Description
This is a presentation explaining the Financial System – nature, evolution and structure, the functions of financial intermediaries, different financial instruments, the role of financial system in economic development and the Indian Financial System
?
It is defined ? as a set of organizations, instruments, markets, services and methods of operations, procedures that are closely interrelated with each other ? as a methodical arrangement in the economy that helps to pool the resources from the surplus sectors and redistributes them to the deficit sectors ? as a group of various units that are continuously engaged in gathering the monetary resources in the economy to allocate them to the needful areas. Each and every entity in the system will address some specific issues and functions meeting the prescribed regulations
? as a collection of markets, institutions, laws, regulations and techniques through which bonds, stocks and other securities are traded, interest rates determined and the financial services produced and delivered
?
The basic requirements for any financial system to be efficient are:
? Efficient monetary system: For the exchange function to be effective, there must be a unit of measurement and account for determining the prices ? Facilities for the creation of the capital: The financial system helps to meet this demand by mobilizing the savings of the surplus units to the demanding units ? Efficient financial markets: These facilitate the process of transfer of resources and the conversion of financial claims into money
?
The evolution of the financial system in any economy can be classified into three major phases:
? Active government intervention: This phase started in the Indian financial sector soon after the independence. This process involved tremendous growth in the financial sector with too many drawbacks and anomalies ? Partial liberalization: This phase focused on reducing the complexity of the regulatory structure and rationalizing the system. This second phase continued till the early nineties ? Total liberalization: Also called the liberalization era, was started in the 1990s. Institutions were given more independence and autonomy to bring out the effective selfregulation
?
Financial institutions can be classified into the following ways:
? Banking and Non-Banking Organization ? Regulatory and Non-Regulatory Intermediaries ? Intermediaries and Non-Intermediaries Institutions
?
Services provided by the financial intermediaries:
? providing assistance in evaluating investment proposals, ? offering diversified investments in large number of projects for their investors’ or clients and monitoring such projects on an ongoing basis ? helping businesses in raising finances by structuring a variety of instruments ? providing consultancy and customized services
?
Financial Intermediaries can be divided into the following two types:
? Depository Institutions
? Commercial Banks. ? Saving and Loans Institutions. ? Credit Unions
? Non-depository Institutions
? ? ? ? ? Finance Companies. Mutual Funds. Security Firms Investment Bankers, Brokers, and Dealers. Pension Funds. Insurance Companies.
?
Financial assets/instruments represent the financial obligations that arise when the borrower raises funds in the financial market All assets are financed by liabilities as advocated by the accounting concept
?
Assets = Liabilities Financial Assets + Real Assets = Financial Liabilities + Savings
?
Since financial assets equal financial liabilities, the real assets will be financed by savings. This also means that there is no external borrowing in the system
?
Three basic points have to be kept in mind when designing the financial products
? Returns generated by the financial product ? Risk associated with the financial product ? Liquidity of the financial product ? ? ? ? ? ? ? Cash Flows Taxation Leverage Dilution Of Control Transaction Costs Quantum Of Funds Maturity Plan
?
Issuer’s Considerations
?
Issuer’s Considerations (continued)
? ? ? ? ? ? ? ? ? ? ? Market Conditions Investor Profile Past Performance Cost Of Funds Regulatory Aspects Risk Liquidity Returns Tax Planning Cash Flows Simplicity
?
Investor’s Considerations
?
Adequate capital formation is indispensable to economic development and financial markets are of crucial importance for capital formation It is evident in the case of well-developed countries where capital formation is more and the less developed countries where the capital formation is low In any economy some economic agents have more resources than they need while some others have less resources than they need, they are as follows
? surplus spending units or surplus economic units ? deficit spending units or deficit economic units
?
?
?
There should be necessarily a connection between these two economic agents
?
The financial system enables the economy to move towards optimum allocation of resources and helps increase the output There are two theories that say that the contribution of financial system goes beyond increasing investment
? First one proposed by Kalecki and Schumpeter, says that the financial system plays an active role in the economy through credit creation and allocation of finance. The investment out of created credit results in prompt income generation
? Second thought proposed by Keynes and Tobin projects that investment determines the savings. The policies attracting the investors to invest more will definitely bring up the level of savings
?
?
