. The stock market, the government bond market and derivatives
market are examples of capital market
• Financial market can be classified in 2 on basis of seasoning of
claim
1. Primary Market and
2. Secondary Market

18. 1. Primary Market:
Primary markets are those markets which deal in the new securities. Therefore
,they are also known as new issue markets. These are markets where
securities are is sued for the first time. In other words, these are the markets for
the securities issued directly by the companies.
2. Secondary Market:
Secondary markets are those markets which deal in existing securities. Existing
securities are those securities that have already been issued and are already
outstanding. Secondary market consists of stock exchanges.

19. Financial market can be classified in 2 on basis of timing of
delivery:
1. Cash / Spot market
2. Forward/Future market
Cash / Spot market:
This is the market where the buying and selling of commodities happens or stocks are sold for
cash and delivered immediately after the purchase or sale of commodities or securities.
Forward/Future market:
This is the market where participants buy and sell stocks/commodities, contracts and the delivery
of commodities or securities occurs at a pre-determined time in future.

20. Financial Market is further classified into2.
1. Foreign exchange market:
Foreign exchange market is simply defined as a market in which one country’s currency is
traded for another country’s currency. It is a market for the purchase and sale of foreign
currencies.
2. Derivatives market:
The derivatives are most modern financial instruments in hedging risk. The individuals and firms
who wish to avoid or reduce risk can deal with the others who are willing to accept the risk for a
price. A common place where such transactions take place is called the derivative market.
The important types of derivatives are forwards, futures, options, swaps etc.,

21. FINANCIAL INSTRUMENTS
Financial instruments are the financial assets, securities and claims.
They may be viewed as financial assets and financial liabilities.
1. Financial assets:
represent claims for the payment of a sum of money sometime in the future (repayment
of principal) and/or a periodic payment in the form of interest or dividend.
2. Financial liabilities:
are the counterparts of financial assets. They represent promise to pay some portion of
prospective income and wealth to others.

22. TYPES OF FINANCIAL
INSTRUMENTS
The financial instruments may be capital market instruments or money market
instruments or hybrid instruments.
Capital Market Instruments:
Financial instruments that are used for raising capital through the capital market. It
includes include equity shares, preference shares, warrants, debentures and bonds.
Money Market Instruments:
•Financial instruments that are used for raising and supplying money in a short period not exceeding one year
through money market are called money market instruments.
•It includes treasury bills, commercial paper, call money, short notice money, certificates of deposits,
commercial bills, money market mutual funds.

23. MONEY MARKET INSTRUMENTS
1. Call and Short Notice Money
These are short term loans. Their maturity varies between one day to
fourteen days. If
money is borrowed or lent for a day it is called call money or overnight
money. When
Money is borrowed or lent for more than a day and up to fourteen days, it
is called short
Notice money.
2. Commercial Bills
A bill of exchange contains a written order from the creditor (seller) to the
debtor (buyer) to pay a certain sum, to a certain person after a certain
period.
According to Negotiable instruments Act, 1881, a bill of exchange is ‘an instrument in writing
containing an unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money only to, or to the order of a certain person or to the bearer of the instrument’.

24. 3.Treasury Bill
Treasury bills are credit instruments used by the Govt. to raise short term funds to meet the
budgetary deficit.
Treasury bills are popularly called T-bills.
These are negotiable instruments. Hence, these are freely transferable.
4.Certificate Of Deposit
CD is a certificate in the form of promissory note issuedby
banks against the short-term deposits of companies and institutions, received by the bank.
It is payable on a fixed date. It has a maturity period ranging from three to twelvemonths.

25. 5. Commercial Paper
•It is a finance paper like Treasury bill. It is an unsecured,
negotiable promissory note.
•It has a fixed maturity period ranging from three to six months. It is
generally issued by leading, nationally
reputed credit worthy and highly rated corporations.
•It is quite safe and highly liquid.
•It is issued in bearer form and on discount. It is also known as
industrial paper or corporate paper.

26. • https://www.ibef.org/industry/financial-
services-india