The document discusses the significance of a well-organized financial system for a country's economic development, highlighting its role in mobilizing savings and providing necessary financial inputs for producing goods and services. It outlines various components of the financial system, including markets, institutions, and instruments essential for facilitating resource allocation and managing risks. Moreover, it examines the evolution and reforms of the Indian financial system, addressing challenges and changes within financial markets and institutions.

1. INDIAN FINANCIAL
INDIAN FINANCIAL
SYSTEM
SYSTEM

2. Financial System
Financial System
The economic development of
The economic development of
any country depends upon the
any country depends upon the
existence of a well organized
existence of a well organized
financial system. It is the
financial system. It is the
financial system which supplies
financial system which supplies
the necessary financial inputs for
the necessary financial inputs for
the production of goods and
the production of goods and
services which in turn promote
services which in turn promote
the well being and standard of
the well being and standard of
living of the people of a country.
living of the people of a country.

3. Financial System
Financial System
The financial system is a broader
The financial system is a broader
term which brings under its fold
term which brings under its fold
the financial markets and the
the financial markets and the
financial institution which support
financial institution which support
the system. The major assets
the system. The major assets
traded in the financial system are
traded in the financial system are
money and monetary assets.
money and monetary assets.

4. Financial System
Financial System
Definition-A set of institutions,
Definition-A set of institutions,
instruments and markets which
instruments and markets which
promote savings and channel
promote savings and channel
them to their most efficient
them to their most efficient
use.
use.

5. Financial Institutions
Commercial Banks
Insurance Companies
Mutual Funds
Provident Funds
Non Banking Financial Companies
Demanders of Funds
Individuals
Businesses
Governments
Suppliers of Funds
Individuals
Businesses
Governments
Financial Markets
Money Market/ Capital Markets
Private
Placement
Funds
Deposits/Shares
Funds
Loans agreement
Funds
Securities
Funds
Securities
Funds
Securities

6. Importance of Financial
Importance of Financial
System
System
Mobilize the savings
Mobilize the savings
Facilitates the free flow of funds
Facilitates the free flow of funds
Provides the intermediation
Provides the intermediation

7. Functions of the Financial
Functions of the Financial
System
System
It provides a payment system for
It provides a payment system for
the exchange of goods and
the exchange of goods and
services.
services.
It enables the pooling of funds for
It enables the pooling of funds for
undertaking large – scale
undertaking large – scale
enterprises.
enterprises.
It provides a mechanism temporal
It provides a mechanism temporal
transfer of resources.
transfer of resources.

8. It provides a way for managing
It provides a way for managing
uncertainty and controlling risk.
uncertainty and controlling risk.
It generates information that
It generates information that
helps in coordinating
helps in coordinating
decentralized decision-making.
decentralized decision-making.
It helps in dealing with the
It helps in dealing with the
incentive problem when one
incentive problem when one
party has an informational
party has an informational
advantage
advantage.
.

9. Functions of the Financial
Functions of the Financial
System
System
Provision of Liquidity
Provision of Liquidity : The
: The
major function of the financial
major function of the financial
system is the provision of
system is the provision of
money and monetary assets for
money and monetary assets for
the production of goods and
the production of goods and
services. In financial language,
services. In financial language,
the money and monetary assets
the money and monetary assets
are referred as liquidity.
are referred as liquidity.

10. Mobilization of savings:
Mobilization of savings: it refers
it refers
to mobilize the savings of public
to mobilize the savings of public
and channelise them into
and channelise them into
productive activities. In other
productive activities. In other
words, the financial system
words, the financial system
facilitates the transformation of
facilitates the transformation of
savings into investment and
savings into investment and
consumption.
consumption.
Economic growth:
Economic growth: it promotes
it promotes
economic growth by balancing of
economic growth by balancing of
distribution of finds, particularly
distribution of finds, particularly
to the under privileged and the
to the under privileged and the
poorer section of society .
poorer section of society .