The process of transferring the monetary resources of the public into the financial resources by the financial intermediaries involves the following functions
? Maturity Intermediation:
? transforms a longer-term asset into a shorter one by giving the borrower a loan for the required time ? By investing in a group of companies the investment companies can diversify the risk, it transforms the more risky assets into less risky ones
? Risk Reduction Through Diversification
? Reducing Costs Of Transaction And Information ? Providing A Payments Mechanism
?
The liabilities of financial institutions are the principal means for making payments for goods and services, and their loans are the chief source of credit for all economic units in society
Regulatory Bodies (1) 1. Regulatory: ? RBI ? Securities and Exchange Board of India (SEBI) ? Board for Industrial and Financial Reconstruction (BIFR) ? Board for Financial Supervision ? Insurance Regulatory Authority 2. Others: ? Deposit Insurance and Credit Guarantee Corporation (DICGC) ? Export Credit and Guarantee Corporation (ECGC) ? Technical Consultancy Organizations (TCOs) ? Stock Holding Corporation of India (SHCI)
Financial Intermediaries (2) 1. Banking: ? Reserve Bank of India (RBI) ? Commercial Banks ? Co-operative Credit Societies ? Co-operative Banks ? Post-office Saving Banks 2. Non-Banking: ? Provident and Pension Funds ? Small Savings Organizations ? Life Insurance Corporation (LIC) ? General Insurance Corporation (GIC) ? Unit Trust of India (UTI) ? Mutual Funds ? Investment Trusts
?
Development Institutions (3) Export and Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) Shipping Credit and Investment Company of India (SCICI) Tourism Finance Corporation of India (TFCI)
? ? ?
Financial Services (4) Hire-purchase and instalment credit Deposit insurance and other insurance Financial and performance guantees Acceptances Merchant banking Factoring Credit rating Credit information Technical and economic consultancy Stock holding Discounting and Rediscounting Refinancing Underwriting Leasing Technology development
Financial Instruments (5) 1. Instruments: ? Equity (ordinary) shares ? Preference shares ? Industrial debentures or bonds ? Capital gains bonds ? Government (giltedged) securities or bonds ? Relief bonds ? National development bonds ? Indira Vikas Patra ? Kisan Vikas Patra ? National Savings Scheme ? National Savings Certificates ? Deposits with Banking institutions ? Deposits with companies
?
?
? ? ? ? ? ?
?
? ? ? ?
?
?
doc_928728874.pptx
This is a presentation explaining the Financial System – nature, evolution and structure, the functions of financial intermediaries, different financial instruments, the role of financial system in economic development and the Indian Financial System
?
It is defined ? as a set of organizations, instruments, markets, services and methods of operations, procedures that are closely interrelated with each other ? as a methodical arrangement in the economy that helps to pool the resources from the surplus sectors and redistributes them to the deficit sectors ? as a group of various units that are continuously engaged in gathering the monetary resources in the economy to allocate them to the needful areas. Each and every entity in the system will address some specific issues and functions meeting the prescribed regulations
? as a collection of markets, institutions, laws, regulations and techniques through which bonds, stocks and other securities are traded, interest rates determined and the financial services produced and delivered
?
The basic requirements for any financial system to be efficient are:
? Efficient monetary system: For the exchange function to be effective, there must be a unit of measurement and account for determining the prices ? Facilities for the creation of the capital: The financial system helps to meet this demand by mobilizing the savings of the surplus units to the demanding units ? Efficient financial markets: These facilitate the process of transfer of resources and the conversion of financial claims into money
?
The evolution of the financial system in any economy can be classified into three major phases:
? Active government intervention: This phase started in the Indian financial sector soon after the independence. This process involved tremendous growth in the financial sector with too many drawbacks and anomalies ? Partial liberalization: This phase focused on reducing the complexity of the regulatory structure and rationalizing the system. This second phase continued till the early nineties ? Total liberalization: Also called the liberalization era, was started in the 1990s. Institutions were given more independence and autonomy to bring out the effective selfregulation
?
Financial institutions can be classified into the following ways:
? Banking and Non-Banking Organization ? Regulatory and Non-Regulatory Intermediaries ? Intermediaries and Non-Intermediaries Institutions
?
Services provided by the financial intermediaries:
? providing assistance in evaluating investment proposals, ? offering diversified investments in large number of projects for their investors’ or clients and monitoring such projects on an ongoing basis ? helping businesses in raising finances by structuring a variety of instruments ? providing consultancy and customized services
?
