FINANCIAL SYSTEM IN INDIA

 

 FINANCIAL SYSTEM IN INDIA

   FINANCIAL SERVICES AND MARKET

   BY  DR .SHASHI AGGARWAL

   FINANCIAL SYSTEM IN INDIA

   GROUP 1

   COURSE SYLLABUS GROUP I: FINANCIAL SYSTEM IN INDIA: AN OVERVIEW STRUCTURE AND GROWTH, MAJOR PROBLEMS AND DEFICIENCIES,

   FINANCIAL MARKETS IN INDIA: STRUCTURE AND SIGNIFICANCE; FINANCIAL MARKET ENVIRONMENT; MONEY MARKET IN INDIA: CONSTITUENTS, REGULATIONS AND RECENT DEVELOPMENT,

   CAPITAL MARKET IN INDIA: CONSTITUENTS, REGULATIONS AND RECENT DEVELOPMENT, NEW ISSUE MARKET, MODE OF RAISING CAPITAL FROM PRIMARY MARKET.

   FINANCIAL SERVICES IN INDIA: NATURE TYPES, REGULATORY FRAMEWORK, MAJOR PROBLEMS FACED BY INDIAN FINANCIAL SERVICES SECTOR.

   LEASING; MEANING, TYPES, FINANCIAL LEGAL AND TAX ASPECTS, HIRE PURCHASE. FACTORING: TYPES, LEGAL AND FINANCIAL ASPECTS.

   GROUP 2

   GROUP II: MUTUAL FUNDS: MEANING, TYPES, STRUCTURE AND SIGNIFICANCE, SEBI GUIDELINES RELATING TO MFS.

   MERCHANT BANKING IN INDIA: ROLE AND FUNCTIONS, SEBI GUIDELINES RELATING TO MERCHANT BANKING,

   VENTURE CAPITAL: MEANING, CHARACTERISTICS, AND SEBI GUIDELINES RELATING TO VENTURE CAPITAL FUNDS.

   CREDIT RATING: MEANING, TYPES AND FUNCTIONS OF CREDIT RATING AGENCY, PROCESS AND METHODOLOGY OF CREDIT RATING.

 

Ø      MEANING AND FUNCTIONS OF FINANCIAL SYSTEM

   THE FINANCIAL SYSTEM IS CHARACTERIZED BY THE PRESENCE OF AN INTEGRATED, ORGANIZED AND REGULATED FINANCIAL MARKETS AND INSTITUTIONS THAT MEET THE SHORT TERM AND LONG TERM FINANCIAL NEEDS OF BOTH THE HOUSEHOLD AND CORPORATE SECTOR.

   FINANCIAL SYSTEM WHICH SUPPLIES THE NECESSARY FINANCIAL INPUTS FOR THE PRODUCTION OF GOODS AND SERVICES. IT INCLUDES FINANCIAL MARKET AND FINANCIAL INSTITUTIONS WHICH ARE THE BACKBONE OF SOUND FINANCIAL SYSTEM.

   FINANCIAL SYSTEM MOBILIZE THE SAVING IN THE FORM OF MONEY AND MONETARY ASSETS AND INVEST THEM INTO PRODUCTIVE VENTURES

Ø      FUNCTIONS

1.       PROVISION OF LIQUIDITY

2.       MOBILIZATION OF SAVING

3.       SIZE TRANSFORMATION FUNCTION

4.       MATURITY TRANSFORMATION FUNCTION

5.       RISK TRANSFORMATION FUNCTION

 

Ø      COMPONENT OF FINANCIAL SYSTEM

Ø      FINANCIAL ASSETS

   A FINANCIAL ASSETS IS ONE WHICH IS USED FOR PRODCUTION OR CONSUMPTION OR FURTHER CREATION OF ASSETS.

   CLASSIFICATION OF FINANCIAL ASSETS:-

1.       MARKETABLE ASSETS:-THOSE ASSETS WHICH CAN BE EASILY TRASFERRED FROM ONE PERSON TO ANOTHER WITHOUT MUCH HINDRANCE LIKE SHARES,BONDS ETC

2.       NON MARKETABLE ASSETS:-WHICH CAN NOT BE TREANSFERRED EASILY  LIKE BANK DEPOSITS,PROVIDENT FUNDS ETC

Ø      FINANCIAL INTERMEDIARIES

   IT REFERS TO ALL KINDS OF FINANCIAL INSTITUTTIONS AND INVESTING INSTITUTIONS WHICH FACILITATES TRANSACTIONS IN FINANCIAL MARKETS.

