Description
The PPT explaining about Indian Financial System.
Indian Financial System
Financial System – Nature, Evolution and Structure
? A set of closely held financial institutions, intermediaries,
financial
instruments,
services,
methods
of
operations,
procedures.
? A set of rules and regulations, abided by which bonds, stocks &
securities are traded, interest rates are determined.
? Financial System of any country mobilizes the resources from
surplus sectors to deficit sectors.
? A well developed & efficient financial system indicates a strong
economy.
Prerequisites of an Efficient Financial System
? Efficient Monetary System: Efficient medium of exchange for
goods and services.
? Facilities for the creation of capital: To meet the demands of
economy and for undertaking production activities.
? Efficient Financial Markets: Facilitates the process of transfer of
resources and the conversion of financial claims into money.
Evolution of the Financial System
? Need for an efficient financial system: Expectations mismatch of
lenders and borrowers.
? Financial
Markets (for proper allocation of funds) –
Financial Institutions (enabling the mobilization of finances , resources and credits) – Financial Services (to match the transactions taking place in these financial markets)– Financial Intermediaries (for specialized guidance to perform financial transactions).
Structure of Financial System
Financial Institutions
? Includes organizations like banks, finance companies, insurance
companies, co-operative societies etc. which help inculcate the habit of pooling savings in people.
? Different
institutions
have
different
responsibilities
and
activities.
? Banking organizations form part of payment mechanism of the
country.
? Non-banking organizations can disburse credit only through
resources made available to them by the savers.
Functions of Financial Intermediaries
? Exchanging financial assets on behalf of customers, providing
investment advise, creating market opportunities for issuers and stimulating markets.
? Assists both sides of the market (lender and borrowers). ? Sophistication of operations. ? Forms the link between issuer of financial claims and the party
that assumes the risk.
? Extending global expertise to their clients in various countries.
Functions of Financial Intermediaries
? Providing security, discretion and high service quality. ? Having an active presence on all the world’s key financial markets. ? Offering professional and individually tailored support and advising
their clients on variety of issues like taxation, money matters etc.
? Offers a range of comprehensive and integrated products and services. ? Risk Reduction through Diversification. ? Reducing costs of transaction and information. ? Providing payment’s mechanism.
Types of Financial Intermediaries
? Depository Institutions
? ? ?
Commercial Banks Saving and Loans Institutions.
Credit Unions.
? Non-Depository Institutions
? ? ? ? ?
Finance Companies. Mutual Funds. Security Firms, Investment Banks, Brokers, Dealers. Pension Funds. Insurance Companies.
Role of Depository Institutions
? Depositories play a crucial role of channelizing savings into the
economy.
? Depository institutions play a key role in transmitting the
monetary policy to the financial markets, borrowers and depositors, and ultimately to the real economy.
? Depository institutions provide funds to serve the interests of
the society by safeguarding their money and acting as an important source for the investment community.
Non-Depository Institutions
? Finance Companies
?
?
?
Consumer Finance Companies: Handles a range of business, including automobile finance, purchase of business equipments, home appliances, home loans, educational loans etc. Sales Finance: Direct loans to consumers by purchasing installment paper from dealers selling automobiles and other consumer durables. (e.g. Bajaj Capital) Commercial Finance: focus principally on extending credit to business firms. (e.g. GE Capital)
Types of Financial Intermediaries
? Mutual Funds ? Insurance Companies ? Investment Banks ? Leasing Companies ? Mortgage Banks ? Pension Funds
Financial Instruments
? Represent the financial obligations that arise when the borrower
raises funds in the financial market.
? This financial claim will be packaged in the form of a certificate,
receipt or any other legal document.
? All assets are financed by liabilities. While the assets can be
either financial or real the liabilities will be either in the form of
savings or financial liabilities.
Designing of Financial Products
? The ability of an issuer to fulfill the promise of future cash flows
depends mainly on his inherent financial strength.
? Considerations of Issuer and Investor in designing financial
instruments:
? Issuer
?
Cash Flow: Issuers may consider the period for which the funds are required and try to spread the borrowings in a way to minimize the costs. Generally, the need for funds will depend on the purpose for which the funds are raised.
Issuer’s Considerations
?
?
?
Taxation: Issuers may have to assess the tax liability of the company and try to design the instrument in order to grant certain tax incentives to the company and the investors. The attempt would be to minimize the tax liability of the issuer. Leverage: Issuers may assess the debt to equity ratio of the company since excess of debt may burden the company with debt servicing. Further, in a falling interest rate scenario a debt contracted for a long-term will increase the cost of funds for the company. Dilution of Control: Likewise, excess of equity will dilute the control over the company and this will be a disincentive especially if the promoters prefer the company to be closely held.
Issuer’s Considerations
? ? ? ? ? ? ? ?
Transaction Costs. Quantum of Funds. Maturity Plan. Market Conditions. Investor Profile.
Past Performance.
Cost of Funds. Regulatory Aspects.
Investor’s Considerations
? Risk ? Liquidity ? Returns/Capital Gains ? Tax Planning ? Cash Flow
? Simplicity
Financial System & Economic Development
doc_527158941.ppt
The PPT explaining about Indian Financial System.
