UNIT 4:

FINANCIAL SYSTEMS: Introduction- Overview of Indian Financial Systemsavings and

Financial Intermediation- financial Markets- Listing Regulations- Primary Markets- Secondary
Markets- Mutual Funds- Indian Fiscal Systems.

FINANCIAL SYSTEMS:

Introduction

A financial system is a set of institutions and practices that facilitate and allow for the exchange
of funds between borrowers, lenders and investors. Financial systems exist on firm-specific,
regional and global levels. They include institutions like: project and the specific terms of
financial deals.Here some components of a financial system:

 Banks
 Government treasuries
 Insurance companies
 Loan companies
 Mutual funds
 Stock exchanges

 Money: Money provides the basis of financial systems. While the consistency of money
may vary based on changes in technology and financial systems themselves, money most
often relates to electronic funds.
 Financial markets: Financial markets are the environments where buyers and sellers
interact with one another to purchase, trade and sell assets like bonds and shares. These
markets include trading houses, such as the New York Stock Exchange and NASDAQ.
 Financial institutions: Financial institutions, such as banks, provide a range of products
and services and act as a mediator between borrowers and investors. They offer services
like mortgages, brokerage accessibility and insurance. They help mobilize savings
directly or indirectly and raise funds for financial assets like loans, securities and
deposits.
 Financial instruments or financial assets: Financial instruments or assets are the
products traded in financial markets, such as securities, stocks, bonds, insurance and
mortgages. There may be different requirements for each credit seeker, and trading stocks
or securities may involve mutual funds or pooling the savings of investors.
 Financial services: Financial services are the services provided by liability and asset
management companies, such as investment, insurance and banking services. These
services help acquire and efficiently invest funds.
 Regulatory agencies: Regulatory agencies oversee all activities of markets and
institutions, and they often rely on government review systems to help ensure best
practices. They review and enforce guidelines related to the practices of systems. They
also supervise specific members of the system to protect the public's money and
investments.
  Central banks: Central banks are integral to government functions. Countries have these
banks to help finance, but not control, the country's available money and credit. An
example of a central bank is the United States Federal Reserve.

Overview of Indian Financial Systemsavings and Financial Intermediation-

1. Financial Institutions
2. Financial Assets
3. Financial Services
4. Financial Markets
Let’s discuss each component of the system in detail.

1. Financial Institutions
The Financial Institutions act as a mediator between the investor and the borrower. The
investor’s savings are mobilized either directly or indirectly via the Financial Markets.

The main functions of the Financial Institutions are as follows:

 A short term liability can be converted into a long term investment

 It helps in conversion of a risky investment into a risk-free investment
 Also acts as a medium of convenience denomination, which means, it can match a small
deposit with large loans and a large deposit with small loans
The best example of a Financial Institution is a Bank. People with surplus amounts of money
make savings in their accounts, and people in dire need of money take loans. The bank acts as an
intermediate between the two.

The financial institutions can further be divided into two types:

 Banking Institutions or Depository Institutions – This includes banks and other credit
unions which collect money from the public against interest provided on the deposits
made and lend that money to the ones in need
 Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds
and brokerage companies fall under this category. They cannot ask for monetary deposits
but sell financial products to their customers.
Further, Financial Institutions can be classified into three categories:

 Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
 Intermediates – Commercial banks which provide loans and other financial assistance
such as SBI, BOB, PNB, etc.
 Non Intermediates – Institutions that provide financial aid to corporate customers. It
includes NABARD, SIBDI, etc.

2. Financial Assets
The products which are traded in the Financial Markets are called Financial Assets. Based on the
different requirements and needs of the credit seeker, the securities in the market also differ from
each other.

Some important Financial Assets have been discussed briefly below:

 Call Money – When a loan is granted for one day and is repaid on the second day, it is
called call money. No collateral securities are required for this kind of transaction.
 Notice Money – When a loan is granted for more than a day and for less than 14 days, it
is called notice money. No collateral securities are required for this kind of transaction.
 Term Money – When the maturity period of a deposit is beyond 14 days, it is called term
money.
 Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities
with maturity of less than a year. Buying a T-Bill means lending money to the
Government.
 Certificate of Deposits – It is a dematerialized form (Electronically generated) for funds
deposited in the bank for a specific period of time.
 Commercial Paper – It is an unsecured short-term debt instrument issued by
corporations.

3. Financial Services
Services provided by Asset Management and Liability Management Companies. They help to
get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

 Banking Services – Any small or big service provided by banks like granting a loan,
depositing money, issuing debit/credit cards, opening accounts, etc.
 Insurance Services – Services like issuing of insurance, selling policies, insurance
undertaking and brokerages, etc. are all a part of the Insurance services
 Investment Services – It mostly includes asset management
 Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of
the Foreign exchange services
The main aim of the financial services is to assist a person with selling, borrowing or purchasing
securities, allowing payments and settlements and lending and investing.

4. Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the trading
of money, bonds, shares and other assets is called a financial market.

The financial market can be further divided into four types:

 Capital Market – Designed to finance the long term investment, the Capital market
deals with transactions which are taking place in the market for over a year. The capital
market can further be divided into three types:
(a)Corporate Securities Market

(b)Government Securities Market

(c)Long Term Loan Market

 Money Market – Mostly dominated by Government, Banks and other Large Institutions,
the type of market is authorized for small-term investments only. It is a wholesale debt
market which works on low-risk and highly liquid instruments. The money market can
further be divided into two types:
(a) Organized Money Market

(b) Unorganized Money Market

 Foreign exchange Market – One of the most developed markets across the world, the
Foreign exchange market, deals with the requirements related to multi-currency. The
transfer of funds in this market takes place based on the foreign currency rate.
 Credit Market – A market where short-term and long-term loans are granted to
individuals or Organizations by various banks and Financial and Non-Financial
Institutions is called Credit Market
Listing Regulations:
Primary Markets- Secondary Markets

Mutual Funds:

A mutual fund is a pool of money managed by a professional Fund Manager. It is a trust that
collects money from a number of investors who share a common investment objective and
invests the same in equities, bonds, money market instruments and/or other securities.

Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer the following
features:

 Professional Management. The fund managers do the research for you. They select the
securities and monitor the performance.
 Diversification or “Don’t put all your eggs in one basket.” Mutual funds typically invest
in a range of companies and industries. This helps to lower your risk if one company
fails.
 Affordability. Most mutual funds set a relatively low dollar amount for initial investment
and subsequent purchases.
 Liquidity. Mutual fund investors can easily redeem their shares at any time, for the
current net asset value (NAV) plus any redemption fees.

Indian Fiscal Systems:

Indian Fiscal System based on the constitution of India is Federal in nature and is
separated between the center and the state. Article 112 of the constitution mandates the
present government to present an annual financial statement before both houses of the
parliament
Categories of Fiscal Policy

The Fiscal System is divided into three categories:

Neutral Fiscal Policy- where government spending is equal to taxation.

Expansionary Fiscal Policy- where the government spending is more than the taxation.

Contractionary Fiscal Policy- where the government spending is less than the ta... Read
more at: https://www.sscadda.com/indian-fiscal-system/

Components of Fiscal Policy

There are three components of Fiscal Policy:

Government Receipts

Government Expenditure

Government Expenditure is the purchase of goods and services by the govt. of India. It
can be categorized into two categories- Revenue Expenditure which is a recurring
expenditure and Capital Expenditure which is a non-recurring expenditure.

Public Accounts of India

Constituted under Article 266 of the constitution, the Public Accounts of India include
the flow of transactions where the Gov... Read more at: https://www.sscadda.com/indian-
fiscal-system/