1.       CAPITAL MARKET INTERMEDIARY: PROVIDE LONG TERM FUNDS

2.       MONEY MARKET INTERMEDIARIES:- SHORT TERM FUNDS. COMMERCIAL BANKS,CO-OPERATIVE BANKS ETC

Ø      MEANING OF FINANCIAL MARKETS

1.       NOT SPECIFIC PLACE OR LOCATION

2.       WHENEVER A FINANCIAL TRANSACTION TAKES PLACE,IT IS DEEMED TO HAVE TAKEN PLACE IN THE FINANCIAL MARKET

3.       FINANCIAL MARKETS CAN BE REFERRED AS TO THOSE CENTRES AND ARRANGEMENT WHICH FACILITATES BUYING AND SELLING OF FINANCIAL ASSETS,CLAIMS AND SERVICES. SOMETIMES WE DO FIND THE EXISTENCE OF A SPECIFIC PLACE OR LOCATION FOR A FINANCIAL MARKET IN CASE OF STOCK EXCHANGE.

4.       TRANSFERRING OF FUNDS FROM THE SURPLUS SECTOR TO THE DEFICIT SECTOR IS THE MAIN FUNCTION OF FINANCIAL MARKET

5.       THE MARKET PARTICIPANTS ARE INVESTORS OR BUYERS OF SECURITIES,BORROWERS OR SELLERS.,INTERMEDIARIES AND REGULATOR BODIES

Ø    CONSTITUENTS OF FINANCIAL MARKET

1.       UNORGANISED MARKETS:-MONEY LENDERS,INDIGNEOUS BANKERS,TRADERS ETC WHO LEND MONEY TO PUBLIC.PRIVATE FINANCE COMPANIES AND CHIT FUND COMPANIES. RBI HAS TAKEN MANY STEPS TO REGULATE THEM BUT NOT VERY SUCCESSFUL.

2.       ORGANIZED MARKETS: STANDARDIZED RULES AND REGULATIONS GOVERNING THEIR FINANCIAL DEALINGS. SUBJECT TO STRICT SUPERVISION AND CONTROL BY THE RBI OR OTHER REGULATORY BODIES.

a)       MONEY MARKET

b)       CAPITAL MARKET

c)        FOREIGN EXCHANGE MARKET

Ø      MEANING OF MONEY  MARKET

   IT IS A MARKET FOR SHORT TERM LOANS OR FINANCIAL ASSETS. IT IS A MARKET FOR LENDING AND BORROWING OF SHORT TERM FUNDS. IT DEALS WITH NEAR SUBSTITUTES FOR MONEY OR NEAR MONEY LIKE TRADE BILLS, PROMISSORY NOTES ETC.

   THE RBI DEFINES MONEY MARKET AS “ A MARKET FOR SHORT TERM FINANCIAL ASSETS THAT ARE CLOSE SUBSTITUTES FOR MONEY, FACILITATES THE EXCHANGE OF MONEY FOR NEW FINANCIAL CLAIMS IN THE PRIMARY MARKET AND ALSO FOR FINANCIAL CLAIMS, ALREADY ISSUED IN THE SECONDARY MARKET.

Ø      COMPONENT OF MONEY MARKET

Ø      CAPITAL MARKET

   A CAPITAL MARKET REFERS TO THE INSTITUTIONAL ARRANGEMENT FOR FACILITATING THE BORROWING AND LENDING OF LONG TERM FUNDS.

   1. INDUSTRIAL SECURITIES MARKET:-

•                       PRIMARY MARKET ( NEW ISSUE MARKET)

•                       SECONDARY MARKET OR STOCK EXCHANGE

2. GOVERNMENT SECURITIES MARKET

3. LONG –TERM LOANS MARKET

1.       TERM LOAN MARKET

2.       MORTGAGE MARKET

3.       FINANCIAL GUARANTEE MARKET

 

Ø     FOREIGN EXCHANGE MARKET

   THE MARKET WHERE FOREIGN EXCHANGE TRANSACTIONS TAKE PLACE IS CALLED A FOREIGN EXCHANGE MARKET. IT DOES NOT REFER TO MARKET PLACE IN THE PHYSICAL SENSE. IT CONSISTS OF A NUMBER OF DEALERS,BANKS AND BROKERS ENGAGED IN THE BUSINESS OF BUYING AND SELLING FOREIGN EXCHANGE.IT ALSO INCUDES THE RBI AND TREASURY AUTHORITES WHO ENTER INTO THIS MARKET AS CONTROLLING AUTHORITES. CONTROLLED BY FOREIGN EXCHANGE AND MAINTENANCE ACT( FEMA)

