ASSIGNMENT ON

INDIAN FINANCIAL SYSTEM

SUBJECT: FINANCIAL MANAGEMENT

SUBMITTED TO

Professor Dr.S.V.RamanaRao. SUBMITTED BY:

A.Sai kumar (2b4-01) M.Harish (2b4-15)

Swapna (2b4-04)

SriSudha (2b4-22)

SaiSarath (2b4-27)

V.Varsha (2b4 38).

FINANCIAL SYSTEM

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. Here some of the definitions of the word 'finance',

The American Heritage® Dictionary of the English Language, Fourth Edition defines the term as under-

1:"The science of the management of money and other assets.";2: "The management of money, banking, investments, and credit. ";3: "finances Monetary resources; funds, especially those of a government or corporate body"4: "The supplying of funds or capital."

Finance therefore represents the resources by way funds needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body.. resources needed personally by an individual for his family and individual needs and resources needed by a business organization to carry on its functions intended for the achievement of its corporate goals.

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector.  While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a deficit.  A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.  A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

In a financial system different parties participate in or perform different functions but the common feature of all those functions is The transfer of money from surplus to deficit economic agents. Examples:

– Bank deposits.

– Use of means of payments (cheques or electronically).

– Managing risk through investing in pensions or using insurance.

– Direct investment through buying and selling equities and bonds.

Transfer of funds from ultimate lenders to ultimate borrowers can be made through direct lending; through trading in organized securities markets or indirectly through financial intermediaries.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy.  The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;The role of a financial system The Financial System provides the environment in which the Individual investors and companies operate.Financial system participants:

– Individuals.– Companies.– Financial institutions, private and public organizations.– Governments.

Functions of the financial system:– Facilitations of transfer of money.– Primary and secondary security markets.– Financial services.

Well integrated set of subsystems which facilitates the flow of funds from area of surplus to the areas of deficit in efficient & effective way.

The financial systems of most developing countries are characterized by co-existence and co-operation between the formal and informal financial sectors.

The formal financial sector is characterized by the presence of an organized, institutional and regulated system which caters to the financial needs of the modern spheres of economy.

The informal financial sector is an unorganized, non-institutional and non-regulated system dealing with traditional and rural spheres of the economy.

Financial InstitutionsFinancial institutions (FI) are companies that act as mediators between surplus and deficit economic agents.Financial Institutions:

– Deposit takers (Banks).– Non-deposit takers (NBFCs).

- Development financial institutions.

Functions of financial institutions:– provision of payment mechanism.– facilitation of lending and borrowing.– provision of insurance, foreign exchange and other services.

• Banks are increase and facilitate money supply.• Banks are closely regulated.

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument.  Funds are available in this market for periods ranging from a single day up to a year.  This market is dominated mostly by government, banks and financial institutions.

Capital Market -  The capital market is designed to finance the long-term investments.  The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies.  Depending on the exchange rate that is applicable, the transfer of funds takes place in this market.  This is one of the most developed and integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.

Financial Instruments

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below; 

1. Call/Notice Money 2. Treasury Bills3. Term Money4. Certificate of Deposit5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional

Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.

Financial Services:

The term “financial service” means any service of a financial nature offered by a financial service supplier of a Party. Financial services include all insurance and insurance-related services, and all banking and other financial services (excluding insurance).Financial services include the following activities:

A, Insurance and Insurance-Related Services (AA) direct insurance (including co- insurance):

(a) Life

(b) Non-life

(B) Reinsurance and retrocession;

(C) Insurance intermediation, such as brokerage and agency;

(D) Services auxiliary to insurance, such as consultancy, actuarial, risk assessment and claim settlement services;

Banking and Other Financial Services (Excluding Insurance)

(AA) acceptance of deposits and other repayable funds from the public;

(BB) lending of all types, including consumer credit, mortgage credit, factoring and financing of commercial transaction;

(CC) financial leasing

(DD) all payment and money transmission services, including credit, charge and debit cards, travelers cheques and bankers drafts;

(EE) guarantees and commitments;

(FF) trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise, the following:

(a) Money market instruments (including cheques, bills, certificates of deposits);

(b) Foreign exchange;

(c) Derivative products including, but not limited to, futures and options;

(d) Exchange rate and interest rate instruments, including products such as swaps, forward rate agreements;

(ee) transferable securities;

(ff) other negotiable instruments and financial assets, including bullion;

(GG) participation in issues of all kinds of securities, including underwriting and placement as agent (whether publicly or privately) and provision of services related to such issues;

(HH) money broking;

Functions of financial services1. Facilitating transactions (exchange of goods and services) in the economy.

2. Mobilizing savings (for which the outlets would otherwise be much more limited).

3. Allocating capital funds (notably to finance productive investment).

4. Monitoring managers (so that the funds allocated will be spent as envisaged).

5.Transforming risk (reducing it through aggregation and enabling it to be carried by those more willing to bear it).

