The document describes the evolution and components of the Indian financial system. It discusses how the system evolved from underdeveloped economies with low incomes and no financial intermediaries, to higher incomes with the birth of intermediaries like banks and mutual funds. The current system includes formal institutions regulated by entities like RBI and SEBI, as well as informal local markets. Key components of the system described include banking, insurance, capital markets, money markets, and various financial instruments and their roles in facilitating funds flow. Regulators like SEBI and their roles in developing, regulating and protecting the securities market are also summarized.

2. Financial system
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3. Evolution
Stage-1
Underdeveloped economy- Low per capita income
Self financing as the development is at low level.
Non existence of financial intermediaries.
Stage-2
Increase in per capita income
Bilateral borrowings & higher financial intermediation
Birth of financial intermediaries
Further increase in per capita income
Financial intermediaries become large
Big banks, investments, Mutual funds, NBFC, stock markets
Financial system becomes more market oriented.

4. Formal Informal
Organized & regulated
Under purview of RBI & MoF/ SEBI
(Banks/NBFC/ Financial instruments
/financial services .)
Unorganized & unregulated
Flexibility in operations
Low transaction cost
Minimum default risk
High interest rates
(money lenders/ land lords/
Local chits/ savings clubs/
Pawn brokers)
Coexistence

5. Indian Financial system
Well integrated set of subsystems which facilitates the flow o f funds from
area of surplus to the areas of deficit in efficient & effective way.
Formal Informal
Financial
Institutions
Financial
markets
Regulators
RBI
SEBI
IRDA
PDRA
Financial
instruments
Financial
services
Money lenders
Local bankers
Traders
Land lords
Pawn brokers
Depositories
Credit rating
Factoring
Merchant
banking
Lease & hire purchase
Underwriting
Equity
Debts/Bonds
Time deposits
MF units
Insurance policies
Banking
Insurance
NBFC
DFI
M F
Capital
Money
Forex

6. Indian Financial system (cont’d)
Banking
Institutions
Non Banking
Fin. Companies
SCB Sch
Co–op
Banks
P.S.Banks
Pvt Banks (Old/New)
Foreign Banks
RRB
Mutual
funds
Insurance &
Pension
Financial Institutions
NBFC DFI
Public MF’s
Private MF’s
National State others
IFCI, IDBI,SIDBI,
NABARD, HDFC
Exim bank, NHB
SFC
SIDC
ECGC
DICGC
Public sector
Pvt sector

7. Indian Financial system (cont’d)
Capital market Money market
Equity Debt
Market Market
Forex market
Financial Markets
Decentralized financial
market for trading
currencies
Banks & other s
Primary Secondary Derivatives Private corporate debt
PSU Bond market
Government securities market
Primary/ secondary
Domestic
international
Stock
exchanges
Futures
Options
(Stock/Index)
Treasury Bills
Guilt edged paper
Call money
Commercial paper
Commercial bills
Certificate of Deposit
Primary /secondary

8. Characteristics / Functions of Fin Mkts
Characteristics
 Larger volume
 Speed of resource movement from one market to other
 Saver decides the place to invest
 Scope for instant arbitrage among various instruments in the market
 High volatility
( Failure of one segment affects others both domestic & international)
Functions
 Efficient payment mechanism
 Providing information's to the company
 Gives sufficient indications to investors to track their portfolio.

10. Call Money market
Call Money /Inter Bank money market is short term ( over night/fortnight)
Overnight is Call Money( C M) & otherwise is Notice money ( N M )
Surplus funds of Banks are traded . They are USL.
Participants are Banks/ Co-Op Banks/ Discount finance houses/ Security
trading Corporation
C M M is located primarily in Mumbai, also at Kolkata/ Chennai/Ahmedabad/
Delhi/Bangalore
Only banks can participate in Call money market .

