2. Meaning and Definition
Financial System is a complex, well-integrated set
of sub-systems of
Financial institution,
Markets,
Instruments, and
Services
which facilitates the transfer and allocation of funds,
efficiently and effectively.
3. Formal and Informal Financial system
Formal Financial Sector is characterized by
presence of an organized, institutional and regulated
system which caters the financial needs of the
modern spheres of the economy.
Informal Financial Sector is an unorganized,
non-institutional and non-regularized system
dealing with the traditional and rural spheres of the
economy.
5. Informal financial system
Informal Financial Sector is an unorganized,
non-institutional and non-regularized system
dealing with the traditional and rural spheres of the
economy.
Advantages: 1). Low Transaction, 2). Minimum
default risk, 3). Less of formalities, 4). Less time
consuming, 5). Fulfillment of urgent requirements.
Disadvantages: 1). Unregulated 2). High rates of
interest 3). Less transparency of procedures, 4). Rise
to black money, 5). Exploitation of victims.
6. Components of Formal Financial System
1. Financial institutions;
2. Financial markets;
3. Financial instruments;
4. Financial services.
7. Components of Formal Financial System
Term finance institutions: IFCI, IDBI, ICICI,
SIDBI,IIBI.
9. Financial Markets
Financial markets are the mechanism enabling
participants to deal in financial claims.
Literally, financial markets also provide a facility in
which their demands and requirements interact to
set a price for such claims. (D=S)
10. Types of Financial Markets
1. Money Market: a market for short-term
securities or securities with a maturity of less than
one year;
2. Capital market: A market for long-term
securities or securities with a maturity period of
one or more year.
Primary market;
Secondary market.
11. Types of the Capital Market
1. Primary market: it refers to the market:
Where securities are created/issued;
where the securities are traded for very first time;
2. Secondary market: it refers to the market where
those securities traded which have already been
issued in the primary market:
Over the counter;
Trade through stock exchanges;
12. Types of the Capital Market
1. Primary market: it refers to the market:
Where securities are created/issued;
where the securities are traded for very first time;
2. Secondary market: it refers to the market where those securities traded which have already been
issued in the primary market:
Over the counter: trade thorough the direct
counters of the company or on the immediate
basis;
Trade through stock exchanges: approach to
BSE, NSE or any other stock exchange through
stock brokers or agents of registered broking
companies.
13. Types of the Capital Market
1. Primary market:
2. Secondary market:
Over the counter: trade thorough the direct counters of the company or on the
immediate basis;
Trade through stock exchanges: approach to BSE, NSE or any other stock
exchange through stock brokers or agents of registered broking companies.
Stock brokers or agents of registered broking
companies: these are the individuals, companies
or the institutions registered with SEBI (1992)
and are authorised to sale and purchase of
securities or the financial assets.
Share khan, Religare and Unicorn etc.
14. 3. Financial Instruments
Financial asset or the financial instrument is
the claim of money, against a particular person or
institution, at a future date, for a specific amount;
A financial asset may also include the claim of
periodic payment in form of interest or dividend,
Implies Debentures, shares, bonds and notes;
1. Primary securities: Equity, Debentures;
2. Secondary securities: Bank deposits, Insurance
policies and Mutual funds.
15. Features of a Security
Marketable;
Traceable;
Tailor-made.
16. Financial Services
Financial facilitate the
ease of:
1. Borrowing and funding;
2. Lending and investing;
3. Buying and selling;
4. Making and enabling
payments and settlements;
5. Managing risk and
exposures;
Need for Financial Services
17. Categories of Financial Services
1. Fund intermediation:
2. Liquidity facility:
3. Payment mechanism:
4. Risk management:
5. Financial engineering is the application of
mathematical methods to the solution of problems
in finance. It is also known
as financial mathematics, mathematical finance,
and computational finance.
