Professional Documents
Culture Documents
Meaning:
Financial system refers to set of complex and interconnected components consisting
specialized and non-specialized financial institutions, organized and unorganized
financial markets, financial instruments and financial services.
The aim of the financial system is to facilitate the circulation of funds in an economy.
it is concerned about money, credit and finance.
Money refers to the medium of exchange or mode of payment. Credit refers to the
amount of debt which is returned along with the interest. And the finance refers to
the monetary resources comprising the ownership funds and debts of the state,
company or a person.
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.
Definition:
According to Amit Chaudhary, "Financial system is the integrated form of financial
institutions, financial markets, financial securities and financial services which
aims is to circulate the funds in an economy for economic growth."
4. Financial system influences both the quality and the pace of economic
development.
The financial system consists of four segments or components. These are: financial
institutions, financial markets, financial services.
2. Financial markets:
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.
Call money market is a market for extremely short period loans say one day to
fourteen days. It is highly liquid.
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.
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.
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.
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:
Mortgages market
3. Financial Instruments:
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
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.
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.
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.