11. Development of financial
Development of financial
system in India
system in India
At the time of independence in
At the time of independence in
1947, there was no strong
1947, there was no strong
financial system in India.
financial system in India.
The industrial sector also had
The industrial sector also had
no access to the savings of
no access to the savings of
the public.
the public.

12. Some serious attention was paid to
Some serious attention was paid to
development of sound financial
development of sound financial
system of India only after the
system of India only after the
launching the planning era in
launching the planning era in
country.
country.
With the adoption of mixed
With the adoption of mixed
economy, the development of the
economy, the development of the
financial system took a different
financial system took a different
turn so as to fulfill the socio-
turn so as to fulfill the socio-
economic and political objectives
economic and political objectives

13. GROWTH IN THE INDIAN
GROWTH IN THE INDIAN
FINANCIAL SYSTEM
FINANCIAL SYSTEM
Emergence of a wide range of
Emergence of a wide range of
financial institutions to provide
financial institutions to provide
a variety of services.
a variety of services.
Significant expansion of the
Significant expansion of the
network of commercial banks
network of commercial banks
and operations of the financial
and operations of the financial
institutions.
institutions.

14. Introduction of a variety of
Introduction of a variety of
schemes and instruments for
schemes and instruments for
mobilizing savings remarkable
mobilizing savings remarkable
growth in the primary as well
growth in the primary as well
as the secondary segments of
as the secondary segments of
the capital market
the capital market.
.

15. TREND IN THE INDIAN
TREND IN THE INDIAN
FINANCIAL SYSTEM
FINANCIAL SYSTEM
The field of market-determined
The field of market-determined
interest rates is increasing and
interest rates is increasing and
correspondingly the domain of
correspondingly the domain of
administered interest rates is
administered interest rates is
shrinking. This is accompanied
shrinking. This is accompanied
by greater volatility in interest
by greater volatility in interest
rates.
rates.

16. Financial intermediaries like
Financial intermediaries like
the industrial Development
the industrial Development
Bank of India, which
Bank of India, which
traditionally had substantial
traditionally had substantial
access to cheaper SLR
access to cheaper SLR
borrowing, have to now rely
borrowing, have to now rely
more on the capital market
more on the capital market

17. In the regulation of financial
In the regulation of financial
markets and financial
markets and financial
intermediaries, prudential
intermediaries, prudential
regulation and supervision
regulation and supervision
(capital adequacy, disclosure,
(capital adequacy, disclosure,
transparency, and so on) are
transparency, and so on) are
being emphasized and product
being emphasized and product
and price controls are being
and price controls are being
done away with.
done away with.

18. Financial innovation
Financial innovation
(introduction of new financial
(introduction of new financial
instruments or processes) is
instruments or processes) is
gaining momentum. Options
gaining momentum. Options
and futures have been
and futures have been
introduced in India.
introduced in India.

19. Financial Sector Reforms
Financial Sector Reforms
in India
in India
Removal of financial
Removal of financial
repression.
repression.
Creation of efficient,
Creation of efficient,
productive, and profitable
productive, and profitable
financial sector.
financial sector.
Evolution of market-
Evolution of market-
determined interest rates.
determined interest rates.

20. Granting of operational and
Granting of operational and
functional autonomy to
functional autonomy to
institutions.
institutions.
Opening up of the external
Opening up of the external
sector in a calibrated fashion.
sector in a calibrated fashion.
Maintenance of financial
Maintenance of financial
stability in face of domestic
stability in face of domestic
and external disturbances.
and external disturbances.

