This document provides an overview of the Indian financial system. It discusses the basic elements of a well-functioning financial system including a strong legal environment, stable money, sound public finances, and financial institutions and markets. The three main parts of the Indian financial system are financial assets, financial institutions, and financial markets. Key financial institutions in India include banks, mutual funds, and insurance companies. Financial markets facilitate activities like mobilizing and allocating savings and monitoring corporate performance.

1. INDIAN FINANCIAL
SYSTEM

5. Basic Elements of a Well-functioning
Financial System
• A strong legal and regulatory environment
• Stable money
• Sound public finances and public debt management
• A central bank
• Sound banking system
• Information system
• Well-functioning securities market

6. FINANCIAL SYSTEM
to enable
 An institutional framework existing in a country
financial transactions
 Three main parts
-Financial assets (loans, deposits, bonds, equities, etc.)
-Financial institutions (banks, mutual funds, insurance
companies, etc.)
-Financial markets (money market, capital market, forex
market, etc.)
• Regulation is another aspect of the financial system (RBI,
SEBI, IRDA,)

7. Functions of a Financial System
• Mobilize and allocate savings
• Monitor corporate performance
• Provide payment and settlement systems
• 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
and broadening

9. DIAGRAMMATIC REPRESENTATIONOF INDIAN
FINANCIALSYSTEM

10. FINANCIAL INSTITUTIONS
• Includes institutions and mechanisms which
-Affect generation of savings by the community
-Mobilisation of savings
-Effective distribution of savings
 Institutions are banks, insurance companies,
mutual funds- promote/mobilise savings
 Individual investors, industrial and trading
companies- borrowers

11. Financialinstitutionsclassifiedas:-
a) Regulatory and financial institutions :
 The two major Regulatory and Promotional Institutions in
India are ReserveBankof India (RBI)and Securities Exchange
Boardof India(SEBI).
 Both RBI and SEBI administer, legislate, supervise, monitor,
control and discipline the entire financialsystem.
India.
 RBI is the apex of all financial institutions in
All financial institutions areunder the control ofRBI.
 Thefinancial markets are under the control ofSEBI.

12. b)Bankinginstitutions:-
-Bankinginstitutionsmobilizethesavingsof thepeople.
-Theyprovide amechanismforthesmooth exchangeof
goods andservices.
-Basiccategoriesof banking institutionsare
commercialbanks,co-operativebanks, developmen
talbanks

13. c)Non bankingfinancialinstitutions:-
- Nonbankingfinancialinstitutionsalsomobilizefinancial resources
directlyorindirectlyfromthepeople.
-Theylendfundsbutnotcreatecredit
-CompanieslikeLIC,GIC,UTI,DevelopmentFinancial Institutions,Or
ganisationo Fundsetc.fal inthiscategory.
-Nonbankingfinancialinstitutionscanbecategorizedas
investment companies, housing companies, leasing companies,hire
purchasecompanies,specializedfinancial institutions(EXIMBanketc.
)investmentinstitutions,state levelinstitutionsetc

14. FINANCIALASSETS/INSTRUMENTS
• Enable channelising funds from surplus units to
deficit units
• There are instruments for savers such as deposits,
equities, mutual fund units, etc.
• There are instruments for borrowers such as loans,
overdrafts, etc.
• Like businesses, governments too raise funds
through issuing of bonds, Treasury bills, etc.
• Instruments like PPF
, KVP
, etc. are available to savers
who wish to lend money to the government

15. MAJOR FINANCIAL INSTRUMENTS
 Money
 Savings account
 Credit market Instruments-bonds, mortgages
 Common Stocks
 Money market funds and mutual funds
 Pension funds
 Financial Derivatives

16. FINANCIAL INTERMEDIARIES
 Mutual Funds- Promote savings and mobilise funds
which are invested in the stock market and bond market
• Indirect source of finance to companies
• Pool funds of savers and invest in the stock market/
bond market
• Their instruments at saver’s end are called units
• Offer many types of schemes: growth fund, income
fund, balanced fund
• Regulated by SEBI

17. •Merchant banking- manage and underwrite new issues, undertake
syndication of credit, advise corporate clients on fund raising
•
•
Subject to regulation by SEBI and RBI
SEBI regulates them on issue activity and portfolio management of
their business.
•RBI supervises those merchant banks which are subsidiaries or
affiliates of commercial banks
•Have to adopt stipulated capital adequacy norms and abide by a
code of conduct

18.  There are other financial intermediaries such as
NBFCs, Venture Capital Funds, Hire and Leasing
Companies, etc.
 India’s financial system is quite huge and cate
rs to every kind of demand for funds
 Banks are at the core of our financial system and t
herefore, there is greater expectation from them in
terms of reaching out to the vast populace as well
as being competitive.

19. FINANCIAL MARKET
• Financial market deals in financial securities (or financial
instruments) and financial services.
• Financial markets are the centers or arrangements that
provide facilities for buying and sel ing of financial claims and
services.
• These are the markets in which money as well as monetary
claims is traded in.
• 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 asavings accountetc.

