The document provides an overview of the Indian financial system and its key components. It discusses the formal and informal financial sectors in India. The formal financial system includes financial institutions, markets, instruments, and services. It describes some of the major financial institutions in India as well as money markets and capital markets. It also summarizes some common financial instruments and services that make up the Indian financial system.

1. INDIAN FINANCIAL SYSTEM
An Introduction on

2. Meaning and Definition
Financial System is a complex, well-integrated set
of sub-systems of
Financial institution,
Markets,
Instruments, and
Services
which facilitates the transfer and allocation of funds,
efficiently and effectively.

3. Formal and Informal Financial system
Formal Financial Sector is characterized by
presence of an organized, institutional and regulated
system which caters the financial needs of the
modern spheres of the economy.
Informal Financial Sector is an unorganized,
non-institutional and non-regularized system
dealing with the traditional and rural spheres of the
economy.

4. Informal financial system
Informal Financial Sector is an unorganized,
non-institutional and non-regularized system
dealing with the traditional and rural spheres of the
economy.
Advantages: 1). Low Transaction, 2). Minimum
default risk, 3). Less of formalities, 4). Less time
consuming, 5). Fulfillment of urgent requirements.
Disadvantages: 1). Unregulated 2). High rates of
interest 3). Less transparency of procedures, 4). Rise
to black money, 5). Exploitation of victims.

5. Components of Formal Financial
System
1. Financial institutions;
2. Financial markets;
3. Financial instruments;
4. Financial services.

6. Components of Formal Financial
System-
Institutions
 Term finance institutions: IFCI (1948), IDBI
(1964), ICICI (1955), SIDBI (1989), IIBI (1997).
 Specialized services institutions: EXIM
(1982), TFCI(1994), ICICI VENTURE;
 Sectoral financial institutions:
NABARD(1982), NHB(1988).
 Investment institutions: UTI(1964),
LIC(1955), GIC(1972) and its subsidiaries;
 state-level financial institutions:
SIDC(1955), SFC(1951).

7. Financial Markets
Financial markets are the mechanism enabling
participants to deal in financial claims.
Literally, financial markets also provide a facility in
which their demands and requirements interact to
set a price for such claims. (D=S)

8. Types of Financial Markets
1. Money Market: a market for short-term
securities or securities with a maturity of less than
one year;
2. Capital market: A market for long-term
securities or securities with a maturity period of
one or more year.
Primary market;
Secondary market.

9. Types of the Capital Market
1. Primary market: it refers to the market:
 Where securities are created/issued;
 where the securities are traded for very first time;
2. Secondary market: it refers to the market where
those securities traded which have already been
issued in the primary market:
 Over the counter;
 Trade through stock exchanges;

10. Types of the Capital Market
 Over the counter: trade thorough the direct
counters of the company or on the immediate
basis;
 Trade through stock exchanges: approach to
BSE, NSE or any other stock exchange through
stock brokers or agents of registered broking
companies.

11. Types of the Capital Market
 Stock brokers or agents of registered broking
companies: these are the individuals, companies
or the institutions registered with SEBI (1992)
and are authorised to sale and purchase of
securities or the financial assets.
 Share khan, Religare and Unicorn etc.

12. 3. Financial Instruments
Financial asset or the financial instrument is
the claim of money, against a particular person or
institution, at a future date, for a specific amount;
A financial asset may also include the claim of
periodic payment in form of interest or dividend,
Implies Debentures, shares, bonds and notes;
1. Primary securities: Equity, Debentures;
2. Secondary securities: Bank deposits, Insurance
policies and Mutual funds.

13. Financial
Services
Financial facilitate the
ease of:
1. Borrowing and funding;
2. Lending and investing;
3. Buying and selling;
4. Making and enabling
payments and settlements;
5. Managing risk and
exposures;
Need for Financial Services

14. Categories of Financial
Services
1. Fund intermediation:
2. Liquidity facility:
3. Payment mechanism:
4. Risk management:
5. Financial engineering is the application of
mathematical methods to the solution of problems
in finance.  It is also known as financial
mathematics, mathematical finance, and
computational finance.

15. Functions of a Financial
System
Mobilize and allocate savings;
Monitor corporate performance;
Provide payment and settlement system;
Optimum allocation of risk bearing and reduction;
Disseminate price related information;
Offer portfolio adjustment facility;
Lower the cost of transactions;
Promote the process of financial deepening of
broadening. Financial Deepening: It refers to the increased
provision of financial services with a wider choice of
services geared to all levels of society.

16. Financial System and
Economic
Increase in rate of saving and investments;
Increase in the productivity and production;
Growth in GDP and GNP of India;
Helps in capital formation;
Utilization of idle funds;
Maintains circular flows in economy;
Increase transparency and reduce risk of several
defaults.
Improvement in living standard;

17. THE MONEY MARKET
An Introduction to

18. Meaning and Definition
Money market refers to the market for financial
assets that are close substitutes for money;
It is the market for overnight to short-term funds
and instruments;
Instrument having maturity period of one or less
than one year.