21. Weakness of Indian
Weakness of Indian
Financial System
Financial System
Lack of Co-ordination between
Lack of Co-ordination between
different Financial Institutions
different Financial Institutions
Monopolistic Market Structures
Monopolistic Market Structures
Dominance of Development
Dominance of Development
Banks in Industrial Financing
Banks in Industrial Financing
Inactive Capital Market
Inactive Capital Market

22. Components / Organization
Components / Organization
of financial system
of financial system
a. Financial assets
a. Financial assets
b. Financial intermediaries
b. Financial intermediaries
c. Financial markets
c. Financial markets
d. Financial instruments
d. Financial instruments
e. Financial Services
e. Financial Services

23. Financial Instruments & Assets
Financial Instruments & Assets
It refers to those documents
It refers to those documents
which represent financial
which represent financial
claim on assets; for ex. Bills of
claim on assets; for ex. Bills of
exchange, Promissory notes,
exchange, Promissory notes,
Shares, Debentures
Shares, Debentures

24. Financial assets
Financial assets:
: the basic
the basic
product of any financial
product of any financial
system is the financial assets.
system is the financial assets.
A financial asset is one, which
A financial asset is one, which
is used for production or
is used for production or
consumption or for further
consumption or for further
creation of assets
creation of assets

25. FINANCIAL INTERMEDIARIES
FINANCIAL INTERMEDIARIES
Financial intermediaries are
Financial intermediaries are
firms that provide services and
firms that provide services and
products that customers may
products that customers may
not be able to get more
not be able to get more
efficiently by them in financial
efficiently by them in financial
markets.
markets.

26. FINANCIAL MARKETS
FINANCIAL MARKETS
A financial market is a market
A financial market is a market
for creation and exchange of
for creation and exchange of
financial assets. If you buy or
financial assets. If you buy or
sell financial assets, you will
sell financial assets, you will
participate in financial markets
participate in financial markets
in some way or the other.
in some way or the other.

27. Functional of Financial
Functional of Financial
Markets
Markets
Financial markets facilitate
Financial markets facilitate
price discovery
price discovery
Financial markets provide
Financial markets provide
liquidity to financial assets
liquidity to financial assets
Financial markets
Financial markets
considerably reduce the cost
considerably reduce the cost
of transacting
of transacting

28. Classification of Financial
Classification of Financial
Markets
Markets
Financial markets can classified
Financial markets can classified
as different types
as different types
Financial claim- Fixed claims (debt
Financial claim- Fixed claims (debt
instruments) and Residual claims
instruments) and Residual claims
(equity instruments).
(equity instruments).
Maturity of claims- Short – term
Maturity of claims- Short – term
financial claims (money market)
financial claims (money market)
and Long – term financial claims
and Long – term financial claims
(capital market).
(capital market).

29. Issue Claim- New issues (Primary
Issue Claim- New issues (Primary
market) and outstanding issues
market) and outstanding issues
(Secondary Market).
(Secondary Market).
Timing of delivery- Cash or Spot
Timing of delivery- Cash or Spot
market and Future or Forward
market and Future or Forward
Market.
Market.
Organizational structure. –
Organizational structure. –
Centralized and Decentralized
Centralized and Decentralized
market.
market.

30. Main Classification of
Main Classification of
Financial Market
Financial Market
Financial markets can be referred to
Financial markets can be referred to
those centers and arrangement
those centers and arrangement
which facilitate buying and selling of
which facilitate buying and selling of
financial assets and services.
financial assets and services.
There are mainly two types of
There are mainly two types of
Financial Capital
Financial Capital
Unorganized Markets.
Unorganized Markets.
Organized Markets
Organized Markets

31. Organized markets
Organized markets
These organized markets can be
These organized markets can be
further classified into two they are:
further classified into two they are:
Capital Market
Capital Market
Money Market
Money Market

32. Capital Market:
Capital Market:
The capital market is a market for
The capital market is a market for
financial assets, which have a long or
financial assets, which have a long or
indefinite maturity, which have a
indefinite maturity, which have a
maturity period of more than one year.
maturity period of more than one year.
Capital market may be further divided
Capital market may be further divided
into three namely:
into three namely:
Industrial securities market
Industrial securities market
Government securities market
Government securities market
Long term market
Long term market

33. Industrial Securities Market
Industrial Securities Market:
:
As the name implies, it is a market
As the name implies, it is a market
for industrial securities namely
for industrial securities namely
Equity shares or ordinary shares.
Equity shares or ordinary shares.
Preference shares, and
Preference shares, and
Debentures or bonds.
Debentures or bonds.