20. FUNCTIONSOFFINANCIAL MARKETS
• T
o facilitate creation and allocation of credit
and liquidity.
• Toserveasintermediaries for mobilization ofsavings
• T
ohelpin the processof balancedeconomicgrowth
• T
oprovidefinancialconvenience
• Tocaterto the variouscreditsneedsof thebusinessorganizations.
• T
oprovide information andfacilitate transactionsatlow cost

21. • Financialmarketcanbeclassifiedin 2onbasisof maturity of claims
1. Money Marketand
2. CapitalMarket
1. MoneyMarket:
•Amarket where short term funds areborrowed and lend is called money
market.It dealsin shortterm monetaryassetswith a maturity period of one
yearor less.Liquid fundsaswell ashighly liquid securitiesaretradedin the
moneymarket.
•Examplesof moneymarketareTreasurybillmarket,callmoney market,
commercialbill marketetc.
2. CapitalMarket:
•Capitalmarketisthe marketfor longterm funds.Thismarketdealsin the long
term claims,securities and stockswith amaturity period of more than
one year.The stock market, the government bond market and derivatives
market areexamplesofcapital market.

22. • Financialmarketcanbeclassifiedin 2on basisofseasoningof
claim
1. Primary Marketand
2. SecondaryMarket
1. Primary Market:
Primarymarketsarethosemarketswhich dealin the new securities.Therefore
, they are also known asnew issuemarkets. Theseare markets where securitiesare is
sued for the first time. In other words, these are the markets for the securities issued
directly bythe companies.
2. SecondaryMarket:
Secondary markets are those markets which deal in existing securities. Existing
securities are those securities that havealready been issuedand are already outstandi
ng. Secondarymarketconsists of stockexchanges.

23. •Financialmarket canbe classified in 2 on basisof timingof
delivery:
1. Cash/ Spot market
2.Forward/Future market
Cash/ Spotmarket:
Thisis the market where the buying and selingof commodities
happens or stocks are sold forcashand delivered immediately
after the purchase or sale of commodities or securities.
Forward/Future market:
This is the market where participants buy and sel
stocks/commodities, contracts and the delivery ofcommodities or
securities occursat apre-determined time infuture.

24. • FinancialMarket is further classified into2.
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 candeal with the otherswho are willing to accept
the risk for aprice.Acommon placewhere suchtransactions
take place is caled the derivative market.
Theimportant types of derivatives are forwards,futures,
options, swaps,etc.

25. FINANCIALINSTRUMENTS
• Financial instruments are the financial assets,securitiesand
claims.
• Theymaybe viewed asfinancial assetsand financial liabilities.
1. Financial assets:
represent claims for the payment of a sum of money so
metime in the future (repayment of principal) and/or a p
eriodic payment in the form of interest or dividend.
2. Financial liabilities:
are the counterparts of financial assets. They represent
promise to pay some portion of prospective income and
wealth to others.

26. TYPESOF FINANCIAL
INSTRUMENTS
• Thefinancial instruments maybe capital market instrumentsor moneymarket
instruments or hybridinstruments.
• CapitalMarketInstruments:
Financialinstrumentsthat areusedfor raisingcapital through the capital
market. It includes include equity shares,preference shares,warrants,
debentures andbonds.
• Money MarketInstruments:
Financial instruments that areusedfor raising and supplyingmoneyin a
short period not exceedingone year through moneymarket arecalled
moneymarketinstruments.
•It includestreasurybills, commercialpaper,callmoney,short notice money,
certificatesof deposits,commercialbills,money marketmutualfunds.

27. MONEY MARKET INSTRUMENTS
1. Calland Short NoticeMoney
•Theseareshort term loans.Theirmaturity variesbetween one dayto fourteen days.If
money is borrowed or lent for a day it is called call money or overnight money. When
moneyisborrowed or lent for more than adayandup to fourteen days,it iscalled short
noticemoney.
2. CommercialBills
•Abill of exchangecontainsawritten order from the creditor (seller)to the debtor
(buyer) to payacertain sum,to acertain personafter acertainperiod.
•According to Negotiable instruments Act, 1881, abill of exchangeis ‘an instrument in
writing containing an unconditional order, signedby the maker,directing acertain person
to payacertain sumof moneyonlyto, or to the order of acertain personor to the bearer
of theinstrument’.

28. 3.TreasuryBill
Treasury bills are credit instruments used by the Govt. to
raise short term funds to meet the budgetary deficit. Treasury
bills are popularly caledTbils.
These are negotiable instruments. Hence, these are freely
transferable.
4.CertificateOf Deposit
CDis a certificate in the form of promissory note issuedby
banks against the short term deposits of companies and institut
ions, received by the bank.
It is payableon a fixed date. It hasa maturity period rangingfrom
three to twelvemonths.

29. 5.Commercial Paper
•It is afinance paper like Treasury bill. Itis an
unsecured, negotiable promissory note.
•It hasafixed maturity period ranging from three to s
ix months. It is generally issued by leading,nationally
reputed credit worthy and highly ratedcorporations.
•It is quite safeand highlyliquid.
•It is issued in bearer form and on discount. Itis also
known asindustrial paper or corporatepaper.

30. SEBI