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Module 01 Overview of Financial System

This document provides an overview of the key components of a country's financial system. It discusses the main constituents as financial institutions, financial services, financial markets, and financial instruments. Financial institutions include banks and non-banking financial companies that act as intermediaries. Financial markets comprise the primary market for new securities and the secondary market for existing securities, including money markets, capital markets, and foreign exchange markets. Financial instruments are tradable assets that provide claims against future income or wealth. Financial services encompass investing, lending, insurance, trading securities, and providing banking services.

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Govind
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132 views

Module 01 Overview of Financial System

This document provides an overview of the key components of a country's financial system. It discusses the main constituents as financial institutions, financial services, financial markets, and financial instruments. Financial institutions include banks and non-banking financial companies that act as intermediaries. Financial markets comprise the primary market for new securities and the secondary market for existing securities, including money markets, capital markets, and foreign exchange markets. Financial instruments are tradable assets that provide claims against future income or wealth. Financial services encompass investing, lending, insurance, trading securities, and providing banking services.

Uploaded by

Govind
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Module No.

1
Overview of Financial System

Introduction to Financial System – Features,

Constituents of Financial System: Financial Institutions; Financial Services; Financial Markets and
Financial Instruments.

MEANING

Financial System consists of financial markets, financial inter-mediation and financial


instruments or financial products. The concept of Finance and Indian Financial System can be
focus on the Financial Markets, Financial Intermediaries, Financial Instruments And Financial
Services.
The term "finance" in simple understanding it is perceived as equivalent to 'Money'. But
finance exactly is not money, it is the source of providing funds for a particular activity. The
definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb.

DEFINITION

According to Christy, the objective of the financial system is to "supply funds to various sectors
and activities of the economy in ways that promote the fullest possible utilization of resources
without the destabilizing consequence of price level changes or unnecessary interference with
individual desires".
According to Robinson, the primary function of the system is "to provide a link between
savings and investment for the creation of new wealth and to permit portfolio adjustment in
the composition of the existing wealth"

FEATURES OF FINANCIAL SYSTEM


• Financial system establishes a link between the one having surplus funds with those who are
in need of such funds. Both the investment and the savings aspects are encouraged,
• Financial system contributes towards the expansion and the development of
financial markets.
• Financial system facilitates the efficient allocation of financial resources for the benefit of the
society and the public at large.
• Financial system boasts the economic quality and accelerates economic development.
• Financial system lays the foundation for an ideal economy.
• Financial system builds an efficient portfolio for the fund seeker.
• Financial system reduces the transaction costs.
• Financial system ensures availability of all the price-related information.

GOVIND D
BBA 4TH SEM
Constituents of Financial System
1. Financial Institutions
2. Financial Services
3. Financial Markets
4. Financial Instruments

GOVIND D
BBA 4TH SEM
1. FINANCIAL MARKETS

A Financial Market can be defined as," the market in which financial assets are created or transferred".
Financial markets refer to the institutional arrangements for dealing in financial asset and credit
instruments of different types such as currency, cheques, bank deposits, bills, bonds etcthe.

financial markets can be broadly classified into:-

i. PRIMARY MARKET

The primary market is that part of the capital markets that deals with the issuance of new securities.
Companies, governments or public sector institutions can obtain funding through the sale of a new
stock or bond issue. The process of selling new issues to investors is called underwriting. In the case of
a new stock issue, the sale is known as an initial public offering (IPO).

ii. SECONDARY MARKET

The secondary market is a market where securities are traded after being initially offered to the public
in the primary market and/or listed on the Stock Exchange, Majority of the trading is done in the
secondary market. Secondary market comprises of equity markets and the debt markets.

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short- term
instrument. Funds are available in this market for periods ranging from a single day up to a year. This
market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments The transactions
taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multi currency requirements, which are met by the
exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes
place in this market. This is one of the most developed and integrated market across the globe.

2. FINANCIAL INSTITUTIONS:

Financial institutions are the intermediaries which facilitates smooth functioning of the financial
system by making investors and borrowers meet. They mobilize savings of the surplus units and
allocate them in productive activities promising a better rate of return. Financial institutions also
provide services to entities seeking advises on various issues ranging from restructuring to
diversification plans. They provide whole range of services to the entities who want to raise funds from
the markets elsewhere. Financial institutions act as financial intermediaries because they act as
middlemen between savers and borrowers.

These financial institutions may be classified as

i. Banking Institutions
ii. Non-Banking Institutions

GOVIND D
BBA 4TH SEM
3. FINANCIAL INSTRUMENTS

A non-banking financial intermediary (company corporation or co-operative society) carrying on any


of the activities specified in the relevant section of the Reserve Bank of India Act. They represent a
claim against the future income and wealth of others. It claims against a person or an institutions. for
the payment of the some of the money at a specified future date. These activities include Lending,
Investing in Shares, Hire-Purchase, Insurance and Chit Funds and Other Securities.

In general, financial intermediary refers to the Development Finance Institutions such as IDB] and IFCI,
the Unit Trust of India (UTT) and Life Insurance Corporation of India (LIC).

4. Financial Services:

Financial services can be defined as "the products and services offered by institutions like banks of
various kinds of facilities for the various financial transactions and other financial related activities like
loans, insurance, credit cards, investment opportunities and money management as well as providing
information on the stock market and other issues like market trends."

The financial services industry includes firms that are engaged in activities such as

• Investing
• Lending
• Insurance
• Securities Trading
• Securities Issuance
• Stock Exchange
• Banks And Financial Institution
• Mutual Funds

Efficiency of financial system largely depends upon the quality and variety of financial services
provided by financial intermediaries. So, term financial services can be defined as "activities, benefits
and satisfaction connected with sale of money, that offers to users and customers, financial related
value"

GOVIND D
BBA 4TH SEM
GOVIND D
BBA 4TH SEM

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