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Finance System

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13 views4 pages

Finance System

Uploaded by

mytimehascome122
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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A financial system is a complex, well integrated set of sub

system of financial institutions, markets, instruments and


services which facilitates the transfer and allocation of
funds, efficiently and effectively. A financial system plays an
important role in economic growth of the country. It
intermediates between the flow of funds belonging to those
who save a part of their income and those who invest in
productive assets. The financial system can be of formal or
informal in nature. A formal financial system is
characterized by presence of an organized, institutional and
regulated system which caters to financial needs of modern
spheres of an economy whereas informal financial sector is
an unorganized, non institutional and non regulated system
dealing with the traditional and rural spheres of an
economy.
Components of formal financial system consists of
1. Financial institutions – These are the intermediaries that
mobilize savings and facilitate allocation of funds in efficient
manner. Financial institutions can be classified as banking
and non banking financial institutions. Banking institutions
are creators and purveyors of credit while non banking
financial institutions are only purveyors of credit. Banking
financial institutions are schedule commercial banks (state
bank of india), private sector banks (HDFC bank). Non bank
financial institutions are development financial institutions,
non bank finance companies, housing finance companies.
2. Financial Markets – The market of an economy where
funds are transacted between the funds surplus and fund
scarce individuals and organizations is known as financial
markets. The basis of transaction is either dividend or
interest. Financial market in every economy are having two
separate segments, one catering to the needs of short term
funds and other catering to the needs of long term finance.
 Money Market – The money market is market for
financial assets that are close substitutes for
money. It is a market for short term funds and
instruments having maturity period of one or less
than one year. The money market instruments
comprise Treasury bills, commercial papers,
certificate of deposit, call notice money market and
collaterised borrowing and lending obligations.
 Capital Market – Capital market is the market for
long term funds. It mobilizes long term savings to
finance long term investments. Capital market is
further divided into primary capital market and
secondary capital market. Primary market is
market for fresh capital. It is market for new issues.
Secondary market is market for outstanding
securities. It is the market where existing securities
are traded or resold.
3. Financial instruments – A financial instrument is a claim
against a person or institutions for payment at a future date
of sum of money or periodic payment in the form of interest
or dividend. Some of the financial instruments are
 Call Money – When a loan is granted for one day and is
repaid on the second day, it is called call money. No
collateral securities are required for this kind of
transaction.
 Notice Money – When a loan is granted for more than a

day and for less than 14 days, it is called notice money.


No collateral securities are required for this kind of
transaction.
 Term Money – When the maturity period of a deposit is

beyond 14 days, it is called term money.


 Treasury Bills – Also known as T-Bills, these are

Government bonds or debt securities with maturity of


less than a year. Buying a T-Bill means lending money to
the Government.
 Certificate of deposits (CD) – CD are issued by banks

and issued to the depositors for a specified period


ranging less than a year. They are negotiable and
tradable in the market. Minimum amount of a CD should
be rupees 1 lakh.
4. Financial services - Services provided by Asset
Management and Liability Management Companies. They
help to get the required funds and also make sure that they
are efficiently invested. The main aim of the financial
services is to assist a person with selling, borrowing or
purchasing securities, allowing payments and settlements
and lending and investing. The financial services in India
include:
 Banking Services – Any small or big service provided
by banks like granting a loan, depositing money, issuing
debit/credit cards, opening accounts, etc.
 Insurance Services – Services like issuing of insurance,
selling policies, insurance undertaking and brokerages,
etc. are all a part of the Insurance services.
 Investment Services – It mostly includes asset
management.
 Foreign Exchange Services – Exchange of currency,
foreign exchange, etc. are a part of the Foreign exchange
services.

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