18. Functions of a Financial System
Mobilize and allocate savings;
Monitor corporate performance;
Provide payment and settlement system;
Optimum allocation of risk bearing and reduction;
Disseminate price related information;
Offer portfolio adjustment facility;
Lower the cost of transactions;
Promote the process of financial deepening of
broadening. Financial Deepening: It refers to the increased
provision of financial services with a wider choice of
services geared to all levels of society.
19. Financial System and Economic
Increase in rate of saving and investments;
Increase in the productivity and production;
Growth in GDP and GNP of India;
Helps in capital formation;
Utilization of idle funds;
Maintains circular flows in economy;
Increase transparency and reduce risk of several
defaults.
Improvement in living standard;
20. Keys elements of well functioning financial system
A strong legal and regulatory environment;
Stable money;
Sound public;
Sound finances and public debt management;
A central bank;
Sound banking system;
Information system;
Well functioning securities market;
22. Financial Markets
Financial markets are the mechanism enabling
participants to deal in financial claims.
Literally, financial markets also provide a facility in
which their demands and requirements interact to
set a price for such claims. (D=S)
23. Types of Financial Markets
1. Money Market: a market for short-term
securities or securities with a maturity of less than
one year;
2. Capital market: A market for long-term
securities or securities with a maturity period of
one or more year.
Primary market;
Secondary market.
25. Meaning and Definition
Money market refers to the market for financial
assets that are close substitutes for money;
It is the market for overnight to short-term funds
and instruments;
Instrument having maturity period of one or less
than one year.
26. Features and characteristics of money market
1. Money market refers to the market for financial assets
that are close substitutes for money;
2. It is the market for overnight to short-term funds and
instruments;
3. Instrument having maturity period of one or less than one
year.
4. It is not a physical location (like stock exchanges),
hence activities are conducted over telephones;
5. Collection of several instruments and their markets;
6. Whole sale market of short term debt instruments;
7. Creditworthiness of the participants is important;
8. Main players are: DHFI, RBI, Banking institutions,
NBFCs, STCI, PSUs and non-residents Indians.
9. Need based market;
10. Price determination through free play of demand and
supply forces;
27. Functions of money market
• Money market is generally expected to perform
three broad functions:
1. Provide balancing mechanism to even out the
demand for and supply of short term funds;
2. Provide a focal point for central bank intervention
for influencing liquidity and general level of
interest rates in the economy;
3. Provide reasonable access t suppliers and users of
short term funds to fulfill their borrowings and
investment requirements at an efficient and market
clearing price.
28. Benefits of The Efficient Money Market
1. Provides a stable source of funds to banks;
2. Encourage development of non bank entities;
3. Facilitates government, market borrowing;
4. Makes effective monetary policy actions;
5. Helps in pricing different floating interest
products.
30. Role of Reserve Bank of India in The Money Market
Money market comes under the direct purview of
Reserve Bank of India;
The aims of RBI’s operations in the money market
are:
1. To ensure that liquidity and short term interest
rates are maintained at levels consistent with the
monetary
2. objectives of maintaining price stability;
3. To bring about order in foreign exchange market;
Tools of RBI: CRR, SLR and open market operations etc.
31. Organization of money market in India
Formal/organized money market;
Informal/unorganized money market.
32. Historical Background of Money Market in India
Developments in Money Market in India
In the 1980s:
1. Sukhamoy chakravorty committee on recommended
need for development of money market instruments:
1985;
2. N. Vagul’s working group on money market:1987;
3. Introduction of money market instruments: 182-days
treasury bills, certificate of deposit and inter-bank
participation certificate(1988-89) and commercial
papers(1990);
4. Abolition of interest rate ceiling on call money and
market based determination of interest rates (1988);
33. Historical Background of Money Market in India
Developments in Money Market in India
In the 1990s:
1. M. Narsimham committee (1991): a high level committee set by
government of India for financial sector reforms;
2. Recommendations of Narsimham committee:
Set up Security Trading Corporation of India(1994);
Primary dealer system(1995), satellite dealer system (1997) [In order
to increase the liquidity in the money market];
Focuses on financial deepening and financial liberalization;
Introduction of treasury bills with several maturity periods;
Auctioned treasury bills introduced (market determined
interest rates)
34. Historical Background of Money Market in India
Developments in Money Market in India
In the 1990s:
1. M. Narsimham committee (1991): a high level committee set by
government of India for financial sector reforms;
2. Recommendations of Narsimham committee:
Introduction of repo rates by RBI;
Reactivation of Bank rate(1997), introduction of LAF(2000), open
market operations (1998);
Introduction to the Money Market derivatives-FWD rate agreement
and interest rates swaps (1999);
Payment system infrastructure: negotiated dealing system(2002),
Clearing corporation of India(2002), RTGS(2004);
Operationalised Collateral Borrowing and Lending Obligation
(CBLO) under CCIL (2003);
35. Money Marker Centers In India
There are three money market centers in India,
which are located at:
