Money

"Anything that is generally acceptable as a means of exchange and which at the same time acts as a
measure and store of value.
Functions of Money
Money performs five important functions :1. Medium of exchange : Money acts as a medium of exchange as it's generally accepted. On the
payment of money, purchase of goods and services can be made i.e. goods and services are exchanged
for money. Money bifurcates buying and selling activities separately so it facilitates the exchange
transactions.
2. Measure of value : Money is a common measure of value so it is possible to determine the rate of
exchange between various goods and services purchased by the people. Exchange value of commodity
can be expressed in terms of money. For e.g. we can say that 10 metres of Cotton Cloth cost $220
dollars or Rs.10,000 rupees only.
3. Store of value : Money acts as a store of value. Money being generally acceptable and its value being
more or less stable, it is ideal for use as a store of value. Being non-perishable and also comparatively
stable in value, the value of other assets can be stored in the form of money. Property can be sold and
its value can be held in money and converted into other assets as and when necessary.
4. Standard or Deferred payment : Money is also inevitably used as the unit in terms of which all future
or deferred payments are stated. Future transactions can be carried on in terms of money. The loans,
which are taken at present, can be repaid in money in the future. The value of the future payments is
regulated by money.
5. Transfer of value : Value of any asset can be transferred from one person to another or to any
institution or to any place by transferring money. The transfer of money can take place irrespective of
places, time and circumstances. Transfer of purchasing power, which is necessary in commerce and
other transactions, has become available because of

NDIAN FINANCIAL SYSTEM

Meaning and definition of financial system:
The financial system is possibly the most important institutional and functional vehicle for economic
transformation. Finance is a bridge between the present and the future and whether the mobilization of
savings or their efficient, effective and equitable allocation for investment, it the access with which the
financial system performs its functions that sets the pace for the achievement of broader national
objectives.
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.
A financial system or financial sector functions as an intermediary and facilitates the flow of funds from
the areas of surplus to the deficit. It is a composition of various institutions, markets, regulations and
laws, practices, money manager analyst, transactions and claims and liabilities.
Features of financial system
The features of a financial system are as follows
1. Financial system provides an ideal linkage between depositors and investors, thus encouraging
both savings and investments.
2. Financial system facilitates expansion of financial markets over space and time.
3. Financial system promotes efficient allocation of financial resources for socially desirable and
economically productive purposes.
4. Financial system influences both the quality and the pace of economic development.
CONSTITUENTS OF FINANCIAL SYSTEM
The financial system consists of four segments or components. These are: financial institutions, financial
markets, financial services.

1. Financial institutions: Financial institutions are intermediaries that mobilize savings & facilitate the
allocation of funds in an efficient manner.
Financial institutions can be classified as banking & non-banking financial institutions. Banking
institutions are creators of credit while non-banking financial institutions are purveyors of credit. While
the liabilities of banks are part of the money supply, this may not be true of non-banking financial
institutions. In India, non-banking financial institutions, namely, the developmental financial institutions
(DFIs) & non-banking financial companies (NBFCs) as well as housing finance companies (HFCs) are
the major institutional purveyors of credit. Financial institutions can also be classified as term-finance
institutions such as the industrial development bank of India (IDBI), industrial credit & Investment
Corporation of India (ICICI), industrial financial corporation of India (IFCI), small industries
development bank of India (SIDBI) & industrial investment bank of India (IIBI).
2. Financial markets:
Financial markets are a mechanism enabling participants to deal in financial claims.
The markets also provide a facility in which their demands & requirements interact to set a price for such
claims. The main organized financial markets in India are the money market & capital market. The first is
a market for short-term securities. Money market is a market for dealing with financial assets & securities
which have a maturity period of upto one year. While the second is a market for long term securities, that
is, securities having a maturity period of one year or more. The capital market is a market for financial
assets which have a long or indefinite maturity.
Money market consists of:
Call money market:
Call money market is a market for extremely short period loans say one day to fourteen days. It is highly
liquid.
Commercial bills market:
It is a market for bills of exchange arising out of genuine trade transactions. In the case of credit sale, the
seller may draw a bill of exchange on the buyer. The buyer accepts such a bill promising to pay at a later
date the amount specified in the bill. The seller need not wait until the due date of the bill. Instead, he can
get immediate payment by discounting the bill.

Treasury bills market:

It is a market for treasury bills which have short-term maturity. A treasury bill is a promissory note or a
finance bill issued by the government. It is highly liquid because its repayment is guaranteed by the
government.
Short-term loan market:
It is a market where short- term loans are given to corporate customers for meeting their working capital
requirements. Commercial banks play a significant role in this market.
Capital market consists of:
Industrial securities market:
It is a market for industrial securities namely equity shares or ordinary shares, preference shares &
debentures or bonds. It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments. It can be further subdivided into primary & secondary market.
Government securities market:
It is otherwise called gilt-edged securities market. It is a market where government securities are
traded. In India there are many kinds of govt securities- short-term & long-term. Long-term securities are
traded in this market while short term securities are traded in the money market.
Long-term loans market:
Development banks & commercial banks play a significant role in this market by supplying long term
loans to corporate customers. Long-term loans market may further be classified into:
Term loans market
Mortgages market
Financial guarantees market
3. Financial Instruments:
Financial instruments refers to those document which represents financial claims on assets. As discussed
earlier, financial assets refers to a claim to the repayment of certain sum of money at the end of specified
period together with interest or dividend. Examples : bills of exchange, promissory notes, treasury bills,
government bonds, deposit receipts, shares debentures etc.

