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Indian Financial System. Learning Objectives. What finance is and what is involved in the study of finance. How financial securities can be used to provide financing for borrowers and simultaneously to provide investment opportunities for lenders. How financial systems work in general.
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Learning Objectives • What finance is and what is involved in the study of finance. • How financial securities can be used to provide financing for borrowers and simultaneously to provide investment opportunities for lenders. • How financial systems work in general. • The channels of intermediation and the role played by market and financial intermediaries within this system. • The basic types of financial instruments that are available and how they are traded. • The importance of the global financial system.
Finance • Finance is the study of how and under what terms savings (money) are allocated between lenders and borrowers. • Financial contracts or securities occur whenever funds are transferred from issuer to buyer. • Savings: The ability by which claims to resources are set aside and become available for other purposes. • Investments: The activity by which resources are actually committed to production.
The Financial System • The household is the primary provider of funds to businesses and government. • Households must accumulate financial resources throughout their working life times to have enough savings (pension) to live on in their retirement years • Financial intermediaries transform the nature of the securities they issue and invest in • Banks, trust companies, credit unions, insurance firms, mutual funds • Market intermediaries simply help make markets work • Investment dealers • Brokers
The Financial SystemChannels of Intermediation • Funds can be channeled from saver to borrower in three ways: • Direct intermediation (direct transfer from saver to borrower – a non-market transaction) • Direct intermediation (a market-based transaction usually through a market intermediary such as a broker) • Indirect claims through a financial intermediary (where the financial intermediary such as a bank offers deposit-taking services and ultimately lends those deposits out as mortgages or loans)
Functions of Financial System • Financial system are of crucial significance to capital formation. • The main function of financial system is the collection of savings and their distribution for industrial investment. • The process of capital formation involves 3 inter-related activities • Savings • Finance • Investment
Structure of Financial System • The organisation of financial system comprises of comprises of 3 components: • Financial Intermediaries • Financial markets • Financial instruments
Financial Intermediaries • Banks and other deposit-taking institutions • Insurance companies • Pension Funds • Mutual Funds
Financial markets • Primary Market • Markets that involve the issue of new securities by the borrower in return for cash from investors (Capital formation occurs) • Secondary Market • Markets that involve buyers and sellers of existing securities. Funds flow from buyer to seller. Seller becomes the new owner of the security. (No capital formation occurs)
Financial instruments • Money Market is a market for dealing in monetary/financial assets of a short-term nature (less than I year) • Commercial Paper • Treasury Bills • Capital Market is a market for long-term funds with maturities greater than 1 year) • Bonds • Debentures