11. Commercial Bills market
• Important mode of financing working capital requirement for Industry & trade.
• BoE is a written instrument / unconditional order signed by the maker , directing a
person to pay a certain amount only to or order of a certain person or to the barer of
the instrument as per N I act 1881
• BoE is a freely exchangeable instrument evidencing a commercial transaction.
• Three parties are involved , drawer of the bill, drawee to whom direction is given &
payee to whom payment is to be made.
• C B’s can be endorsed & by the endorser & the person to whom it is endorsed is
endorsee.
• Bills can be Sight/ Usance/ Supply / Accommodation. It can be Indian or foreign
• A strong bills market can support liquidity in the M M & in turn to the financial system.
• Its important character is self liquidating capability. It is next best to cash & TB
• Banks can meet short term liquidity as the bills can be rediscounted with central bank

12. Treasury bills market
Short term rupee borrowing instrument of the Government.
More liquid /safe/ . Default risk absent.
Regularly available / RBI auctions on weekly/fortnightly basis.
Eligible for inclusion as SLR securities.
Participants are all entities registered in India
Types of T bills
91 days 182 days 364 days
Introduced in 1993
Weekly auction on Wednesday
& payment on following Friday
Best way to park surplus funds
Size- Rs 25,000 & multiples
thereafter
Reintroduced in April 2005.
Weekly auction on Wednesday
Of non reporting week &
payment on following Friday
Introduced in 1992
Fortnightly auction on Wednesday
Of reporting week & payment on
following Friday.
Good opportunity for Banks
& other market participants.
Size- Rs 1 crore & multiples &
thereafter

13. Guilt edged securities (G securities)
Government needs funds for development & non Development
expenditure & to repay existing loans and they raise funds through G
securities
These are debt market instruments and is a larger than Industries securities
market
Traded both in primary & secondary markets .
These are unconditionally guaranteed by central & State governments.
All G securities are issued by RBI & are normally coupon.
Coupon rate is fixed during the tenor of the term of the security.
The market players are all entities registered in India.

14. Commercial Paper market
• A promissory note issued by large companies to raise short term funds with
high credit rating
• These are unsecured but backed by lines of credit from their Bankers.
• C P’s are redeemable at par on maturity which ranges from one week to an year
• The denominations Rs 5 lakhs & multiples thereof
• Involved parties are
a) issuing company b) Issuing & Paying agent
c) Credit rating agency (ICRA - A2, CRISIL- P2, CARE – PR2 ,)
d) investor (Individuals, Banks, FI’s other corporates, MMMF’s, NRI’s, FII’s )
e) Banker (indirectly)
• The eligibility for the company to issue CP’s are
1) latest TNW not less than Rs 4 crs
2) Working capital limits from banks not less than Rs 4 crs,
3) Company to be classified as standard asset by the Bank

15. Certificate of Deposits
• CD is a Unsecured , marketable short term instrument introduced by RBI in 1989 .
• Can be issued only by Banks & specified FI’s
• The buyers are individuals, cos, trusts, associations, Banks , NRI’s etc. ( MF’s are banned)
• They are issued in demat form & transferable after 7 days of issue.
• Minimum denomination is Rs 1.00 lakh and is issued at discount (stamp duty/issuing cost)
• The minimum period of maturity is 7 days & max is 1 year.
• To support banks to maintain their share in Financial markets & acts as intermediary .
• Helps banks to mop up excess liquidity from the system .
• The advantages of CD’s are
( Short term investment, highly liquid (transferable by endorsement) , availability of
secondary market through DFHI), traded in NSE.

17. Capital markets
Equity Market Debt Market
Primary Secondary Derivatives
Private corporate debt
PSU Bond market
Government securities
Domestic
(IPO)
International
(ADR/GDR)
Stock
Exchanges
Trading
of securities
Futures / Options
(Stock/Index)

18. Regulators- SEBI
Set up in 1988 & got legal teeth since 1992 with wide range of powers.
Capital
Market
Capital
Market
Intermediaries
Mutual
Funds
Venture
capital
FII’s Corporate
Bond
market
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19. Role & Functions of SEBI
19
To Protects investors interest, educate & address their grievances .
Develop & regulate securities market through appropriate measures.
Register & regulate all the market intermediaries, regulate the working of stock
brokers, sub brokers, share transfer agents .
Inspection of stock exchanges, brokers, sub brokers, depositories, Mutual funds ,
review operations & administrative control of each exchange.
Proactive oversight on market monitoring & market surveillance on continuous
basis.
Promote self regulatory organizations for making regulations more effective.
Strengthening insiders trading regulations to make the securities market more
transparent.
Can suspend/ cancel license if the dealers / brokers/ participants violate norms