Indian Financial System by Darshan Toprani Series 1

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Indian Financial System byDarshan TopraniSeries
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Indian Financial System

• Introduction
• Composition
• Functions
• Saving Function
• Liquidity Function
• Payment Function
• Risk Function
• Policy Function

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Financial Markets

• Defined as the market in which financial assets
  are created or transferred.
• These 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.

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• Classification
• Money market
• (Short term instrument)
• Capital markets
• (Long term instrument)
• The most important distinction between the two
• The difference in the period of maturity.

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Money Market

• Main Function
• To channelize savings into short term productive
  investments like working capital .
• Instruments in Money Market
• Call money market
• Treasury bills market
• Markets for commercial paper
• Certificate of deposits
• Bills of Exchange
• Money market mutual funds
• Promissory Note

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Call Money Market

• Part of the national money market
• Day-to day surplus funds mainly of banks are
  traded
• Short term in nature
• Maturity of these loans vary from 1 to 15 days
• Lent for 1 day Call money
• Lent for more than 1 day but less than 15 days
  Notice money
• Convenient interest rate
• Highly liquid loan repayable on demand

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Commercial Papers

• Unsecured Promissory note.
• Issued by well known companies with strong and
  high credit rating.
• Sold directly by the issuers to investors or
  through agents like merchant banks and security
  houses.
• Flexible Maturity
• Low interest rates with compared to banks.
• Imparts a degree of financial stability to the
  system.

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Promissory Note

• Referred as note payable in accounting
• It 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).
• The obligation may arise from the repayment of a
  loan or from another form of debt.
• For 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.

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Certificates of deposits

• Defined as short term deposit by way of usance
  promissory notes.
• Greater flexibility to investors in the
  deployment of surplus funds.
• Permitted by the RBI to banks
• Maturity of not less than 3 months and upto 1
  year.
• Transferable in nature
• Free negotiability and limited flexibility

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Money market mutual funds

• Invest primarily in money market instruments of
  very high quality.
• RBI and public financial institution can set it
  either directly or through its existing
  subsidiaries.
• MMMF
• Open Ended
• Close Ended

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Capital Markets

• Provided resources needed by medium and large
  scale industries.
• Purpose for these resources
• Expansion
• Capacity Expansion
• Investments
• Mergers and Acquisitions
• Deals in long term instruments and sources of
  funds

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• Main Activity
• Functioning as an institutional mechanism to
  channelize funds from those who save to those who
  needed for productive purpose.
• Provides opportunities to various class of
  individuals and entities.

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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 Preference Shares Equity Shares 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 High networth individual Retail investors Employees Financial Institutions Mutual Fund Houses Banks Securities that are traded 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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