Indian Financial

System
Assignment

BY
D.Naveen
M.I.B
Overview of Indian Financial System

Introduction

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
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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

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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.

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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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