1. Mumbai
2. Delhi
3. Kolkata.
Note: Mumbai is the only money market center in
India with money flowing in from all parts of the
country getting transacted there.
37. Money Market Instruments
1. Treasury bills are short-term instruments used by
the government to raise short-term funds;
• Negotiable securities;
• Highly liquid;
• No default risk;
• Assured yield, low transaction cost, inclusion in SLR
limit;
• Transacted through SGL account and not issued as a
scrip;
• Maturity periods are: 91-days, 181-days and 364-days;
• Min. amount of 25,000Rs. And multiples of the same.
• Categorized as: On-tap, auctioned and Adhoc T-bills.
38. Money Market Instruments
2. Call money: commercial banks borrow money
from other banks to maintain minimum cash
balance known as cash reserve ratio (CRR);
Maturity: over the night;
Rating:
Denomination: not specified or equal to NDTL;
Raised by: commercial banks;
Related term: notice money and term money.
39. Money Market Instruments
3. Notice Money: commercial banks borrow money
from other banks to maintain minimum cash
balance known as cash reserve ratio (CRR);
Maturity: 1 day to 14 days;
Rating:
Denomination: not specified;
Raised by: commercial banks;
Related term: call money and term money.
40. Money Market Instruments
4. Term money: commercial banks borrow money
from other banks to maintain minimum cash
balance known as cash reserve ratio (CRR);
Maturity: 15-364 days;
Rating:
Denomination: not specified;
Raised by: commercial banks;
Related term: notice money and call money.
41. Link between the call money market and other
financial markets
Call rate interest rate paid on the call loans;
MIBOR (1998): developed by National stock
exchange of India along with MIBID-Mumbai inter-
bank bid rate for overnight money markets; provides
quotations from overnight to 24 months;
LIBOR- London inter-bank offer rate;
Call rate volatility: call rates are subject to change;
43. Money market intermediaries in India
DHFI(1988)- discount and finance house of India;
Money market mutual funds of India;
44. Link between the money market and monetary
policy of India
Direct instruments :
Reserve requirements;
Limits on refinance;
Administered interest rates;
Qualitative and quantitative restrictions on the
credit;
Indirect instruments:
Open market operations
Repos.
47. Money Market Instruments
5. Commercial papers (CP-1990) is an unsecured
short-term promissory note issued at a discount by
creditworthy corporate, primary dealers and all-
Indian financial institution.
maturity: 7 days – 364 days;
Rating: P series of CRISIL;
Denomination: 5 lac and multiples;
Investment through: demat account.
48. Money Market Instruments
6. Certificates of deposits(CD-1989) are short-
term tradable time deposits issued by commercial
banks and financial institutions;
Maturity:7 days to 1 year for banks but 1-3 years for
FIs ;
Rating:
Denomination: 1 lakh and multiples;
Issued by: financial institutions.
Related term: it is same as FD but freely
transferable and tradable unlike the FD.
