HW31555-4 financial markets and services.pptx

Financial System:
Financial Markets &
Services
An introduction

Definition
The institutions , Instrument , services and mechanisms,
which influence the generation of savings , Investment ,
capital formation and growth.
PROF S.B.GUPTA : A financial System as a set of institutional
arrangement through which financial surplus available in the
economy are mobilised .’’
Dr.S.Gurusamy, in his book Financial Services and Systems
defined the term financial system as “a set of complex and
closely interconnected financial institutions, markets,
instruments, services, practices and transactions in

A financial system or financial sector functions as an intermediary and facilitates the flow of
funds from the areas of surplus to the areas of deficit.
A Financial System is a composition of various institutions, markets, regulations and laws,
practices, money manager, analysts, transactions and claims and liabilities.
Introduction to Financial System

The term financial system is a set of interrelated activities/services working
together to achieve some predetermined purpose or goal. It includes different
markets, the institutions, instruments, services and mechanisms which
influence the generation of savings, investment capital formation and growth.
Van Horne defined the financial system as the purpose of financial markets
to allocate savings efficiently in an economy to ultimate users either for
investment in real assets or for consumption.
Accd. to Christy, objective of the financial system is to "supply funds to
various sectors and activities of the economy in ways that promote the
fullest possible utilization of resources without the destabilizing
consequence of price level changes or unnecessary interference with
individual desires."

The economic development of a nation is reflected by the progress of
various economic units classified in to corporate, Government and
household sectors . The performance of these sectors resulting into
surplus or deficit is mobilised or channelised effectively by an efficient
financial system.
An efficient financial system encourages saving and Investments,
efficiently allocating the resources in different avenues to accelerate
the rate of economic development .
● Provision of liquidity
● Mobilization of savings
● Size transformation system
● Maturity Transformation system

A financial system is an economic arrangement wherein financial institutions facilitate the
transfer of funds and assets between borrowers, lenders, and investors. Its goal is to efficiently
distribute economic resources to promote economic growth and generate a return on investment
(ROI) for market participants.
Thus, financial system is a set of complex and closely interlinked financial institutions,
financial markets, financial instruments and services which facilitate the transfer of funds.
Financial institutions mobilize funds from suppliers and provide these funds to those who
demand them. Similarly, the financial markets are also required for movement of funds from
savers to intermediaries and from intermediaries to investors. In short, financial system is a
mechanism by which savings are transformed into investments.
● financial institutions
● financial markets
● financial assets
● and financial services are the components of the financial system.

A financial system provides a stable, widely
accepted medium of exchange reduces the
costs of transactions. It facilitates trade and,
therefore, specialization in production.
Financial assets with attractive yield, liquidity
and risk characteristics encourage saving in
financial form. By evaluating alternative
investments and monitoring the activities of
borrowers, financial intermediaries increase
the efficiency of resource use. Access to a
variety of financial instruments enables an
economic agent to pool, price and exchange
risks in the markets. Trade, the efficient use of
resources, saving and risk taking are the
cornerstones of a growing economy. In fact,
the country could make this feasible with the
active support of the financial system. The
financial system has been identified as the
most catalyzing agent for growth of the
economy, making it one of the key inputs of
INTER-RELATIONSHIPS IN THE FINANCIAL
SYSTEM

Mobilize Savings-
Raising n
deploying funds
Platform for savers to
fund their savings in
different services,
securities etc.&
financial mix
decision
Distribute savings
for industrial
investment
Stimulate Capital
Formation
Formulate the capital
out of their earnings
for the further capital
needs in future and
industrial investment
Accelerate
economic
growth
Directing the saving fund
to the industrial capital
need & economic activities
motivating them for capital
formation in economy
Savings are invested
in different industries
to meet their funding
requirement &
individual capital
growth needs
Objectives of Financial System