34. It is a market where industrial
It is a market where industrial
concerns raise their capital or
concerns raise their capital or
debt by issuing appropriate
debt by issuing appropriate
instruments. It can be further
instruments. It can be further
sub-divided into two:
sub-divided into two:
 Primary market or New issue
Primary market or New issue
market
market
 Secondary market or stock
Secondary market or stock
exchange.
exchange.

35. Primary Market
Primary Market
There are three ways by which a
There are three ways by which a
company may raise capital in a
company may raise capital in a
primary market. They are:
primary market. They are:
 Public Issue
Public Issue
 Rights issue – (Issue of additional
Rights issue – (Issue of additional
shares to existing shareholders)
shares to existing shareholders)
 Private placement – selling of
Private placement – selling of
securities privately to a small
securities privately to a small
group of investors.
group of investors.

36. Secondary Market:
Secondary Market:
It is a market for secondary sale of
It is a market for secondary sale of
securities. In other words, securities
securities. In other words, securities
which have already passed through
which have already passed through
the new issue market are traded in
the new issue market are traded in
this market. This market consists of
this market. This market consists of
all stock exchange recognized by
all stock exchange recognized by
government of India. The stock
government of India. The stock
exchanges in India are regulated
exchanges in India are regulated
under the securities controls
under the securities controls
(Regulation) Act, 1956.
(Regulation) Act, 1956.

37. Government Securities Market
Government Securities Market
It is a market where government
It is a market where government
securities are traded. In India there
securities are traded. In India there
are many kinds of Government
are many kinds of Government
securities-- short term and long
securities-- short term and long
term. Government securities are
term. Government securities are
issued in denomination of Rs. 100.
issued in denomination of Rs. 100.
Interest is payable half-yearly and
Interest is payable half-yearly and
they carry tax exemption also.
they carry tax exemption also.

38. Long-Term Loans Market
Long-Term Loans Market
Development banks and
Development banks and
commercial banks plan a
commercial banks plan a
significant role in this market by
significant role in this market by
supplying long-term loans to
supplying long-term loans to
corporate customers. Long-term
corporate customers. Long-term
loans market may further be
loans market may further be
classified into.
classified into.
 Term loans market – IDBI, IFCI
Term loans market – IDBI, IFCI
 Mortgage market – HUDCO, LIC,
Mortgage market – HUDCO, LIC,
Land Development Banks
Land Development Banks
 Financial guarantees market.
Financial guarantees market.

39. Importance Of Capital
Importance Of Capital
Market
Market
It serves as an important source
It serves as an important source
for the productive use of the
for the productive use of the
economy’s saving.
economy’s saving.
It provides incentives to savings
It provides incentives to savings
and facilitates capital formation by
and facilitates capital formation by
offering suitable rates of interest.
offering suitable rates of interest.
It provides an avenue for investors
It provides an avenue for investors
to invest in financial assets.
to invest in financial assets.

40. It facilitates increase in production
It facilitates increase in production
and productivity in the economy
and productivity in the economy
and thus, enhances the economic
and thus, enhances the economic
welfare of the society.
welfare of the society.
A healthy capital market consisting
A healthy capital market consisting
of expert intermediaries promotes
of expert intermediaries promotes
stability in values of securities.
stability in values of securities.
It serves as an important source for
It serves as an important source for
technological up gradation in the
technological up gradation in the
industrial sector by utilizing the
industrial sector by utilizing the
funds invested by the public
funds invested by the public

41. Money Market
Money Market
Money market is a market for
Money market is a market for
dealing with financial assets and
dealing with financial assets and
securities which have a maturity
securities which have a maturity
period of up to one year. In other
period of up to one year. In other
words, it is a market for purely
words, it is a market for purely
short term funds.
short term funds.