Characteristics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focused. The firms providing these services, study the needs of their customers in detail before deciding their financial strategy, giving due regard to costs, liquidity and maturity considerations. Financial services firms continuously remain in touch with their customers, so that they can design products which can cater to the specific needs of their customers. The providers of financial services constantly carry out market surveys, so they can offer new products much ahead of need and impending legislation. Newer technologies are being used to introduce innovative, customer friendly products and services which clearly indicate that the concentration of the providers of financial services is on generating firm/customer specific services.

ii) Intangibility: In a highly competitive global environment brand image is very crucial. Unless the financial institutions providing financial products and services have good image, enjoying the confidence of their clients, they may not be successful. Thus institutions have to focus on the quality and innovativeness of their services to build up their credibility.

iii) Concomitant: Production of financial services and supply of these services have to be concomitant. Both these functions i.e. production of new and innovative financial services and supplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlike any other service, financial services do tend to perish and hence cannot be stored. They have to be supplied as required by the customers. Hence financial institutions have to ensure a proper synchronization of demand and supply.

v) People based services: Marketing of financial services has to be people intensive and hence it’s subjected to variability of performance or quality of service. The personnel in financial services organization need to be selected on the basis of their suitability and trained properly, so that they can perform their activities efficiently and effectively.

vi) Market Dynamics: The market dynamics depends to a great extent, on socioeconomic changes such as disposable income, standard of living and educational changes related to the various classes of customers. Therefore financial services have to be constantly redefined and refined taking into consideration the market dynamics. The institutions providing financial services, while evolving new services could be proactive in visualizing in advance what the market wants, or being reactive to the needs and wants of their customers.

Scope of Financial ServicesFinancial services cover a wide range of activities. They can be broadly classified into two, namely:

i. Traditional. Activities

ii.Modern activities.

i. Traditional ActivitiesTraditionally, the financial intermediaries have been rendering a wide range of services encompassing both capital and money market activities. They can be grouped under two heads, viz.

1. Fund based activities and

2. Non-fund based activities.

Fund based activities: The traditional services which come under fund based activities are the following:

Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary market activities).

Dealing in secondary market activities.

Participating in money market instruments like commercial

Papers, certificate of deposits, treasury bills, discounting of bills etc.

Involving in equipment leasing, hire purchase, venture capital, seed capital,

Dealing in foreign exchange market activities. Non fund based activities

Non fund based activitiesFinancial intermediaries provide services on the basis of non-fund activities also. This can be called ‘fee based’ activity. Today customers, whether individual or corporate, are not satisfied with mere provisions of finance. They expect more from financial services companies. Hence a wide variety of services, are being provided under this head. They include:

Managing the capital issue — i.e. management of pre-issue and post-issue activities relating to the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to market their issue.

Making arrangements for the placement of capital and debt instruments with investment institutions.

Arrangement of funds from financial institutions for the clients’ project cost or his working capital requirements.

Assisting in the process of getting all Government and other clearances.

ii. Modern ActivitiesBeside the above traditional services, the financial intermediaries render innumerable services in recent times. Most of them are in the nature of non-fund based activity. In view of the importance, these activities have been in brief under the head ‘New financial products and services’. However, some of the modern services provided by them are given in brief hereunder.

Rendering project advisory services right from the preparation of the project report till the raising of funds for starting the project with necessary Government approvals.

Guiding corporate customers in capital restructuring.

Acting as trustees to the debenture holders.

Recommending suitable changes in the management structure and management style with a view to achieving better results.

Structuring the financial collaborations / joint ventures by identifying suitable joint venture partners and preparing joint venture agreements.

Rehabilitating and restructuring sick companies through appropriate scheme of reconstruction and facilitating the implementation of the scheme.

Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk by using swaps and other derivative products.

Managing In- portfolio of large Public Sector Corporations.

Undertaking risk management services like insurance services, buy-hack options etc.

Advising the clients on the questions of selecting the best source of  funds taking into consideration the quantum of funds required, their cost, lending period etc.

Guiding the clients in the minimization of the cost of debt and in the determination of the optimum debt-equity mix.

Promoting credit rating agencies for the purpose of rating companies which want to go public by the issue of debt instrument.

Undertaking services relating to the capital market, such as 1)Clearing services, 2)Registration and transfers, 3)Safe custody of securities, 4)Collection of income on securities.

RegulatorsThe formal financial system comes under the regulations of

The ministry of finance (MOF), Reserve Bank of India (RBI), Securities and Exchange board of India (SEBI) and other regulatory

bodies.Reference:

Khan M Y, "Indian Financial System, Tata Mc Graw-Hill, New Delhi, 2001

Mishra R K, An Overview of financial services, financial services, emerging trends, Delta, Hyderabad, 1997.

 www.nseindia.com www.rbi.org.in www.sebi.gov.in , www.indiainfoline.com