Indian financial system

The Indian Financial

Copyright© 2008 Dorling Kindersley India Pvt. Ltd
System
Markets, Institutions and
Services

The Indian Financial System, 2e -- Pathak

1
Financial System: An
Introduction


The Indian Financial System


Chapter Objectives

To understand the

 meaning of financial system
 components of the financial system
 functions of the financial system
 key elements of the financial system
 key elements of a well functioning financial
system
 bank-based and market-based financial
systems
 nature and role of financial institutions and
markets
 link between money market and capital
market
 link between primary market and secondary
market

Meaning of the Financial
System

 A set of sub systems of financial
institutions, markets, instruments and
services
 Intermediates with the flow of funds
between savers and borrowers.
 Facilitates transfer and allocation of scarce
resources efficiently and effectively


Types of Financial
System

 Formal financial system – organized,
institutional and regulated

 Informal financial system
Advantages
Low transaction costs
Minimum default risk
Transparency of procedures
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated


Components of the Financial
System

 Financial Institutions

 Financial Markets

 Financial Instruments

 Financial Services


Types of Financial
Institutions

 Banking: creators and purveyors of credit.
Types
Commercial Banks
Cooperative Banks
 Non-banking: purveyors of credit
Types
Developmental financial
institutions
Mutual funds
Insurance companies
NBFCs


Functions of Financial
Institutions

Provide three transformation services

 Liability, asset and size transformation

 Maturity transformation

 Risk transformation


Financial Markets

Types
 Money Market – A market for short-term debt
instruments
 Capital Market – A market for long-term equity
and debt instruments

Segments
 Primary Market – A market for new issues
 Secondary Market – A market for trading
outstanding issues


Link Between Primary and
Secondary Capital Market

 A buoyant secondary market is
indispensable for the presence of a
vibrant primary market.

 The secondary market provides a basis for
the determination of prices of new issues.

 Depth of the secondary market depends on
the primary market.

 Bunching of new issues affects prices in the
secondary market.


Financial Instruments

Types

Primary

Secondary

Distinct Features

Marketable

Tradable

Tailor-made


Financial Services

Major Categories
Funds intermediation

Payments mechanism

Provision of liquidity

Risk management

Financial engineering


System

Mobilise and allocate savings
Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and
reduction
Disseminate prize related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening
and broadening


Key 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


Financial System Designs

Types
Bank-based

Market-based


Market-based Financial
System
Advantages

Provide attractive terms to both investors
and borrowers
Facilitate diversification
Allow risk sharing
Allow financing of new technologies

Drawbacks
Prone to instability
Exposure to market risk
Free-rider problem


Bank-based Financial
System

Advantages
Close relationships with parties
Provide tailor-made contracts
Efficient inter-temporal risk sharing
No free-rider problem

Drawbacks
Retards innovation and growth
Impedes competition


Markets

Enabling economic units to exercise their
time preference
Separation, distribution, diversification and
reduction of risk
Efficient payment mechanism
Providing information
Enhancing liquidity
Providing portfolio management services


Indian financial system

More Related Content

What's hot

Viewers also liked

Similar to Indian financial system

In this document

Indian financial system