structure of financial system

1. STRUCTURE OF FINANCIAL SYSTEM
By:
PEDA BABU VADIYALA
2015MBA0155
CENTRAL UNIVERSITY OF KARNATAKA

2. Financial System
• A financial system functions as an intermediary
between savers and investors. It facilitates the flow
of funds from the areas of surplus to the areas of
deficit. It is concerned about the money, credit and
finance.
• A financial system may be defined as a set of
institutions, instruments and markets which
promotes savings and channels them to their most
efficient use. It consists of individuals (savers),
intermediaries, markets and users of savings
(investors).

4. Financial Institutions
• They are business organizations dealing in
financial resources.
• They collect resources by accepting deposits
from individuals and institutions and lend
them to trade, industry and others.
• This means financial institutions mobilize the
savings of savers and give credit or finance to
the investors.

5. On the basis of the nature of activities, financial
institutions may be classified as:
1.Banking financial institutions
• Banking institutions mobilize the savings of
the people.
• They provide a mechanism for the smooth
exchange of goods and services.
• They extend credit while lending money.
• They not only supply credit but also create
credit.

6. Contd..
2. Non-banking financial institutions
• The non-banking financial institutions also
mobilize financial resources directly or indirectly
from the people.
• They lend funds but do not create credit.
Companies like LIC, GIC,UTI, Development
Financial Institutions.
• Non-banking financial institutions can be
categorized as investment companies, housing
companies, leasing companies, hire purchase
companies, specialized financial institutions

7. Financial Markets
• Financial markets are the centres or
arrangements that provide facilities for buying
and selling of financial claims and services.
• Financial markets exist wherever financial
transactions take place.
• Financial transactions include issue of equity
stock by a company, purchase of bonds in the
secondary market, deposit of money in a bank
account, transfer of funds from a current
account to a savings account etc.

8. Classification on the basis of the type
of financial claim:
1.Debt market: The debt market is the financial
market for fixed claims like debt instruments
2.Equity Market: The equity market is the
financial market for residual claims i.e., equity
instruments

9. Classification on the basis of maturity
of claims:
1. Money markets
• A market where short term funds are borrowed and
lend is called money market.
• It deals in short term monetary assets with a maturity
period of one year or less.
2. Capital Markets
• Capital market is the market for long term funds.
• This market deals in the long term claims, securities
and stocks with a maturity period of more than one
year.

10. Classification on the basis of seasoning of
claim:
1. Primary markets
• Primary markets are those markets which deal in the new
securities.
• Therefore, they are also known as new issue markets.
• These are markets where securities are issued for the first
time.
2. Secondary market
• Secondary markets are those markets which deal in existing
securities.
• Existing securities are those securities that have already
been issued and are already outstanding.
• Secondary market consists of stock exchanges.

11. Classification on the basis of structure
or arrangements:
1.Organized markets
• These are financial markets in which financial
transactions take place within the well
established exchanges or in the systematic and
orderly structure.
2. Unorganized markets.
• These are financial markets in which financial
transactions take place outside the well
established exchange or without systematic and
orderly structure or arrangements.

12. Classification on the basis of timing of
delivery:
1.Cash/spot market
• This is the market where the buying and selling of
commodities happens or stocks are sold for cash
and delivered immediately after the purchase or
sale of commodities or securities.
2. Forward/future market
• This is the market where participants buy and sell
stocks/commodities, contracts and the delivery of
commodities or securities occurs at a pre-
determined time in future.

13. Other types of financial market:
1. Foreign exchange market:
 Foreign exchange market is simply defined as a market in
which one country’s currency is traded for another country’s
currency.
 It is a market for the purchase and sale of foreign currencies.
2. Derivatives market:
 The derivatives are most modern financial instruments in
hedging risk.
 The individuals and firms who wish to avoid or reduce risk can
deal with the others who are willing to accept the risk for a
price.
 A common place where such transactions take place is called
the derivative market.

14. Financial Instruments
 Which are used for raising resources for corporate
activities That are used for raising capital through
the capital market are known as ‘capital market
instruments’.
 Example: Preference shares, equity shares,
warrants, debentures and bonds.

15. Contd..
That are used for raising and supplying money in
short period not exceeding one year through
various securities are called ‘money market
instruments’.
Example: treasure bills, gilt-edge securities, state
government and public sector instruments,
commercial paper, commercial bills etc.

16. Financial Services
• The development of a sophisticated and
matured financial system in the country,
especially after the early nineties, led to the
emergence of a new sector.
• This new sector is known as financial services
sector. Its objective is to intermediate and
facilitate financial transactions of individuals
and institutional investors.
• The financial institutions and financial markets
help the financial system through financial
instruments.

17. Contd..
• The financial services include all activities
connected with the transformation of savings
into investment.
• Important financial services include lease
financing, hire purchase, installment
payment systems, merchant banking,
factoring, forfaiting etc.