Ø     FEATURES OF FOREIGN EXCHANGE MARKET

1.       TO MAKE NECESSARY ARRANGEMENT TO TRANSFER PURCHASING POWER FROM ONE COUNTRY TO ANOTHER

2.       ADEQUATE CREDIT FACILITIES

3.       COVER FOREIGN EXCHANGE RISK

4.       THREE TIERED SYSTEM IN THE INDIA

5.       TRADING BETWEEN BANKS AND THEIR COMMERCIAL CUSTOMERS

6.       TRADING BANKS THROUGH AUTHORIZED BROKERS

7.       TRADING WITH BANK ABROAD

Ø      FINANCIAL INSTRUMENTS

1.       PRIMARY SECURITIES

2.       SECONDARY SECURITIES

AGAIN THESE SECURITIES MAY BE CLASSIFIED ON THE BASIS OF DURATION AS FOLLOWS:-

1.       SHORT –TERM SECURITIES :MATURITY LESS THAN ONE YEAR LIKE TRASURY BILL

2.       MEDIUM –TERM SECURITIES:MATURITY ONE TO FIVE PERIOD

3.       LONG TERM SECURITIES: MATURITIES MORE THAN FIVE YEARS LIKE GOVT BONDS MATURING AFTER FIVE YEARS

 

 

Ø     DEVELOPMENT BANKS

 

1.       DEVELOPMENT BANKS ARE MULTIPURPOSE INSTITUTIONS WHICH PROVIDE MEDIUM AND LONG TERM CREDIT TO INDUSTRIAL UNDERTAKING,DISCOVER INVESTMENT PROJECTS AND PROVIDE TECHNICAL AND MANAGERIAL ASSISTENCE.

2.       THE INDUSTRIAL FINANCE CORPORATION OF INDIA WAS SET UP IN 1948 WITH THE OBJECT OF MAKING MEDIUM AND LONG TERM FUNDS. REGIONAL LEVEL STATE FINANCIAL CORPORATIONS WERE ESTABLISHED. ICICI IN 1955 AND REFINACE CORPORATION OF INDIA IN 1958. IDBI IN 1964  ETC

3.       NABARD FOR AGRICULTURE,EXIM BANKS FOR FOREIGN TRADE,THE NATIONAL HOSING BANK FOR HOUSING FINANCE.

Ø      FINANCIAL SERVICES

1.       ALL TYPES OF ACTIVITIES WHICH ARE OF FINANCIAL NATURE .IN BROAD SENSE MEANS MOBILISING AND ALLOCATING SAVINGS.

2.       IT CATERS TO THE REQUIRMENT OF BOTH INDIVIDUAL AND CORPORATE CUSTOMERS.

3.       FINANCIAL SERVICES CAN BE DEFINED AS TO INCLUDE NOT ONLY THE PROVISIONS OF A FINANCIAL SERVICE BUT ALSO THE SALE OF FINANCIAL PRODUCTS OR BOTH.

§FINANCIAL SERVICE ARE OF TWO TYPES:-

1.       FUND BASED LIKE UNDERWRITERS,DEALING IN SECONDARY MARKET ACTIVITEIS,LEASING ETC

2.       NON FUND BASED:-ON FEE BASED LIKE PROVIDING ADVISORY SERVICES ETC

Ø     SIGNIFICANT

1.       MOBILISING SAVING

2.       PROMOTING INVESTMENT

3.       ENCOURAGING INVESTMENT IN FINANCIAL ASSETS

4.       ALLOCATING SAVING IN MORE EFFICIENT MANNER

5.       HELPS IN DEVELOPING TRADE,INDUSTRY AND CAPITAL FORMATION

6.       DEVELOPING BACKWARD AREA

   WEAKNESS OF INDIAN FINANCIAL SYSTEM

1.       LACK OF CO-ORDINATION BETWEEN DIFFERENT FINANCIAL INSTITUTIONS

2.       DOMINANCE  AND MONOPOLISTIC STRUCTURE OF DEVELOPMENT BANKS