4. Encourage investments in national priorities
5. Financial services to corporates
6. Financing trade and economic growth
7. Sectoral and Economic development
8. Financing Government programs
9. Expands activities of Financial Institutions
10. Spectrum of financial assets
11. Promotion of Domestic and Foreign Trade
12. Balanced Regional development
1. Promoting investment
2. Mobilize savings
3. Minimizing the risks Maximizing the Returns
F
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1. To facilitate creation and allocation of credit and liquidity.
2. To serve as intermediaries for mobilization of savings.
3. To help in the process of balanced economic growth.
4. To provide financial convenience.
5. To provide information and facilitate transactions at low cost.
6. To cater to the various credits needs of the business organizations.
Functions of Financial Markets

allocating the savings efficiently and effectively. It plays a crucial
role in economic development through saving investment
process. This savings – investment process is called capital
formation.
2. It promotes the process of capital formation and helps to
monitor corporate performance.
3. It provides a mechanism for managing uncertainty and
controlling risk.
4. It provides a mechanism for the transfer of resources across
geographical boundaries, mobilizing savings and liquidity.
5. It offers portfolio adjustment facilities (financial markets and
financial intermediaries as to distribute returns & risk according to
maturity).
6. It helps in lowering the transaction costs and diversify the risk
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Robust and strong financial prudential measures adopted for
greater trust and creditworthiness in financial structure and
systems.
Automation and digitalization with use of ICT to bring
financial markets at par with global markets.
Multiplicity of financial instruments to suit the needs of
different categories of suppliers and borrowers in the
financial system.
Growth of innovative and hybrid instruments in both capital
and money market to promote savings and investments habit
among people.
Comprehensive and integrated regulatory (SEBI, RBI, IRDA
etc.) and legislative mechanism for development and
diversification of operations in financial markets, institutions

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Problems of Indian financial services
Lack of qualified and suitable personnel
Expensive physical infrastructure
Financial services firms lack core competencies
Performance review measures not available, not implement any cost control and
review techniques.
Fully depend on fee based businesses.

WEAKNESSES OF INDIAN FINANCIAL SYSTEM
(i) Lack of coordination between different financial institutions: problem of
coordination arises in working due to large number of financial intermediaries and
other government owned financial institutions.
(ii) Monopolistic market structures: large financial institutions have created a
monopolistic market structures in the financial system. For instance, LIC (insurance)
and UTI (mutual fund). It leads to inefficiency in their working or mismanagement or
lack of effort in mobilising savings of the public and so on. Ultimately, it would retard
the development of the financial system of the country itself.
(iii) Dominance of development banks in industrial financing: The industrial
financing
today in India is largely through the financial institutions and development banks
acting as a backbone of economic development created by the Government both at
the national and regional levels. As such, they fail to mobilise the savings and is a
serious bottleneck which stands in the way of the growth of an efficient financial

WEAKNESSES OF INDIAN FINANCIAL SYSTEM
(iv) Inactive and erratic capital market: Individuals or corporations don’t resort
to capital market since it is very erratic and inactive. Investors prefer investments
in physical assets to investments in financial assets while corporate customers
are able to raise their financial resources through development banks.
(v) Imprudent financial practice: The dominance of development banks has
developed imprudent financial practice among corporate customers. The
development banks provide most of the funds in the form of term loans. So,
there is a preponderance of debt in the financial structure of corporate
enterprises. This predominance of debt capital has made the capital structure of
the borrowing concerns uneven and lopsided. To make matters worse, when
corporate enterprises face any financial crisis, these financial institutions permit
a greater use of debt than is warranted. It is against the traditional concept of a
sound capital structure.

There is no specific place or location to indicate a financial market. Wherever a financial
transaction takes place, it is deemed to have taken place in the financial market. Hence,
financial markets are pervasive in nature since, financial transactions are themselves very
pervasive throughout the economic system. For instance, issue of equity shares, granting
of loan by term lending institutions, deposit of money into a bank, purchase of debentures,
sale of shares and so on.
However, financial markets can be referred to as those centres and arrangements which
facilitate buying and selling of financial assets, claims and services. Sometimes, we do
find the existence of a specific place or location for a financial market as in the case of
stock exchange.
Classification of financial markets
Unorganised markets
Organised markets (i) Capital market. (ii) Money market.
Introduction to Financial Markets

Classification -Financial Markets
Debt Market
Equity Market
Money
Market
Capital
Market Primary Market
Secondary Market
Organized markets
Unorganized
markets
Cash / Spot
market
Forward/Future
market
Foreign exchange
market
Derivatives
market

Classification of financial assets
(i) Marketable assets- Marketable assets
are those which can be easily transferred
from one person to another without much
hindrance. Eg: Shares of Listed
Companies, Government Securities,
Bonds of Public Sector Undertakings, etc.
(ii) Non-marketable assets- On the other
hand, if the assets cannot be transferred
easily. Eg: Bank Deposits, Provident Funds,
Pension Funds, National Savings

Financial services can also
be called 'financial
intermediation'. Financial
intermediation is a process
by which funds are
mobilizing from a large
number of savers & make
them available to all those
who are in need of it and
particularly to, corporate
customers.

