Indian Financial System

Financial System refers to the financial

needs of different sectors of the
economy and the ways and means to
meet such needs efficiently and
economically. Funds are required for
meeting various monetary needs. The
financial needs are met from different
sources and agencies.


Financial institutions:/intermediaries
Financial institutions are the intermediaries who
facilitates smooth functioning of the financial system by
making investors and borrowers meet. They mobilize
savings of the surplus units and allocate them in
productive activities promising a better rate of return.
Financial institutions also provide services to entities
seeking advises on various issues ranging from
restructuring to diversification plans. They provide
whole range of services to the entities who want to
raise funds from the markets elsewhere. Financial
institutions act as financial intermediaries because
they act as middlemen between savers and borrowers.
Were these financial institutions may be of Banking or
Non-Banking institutions.
Financial Markets:
Finance is a prerequisite for modern business and
financial institutions play a vital role in economic
system. It's through financial markets the financial
system of an economy works. The main functions of
financial markets are:

1. To facilitate creation and allocation of credit and
liquidity;
2. To serve as intermediaries for mobilization of
savings;
3. To assist process of balanced economic growth;
4. To provide financial convenience
CapitalMarket
A capital market is an organized market. It
provides long term finance for business.
According to Shri, K.S. Capital Market refers to
the facilities and institutional arrangements for
borrowing and lending long-term funds.
Capital Market is divided into three groups:
1. Industrial / Corporate Securities Market
It is a market for industrial securities. Corporate
securities are equity and preference shares,
debentures and bonds of companies. Industrial
security's market is very Sensitive and Active
Financial Market

It can be divided into two groups: Primary and
Secondary Market
Primary Market: It is a market for new issue of
securities, which are issued to the public for first
time. It is also called as New Issue Market.
Secondary Market: In the secondary market,
there is a sale of secondary securities. It is also
called as Stock Market. It facilitates buying and
selling of securities.

2. Government Securities Market
In this market, government securities are bought
and sold. It is also called as Gilt-Edged Securities
Market. The securities are issued in the form of
bonds and credit notes. The buyers of such
securities are Banks, Insurance Companies,
Provident funds, RBI and Individuals. These
securities may be of short-term or long term

3. Long-Term Loans Market

Banks and Financial institutions provide long-term
loans to firms, for modernization, expansion and
diversification of business
Long-Term Loan Market can be divided into:
Term Loans Market: Banks and Financial Institutions
provide term loans to companies for a period of one
year. The financial institutions help in recognizing
investment opportunities to motivate emerging
businessmen. They also give encouragement to
modernization.
Mortgages Market: It provides loans against securities of
immovable assets like land and buildings.
Financial Guarantees Market: Financial Institutions (FIS)
and banks provide financial guarantees on behalf of their
clients to third parties

Money Market
Money Market is the market for short term funds
i.e. for a period up to one year.
The money market is divided into two: Unorganized
and Organized Money Market.
1. Unorganized Market
Unorganized market consists of: Money lenders,
Indigenous Bankers, Chit Funds, etc.
Money Lenders: Money Lenders lend money to
individuals at a high rate of interest.
Indigenous Bankers: They operate like money
lenders. They also accept deposits from public.
Chit Funds: These collect funds from members and
provide loans to members and others

2. Organized Money Market
Organized Markets work as per the rules and
regulations of the RBI. RBI keeps a strict control
over the Organized Financial Market in India.
Organized Market consists of: Treasury Bills,
Commercial Paper (CP), Certificate Of
Deposit(CD), Call Money Market, Commercial Bill
Market.
Treasury Bills: To raise short term funds treasury
bills are issued by Government. It is purchased by
Commercial Banks. At present, Government
issues 91 days and 364 days treasury bills.

Commercial Paper (CP): Commercial paper is issued by
companies who are listed on Stock Exchange. CP is issued at
discount and repaid at face value. The maturity period ranges
from 7 days to one year. CP's are issued in multiple of 5 lakh.
The company issuing CP must have tangible net worth of at
least 4 crore.
Certificate Of Deposit (CD): CD's are used by Commercial
Banks and Financial Institutions to raise finance from the
market. The maturity period for CD's is between 7 days to 1
year. CD's is issued at a discount and repaid at face value. CD's
is issued for a minimum of 25 lakhs.
Call Money Market: A loan which is taken or given for a very
short period, that is for one day is called Call Money Market. It
involves lending and borrowing of money on a daily basis. No
security is required for these very short-term loans.
Commercial Bill Market (CBM): This market deals with Bills of
exchange. The drawer of the bill can get the bills discounted
with Commercial Banks. The Commercial Banks can get the
bills rediscounted with Financial Institutions.

Financial Instruments
Another important constituent of financial
system is financial instruments. They represent a
claim against the future income and wealth of
others. It will be a claim against a person or an
institutions, for the payment of the some of the
money at a specified future date
Financial Services:
Efficiency of emerging financial system largely
depends upon the quality and variety of financial
services provided by financial intermediaries. The
term financial services can be defined as
"activites, benefits and satisfaction connected
with sale of money, that offers to users and
customers, financial related value".
Role of financial system
The financial system acts as a connecting link
between savers of money and users of money
and thereby promotes faster economic and
industrial growth.
Thus financial system may be defined as a set of
markets and institutions to facilitate the
exchange of assets and risks.
Efficient functioning of the financial system
enables proper flow of funds from investors to
productive activities which in turn facilitates
investment.

* It serves as a link between savers and investors. It helps in
utilizing the mobilized savings of scattered savers in more
efficient and effective manner. It channelises flow of saving into
productive investment.
* It assists in the selection of the projects to be financed and also
reviews the performance of such projects periodically.
* It provides payment mechanism for exchange of goods and
services.
* It provides a mechanism for the transfer of resources across
geographic boundaries.
* It provides a mechanism for managing and controlling the risk
involved in mobilizing savings and allocating credit.
* It promotes the process of capital formation by bringing
together the supply of saving and the demand for investible
funds.
* It helps in lowering the cost of transaction and increase
returns. Reduce cost motives people to save more.
* It provides you detailed information to the operators/ players
in the market such as individuals, business houses, Governments
etc