Finance is a bridge between the present & the future and whether it be

the mobilisation
Of saving or their efficient,effective and equitable allocation for
investment.

Financial System
Savin Finance Investment
g
Capital Formation

Economic Growth

The financial system is concerned about money ,credit and finance

- the term intimately related yet somewhat different from each
other. Money refers to the current medium of exchange or means
of payment.Credit or a loan is a sum of money to be returned only
with intrest.Finance is the monetary resources comprising debt and
ownership funds.
 FINANCIAL
SYSTEM

Financial Financial Financial Financial

Institution Markets Instruments Services

(Claims,Assets,Secu
rities)
Primar Secondar
Regulato Other y y
ry s
Non
Intermediari
Intermediari Long Short Medium
es
es Term Term Term

Organis UnOrganis
Bankin Non ed ed
g Banking

Primary Secondar
y

Capital Money
Markets Markets

Debt Equity Drivative

Markets Markets s Market
FINANCIAL INSTITUTIONS : As a bussiness organisation that act as
mobilisers and
depositories of savings and as
purveyors of credit or finance.They also provide various financial
services to the community.It can be divided into Regulatory,Inter-
mediaries,Non-Intermediaries and that can be also divided into
Banking & Non-Banking.

INTERMEDIARIES & NON-INTERMEDIARIES : Intermediaries

intermediate between
savers and
investors.They lend money as well as mobilise savings .Their libalities
are towards the ultimate savers,while there assets are from the
investors or borrowers .Non-Intermediary institution do the loan
business but there resources are not directly obtained from the
savers.

BANKING & NON-BANKING : The banking institution have quite a

few things in
common with the non-banking.
(a)They participate in the economics payment mechanism i.e they
provide transaction services.
FINANCIAL MARKETS : Financial markets are the centre or
arrangements that provides
facilities for buying and selling of financial
claims and services.The corporations financial institutions,individuals and
governments trade in financial product on these markets either directly
or through brokers & dealers. It can be divided as Primary & Secondary
or Organised & Un-Organised.

Organised & Un-Organised : The organised financial markets

comprises of an impressive network of banks,other financial &
investment institutions. On the other hand Un-Organised financial market
comprises of relativaly less controlled money lenders indigenious
bankers,landlord,traders etc.

Financial markets are sometimes classified as primary and

secondary market. The primary market deal in new financial claims or
new securities. Secondary markets deal with securities already issued or
existing or outstanding.
MONEY & CAPITAL MARKETS: Financial markets are classified
as money and capital market. Money market deal in the short
term themes and capital markets does show in the long term
claims. Commercial banks belongs to both. Tragedy bills call
money and commercial bills are money market. Stock market
and governments bonds are capital market. Equity market, debt
market and derivatives market are the part of capital market.

Financial market are set to be perfect when:

1). A large number of savers and investors operate in market.
2). The savers and investors are rational.
3). There are no transaction costs.
4). The financial assets are infinitively devisable.
5). There are no taxes.
FUNCTIONS OF FINANCIAL MARKETS: Financial markets
perform the essential function of channeling, funs from
household firm and government that have saved surplus fund by
spending less than their income to those who have a storage of
funds because they wish to spend more that their income.

Well functioning financial market also directly improve

the well beings of consumer by allowing them to time their
purchase better. They provide funds to young people to buy what
they need and can eventually afford without forcing them to wait
until the saved up the entire purchase price.
FINANCIAL INSTRUMENTS AND SERVICES: Financial system
deal in financial services and claims or financial assets or
securities or financial instruments. These services and claims are
many and varied in character this is so because of the diversity of
motives behind borrowing and landing.

FINANCIAL ASSETS: The financial assets represents a claims to

the payment of a sum of money sometime in future or a periodic
payment in the form of interest or dividend.

FINANCIAL SECURITIES: Financial securities are classified as

primary and secondary securities. The primary securities are
issued by the ultimate investors directly to the ultimate savers as
ordinary shares and debentures while the secondary securities are
issued by the financial intermediaries to the ultimate savers as
bank deposit insurance policies.
FINANCIAL INSTRUMENTS: Financial instruments differ from each
other in respect of their investment characteristics which of course
are independent and inter related among the investment
characteristics of financial assets or financial products the following
are important:
1). Liquidity
2). Marketability
3). Reversibility
4). Transaction costs so on.
REGULATORY FRAMEWORK FOR FINANCIAL SERVICES: The
regulatory and supervisory infrastructure play a critical role in
ensuring the health, soundness, stability of the financial system.
The role of such infrastructure or arrangements has become all
the greater with continuous and for reaching technological
progress, liberalization and greater integration in financial market.
This infrastructure lay down the specific rules or behavior for
participants in the financial system. It provides for the monitoring
of the observation of those rules. The financial regulation is
regarded necessary because, in its absence economic costs
imposed by financial market failure would be high indeed.

At present, regulators in India are the government,

reserve bank of India (RBI), securities and exchange board of
India.
FINACIAL RISK: Financial risk is associated with the use of debt
financing by firms or companies. Since the presence of debt
involves the legal or mandatory obligations to made this specified
payments at specified time period. There is a risk that the earnings
of the firm may not be sufficient to meet these obligations towards
the creditors. In case of share holders, the financial risk arises
because of not only the mandatory natural of debt obligations but
also the property of “prior payments of these obligations”. In short,
the use of debt by the firm causes variability of return for both
creditors and shareholders.

Financial risk is usually measured by the debt/equity ratio

of the firm; the higher this ratio, the greater the variability of return
and higher the financial risk.