42. Types of Money Market
Types of Money Market
 Call money market
Call money market
 Commercial Bill Market
Commercial Bill Market
 Treasury Bills Market
Treasury Bills Market
 Short-Term Loan Market
Short-Term Loan Market

43. Foreign Exchange Market
Foreign Exchange Market
The term foreign exchange refers to
The term foreign exchange refers to
the process of converting home
the process of converting home
currencies into foreign currencies
currencies into foreign currencies
and vice-versa. According to Dr.
and vice-versa. According to Dr.
Paul Einzing “Foreign exchange is
Paul Einzing “Foreign exchange is
the system or process of
the system or process of
converting one national currency
converting one national currency
into another, and of transferring
into another, and of transferring
money form one country to
money form one country to
another”
another”

44. Functions Foreign
Functions Foreign
Exchange Market
Exchange Market
 To make necessary arrangements
To make necessary arrangements
to transfer purchasing power from
to transfer purchasing power from
one country to another.
one country to another.
 To provide adequate credit
To provide adequate credit
facilities for the promotion of
facilities for the promotion of
foreign trade.
foreign trade.
 To cover foreign exchange risks by
To cover foreign exchange risks by
providing hedging facilities.
providing hedging facilities.

45. Financial Assets
Financial Assets
 The basic product of any financial system is
The basic product of any financial system is
the financial assets. A financial asset is one,
the financial assets. A financial asset is one,
which is used for production or consumption
which is used for production or consumption
or for further creation of assets. For
or for further creation of assets. For
instance, A buys equity shares and these
instance, A buys equity shares and these
shares are financial assets since they can
shares are financial assets since they can
earn income.
earn income.
 In this context, one must know the
In this context, one must know the
distinction between financial assets and
distinction between financial assets and
physical assets are not useful for further
physical assets are not useful for further
production of goods or earning income. For
production of goods or earning income. For
instance, X purchases land and buildings,
instance, X purchases land and buildings,
gold and silver. These are physical assets.
gold and silver. These are physical assets.

46. Classification of financial
Classification of financial
assets
assets
Financial assets can be classified
Financial assets can be classified
differently under different
differently under different
circumstances. One such
circumstances. One such
classification is :
classification is :
1.marketable assets
1.marketable assets
2.non-marketable assets
2.non-marketable assets

47. Marketable assets
Marketable assets
Marketable assets are those, which
Marketable assets are those, which
can be easily transferred from one
can be easily transferred from one
person to another without much
person to another without much
hindrance. Examples: shares of
hindrance. Examples: shares of
listed companies, government
listed companies, government
securities etc.
securities etc.

48. Non-Marketable Assets
Non-Marketable Assets
The assets which can’t be
The assets which can’t be
transferred easily from one person
transferred easily from one person
to another is termed as non-
to another is termed as non-
marketable assets such as
marketable assets such as
▪
▪ Bank Deposits
Bank Deposits
▪
▪ Provident Funds/Pension Funds
Provident Funds/Pension Funds
▪
▪ National Savings Certificates
National Savings Certificates
▪
▪ Insurance Policies
Insurance Policies

49. Financial Intermediaries
Financial Intermediaries
The term financial intermediary
The term financial intermediary
includes all kinds of organizations,
includes all kinds of organizations,
which intermediate and facilitate
which intermediate and facilitate
financial transactions of both
financial transactions of both
individuals and corporate customer.
individuals and corporate customer.
Thus, it refers to all kinds of financial
Thus, it refers to all kinds of financial
institutions and investing institutions,
institutions and investing institutions,
which facilitate financial transaction in
which facilitate financial transaction in
financial markets
financial markets