IntroductionThe experiences of the The economic scene in the post independence period has seen a sea change; the end result being that the economy has made enormous progress in diverse fields. There has been a quantitative expansion as well as diversification of economic activities 1980s have led to the conclusion that to obtain all the benefits of greater reliance on voluntary, market-based decision-making, India needs efficient financial systems
It is the financial system that supplies the necessary financial inputs for the production of goods and services which in tern promote the well being and standard of living of the country. Financial system is a broader term which brings under its fold the financial markets (long term & short term.) and the financial institutions which support the system
The major assets traded in the financial system is to mobilize the savings in the from money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the three flow of funds to more productive activities and thus promotes investments. Thus the financial system provided the intermediation between savers and investors and promotes faster economic development.
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
Banking Institutions: Participate in the economys payment mechanism, deposit liabilities constitute a major part of national money supply. Non-Banking Institutions: LIC, SIDBI, IIBI, IFCI ( All India Financial Institutions), SFCs & SIDCs
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.
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.
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
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
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.
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.
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
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
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
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.
Primary Markets Secondary MarketsWhen companies need financial resources The place where such securities are traded byfor its expansion, they borrow money from these investors is known as the secondaryinvestors through issue of securities. market.Securities issued Securities like Preference Shares anda) Preference Shares Debentures cannot be traded in theb) Equity Shares secondary market.c) DebenturesEquity shares is issued by the under writers Equity shares are tradable through a privateand merchant bankers on behalf of the broker or a brokerage house.company.People who apply for these securities are: Securities that are traded are traded by thea) High networth individual retail investors.b) Retail investorsc) Employeesd) Financial Institutionse) Mutual Fund Housesf) BanksOne time activity by the company. Helps in mobilising the funds for the investors in the short run.
Primary Securities: Equity, Preference, Debt and Various combinations. Secondary Securities: Mutual Fund Units and Insurance Policies etc.