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Indian financial system
- 1. The Indian Financial
Copyright© 2008 Dorling Kindersley India Pvt. Ltd
System
Markets, Institutions and
Services
The Indian Financial System, 2e -- Pathak
- 2. Copyright© 2008 Dorling Kindersley India Pvt. Ltd
1
Financial System: An
Introduction
The Indian Financial System, 2e -- Pathak
- 3. The Indian Financial System
Copyright© 2008 Dorling Kindersley India Pvt. Ltd
The Indian Financial System, 2e -- Pathak
- 4. Chapter Objectives
Copyright© 2008 Dorling Kindersley India Pvt. Ltd
To understand the
meaning of financial system
components of the financial system
functions of the financial system
key elements of the financial system
key elements of a well functioning financial
system
bank-based and market-based financial
systems
nature and role of financial institutions and
markets
link between money market and capital
market
link between primary market and secondary
The Indian Financial System, 2e -- Pathak
market
- 5. Meaning of the Financial
System
Copyright© 2008 Dorling Kindersley India Pvt. Ltd
A set of sub systems of financial
institutions, markets, instruments and
services
Intermediates with the flow of funds
between savers and borrowers.
Facilitates transfer and allocation of scarce
resources efficiently and effectively
The Indian Financial System, 2e -- Pathak
- 6. Types of Financial
System
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Formal financial system – organized,
institutional and regulated
Informal financial system
Advantages
Low transaction costs
Minimum default risk
Transparency of procedures
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated
The Indian Financial System, 2e -- Pathak
- 7. Components of the Financial
System
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Financial Institutions
Financial Markets
Financial Instruments
Financial Services
The Indian Financial System, 2e -- Pathak
- 8. Types of Financial
Institutions
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Banking: creators and purveyors of credit.
Types
Commercial Banks
Cooperative Banks
Non-banking: purveyors of credit
Types
Developmental financial
institutions
Mutual funds
Insurance companies
NBFCs
The Indian Financial System, 2e -- Pathak
- 9. Functions of Financial
Institutions
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Provide three transformation services
Liability, asset and size transformation
Maturity transformation
Risk transformation
The Indian Financial System, 2e -- Pathak
- 10. Financial Markets
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Types
Money Market – A market for short-term debt
instruments
Capital Market – A market for long-term equity
and debt instruments
Segments
Primary Market – A market for new issues
Secondary Market – A market for trading
outstanding issues
The Indian Financial System, 2e -- Pathak
- 11. Link Between Primary and
Secondary Capital Market
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A buoyant secondary market is
indispensable for the presence of a
vibrant primary market.
The secondary market provides a basis for
the determination of prices of new issues.
Depth of the secondary market depends on
the primary market.
Bunching of new issues affects prices in the
secondary market.
The Indian Financial System, 2e -- Pathak
- 12. Financial Instruments
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Types
Primary
Secondary
Distinct Features
Marketable
Tradable
Tailor-made
The Indian Financial System, 2e -- Pathak
- 13. Financial Services
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Major Categories
Funds intermediation
Payments mechanism
Provision of liquidity
Risk management
Financial engineering
The Indian Financial System, 2e -- Pathak
- 14. Functions of Financial
System
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Mobilise and allocate savings
Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and
reduction
Disseminate prize related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening
and broadening
The Indian Financial System, 2e -- Pathak
- 15. Key Elements of a Well-
functioning Financial System
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A strong legal and regulatory
environment
Stable money
Sound public finances and public debt
management
A central bank
Sound banking system
Information system
Well-functioning securities market
The Indian Financial System, 2e -- Pathak
- 16. Financial System Designs
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Types
Bank-based
Market-based
The Indian Financial System, 2e -- Pathak
- 17. Market-based Financial
System
Advantages
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Provide attractive terms to both investors
and borrowers
Facilitate diversification
Allow risk sharing
Allow financing of new technologies
Drawbacks
Prone to instability
Exposure to market risk
Free-rider problem
The Indian Financial System, 2e -- Pathak
- 18. Bank-based Financial
System
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Advantages
Close relationships with parties
Provide tailor-made contracts
Efficient inter-temporal risk sharing
No free-rider problem
Drawbacks
Retards innovation and growth
Impedes competition
The Indian Financial System, 2e -- Pathak
- 19. Functions of Financial
Markets
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Enabling economic units to exercise their
time preference
Separation, distribution, diversification and
reduction of risk
Efficient payment mechanism
Providing information
Enhancing liquidity
Providing portfolio management services
The Indian Financial System, 2e -- Pathak