Indian financial system

The Finance is the science of money manages- ment. We can say that finance is something
related to manage - ment of money and other assets. Finance represents the resources by way
funds needed for a particular activity. Finance is also referred to as "Funds" or "Capital", when
referring to the financial needs of a corporate body. Now you can finance anything that you want
for example you can have home loans, business loans, education economic development of a
nation is reflected by the progress of the various economic units, broadly classified into
corporate sector, government and household sector. While performing their activities these units
will be placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a deficit. A financial
system or financial sector functions as an intermediary and facilitates the flow of funds from the
areas of surplus to the areas of deficit. A Financial System is a composition of various
institutions, markets, regulations and laws, practices, money manager, analysts, transactions and
claims and liabilities.

The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities
in the economy. The financial system is concerned about money, credit and finance-the three
terms are intimately related yet are somewhat different from each other. Indian financial system
consists of financial market, financial instruments and financial intermediation. These are briefly
discussed below;

Financial system overview

A Financial Market can be defined as the market in which financial assets are created or
transferred. As against a real transaction that involves exchange of money for real goods or
services, a financial transaction involves creation or transfer of a financial asset. Financial Assets
or Financial Instruments represents 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.

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-
term instrument. Funds are available in this market for periods ranging from a single day up to a
year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by
the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of
funds takes place in this market. This is one of the most developed and integrated market across
the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and
long-term loans to corporate and individuals.

Financial Intermediaries-

Having designed the instrument, the issuer should then ensure that these financial assets reach
the ultimate investor in order to garner the requisite amount. When the borrower of funds
approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate
information of the issue, issuer and the security should be passed on to take place. There should
be a proper channel within the financial system to ensure such transfer. To serve this purpose,
financial intermediaries came into existence. Financial intermediation in the organized sector is
conducted by a widerange of institutions functioning under the overall surveillance of the
Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to
ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs,
brokers, and dealers. However, as the financial system widened along with the developments
taking place in the financial markets, the scope of its operations also widened. Some of the
important intermediaries operating ink the financial markets include; investment bankers,
underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual
funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory
organizations, etc. Though the markets are different, there may be a few intermediaries offering
their services in move than one market e.g. underwriter. However, the services offered by them
vary from one market to another.

Intermediary - Market-Role

Stock Exchange -Capital Market -Secondary Market to securities

Investment Bankers - capital Market, credit Market - corporate advisory services, Issue of
securities

Registrars,Depositories,custodian - Capital Market - Issue securities management

Primary dealers satellite Dealers - Money Market - share transfer activity market making for
govt.
Forex Dealers - Forex Market - Ensure exchange ink currencies

Financial tools-

Money Market Tools-

The money market can be defined as a market for short-term money and financial assets that are
near substitutes for money. The term short-term means generally a period upto one year and near
substitutes to money is used to denote any financial asset which can be quickly converted into
money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1.Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When
money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening
holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and
repaid on the next working day, (irrespective of the number of intervening holidays) is "Call
Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice
Money". No collateral security is required to cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money
market. The entry restrictions are the same as those for Call/Notice Money except that, as per
existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It
is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry
of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are
issued at a discount to the face value, and on maturity the face value is paid to the holder. The
rate of discount and the corresponding issue price are determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in

dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of CDs are presently
governed by various directives issued by the Reserve Bank of India, as amended from time to
time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks
(RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have
been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments
viz., term money, term deposits, commercial papers and interoperate deposits should not exceed
100 per cent of its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the
debt obligation is transformed into an instrument. CP is thus an unsecured promissory note
privately placed with investors at a discount rate to face value determined by market forces. CP
is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP
provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the
banking system is not less than Rs.4 crore and (c) the borrowal account of the company is
classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7
days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other
agencies.

The capital market generally consists of the following long term period i.e., more than one year
period, financial instruments; in the equity segment Equity shares, preference shares, convertible
preference shares, non-convertible preference shares etc and in the debt segment debentures, zero
coupon bonds, deep discount bonds etc.

Hybrid Instruments
Hybrid instruments have both the features of equity and debenture. This kind of instruments is
called as hybrid instruments. Examples are convertible debentures, warrants etc.

In India money market is regulated by Reserve bank of India and Securities Exchange Board of
India (SEBI) regulates capital market. Capital market consists of primary market and secondary
market. All Initial Public Offerings comes under the primary market and all secondary market
transactions deals in secondary market. Secondary market refers to a market where securities are
traded after being initially offered to the public in the primary market and/or listed on the Stock
Exchange. Secondary market comprises of equity markets and the debt markets. In the secondary
market transactions BSE and NSE plays a great role in exchange of capital market instruments.

Conclusion-

Financial System of any country consists of financial markets, financial intermediation and
financial instruments or financial products. Financial system is An information system,
comprised of one or more applications, that is used for any of the following: collecting,
processing, maintaining, transmitting, and reporting data about financial events supporting
financial planning or budgeting activities; accumulating and reporting cost information.

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