Indian Financial System
Financial System – Nature, Evolution and Structure
? A set of closely held financial institutions, intermediaries,
financial
instruments,
services,
methods
of
operations,
procedures.
? A set of rules and regulations, abided by which bonds, stocks &
securities are traded, interest rates are determined.
? Financial System of any country mobilizes the resources from
surplus sectors to deficit sectors.
? A well developed & efficient financial system indicates a strong
economy.
Prerequisites of an Efficient Financial System
? Efficient Monetary System: Efficient medium of exchange for
goods and services.
? Facilities for the creation of capital: To meet the demands of
economy and for undertaking production activities.
? Efficient Financial Markets: Facilitates the process of transfer of
resources and the conversion of financial claims into money.
Evolution of the Financial System
? Need for an efficient financial system: Expectations mismatch of
lenders and borrowers.
? Financial
Markets (for proper allocation of funds) –
Financial Institutions (enabling the mobilization of finances , resources and credits) – Financial Services (to match the transactions taking place in these financial markets)– Financial Intermediaries (for specialized guidance to perform financial transactions).
Structure of Financial System
Financial Institutions
? Includes organizations like banks, finance companies, insurance
companies, co-operative societies etc. which help inculcate the habit of pooling savings in people.
? Different
institutions
have
different
responsibilities
and
activities.
? Banking organizations form part of payment mechanism of the
country.
? Non-banking organizations can disburse credit only through
resources made available to them by the savers.
Functions of Financial Intermediaries
? Exchanging financial assets on behalf of customers, providing
investment advise, creating market opportunities for issuers and stimulating markets.
? Assists both sides of the market (lender and borrowers). ? Sophistication of operations. ? Forms the link between issuer of financial claims and the party
that assumes the risk.
? Extending global expertise to their clients in various countries.
Functions of Financial Intermediaries
? Providing security, discretion and high service quality. ? Having an active presence on all the world’s key financial markets. ? Offering professional and individually tailored support and advising
their clients on variety of issues like taxation, money matters etc.
? Offers a range of comprehensive and integrated products and services. ? Risk Reduction through Diversification. ? Reducing costs of transaction and information. ? Providing payment’s mechanism.
Types of Financial Intermediaries
? Depository Institutions
? ? ?
Commercial Banks Saving and Loans Institutions.
Credit Unions.
? Non-Depository Institutions
? ? ? ? ?
Finance Companies. Mutual Funds. Security Firms, Investment Banks, Brokers, Dealers. Pension Funds. Insurance Companies.
Role of Depository Institutions
? Depositories play a crucial role of channelizing savings into the
economy.
? Depository institutions play a key role in transmitting the
monetary policy to the financial markets, borrowers and depositors, and ultimately to the real economy.
? Depository institutions provide funds to serve the interests of
the society by safeguarding their money and acting as an important source for the investment community.
Non-Depository Institutions
? Finance Companies
?
?
?
Consumer Finance Companies: Handles a range of business, including automobile finance, purchase of business equipments, home appliances, home loans, educational loans etc. Sales Finance: Direct loans to consumers by purchasing installment paper from dealers selling automobiles and other consumer durables. (e.g. Bajaj Capital) Commercial Finance: focus principally on extending credit to business firms. (e.g. GE Capital)
Types of Financial Intermediaries
? Mutual Funds ? Insurance Companies ? Investment Banks ? Leasing Companies ? Mortgage Banks ? Pension Funds
Financial Instruments
? Represent the financial obligations that arise when the borrower
raises funds in the financial market.
? This financial claim will be packaged in the form of a certificate,
receipt or any other legal document.
? All assets are financed by liabilities. While the assets can be
either financial or real the liabilities will be either in the form of
savings or financial liabilities.
Designing of Financial Products
? The ability of an issuer to fulfill the promise of future cash flows
depends mainly on his inherent financial strength.
? Considerations of Issuer and Investor in designing financial
instruments:
? Issuer
?
Cash Flow: Issuers may consider the period for which the funds are required and try to spread the borrowings in a way to minimize the costs. Generally, the need for funds will depend on the purpose for which the funds are raised.
Issuer’s Considerations
?
?
?
Taxation: Issuers may have to assess the tax liability of the company and try to design the instrument in order to grant certain tax incentives to the company and the investors. The attempt would be to minimize the tax liability of the issuer. Leverage: Issuers may assess the debt to equity ratio of the company since excess of debt may burden the company with debt servicing. Further, in a falling interest rate scenario a debt contracted for a long-term will increase the cost of funds for the company. Dilution of Control: Likewise, excess of equity will dilute the control over the company and this will be a disincentive especially if the promoters prefer the company to be closely held.
Issuer’s Considerations
? ? ? ? ? ? ? ?
Transaction Costs. Quantum of Funds. Maturity Plan. Market Conditions. Investor Profile.
Past Performance.
Cost of Funds. Regulatory Aspects.
Investor’s Considerations
? Risk ? Liquidity ? Returns/Capital Gains ? Tax Planning ? Cash Flow
? Simplicity
Financial System & Economic Development
doc_527158941.ppt