Financial Intermediaries can be divided into the following two types:
? Depository Institutions
? Commercial Banks. ? Saving and Loans Institutions. ? Credit Unions
? Non-depository Institutions
? ? ? ? ? Finance Companies. Mutual Funds. Security Firms Investment Bankers, Brokers, and Dealers. Pension Funds. Insurance Companies.
?
Financial assets/instruments represent the financial obligations that arise when the borrower raises funds in the financial market All assets are financed by liabilities as advocated by the accounting concept
?
Assets = Liabilities Financial Assets + Real Assets = Financial Liabilities + Savings
?
Since financial assets equal financial liabilities, the real assets will be financed by savings. This also means that there is no external borrowing in the system
?
Three basic points have to be kept in mind when designing the financial products
? Returns generated by the financial product ? Risk associated with the financial product ? Liquidity of the financial product ? ? ? ? ? ? ? Cash Flows Taxation Leverage Dilution Of Control Transaction Costs Quantum Of Funds Maturity Plan
?
Issuer’s Considerations
?
Issuer’s Considerations (continued)
? ? ? ? ? ? ? ? ? ? ? Market Conditions Investor Profile Past Performance Cost Of Funds Regulatory Aspects Risk Liquidity Returns Tax Planning Cash Flows Simplicity
?
Investor’s Considerations
?
Adequate capital formation is indispensable to economic development and financial markets are of crucial importance for capital formation It is evident in the case of well-developed countries where capital formation is more and the less developed countries where the capital formation is low In any economy some economic agents have more resources than they need while some others have less resources than they need, they are as follows
? surplus spending units or surplus economic units ? deficit spending units or deficit economic units
?
?
?
There should be necessarily a connection between these two economic agents
?
The financial system enables the economy to move towards optimum allocation of resources and helps increase the output There are two theories that say that the contribution of financial system goes beyond increasing investment
? First one proposed by Kalecki and Schumpeter, says that the financial system plays an active role in the economy through credit creation and allocation of finance. The investment out of created credit results in prompt income generation
? Second thought proposed by Keynes and Tobin projects that investment determines the savings. The policies attracting the investors to invest more will definitely bring up the level of savings
?
?
The process of transferring the monetary resources of the public into the financial resources by the financial intermediaries involves the following functions
? Maturity Intermediation:
? transforms a longer-term asset into a shorter one by giving the borrower a loan for the required time ? By investing in a group of companies the investment companies can diversify the risk, it transforms the more risky assets into less risky ones
? Risk Reduction Through Diversification
? Reducing Costs Of Transaction And Information ? Providing A Payments Mechanism
?
The liabilities of financial institutions are the principal means for making payments for goods and services, and their loans are the chief source of credit for all economic units in society
Regulatory Bodies (1) 1. Regulatory: ? RBI ? Securities and Exchange Board of India (SEBI) ? Board for Industrial and Financial Reconstruction (BIFR) ? Board for Financial Supervision ? Insurance Regulatory Authority 2. Others: ? Deposit Insurance and Credit Guarantee Corporation (DICGC) ? Export Credit and Guarantee Corporation (ECGC) ? Technical Consultancy Organizations (TCOs) ? Stock Holding Corporation of India (SHCI)
Financial Intermediaries (2) 1. Banking: ? Reserve Bank of India (RBI) ? Commercial Banks ? Co-operative Credit Societies ? Co-operative Banks ? Post-office Saving Banks 2. Non-Banking: ? Provident and Pension Funds ? Small Savings Organizations ? Life Insurance Corporation (LIC) ? General Insurance Corporation (GIC) ? Unit Trust of India (UTI) ? Mutual Funds ? Investment Trusts
?
Development Institutions (3) Export and Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) Shipping Credit and Investment Company of India (SCICI) Tourism Finance Corporation of India (TFCI)
? ? ?
Financial Services (4) Hire-purchase and instalment credit Deposit insurance and other insurance Financial and performance guantees Acceptances Merchant banking Factoring Credit rating Credit information Technical and economic consultancy Stock holding Discounting and Rediscounting Refinancing Underwriting Leasing Technology development
Financial Instruments (5) 1. Instruments: ? Equity (ordinary) shares ? Preference shares ? Industrial debentures or bonds ? Capital gains bonds ? Government (giltedged) securities or bonds ? Relief bonds ? National development bonds ? Indira Vikas Patra ? Kisan Vikas Patra ? National Savings Scheme ? National Savings Certificates ? Deposits with Banking institutions ? Deposits with companies
?
?
? ? ? ? ? ?
?
? ? ? ?
?
?
doc_928728874.pptx