The Financial System

Prepared by:-

PANDYA KIRAN PARMAR RANJIT PATEL JIGNESH BHAYANI SANJAY

In this chapter we will learn.

Functions of financial system Financial assets Financial markets Financial market returns Equilibrium in financial markets Financial intermediaries Regulatory infrastructure Trends in the Indian financial system

Function of the financial markets

Payment system Pooling of funds Transfer of resources Risk management Information for decentralized decision making Dealing with incentive problem

Financial assets

Tangible assets
Land, Building, Machinery.

Intangible assets
Goodwill, Patent, Trademark

Financial markets
Functions

of financial markets

To facilitate price discovery To provide liquidity To reduce the cost of transacting

Classification of financial markets

Type of financial claims
Debt market Equity market

Maturity of claims
Money market Capital market

 Seasoning of claim
Primary market Secondary market

Timing of delivery
Cash market Future market

Nature of organizational structure

Exchange traded market Over the counter market

Financial market returns

Interest rates Rates of return on risk assets Inflation and real interest rates

Determinants of rates of return Expected productivity of capital Degree of uncertainty about productivity of capital Time preference of people Degree of risk aversion

Equilibrium in financial markets

Interest Rate

ie

ie

A Amount Of Loanable Funds

Interest Rates in India

Repo rate Bank rate Prime lending rate Fixed deposit rate Government bond rate

Financial Intermediaries
Commercial Bank Developmental Financial Institutions Insurance Companies Other Public Sector Financial Institutions Mutual Funds Non Banking Financial Corporations Other Organizations

Rationale for financial intermediaries

Diversification Low transaction cost Economies of scale Signaling Confidentiality

Regulatory infrastructure

Reserve Bank of India

Formulate and implement monetary and credit policies Bankers bank Supervision Regulates foreign exchange transaction Developing Indian financial system Promote the development of new institution Influences the allocation of credit Encourage the banking system in rural area

Security Exchange Board of India

Regulate business in stock exchange Register and regulate capital market intermediaries Prohibit fraudulent and unfair trade practice Regulate acquisition of shares and take over of companies Regulate the mutual funds

Growth and Trend

Emergence of financial institution Expansion of network Growth in primary and secondary segment of capital market Introduction of new schemes

Financial Development Measures

Finance ratio = total financial claims

National income

Financial interrelations ratio

= total financial claims Net physical capital formation

New issue ratio

= primary issues______ Net physical capital formation

Intermediation ratio
= issue of financial institutions total financial issue in the economy

1950
(Approx.) Finance ratio (%) Financial interrelation ratio New issue ratio Intermediation ratio 5 0.60 0.45 0.25

1995
(Approx.) 45 3.0 2.0 0.70

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