OVERVIEW OF

Indian Financial
MARKETS

MEANING OF FINANCIAL
SYSTEM
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 financial system is concerned about money, credit and
finance

 In finance, the financial system is the system that allows the

transfer of money between savers and borrowers. It comprises
a set of complex and closely interconnected financial
institutions, services, markets, instruments , practices, and
transactions

Indian financial system

AN OVERVIEW OF FINANCIAL SYSTEM

Functions of the Financial system

To link the savers & investors.
To inspire the operators to monitor the performance of the
investment.
To achieve optimum allocation of risk bearing.
It makes available price - related information.
It helps in promoting the process of financial deepening and
broadening

Organization / Structure of
financial system

Financial
system

Financial
Intermediaries

Financial
Markets

Financial
Assets

Financial assets/instruments
Enable channelising funds from surplus units to
deficit units
There are instruments for savers such as deposits,
equities, mutual fund units, etc.
There are instruments for borrowers such as loans,
overdrafts, etc.
Like businesses, governments too raise funds
through issuing of bonds, Treasury bills, etc.
Instruments like PPF, KVP, etc. are available to savers
who wish to lend money to the government

Financial Institutions
Includes institutions and mechanisms which
Affect generation of savings by the community
Mobilisation of savings
Effective distribution of savings

Institutions are banks, insurance companies, mutual fundspromote/mobilise savings

Individual investors, industrial and trading companiesborrowers

Financial Markets
Money Market- for short-term funds (less than a year)
Organised (Banks)
Unorganised (money lenders, chit funds, etc.)

Capital Market- for long-term funds

Primary Issues Market
Stock Market
Bond Market

Indian Financial System

Organized

Non- Organized
Money lenders

Regulators
Financial Institutions
Financial Markets
Financial services

Local bankers
Traders

Landlords
Pawn brokers

Chit Funds

Organized Indian Financial System

Regulators

Financial
Instruments

Forex
Market

Financial
Markets

Capital
Market

Money
Market

Primary Market
Secondary Market

Money Market
Instrument

Capital Market
Instrument

Financial
Intermediaries

Credit
Market

Evolution of Indian financial

system
Evolution of Indian financial system Barter, money lender, chit
funds, indigenous bankers, cooperative banks, joint stock
banks, consolidation, commercial banks ,nationalization
,investment banks, insurance companies, stock market,
specialized financial institutions, merchant banking, universal
banking

Evolution of Financial System

Barter
Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies

Banks

Joint-Stock Banks

Consolidation
Commercial Banks
Nationalization
Investment Banks
Development Financial Institutions
Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions
Merchant Banking
Universal Banking

Indian Capital markets Chronology

1994-Equity Trading commences on NSE

1995-All Trading goes Electronic
1996- Depository comes in to existence
1999- FIIs Participation- Globalisation
2000- over 80% trades in Demat form
2001- Major Stocks move to Rolling Sett
2003- T+2 settlements in all stocks
2003 - Demutualisation of Exchanges

Interrelation--Financial system & Economy

Financial System
Households Foreign
Sectors

Savers Lenders

Investors
Borrowers

Corporate Sector
Govt.Sector

Economy

Un-organized
Sector

Structure of Indian financial

system

Functions of a financial
system
Liquidity Function : The financial markets provide the investor
with the opportunity to liquidate investments like stocks
bonds debentures whenever they need the fund.
Payment function : The financial system offers a very
convenient mode for payment of goods and services. Cheque
system, credit card system etc are the easiest methods of
payments. The cost and time of transactions are drastically
reduced

 Saving function : Public saving find their way into the hands of
those in production through the financial system. Financial
claims are issued in the money and capital markets which
promise future income flows. The funds with the producers
result in production of goods and services thereby increasing
society living standards.
Risk function: The financial markets provide protection against
life, health and income risks. These are accomplished through
the sale of life and health insurance and property insurance
policies. The financial markets provide immense opportunities
for the investor to hedge himself against or reduce the possible
risks involved in various investments

 Policy function : The government intervenes in the financial

system to influence macroeconomic variables like interest
rates or inflation so if country needs more money
government would cut rate of interest through various
financial instruments and if inflation is high and too much
money is there in the system then government would
increase rate of interest

Indian Financial System An Overview

STRUCTURE OF FINANCIAL MARKETS IN INDIA

Financial Markets in India

Debt Market
Primary /
Secondary

RBI

Forex
Market

RBI

Capital Market
Primary /
Secondary &
Depository

SEBI

Insurance
Life/General

IRDA

REGULATORY AUTHORITY

Banks (including
RRBs, co-op etc)

RBI

Mutual Funds,
Venture Funds,
Investment Bonds

RBI/SEBI

23

Components of the Financial System

Financial Institutions/ Intermediaries
Financial Markets
Financial Instruments
Financial Services

Financial intermediaries
Come in between the ultimate borrowers and ultimate
lenders
provide key financial services such as merchant banking,
leasing, credit rating, factoring etc.
Services provided by them are: Convenience( maturity
and divisibility), Lower Risk(diversification), Expert
Management and Economies of Scale.

