INVESTMENT BANKING AND FINANCIAL SERVISES UNIT 1 THE

INVESTMENT BANKING AND FINANCIAL SERVISES UNIT – 1 THE FINANCIAL SYSTEM

INTRODUCTION q The term ‘system’ in terms of financial system implies a set of complex and closely connected institution, agent, practices, markets, claims, transactions, liabilities in the economy. q Financial system is a set of complex and closely connected with financial institution, financial markets, financial instruments and financial services etc. q The Financial System is the process by which money flows from savers to users.

DEFINITION In the words of Robinson q “ Financial system provides a link between savings and investments. ” In general term q “Financial system is a set of complex and closely intermixed and integrated financial institutions, Financial markets, financial instruments, financial services and procedure. ”

Above definitions cleared that……. ü The financial system is a set of sub-systems of financial institutions, financial markets, financial services and financial instruments. ü It consist of organized (Formal) and unorganized (Informal) financial market. ü The financial system facilitates transfer and allocation of funds. ü The financial system is an arrangement through which surplus funds can transfer efficiently to users. ü Financial institutions, financial services, financial assets, financial institutions and financial markets are the components of the organized financial system.

Indian Financial System q Organized Financial System : The organized financial system is formal and regulated system. This system consist of banks, investment institutions, financial instruments and financial services. Each component of organized system is systematically coordinated by the Reserve Bank of India or SEBI. Banking institutions, non banking institutions, mutual funds, capital market, money market operate in this organized financial system. The entire co-operative credit system is linked with RBI. q Unorganized Financial System : Unorganized financial system consist of money lender, lending pawn brokers, landlord, traders, indigenous bankers etc. it is unorganized because its activities are not systematically coordinated by Reserve Bank of India. There is no direct control of RBI.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM 1) Financial Institutions: § Financial institutions are also known as financial intermediaries § The financial institutions are the intermediaries who serve as a link between saver and investors. § Financial institutions promote savings, mobilizing, creating credit and faciliting trade transaction.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM Financial Institutions include: • Banking institutions like scheduled commercial banks of public sector and private sector. • Non-banking institutions such as non-banking finance companies. • Financial institutions such as Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), National Bank of Agriculture and Rural Development (NABARD), Export-Import Bank of India (EXIM-Bank), State Finance Corporation (SFC) etc. • Mutual Funds of Public and Private Sector. • Insurance companies of public and private sector. • Housing finance companies.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM 2) Financial Markets Financial Market is where financial securities like stocks and bonds and commodities like valuable metals are exchanged at efficient market price. § Efficient market prices means the unbiased price that reflects belief at collective speculation of all investors about the future prospect. § The trading of stocks and bonds in the financial market can take directly between buyers and sellers or by medium of stock exchange. § Financial market can be domestic or international. §

COMPONENTS OF ORGANISED FINANCIAL SYSTEM

COMPONENTS OF ORGANISED FINANCIAL SYSTEM

COMPONENTS OF ORGANISED FINANCIAL SYSTEM

COMPONENTS OF ORGANISED FINANCIAL SYSTEM • The whole financial system is operated by financial institutions. • Financial market can be divided into capital market and money market. While capital market is classified into primary market and secondary market. • Primary market deals with the new issue securities. So it is known as New Issue Market. • While , secondary market deals with securities which are already issued. Infect, secondary market is exchange traded market.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM 3) Financial Instruments (Financial Assets) § Financial assets or instruments include equity shares, preference shares, debentures, mutual fund units, bookdebts etc. § Financial instruments are subdivided into two categories such as primary securities and secondary (subsidiary) securities.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM Financial Instruments Primary securities Secondary securities Equity Debentures Bonds Book Debts Bank Deposits Time Deposits Life insurance Policies Mutual Fund Units

COMPONENTS OF ORGANISED FINANCIAL SYSTEM 4) Financial Services § All these services are included in financial services which are provided in financial form. All these services are co-related with financial market § Financial services include home finance, hire purchase depositories, credit rating, venture capital, investment banking, factoring, underwriting, leasing etc. § The financial services need borrowing and funding.

COMPONENTS OF ORGANISED FINANCIAL SYSTEM

COMPONENTS OF UNORGANISED FINANCIAL SYSTEM § Unorganized financial system consist of money lender, lending pawn brokers, landlord, traders, indigenous bankers etc. § It is unorganized because its activities are not systematically coordinated by Reserve Bank of India. There is no direct control of RBI. § Unorganized financial system in India consists of the following: Money Lenders Indigenous Bankers Unorganized Financial System Group of persons Non-banking financial intermediaries

COMPONENTS OF UNORGANISED FINANCIAL SYSTEM 1. Money Lenders : Whose main activity is money lending and charge a very high rate of interest. 2. Indigenous bankers : Belong to unorganized sector of the money market. The indigenous bankers accept deposits from the public and lend the money in form of loans. Loans are made against mortgage of house, land other properties. 3. Group of persons : are in form of saving funds association. They have their own rules and regulations. 4. Non-banking financial Intermediaries: are unregulated in form of chit funds, Nidhi, Finance companies.

Functions and Role of Financial System

Functions and Role of Financial System 1) Pooling of Funds: In a financial system, the Savings of people are transferred from households to business organizations. With these production increases and better goods are manufactured, which increases the standard of living of people. 2) Capital Formation: Business require finance. These are made available through banks, households and different financial institutions. They mobilize savings which leads to Capital Formation. 3) Facilitates Payment: The financial system offers convenient modes of payment for goods and services. New methods of payments like credit cards, debit cards, cheques, etc. facilitates quick and easy transactions.

Functions and Role of Financial System 4) Provides Liquidity: In financial system, liquidity means the ability to convert into cash. The financial market provides the investors the opportunity to liquidate their investments, which are in instruments like shares, debentures, bonds, etc. Price is determined on the daily basis according to the operations of the market force of demand supply. 5) Short and Long Term Needs: The financial market takes into account the various needs of different individuals and organizations. This facilitates optimum use of finances for productive purposes. 6) Risk Function: The financial markets provide protection against life, health and income risks. Risk Management is an essential component of a growing economy.

Functions and Role of Financial System 7) Better Decisions: Financial Markets provide information about the market and various financial assets. This helps the investors to compare different investment options and choose the best one. It helps in decision making in choosing portfolio allocations of their wealth. 8) Finances Government Needs: Government needs huge amount of money for the development of defense infrastructure. It also requires finance for social welfare activities, public health, education, etc. This is supplied to them by financial markets. 9) Economic Development: India is a mixed economy. The Government intervenes in the financial system to influence macro-economic variables like interest rate or inflation. Thus, credits can be made available to corporate at a cheaper rate. This leads to economic development of the nation.

One line questions 1. Full form of IRDA. 2. ____ controls the entire operation of foreign currency. 3. Who regulates the money market? 4. Components of organized financial systems are ______. 5. Scheduled commercial banks and scheduled co-operative banks are components of _______.