19. Functions of money market
• Money market is generally expected to perform
three broad functions:
1. Provide balancing mechanism to even out the
demand for and supply of short term funds;
2. Provide a focal point for central bank intervention
for influencing liquidity and general level of
interest rates in the economy;
3. Provide reasonable access t suppliers and users of
short term funds to fulfill their borrowings and
investment requirements at an efficient and market
clearing price.

20. Role of Reserve Bank of India in The Money
Market
Money market comes under the direct purview of
Reserve Bank of India;
The aims of RBI’s operations in the money market
are:
1. To ensure that liquidity and short term interest
rates are maintained at levels consistent with the
monetary
2. objectives of maintaining price stability;
3. To bring about order in foreign exchange market;
Tools of RBI: CRR, SLR and open market operations etc.

21. Money Market Instruments
1. Treasury bills;
2. Call money;
3. Notice money;
4. Term money;
5. Commercial papers (CP);
6. Certificates of deposits(CD);
7. Commercial bills (CB);
8. Collateralized borrowing and lending obligations
(CBLO).

22. Money Market Instruments
1. Treasury bills are short-term instruments used by
the government to raise short-term funds;
• Negotiable securities;
• Highly liquid;
• No default risk;
• Assured yield, low transaction cost, inclusion in SLR
limit;
• Transacted through SGL account and not issued as a
scrip;
• Maturity periods are: 91-days, 181-days and 364-days;
• Min. amount of 25,000Rs. And multiples of the same.
• Categorized as: On-tap, auctioned and Adhoc T-bills.

23. Money Market Instruments
2. Call money: commercial banks borrow money
from other banks to maintain minimum cash
balance known as cash reserve ratio (CRR);
 Maturity: over the night;
 Rating:
 Denomination: not specified or equal to NDTL;
 Raised by: commercial banks;
 Related term: notice money and term money.

24. Money Market Instruments
3. Notice Money: commercial banks borrow money
cashfrom other banks to maintain minimum
balance known as cash reserve ratio (CRR);
 Maturity: 1 day to 14 days;
 Rating:
 Denomination: not specified;
 Raised by: commercial banks;
 Related term: call money and term money.

25. Money Market Instruments
4. Term money: commercial banks borrow money
from other banks to maintain minimum cash
balance known as cash reserve ratio (CRR);
 Maturity: 15-364 days;
 Rating:
 Denomination: not specified;
 Raised by: commercial banks;
 Related term: notice money and call money.

26. Money Market Instruments
5. Commercial papers (CP-1990) is an unsecured
short-term promissory note issued at a discount by
creditworthy corporate, primary dealers and all-
Indian financial institution.
 maturity: 7 days – 364 days;
 Rating: P series of CRISIL;
 Denomination: 5 lac and multiples;
 Investment through: demat account.

27. Money Market Instruments
6. Certificates of deposits(CD-1989) are short-
term tradable time deposits issued by commercial
banks and financial institutions;
 Maturity:7 days to 1 year for banks but 1-3 years for
FIs ;
 Rating:
 Denomination: 1 lakh and multiples;
 Issued by: financial institutions.
 Related term: it is same as FD but freely
transferable and tradable unlike the FD.

28. Money Market Instruments
7. Commercial bills (CB) are negotiable instruments
drawn on the seller by the buyer, in turn, accepted and
discounted by commercial banks;
1. Features of commercial bills:
 Maturity: 30, 60,90 days usually;
 Rating:
 Denomination: not specified-can be any amount;
 Discounted through: Commercial banks;
 some time also known as trade bills; but known as the
commercial bill when discount by the bank.

29. THE CAPITAL MARKET
An Introduction to

30. Meaning and Definition
Capital market is a market where securities with
the long tenure are bought and sold such as equity
and debt, funds are raised for long period;

31. Types of the Capital Market
1. Primary market: it refers to the market:
 Where securities are created/issued;
 where the securities are traded for very first time;
2. Secondary market: it refers to the market where
those securities traded which have already been
issued in the primary market:
 Over the counter;
 Trade through stock exchanges;

32. Role of capital markets in the
growth of economy
It helps in economic growth of a country by
mobilizing the savings and direct is to the right way
for more productive uses:
Directs cash from deficit sector to the surplus sector:
issue of securities in the primary; domestic,
government, corporate sector.
 direct cash from the surplus sector to the financial
intermediaries: issue of the secondary in the primary
market;
Facilitation of the liquidity: resale and repurchase of
the financial assets through the secondary market.

