I.
The recent issues and challenges in the financial system are:
1. Repayment of loans by people and institutions,
2. Liquidity issues of the banks,
3. Creation of more money,
4. Allotment of more resources due to increasing population,
5. Covering all areas for providing services,
6. Increase in infrastructure to deliver fast services,
7. Awareness creation amongst public for being safe from frauds and crimes,
8. Prevent cybercrimes and safeguard public money,
9. Allow flexibility in operations and reduction of formalities and long procedures,
10.Motivate people and institutions to channelize the money properly.
II. The types and causes of financial risks are as follows:
1. Operational risk, it occurs due to various operations by banks etc.
2. Credit risk, it occurs due to giving of loans to people, institutes and doubt of
recovery,
3. Market risk, it occurs due to fall in the stock market or fall in rate of interest or fall
in production
4. liquidity risk, it occurs due to non-repayment of dues and loans and non-
conversion of assets to cash
5. legal risk, it occurs due to implications on different activities by law, govt. bodies,
enforcement and regulatory bodies to control fraud, cheating
6. Foreign currency risk, it occurs due to fall, rise or fluctuations in rates of foreign
currency.
III. Leasing: The leasing means an asset is given on rent/instalment to a lease for use for
different purposes for a fixed period of time and the asset is owned by the giver of the
asset.
Hire Purchase: Hire purchase means the assets are taken on rent/instalment for a
period of time and after full payment of the amount of the asset, the ownership is transferred to
the buyer.
Bill discounting: When a business requires immediate cash before the bill is due for
payment, it is a short term loan and helps business to manage cash flow and working capital
Venture Capital: It is a type of equity financing by institutions to startups, new
business, emerging business which have high potential of growth.
IV. The objectives and significance of financial intermediaries are as follows:
Financial intermediaries help connect savers with borrowers, and their objectives
include:
Risk management
Financial intermediaries spread risk across a variety of assets to protect savers from potential
losses.
Liquidity
Financial intermediaries allow savers to access their funds when needed, while also
providing long-term financing to borrowers.
Information gathering
Financial intermediaries collect and analyze information about borrowers to assess
creditworthiness.
Innovation
Financial intermediaries develop new products and services to meet the needs of savers and
borrowers.
Efficiency
Financial intermediaries help mobilize savings and allocate capital efficiently.
Cost reduction
Financial intermediaries reduce costs by having access to economies of scale.
Profitability
Financial intermediaries generate an interest rate spread that covers all operating costs and
provides a profit.
Financial intermediaries can be banks, insurance companies, or other institutions that act as
middlemen between savers and borrowers.
V. The need and importance of a Regulatory framework for the Financial system are as
follows:
1. To control frauds, cheating and other types of misconduct,
2. To save public from being cheated,
3. To manage the financial system smoothly without any obstacles, malpractices,
4. To ensure compliance of rules, law by govt. and other controlling agencies,
5. To prevent loss of money and prevent it from being going into wrong hands,
6. To maintain trustworthiness of financial institutions in public and other investors,
7. To build image of the financial system within and outside the country.