49. Money Market Instruments
7. Commercial bills (CB) are negotiable instruments drawn
on the seller by the buyer, in turn, accepted and discounted
by commercial banks;
1. Types of commercial bills:
Demand bill
Usance bill:
Clean bill:
Documentary bill:
Inland bill:
Foreign bill:
Hundi:
Derivative usance promissory notes:
Inchoate:
50. Money Market Instruments
7. Commercial bills (CB) are negotiable instruments
drawn on the seller by the buyer, in turn, accepted and
discounted by commercial banks;
1. Features of commercial bills:
Maturity: 30, 60,90 days usually;
Rating:
Denomination: not specified-can be any amount;
Discounted through: Commercial banks;
some time also known as trade bills; but known as the
commercial bill when discount by the bank.
51. Money Market Instruments
9. Collateralized borrowing and lending
obligations (CBLO): same as the call money
facility availed by the non-bank financial
institutions and entities;
Because non-bank financial institutions are not
eligible for availing the facility of the call money.
53. Meaning and Definition
Capital market is a market where securities with
the long tenure are bought and sold such as equity
and debt, funds are raised for long period;
54. Types of the Capital Market
1. Primary market: it refers to the market:
Where securities are created/issued;
where the securities are traded for very first time;
2. Secondary market: it refers to the market where
those securities traded which have already been
issued in the primary market:
Over the counter;
Trade through stock exchanges;
55. Role of capital markets in the growth of economy
It helps in economic growth of a country by
mobilizing the savings and direct is to the right way
for more productive uses:
Directs cash from deficit sector to the surplus sector:
issue of securities in the primary; domestic,
government, corporate sector.
direct cash from the surplus sector to the financial
intermediaries: issue of the secondary in the primary
market;
Facilitation of the liquidity: resale and repurchase of
the financial assets through the secondary market.
56. Functions of The Capital Market
1. Mobilization of savings;
2. Provides risk capital to entrepreneurs such as equity and quasi
equity;
3. Encourage broader ownership of productive assets through
equity participation;
4. Lower cost of transaction and information;
5. Improve efficiency of capital allocation through competitive
pricing methods;
6. Enable quick valuation of the financial assets i.e. share and
debentures;
7. Provides insurance against market risk;
8. Increases the width of market by enabling wider participation;
9. Provide operational efficiency;
10. Develop integration among different sectors and participants.
57. Components of Capital Market
1. Primary market: it refers to the market where
financial securities are created/issued and sold for
very first time; it serves the mobilization function
and capital creation/formation function;
2. Secondary market: it refers to the market where
those financial securities are re-bought and re-sold
which have already been issued and sold in primary
market; it facilitates the liquidity function.
Hence, primary market is for the new issues and
secondary market is for the outstanding or the
existing issues;
58. Primary Market
1. Primary market: it refers to the market where
financial securities are created/issued and sold for
very first time; it serves the mobilization function
and capital creation/formation function;
59. Issue of The Securities in Primary Market
Name of the Security Domestic issue External issue
1. Equity Corporate (primary
issues)
Financial
intermediaries (secondary
issues)
Through issue of:
Global Depository
Receipts (GDR);
American Depository
Receipt (ADR)
2. Debt Corporate (primary
issues)
Government (primary
issues)
External commercial
borrowing (ECB)
3. Other external
borrowings:
i. Foreign Direct
Investment (FDI)
See next slide
60. Issue of The Securities in Primary Market
Other external borrowings Method of investment
1. Foreign Direct Investment (FDI) Equity form;
Debt form;
2. Foreign Institutional Investments
(FII)
In the form of portfolio investment;
3. Non-resident Indian Deposits (NRI) short- term and medium term
borrowings;
61. Methods of Issuing Equity in Primary Market
1. Public issues through prospectus: IPOs, FPOs;
2. Private placement;
3. Right issues;
4. Preferential issues;
62. Secondary Market
Secondary market: it refers to the market where
those financial securities are re-bought and re-sold
which have already been issued and sold in primary
market; it facilitates the liquidity function.
63. Functions of The Secondary Market
1. Facilitates liquidity and marketability of securities;
2. Provides valuation of securities;
3. Reduces cost of capital;
4. Enable price discovery;
5. Creates a wealth effect;