Financial instruments can also be called financial securities. Financial securities can be classified into:
i. Primary or direct securities
ii. Secondary or indirect securities.
Primary securities
These are securities directly issued by the ultimate investors to the ultimate savers. Examples, shares and
debentures issued directly to the public.
Secondary securities
These are securities issued by some intermediaries called financial intermediaries to the ultimate savers.
E.g. unit trust of India and Mutual funds issue securities in the form of units to the public and money
pooled is invested in companies.
Again these securities may be classified on the basis of duration as follows:
i. Short-term securities
ii. Medium-term securities
iii. Long-term securities.
Short-term securities are those which mature within a period of one year. E.g. Bills of exchange ,treasury
bills, etc. medium term securities are those which have a maturity period ranging between one and five
years.e.g. Debentures maturing within a period of 5 years. Long-term securities are those which have a
maturity period of more than five years. E.g. government Bonds maturing after 10 years.
Characteristic Features of Financial Instruments
Generally speaking, financial instruments possess the following characteristic features:
i. Most of the instruments can be easily transferred from one hand to another without many cumbersome
formalities.
ii. They have a ready market, i.e., they can be bought and sold frequently and thus, trading in these
securities is made possible.
iii. They possess liquidity, i.e., some instruments can be converted into cash readily. For instance, a bill of
exchange can be converted into cash readily by means of discounting and rediscounting.

iv. Most of the securities posses security value, i.e., they can be given as security for the purpose of
raising loans.
v. Some securities enjoy tax status, i.e., investment in these securities are exempted from income tax,
wealth tax, etc., subject to certain limits. E.g. public sector tax free bonds, magnum tax saving
certificates.
vi. They carry risk in the sense that there is uncertainty with regard to the payment of principle or interest
or dividend as the case may be.
vii. These instruments facilitates future trading so as to cover risks due to price fluctuations, interest rates,
etc.
viii. These instruments involve less handling costs since expenses involved in buying and selling these
securities are generally much less.
ix. The return on these instruments is directly in proportion to the risk undertaken.
x. These instruments may be short-term or medium term or long term depending upon the maturity period
of these instruments.
4. Financial Services:
Financial intermediaries provide key financial services such as merchant banking, leasing hire purchases,
credit-rating, and so on. Financial services rendered by the financial intermediaries bridge the gap
between lack of knowledge on the part of investors and increasing sophistication of financial instruments
and markets. These financial services are vital for creation of firms, industrial expansion, and economic
growth.
Before investors lend money, they need to be reassured that it is safe to exchange securities for funds.
This reassurance is provided by the financial regulator, who regulates the conduct of the market, and
intermediaries to protect the investors interests. The Reserve Bank of India regulates the money market
and Securities Exchange Board of India (SEBI) regulates capital market.
FUNCTIONS OF FINANCIAL SYSTEM
Good financial system search in the following ways :
1. Promotion of liquidity:

The major function of financial system is the provision of money and monetary assets for the production of
goods and services. There should not be any shortage of money for productive ventures. In financial
language, the money and monetary assets are referred to as liquidity. The term liquidity refers to cash or
money and other assets which can be converted into cash readily without loss of value and time.
2. Link between savers and investors:
One of the important functions of financial system is to link the savers and investors and thereby help in
mobilizing and allocating the savings effectively and efficiently. By acting as an efficient medium for
allocation of resources, it permits continuous up gradation of technologies for promoting growth on a
sustained basis.
3. Information available:
It makes available price- related information which is a valuable assistance to those who need economic
and financial decision.
4. Helps in projects selection:
A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor
the performance of the investment. It provides a payment mechanism for the exchange of goods and
services, and transfers economic resources through time and across geographic regions and industries.
5. Allocation of risk:
One of most important function of the financial system is to achieve optimum allocation of risk bearing. It
limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An effective financial
system aims at containing risk within acceptable limit and reducing cost of gathering and analyzing
information to assist operators in taking decisions carefully.
6. Minimizes situations of Asymmetric information:
A financial system minimizes situations where the information is Asymmetric and likely to affect
motivations among operators or when one party has the information and the other party does not. It provides
financial services such as insurance and pension and offers portfolio adjustments facilities.
7. Reduce cost of transaction and borrowing:
A financial system helps in creation of financial structure that lowers the cost of transactions. This has a
beneficial influence on the rate of return to the savers. It also reduces the cost of borrowings. Thus , the
system generates an impulse among the people to save more.

8. Financial deepening and broadening:

A well functioning financial system helps in promoting the process of financial deepening and broadening.
Financial deepening refers to an increase of financial assets as a percentage of the gross domestic product.
Financial broadening refers to building an increasing number and a variety of participants and instruments.