Types of Financial intermediaries

Financial
Intermediaries

Banks

NBFCs

Mutual Funds

Insurance
Organizations

Types of Financial intermediaries

1. commercial banks

Collect savings primarily in the form of deposits and

traditionally finance working capital requirement of
corporates
With the emerging needs of economic and financial system
banks have entered in to:
Term lending business particularly in the infrastructure
sector,
Capital market directly and indirectly,
Retail finance such as housing finance, consumer
finance
Enlarged geographical and functional coverage

2. Non-banking finance companies (NBFC)

A Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956 engaged in the
business of loans and advances, acquisition of
shares/stocks/ bonds/debentures/securities issued by
Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase, insurance
business, etc.
Provide variety of fund/asset-based and non-fund
based/advisory services.
Their funds are raised in the form of public deposits
ranging between 1 to 7 years maturity.

 Depending upon the nature and type of service provided, they

are categorised into:
Asset finance companies
Housing finance companies
Venture capital funds
Merchant banking organisations
Credit rating agencies
Factoring and forfaiting organisations
Housing finance companies
Stock brokering firms
Depositories

3. Mutual funds
A mutual fund is a company that pools money from many
investors and invests in well diversified portfolio of sound
investment.
issues securities (units) to the investors (unit holders) in
accordance with the quantum of money invested by them.
profit shared by the investors in proportion to their
investments.
set up in the form of trust and has a sponsor, trustee, asset
management company and custodian
advantages in terms of convenience, lower risk, expert
management and reduced transaction cost.

Mutual Fund Operation

Flow Chart

4. Insurance organizations
They invest the savings of their policy holders in exchange
promise them a specified sum at a later stage or upon the
happening of a certain event.
Provide the combination of savings and protection
Through the contractual payment of premium creates the
desire in people to save.

Financial Market
It is a place where funds from surplus units are transferred
to deficit units.
It is a market for creation and exchange of financial assets
They are not the source of finance but link between savers
and investors.
Corporations, financial institutions, individuals and
governments trade in financial products on this market
either directly or indirectly.

Financial
Market

Money
Market

Capital/
Securities
Market

Primary
Market
Secondary/
Stock Market

Money market
A market for dealing in monetary assets of short term
nature, less than one year.
enables raising up of short term funds for meeting
temporary shortage of fund and obligations and temporary
deployment of excess fund.
Major participant are: RBI and Commercial Banks
Major objectives:
equilibrium mechanism for evening out short term
surpluses and deficits
focal point for influencing liquidity in economy
access to users of short term funds at reasonable cost

Money
Market

Call
Market

T-bills
Market

Bills

CP

Market

Market

CD
Market

Repo
Market

Capital market
A market for long term funds
focus on financing of fixed investments
main participants are mutual funds, insurance organizations,
foreign institutional investors, corporate and individuals.
two segments: Primary market and secondary market

Primary/new issue market

A market for new issues i.e. a market for fresh capital.
provides the channel for sale of new securities, not
previously available.
provides opportunity to issuers of securities; government
as well as corporates.
to raise resources to meet their requirements of
investment and/or discharge some obligation.
does not have any organizational setup
performs triple-service function: origination, underwriting
and distribution.

Secondary market/
stock market
A market for old/existing securities.
a place where buyers and sellers of securities can enter
into transactions to purchase and sell shares, bonds,
debentures etc.
enables corporates, entrepreneurs to raise resources for
their companies and business ventures through public
issues.
has physical existence
vital functions are:
nexus between savings and investments
liquidity to investors
continuous price formation

Financial Instruments
Types
Primary
Secondary

Distinct Features
Marketable
Tradable
Tailor-made

Financial Instruments
Primary Securities: Equity, Preference, Debt and
Various combinations.
Secondary Securities: Mutual Fund Units and Insurance
Policies etc.

Financial Services
Major Categories
Funds intermediation
Payments mechanism
Provision of liquidity

Risk management
Financial engineering

Financial Services

Depositories
Custodial
Credit Rating
Leasing
Portfolio Management
Underwriting etc.