Appendix
is referred to as the products and services which are
offered by the banks as they provide various kinds of
facilities of financial transactions and other financial
activities loans, insurance, brokerage firms, credit
cards, consumer finance, investment opportunities
and money management and also give information
on the stock market and other issues like market ups
and downs. The basic aim of this sector is to act as
intermediary between individual and institutional
investors which will help in financial transactions.
The financial companies comprise of both Asset
Management Companies and Liability Management
Companies. In Asset Management Companies, there
leasing are companies, mutual funds,
merchant bankers and issue/portfolio managers
while Liability Management Companies has the bill
Financial
Services

Fund Based Activities.
Fund based activities comprises of
activities which are concerned
with acquiring funds and assets
for clients. Different services
covered under fund based
activities are: Primary and
secondary market activities,
dealing in money market
instruments, foreign exchange
market activities and involving in
hire purchase, venture capital,
equipment leasing etc.
Non-fund based Activities.
These services are provided by
financial intermediaries on non-
fund basis and are called fees-based
services. Non-fund based activities
are specialized services offered by
financial institutions to customers in
exchange for fees, commission,
dividend and brokerage. This
comprises of services such as
Portfolio management, issue
management, stock broking,
merchant banking, credit rating,
debt and capital reconstructing,

Modern Activities
Financial intermediaries beside the traditional services offers a wide range of financial
services at present. These activities are mostly in the category of non-fund based
activities.
Few of the modern activities are listed below: –
● Merger and acquisition planning and helping with their smooth carry out.
● Providing guidance in capital reconstructing to corporate customers.
● Assisting in rehabilitation and reconstruction of sick companies.
● Portfolio management of large public sector corporations.
● Providing recommendations in project management, capital and organization
structure for attaining better results.
● Acting as trustees to the debentures-holders.
● Providing project advisory services ranging from project preparation to capital
raising.

Financial Services offered by various
financial institutions broadly are:
Factoring. . Book Building.
Leasing. . Forfeiting.
Mutual Fund . Merchant
Banking.
Hire Purchase Finance. . Credit card.
Housing Finance. . Portfolio
Finance.
Underwriting. . Credit Rating.
Interest & Credit Swap.
Asset Liability Management.

Types of Financial Services
Provision
of funds
Venture capital
Banking services,
Asset financing, Trade
financing, Credit cards,
Factoring & forfaiting
Managing
Investible
funds
Portfolio management ,
Merchant banking ,
Mutual and pension
funds
Risk
financing
Project preparatory
services ,Insurance ,
Export credit
guarantee

Consultanc
y services
(a) Project preparatory
services (b) Project report
preparation (c) Project
appraisal (d)
Rehabilitation of projects
(e) Business advisory
services (f) Valuation of
investments (g) Credit
rating (h) Merger,
acquisition and
Market
operations
(a) Stock market
operations (b) Money
market operations (c)
Asset management (d)
Registrar and share
transfer agencies (e)
Trusteeship (f) Retail
market operation (g)
Futures, options and
Research and
development
(a) Equity and market
research
(b) Investor
education
(c) Training of
personnel
(d) Financial

3) Factoring :
Factoring is done when the company requires immediate money. It is done by selling the account
receivable like invoices to a third party known as factor at certain discount for immediate cash.
This cash is required for continuous working of the business.
1) Lease Financing :
A lease is known as the agreement between two parties known as lessor and lessee. The lessor is the
owner of the asset and lessee is the user of the asset. In this agreement, there is transfer of asset
from lessor to lesser for certain time period, in return the lessor receives the regular rent. As the
lease period gets over, the asset is returned back to lessor until there is renewal of the contract.
2) Hire Purchase :
The hire purchase refers to the hiring of an asset for certain time period and when the time
period gets over, there is purchase of same asset. At the time of sharing of asset, the person
hiring the asset gets the ownership and is allowed in use it. It is being used for financing of
capital goods like industrial finance, financing of capital / consumer goods etc.