33. Components of Capital Market
1. Primary market: it refers to the market where
financial securities are created/issued and sold for
very first time; it serves the mobilization function
and capital creation/formation function;
2. Secondary market: it refers to the market where
those financial securities are re-bought and re-sold
which have already been issued and sold in primary
market; it facilitates the liquidity function.
Hence, primary market is for the new issues and
secondary market is for the outstanding or the
existing issues;

34. Methods of Issuing Equity in
Primary Market
1. Public issues through prospectus: IPOs, FPOs;
2. Private placement;
3. Right issues;
4. Preferential issues;

35. Secondary Market
Secondary market: it refers to the market where
those financial securities are re-bought and re-sold
which have already been issued and sold in primary
market; it facilitates the liquidity function.

36. Functions of The Secondary Market
1. Facilitates liquidity and marketability of securities;
2. Provides valuation of securities;
3. Reduces cost of capital;
4. Enable price discovery;
5. Creates a wealth effect;

37. Indian Financial System-
History
 Pre 1951
1. Control of Money Lenders
2. No Laws / Total Private Sector
3. No Regulatory Bodies
4. Hardly any industrialization
5. Banks – Traditional lenders for Trade and that too short
term
6. Main concentration on Traditional Agriculture
7. Narrow industrial securities market (i.e. Gold/Bullion/Metal
but largely linked to London Market)
8. Absence of intermediatary institutions in long-term financing
of industry
9. Industry had limited access to outside saving/resources

38. Indian Financial System-
History
 1951 to 1990
1. Moneylenders ruled till 1951. No worth-while Banks at that
time. Industries depended upon their own money.
2. 1951 onwards 5 years PLAN commenced.
 PVT. SECTORS TO PUBLIC SECTOR – MIXED ECONOMY
1. 1st 5 year PLAN in 1951 – Planned Economic Process.
2. As part of Alignment of Financial Systems – Priorities laid
down by Govt. – Policies.
 MAIN Elements of Fin. Organisations
1. Public ownership of Financial Institution
2. Strengthening of Institutional Structure
3. Protection to Investors
4. Participation in Corporate Management
5. Organisational Deficiencies.

39. Indian Financial System-
History
 Nationalization
 RBI -1948
 SBI -1956 (take-over of Imperial Bank of India)
 LIC -1956 (Merges of over 250 Life Insurance
Companies)
 Banks -1969 (14 major banks with Deposits of
over Rs. 50Crs. nationalised) 1980 - (6 more
Banks)
 Insurance -1972 (General Insurance Corp.
GIC by New India , Oriental, united and
National.

40. Indian Financial System-
History
 POST 1990s
 Development Financial Institutions : (DFIs)
 Started providing Working Capital also
 Privatization of DFI
 Reduction in Govt. holding & Public Participation e.g.
IFCI Ltd., IDBI Ltd., ICICI Ltd.
 Conversion into Banking / Merger into Banking
Companies IDBI Bank & ICICI Bank
 Issuance of Bond by DFIs without Govt.’s Guarantees to
mobilise resources.
 Reduction in holding of Govt. in Banks, i.e. Public
Participation / Listing

41. Indian Financial System-
History
INDUSTRIES
 Rise & Growth of Service Sector industries.
 Reliance & Dependence on technology.
 E-mail & mobile made sea-change in communication, data
collection etc.
 Computerization – a catch phrase and inevitable need of an hour.
 Dependent on Capital Market rather than only Debts dependency.
 Scalability of operations through globally competitive size.
 Broad basing of Board.
 Professional Management.
NBFC
 NBFC under RBI governance to finance retail assets and mobilize
small/medium sized savings.
 Very large NBFCs are emerging (Shri Ram Transport Finance, Birla,
Tata Finance, Sundaram Finance, Reliance Finance, DLF, Religare
etc.

42. Indian Financial System-
History
Commercial Bank
 Govt. holding reduced even by up to 40%
 Setting up of Universal Banks (from CASA to
Corp. Finance)
 One-stop Banking.
 Capital Adequacy. (Basel II accepted) 9%
 Assets classification
 NPA classification – substandard, Doubtful & Loss
Assets.
 Focus on Non-Fund Business like L/C,
Guarantees, Acceptance, FOREX etc.
 New Private Sector Banks (AXIS, YES, HDFC,
KOTAK MAHINDRA etc.)

43. 43
Indian Financial System – An Overview
STRUCTURE OF FINANCIAL MARKETS IN INDIA
Financial Markets in India
Debt
Market
Primary /
Secondary
Forex
Market
Capital
Market
Primary /
Secondary &
Depository
Insurance
Life/General
Banks
(including
RRBs, co-op
etc)
Mutual Funds,
Venture Funds,
Investment
Bonds
RBI RBI SEBI IRDA RBI RBI/SEBI
REGULATORY AUTHORITY

44. References
 wikipedia.org
 Indian Financial system by M Y Khan
 shodhganga.inflibnet.ac.in