Indian Financial System by Darshan Toprani Series 1

Indian Financial System by
Darshan Toprani
Series 1
Indian Financial System
Introduction
Composition
Functions
Saving Function
Liquidity Function
Payment Function
Risk Function
Policy Function
Financial Markets
Defined as the market in which financial assets
are created or transferred.
These assets represent a claim to the payment of a

sum of money sometime in the future and/or
periodic payment in the form of interest or
dividend.
Classification
Money market
(Short term instrument)
Capital markets
(Long term instrument)
The most important distinction between the

two:
The difference in the period of maturity.
Money Market
Main Function
To channelize savings into short term productive
investments like working capital .
Instruments in Money Market

Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note
Call Money Market
Part of the national money market
Day-to day surplus funds mainly of banks are traded
Short term in nature
Maturity of these loans vary from 1 to 15 days
Lent for 1 day: Call money
Lent for more than 1 day but less than 15 days: Notice money
Convenient interest rate
Highly liquid loan repayable on demand

Commercial Papers
Unsecured Promissory note.
Issued by well known companies with strong and

high credit rating.
Sold directly by the issuers to investors or through

agents like merchant banks and security houses.
Flexible Maturity
Low interest rates with compared to banks.
Imparts a degree of financial stability to the system.

Promissory Note
Referred as note payable in accounting
It is a contract detailing the terms of a promise

by one party (the maker) to pay a sum of money
to the other (the payee).
The obligation may arise from the repayment of

a loan or from another form of debt.
Forexample, in the sale of a business, the

purchase price might be a combination of an
immediate cash payment and one or more
promissory notes for the balance.
Certificates of deposits
Defined as short term deposit by way of usance
promissory notes.
Greater flexibility to investors in the deployment of

surplus funds.
Permitted by the RBI to banks
Maturity of not less than 3 months and upto 1 year.
Transferable in nature
Free negotiability and limited flexibility

Money market mutual funds
Invest primarily in money market instruments of
very high quality.
RBI and public financial institution can set it either

directly or through its existing subsidiaries.
MMMF
Open Ended
Close Ended
Capital Markets
Provided resources needed by medium and large
scale industries.
Purpose for these resources

Expansion
Capacity Expansion
Investments
Mergers and Acquisitions
Deals in long term instruments and sources of

funds
Main Activity
Functioning as an institutional mechanism to

channelize funds from those who save to those who
needed for productive purpose.
Provides opportunities to various class of individuals

and entities.
Structure of Capital Markets
Primary Markets Secondary Markets
When companies need financial resources The place where such securities are traded
for its expansion, they borrow money from by these investors is known as the secondary
investors through issue of securities. market.
Securities issued Securities like Preference Shares and

a) Preference Shares Debentures cannot be traded in the
b) Equity Shares secondary market.
c) Debentures
Equity shares is issued by the under writers Equity shares are tradable through a private
and merchant bankers on behalf of the broker or a brokerage house.
company.
People who apply for these securities are: Securities that are traded are traded by the
a) High networth individual retail investors.
b) Retail investors
c) Employees
d) Financial Institutions
e) Mutual Fund Houses
f) Banks
One time activity by the company. Helps in mobilising the funds for the
investors in the short run.
Thank-You

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Indian Financial System by

These assets represent a claim to the payment of a

The most important distinction between the

Instruments in Money Market

Day-to day surplus funds mainly of banks are traded

Short term in nature

Maturity of these loans vary from 1 to 15 days

Lent for 1 day: Call money

Convenient interest rate

Highly liquid loan repayable on demand

Issued by well known companies with strong and

Sold directly by the issuers to investors or through

Low interest rates with compared to banks.

Imparts a degree of financial stability to the system.

It is a contract detailing the terms of a promise

The obligation may arise from the repayment of

Forexample, in the sale of a business, the

Greater flexibility to investors in the deployment of

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Free negotiability and limited flexibility

RBI and public financial institution can set it either

Purpose for these resources

Deals in long term instruments and sources of

Functioning as an institutional mechanism to

Provides opportunities to various class of individuals

Securities issued Securities like Preference Shares and

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