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Introduction to financial system and financial services

The document provides an introduction to financial systems and financial services. It defines key terms like financial assets, financial intermediaries, and financial markets. It describes the major components of India's financial system including banks, capital markets, money markets, and development institutions. It also outlines some weaknesses of India's historical financial system as well as modern financial services and products that have emerged.

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Introduction to Financial System and Financial Services
Meaning of Financial System It is the financial system that supplies the necessary financial inputs for the production of goods and services which in turn promote the well being and standard of living of the people of the country. Financial system is a broader term which brings under its fold the financial markets (long term & short term)and the financial institutions which support the system 2
Major assets in the Financial System The major assets traded in the financial system is to mobilize the savings in the form of money and monetary assets and invest them to productive ventures. An efficient functioning of the financial system facilitates the free flow of funds to more productive activities and thus promotes investments. Thus the financial system provided the intermediation between savers and investors and promotes faster economic development. 3
Functions of Financial System • Provision of Liquidity. • Mobilization of Savings. • Financial Concepts: Financial Assets Financial Intermediaries Financial Markets Financial rates and return Financial instruments 4
Financial Assets A Financial asset is one which is used for production or consumption or for future creation of assets. Types of Financial assets Marketable assets Non marketable assets 5
Financial intermediaries Financial intermediaries includes all kinds of organizations which intermediate and facilitate financial transactions of both the Indivuals and Corporate customers. It refers to all financial institutions and investing institutions which facilitate financial transactions in financial markets. 6
Financial intermediaries 7 In India Organized Sector and Unorganized Sector Organized Sector consists of Capital Markets & Money Markets intermediaries. Capital Market intermediaries consists of – • Development Banks • Insurance Co’s • UTI • Govt. (PF, NSC) • Exim Bank • NBFC (Leasing co, H.P Co, Investment Co)
Financial intermediaries 8 In India Money Market intermediaries are • RBI • Commercial banks • Co operative Banks • Post Office • Govt. (Treasury bills) Unorganized Sector consists of • Money Lenders • Indigenous bankers • Pawn Brokers • Traders • Land lords
Financial Markets 9 Financial markets can be referred to as those centers and arrangements which facilitate buying and selling of financial assets, claims and services Classification of Financial Markets. • Organized market • Unorganized market
Organized markets 10 Organized markets consists of Capital markets and Money markets. Capital market consists of Industrial securities markets, Govt Securities markets and Long term markets. Industrial Securities markets consists of Primary markets and Secondary Markets. Long term market consists of Term Loan market, Market for Mortgage and market for financial guarantees.
Money market Money market consists of • Call money Market • Commercial Bill Market • Treasury Bill Market • Short term Loan Market 11
Financial Risk and Returns Financial Risk and returns is guided by the risk return trade off. Interest rate plays a important role Financial Instruments - It refers to the documents that which represent financial claims on assets. It refers to a claim on to the repayment of a certain sum at the end of a specified period together with interest or dividend. Example - Bill of exchange, Share, debenture, government bond, treasury bill, etc. 12
Features of Financial Instruments Features of Financial Instruments: • They are easily transferable • They have a ready market They posses liquidity • They can be used as a security for raising loans • Some of them have tax savings • They have specified maturity period • They facilitate futures trading to cover risk (forex) 13
History and Growth of Financial System in India Nationalization of Financial institutions – formation of SBI, LIC and Nationaliasation of commercial banks. Starting up of UTI Establishment of development banks like – IFCI, ICICI, IDBI,SIDBI. 14
Institution for Financing agriculture Institution for Financing agriculture – NABARD Institution of Foreign trade – (Exim Bank) Institution for housing finance – NHB Mutual Fund Industry. Venture capital Institutions. Credit Rating Agencies. Legislative Support – MRTP Act , New Economic Policy, Negotiable instrument Act, Banking Regulation Act and The Stamp Act 15
Weaknesses of Indian Financial System Weaknesses of Indian Financial System: • Lack of Co-ordination between different Financial institutions. • Monopolistic Market Structure • Dominance of development Banks in Industrial Financing Inactive • Erratic Capital Market • Imprudent Financial Practices 16
Meaning of Financial Services In general all types of activities which are of financial nature could be brought under the term financial services. Classification of Financial Services Industry. • Capital Market intermediaries • Money Market intermediaries. 17
Scope of Financial Services It is categorized into • Traditional activities - The traditional activities are Fund based and non fund based activities. Fund Based – activities are - Underwriting activities Dealing in secondary markets • Modern activities. 18
Money Market Instruments Participating in money market instruments Involving in equipment leasing, H.P , venture capital and seed capital. Dealing in forex markets. Non fund based activities are…, Managing the Capital issues. Making arrangements for private placements. Making arrangement of funds for project finance and working capital requirements. 19
Modern activities Modern activities are • Providing project advisory / consultancy • Planning for Merger and Acquisition • Guiding Corporate in capital restructuring • Managing portfolio of large PSU • Assisting in establishing the right debt-equity mix • Restructuring the sick companies • Hedging of risk due to forex / interest rates variations 20
Causes of Financial Innovation Causes of Financial Innovation • Low profitability • Keen Competition • Economic liberalization • Improved Communication technology • Customer Service / delight • Global impact Investor awareness 21
New Financial Services and Products New Financial Services and Products • Merchant Banking • Loan Syndication • Leasing Mutual Funds Factoring • Forfeiting • Venture Capital • Corporate advisory services • Securitization • Forwards, Futures, Swaps, Options 22
Challenges facing financial sector Challenges facing financial sector: • Lack of Qualified personnel • Lack of investor awareness • Lack of transparency • Lack of specialization • Lack of recent data • Lack of efficient risk management system 23
Present Scenario of financial sector Present Scenario of financial sector: • Conservatism to dynamism • Emergence of primary Equity Market • Concept of Credit rating • Process of globalization • Process of liberalization 24