4) Forfaiting is a method of trade financing. In this process, exporters sell their foreign
receivables, either for a long-term or a medium-term, to a forfaiter at a discount. The forfaiter then
gets the sum due from the importer on the contracted payment date. A forfaiting transaction
occurs on a non-recourse basis. The term ‘non-recourse’ here means that the forfaiter has no right
to recover payment from the exporter in case of default by the importer.
5) Mutual Fund :
Mutual fund is the type of investment in which the pool of funds is sourced from various
investors for investing in various securities like stocks, bonds, money market instruments
and similar assets. It is managed by the money managers who invest the fund capital and
tries to get capital gains and income for the investors of the fund. The portfolio of mutual
fund is organised and is according to the investment objective given in the prospectus.
6) Exchange Traded Funds (ETFs) :
It is traded same like stocks in the stock exchange. It has the following assets like stocks, commodities or
bonds. They trade near to the net asset value according to the working of the trading day. The ETFs also has
a role to monitor various index like stock index or bond index. Exchange traded funds is useful for
investments as there are low costs, tax efficiency and stock-like features. They are very famous among
exchange-traded product.

7) Consumer Credit/Consumer Finance :
The term consumer credit means the activities related to giving credit to the consumers for
empowering them to acquire their own goods required for daily use. It is also known as credit
merchandising, deferred payments, installment buying, hire purchase, pay-out-of income scheme,
pay-as-you earn scheme, easy payment, credit buying, installment credit plan, etc.
8) Bill Discounting :
The bill discounting or a bill of exchange is known as the short-term, negotiable and can
easily liquidates money market instrument. It is used for financing a transaction in goods
which is trade related instrument.
9) Venture Capital :
Venture capital includes two words i.e. venture and capital Venture refers to the way of doing
something whose result is not known as it is present with various kinds of loss while capital
refers to human and non-human resources required for starting the business.

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT
Mobilising savings: system creates varieties of forms of savings so that savings
can take place according to the varying asset preferences of different classes of
savers.
Promoting investments: the level of investment determines the increase in
output of goods and services and incomes in the country. The financial
system collects the savings and channels them into investment which
contributes positively towards economic development.
Encouraging investment in financial assets: it encourages savings to flow
into financial assets (money and monetary assets) as against physical assets
(land, gold and other goods and services) which is non-inflationary in nature
and would aid growth in the economy in the long run.

Allocating savings on the basis of national priorities: the financial system
allocates the savings in a more efficient manner so that the scarce capital may
be more efficiently utilised among the various alternative investments to certain
sectors from the social and economic point of view, on the basis of on national
priorities.
Creating credit: Large financial resources are needed for accelerating economic
development of a nation and thereby making available large resources to finance
trade, production, distribution, etc by creating credit.
Providing a spectrum of financial assets: it enables them to choose their asset
portfolios in such a way as to achieve a preferred mix of return, liquidity and risk to
meet the varied requirements and preferences of households.

Financing trade, industry and agriculture: it ensures that all worthy project – be it
in trade or agriculture or industry – suffers due to lack of funds. Thus, they promote
industrial and agricultural development which have a greater say on the economic
development of a country.
Encouraging entrepreneurial talents: The financial institutions encourage the
managerial and entrepreneurial talents furnishing the necessary financial assistance
and technical consultancy services and enhancing risk taking capacity.
Providing financial services: financial intermediations (markets) and financial
institutions play a dynamic role by offering varieties of innovative financial products
and services to meet the ever-increasing demands of individuals and corporates.
Developing backward areas: package of services, infrastructure and incentives
conducive to a healthy growth of industries

DEVELOPMENT OF FINANCIAL SYSTEM IN INDIA
At the time of Independence in 1947, there was no strong financial institutional mechanism
in the country. There was absence of issuing institutions and non-participation of
intermediary financial institutions. The industrial sector also had no access to the savings
of the community. The capital market was very primitive and shy. The private as well as the
unorganised sector played a key role in the provision of ‘liquidity’. The Government started
creating new financial institutions to supply finance both for agricultural and industrial
development and it also progressively started nationalising some important financial
institutions so that the flow of finance might be in the right direction.
● Nationalisation of Financial Institutions Venture Capital
Institutions
● Starting of Unit Trust of India 1964 Credit Rating Agencies
● Establishment of Development Banks Multiplicity of Financial
Instruments
● Institution for Financing Agriculture Legislative Support
(MRTP/FERA)
● Institution for Foreign Trade Mutual Funds Industry

Milestones
Indian Financial Markets & Services
RBI ACT 1935
Creation of RBI as
supervisory body
NATIONALISATIO
N OF BANKS 1969
UTI , 1964
ECONOMIC
REFORMS
1991
TECHNOLOGICAL
UPGRADATION
MODERN
TRADING
INSTRUMENTS
INDIAN FINANCIA
L
SYSTEM GROWT
H
POST INDEPEN
DENCE
UPTIL NOW

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