Trade Finance

Financial Markets & Role of

Banks in Financial Sector
Agenda

In this session, you will learn about:

• Financial System

• Constituents of Financial System

• Role of Commercial banks in

economic development
Financial System
What is a Financial System?

Q What is a financial system?

Components of a Financial System
A Financial System is a system that brings together Financial Participants,
Markets, Products, and Services.

PARTICIPANTS MARKETS PRODUCTS SERVICES

FINANCIAL SYSTEM
Goal of Financial System

The primary goal of a financial system is

accelerated growth of an economy.
Objectives of Financial System

Saving Mobilization Investments National Growth

Prices in a Financial Market

MARKET
SUPPLY
MARKET External Socio-
Political Factors
DEMAND

Prices
Functions of Financial System

Functions of a Financial System

Play the role of

Facilitate the flow of Monitor and regulate
intermediaries to
funds to finance the participants in the
determine the flow of
investments financial system
funds
How Financial System Works?

Indirect Finance

Financial
Funds Intermediaries Funds

Funds

Lenders Borrowers
Savers Spenders
Households Financial Households
Funds Funds
Business markets Business firms
Governments Governments
Foreigners Foreigners
Direct Finance
Structure of the Modern Financial System

Financial System

Financial Financial Financial Financial Financial

Market Instruments Participants Regulator Services
Participants of the Financial System

Buy Side Sell Side

Invest in assets Sell assets

to gain more to get
profit financing

ONES WITH ONES WITH

SURPLUS FUNDS DEFICIT FUNDS

Financial System
Financial Market

A market where financial instruments

are traded in order to raise capital.
What is Financial Market?
A market where investors and borrowers can trade in financial securities,
commodities and other financial instruments at prices that reflect the market demand
and supply.

Shares

FINANCIAL
MARKET

Company Investor

Cash
Financial Market

The market for such securities could be short term,

medium term or long term capital.

Short
Term
Capital

Medium
Term
Financial Capital
Role of Market
Facilitator

Long
Term
Capital
Functions of Financial Market
Financial markets have five major economic functions:

Reduction of
Price Discovery Liquidity
Transaction Costs

Regulating Settlement of
Intermediaries Transactions
Types of Financial Markets

Order
Driven
Market
Quote
Secondary
Driven
Market
Market

Primary Capital
Market Market

Money
Market
Instruments Offered In Financial Markets

Stocks Foreign exchange Commodities

Financial Instruments

Bonds Derivatives

17
Instruments Offered In Financial Markets

Money Market
Insurance And Pension
Instruments

Financial Instruments

Government Securities Debentures

18
Financial Instruments

Stocks  Includes examples such as equity shares

 Fixed Income Instruments which provides a coupon as

income
Bonds

Insurance
 Protection for short term and long term investments
And Pension

 Securities issued by the Government for various purposes Government

(Municipal bonds, T-Bills) Securities

Debentures  : Bonds which are unsecured are known as Debentures

Financial Instruments

Foreign  Foreign Exchange: Exchange of one currency for another

Exchange using an exchange rate

 Instruments which derive their value from an underlyer. Derivatives

Money  Short term instruments which have maturities less than a

Market year. E.g. T-Bills Repo, Certificate of Deposit, Commercial
Instruments Papers

 Can be traded directly or using derivative products. Commodities

Financial Services
Financial
Services

Mergers & Research & Sales & Market

Underwriting
Acquisition Advise Trading Making

Specialized
Asset
Financial
Management
Solutions
Financial Services

Mergers and  Equity valuation of a company, research on the sector, target

Acquisitions companies, when to pay, how much to pay, how to pay etc

 Provide specialized market research reports on the trends Research and

and views of the market (not just equity, but global
underlyers) Advice

 Provide a guarantee that a company will be able to raise the

Underwriting capital from the public
Financial Services

Sales &
 Create structured products per client requirements
Trading

 Publish prices in the market to entice the other participants Market

to trade against them, which in turn increases liquidity
Making

Asset  Manage the assets of global clients and allow them to trade
Management and invest in all the large financial centres of the world
Importance of Financial System

Vital to the functioning of the industry as the instruments help raise long term capital.

FINANCIAL MARKETS 2010

$ 1643 Trillion
Role of Commercial banks in
Economic Development
Capital Formation

Capital Formation is the process of building capital stock

of a country by Investing in productive plants and
equipment's. In other words capital formation is
increasing of capital assets by efficient use of existing
resources of the country.

 Generally, the higher the capital formation of an economy, the faster an economy
can grow its aggregate income. Increasing an economy's capital stock also increases
its capacity for production, which means an economy can produce more. Producing
more goods and services can lead to an increase in national income levels.

 The banks are, therefore, not only the store houses of the country’s wealth, but also
provide financial resources necessary for economic development.

 Banks are swiftly able to mobilise the funds from Surplus to Deficit creating value
and in the process increasing capital
Promotion of Trade and Industry

 With the growth of commercial

banking, there is vast expansion in
trade and industry.

 The use of bank draft, check, bill of

exchange, credit cards and letters of
credit etc. has revolutionized both
national and international trade.

 Acting as lenders, the banks offer start-

up loans and financing for capital
equipment purchases.
Influencing Economic Activity

 The banks can also influence the

economic activity of the country
through its influence on:

a. Availability of credit
b. The rate of interest

 If the commercial banks are able to

increase the amount of money in
circulation through credit creation or
by lowering the rate of interest, it
directly affects economic development.

 Development banks set up as a term

lending institution not only provide
funds but also provide advisory,
promotional and entrepreneurial
services.
Development of Agriculture

 A large number of formal institutional agencies like Co-operative banks,

Regional Rural Banks (RRB), Scheduled Commercial Banks, Non Banking
Financial Institutions (NBFI) and Self help groups (SHG’s) etc. are involved in
meeting short term and long term needs of the farmers.

 Several others initiatives have been taken to strengthen the institutional

mechanism of rural credit.

 The provision of credit to agriculture sector has greatly helped in raising

agriculture productivity and income of the farmers.
Monetisation by Support to Rural Areas

 An underdeveloped economy is characterized by the existence of a large non-

monetized sector , particularly , in the backward and inaccessible areas of the
country . The existence of this non monetized sector is a hindrance in the
economic development of the country .

 The banks, by opening branches in rural and backward areas , can promote
the process of monetisation in the economy
Implementation of Monetary Policy

 Monetary policy refers to actions taken by central banks to affect monetary

and financial conditions with the aim of achieving the broader macro-
economic policy objectives of low inflation and sustainable economic growth.

 The central bank of the

country controls and
regulates volume of credit
through the active
cooperation of the banking
system in the country.

 It helps in bringing price

stability and promotes
economic growth with in the
shortest possible period of
time.
Role of Commercial Banks
in 21st Century
Role of Commercial Banks in 21st Century

 The commercial banks are now not

confined just to local banking.
 They are fast changing into global
banking i.e., understanding the
global customer, using latest
information technology, competing
in the open market with high
technology system, changing from
domestic retail banking to
investment banking etc.
 The commercial bank are now
considered the nerve system of all
economic development in the
country.
 The advent of Direct Banking
Channels and Virtual banking has
made a huge difference with
customers being able to transact at
the click of a button.
Role of Commercial Banks in 21st Century

Today’s commercial banking is characterised by three basic characters:

Multiple Deposits, Credit cards, Insurance, Investments and

Products Securities

Multiple
Call centres, Branch banking, online marketing,
channels of
Channel partners etc.
distribution

Multiple Consumer, Small and Medium scale, corporate

customer banking, Personal banking, Preferred banking, NRI
groups Services
 &
Thank You
For Your
Attention