Indian Financial System by Darshan Toprani Series 1

Indian Financial System by Darshan Toprani Series 1

Indian Financial System üIntroduction üComposition üFunctions ØSaving Function ØLiquidity Function ØPayment Function ØRisk Function ØPolicy Function

Financial Markets üDefined as the market in which financial assets are created or transferred. üThese assets represent 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.

üClassification ØMoney market (Short term instrument) ØCapital markets (Long term instrument) üThe most important distinction between the two: ØThe difference in the period of maturity.

Money Market üMain Function ØTo channelize savings into short term productive investments like working capital. üInstruments in Money Market ØCall money market ØTreasury bills market ØMarkets for commercial paper ØCertificate of deposits ØBills of Exchange ØMoney market mutual funds ØPromissory Note

Call Money Market üPart of the national money market üDay-to üShort day surplus funds mainly of banks are traded term in nature üMaturity of these loans vary from 1 to 15 days üLent for 1 day: Call money üLent for more than 1 day but less than 15 days: Notice money üConvenient üHighly interest rate liquid loan repayable on demand

Commercial Papers üUnsecured Promissory note. üIssued by well known companies with strong and high credit rating. üSold directly by the issuers to investors or through agents like merchant banks and security houses. üFlexible üLow Maturity interest rates with compared to banks. üImparts a degree of financial stability to the system.

üReferred Promissory Note as note payable in accounting üIt is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). üThe obligation may arise from the repayment of a loan or from another form of debt. üFor example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Certificates of deposits üDefined as short term deposit by way of usance promissory notes. üGreater flexibility to investors in the deployment of surplus funds. üPermitted üMaturity by the RBI to banks of not less than 3 months and upto 1 year. üTransferable üFree in nature negotiability and limited flexibility

Money market mutual funds üInvest primarily in money market instruments of very high quality. üRBI and public financial institution can set it either directly or through its existing subsidiaries. üMMMF ØOpen Ended ØClose Ended

Capital Markets üProvided resources needed by medium and large scale industries. üPurpose for these resources ØExpansion ØCapacity Expansion ØInvestments ØMergers and Acquisitions üDeals funds in long term instruments and sources of

üMain Activity ØFunctioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose. ØProvides opportunities to various class of individuals and entities.

Structure of Capital Markets Primary Markets Secondary Markets When companies need financial resources for its expansion, they borrow money from investors through issue of securities. The place where such securities are traded by these investors is known as the secondary market. Securities issued a)Preference Shares b)Equity Shares c)Debentures Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares is issued by the under writers and merchant bankers on behalf of the company. Equity shares are tradable through a private broker or a brokerage house. People who apply for these securities are: a)High networth individual b)Retail investors c)Employees d)Financial Institutions e)Mutual Fund Houses f)Banks Securities that are traded by the retail investors. One time activity by the company. Helps in mobilising the funds for the investors in the short run.

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