INDIAN FINANCIAL

SYSTEMS
IV BBA
INTRODUCTION TO FINANCIAL SYSTEM

• Economic growth and development of any county depends upon a well-

knit financial system.
• Financial system has 4 subsets- Financial Institutions, Markets,
Instruments, Services.
• Which helps in formulation of Capital
• A mechanism by which savings are transformed into investment
DEFINITION OF FINANCIAL SYSTEM

Financial institution is defined as set of institution, markets, instrument,

services which promotes savings at channelize them to their most
efficient use.
Dr. S Guruswamy defines Financial systems as “ A set of complex and
closely interconnected financial institutions, markets, instruments,
services, practices and transactions”.
 FUNCTIONS OF STATE FINANCE CORPORATIONS

1. Providing Term Loans:

2. Offering Working Capital Assistance: Support businesses in managing day-to-day operations and liquidity needs.
3. Discounting Bills of Exchange: Assist industries in managing short-term financial obligations through bill discounting
services.
4. Guaranteeing Loans: Act as guarantors for industries seeking financial assistance from other financial institutions.
5. Promoting Special Economic Zones (SEZs): Facilitate financial aid to industries in special economic and industrial zones.
6. Encouraging Modernization: Provide funding for upgrading existing manufacturing units with advanced technology.
• Advisory Services: Offer business advisory and consultancy services to promote sustainable business practices
FEATURES/CHARACTERISTICS/ROLE

• Link between saver and investor

• Assists in selection of projects
• Payment mechanism
• Transfer of resources
• Risk management and control
• Capital formation
• Reduce cost and increase returns
• Provide detail information
 CHAPTER 2
FINANCIAL INSTITUTIONS
• Financial institutions play a crucial role in the
economic development of a country by facilitating
financial transactions, mobilizing savings, providing
credit, and ensuring liquidity in the market. These
institutions act as intermediaries between savers
and borrowers, and promoting capital formation and
economic growth.
 CHARACTERISTICS OF FI

Intermediary Function
Liquidity Provision
Risk Management Regulation and Compliance
Economic Stability Contribution
Diversified Services
Technology Integration
 MONEY MARKET INSTITUTIONS

• The short-term financial system by facilitating liquidity management and

short-term borrowing and lending. These institutions provide a platform
for trading highly liquid and low-risk financial instruments with a maturity
period of less than one year.
• The primary objective of money market institutions is to ensure the
smooth functioning of financial markets by regulating short-term funds
and maintaining monetary stability.
 MONEY MARKET INSTITUTIONS ARE:

• Central Bank (Reserve Bank of India - RBI)

• Commercial Banks
• Non-Banking Financial Companies (NBFCs)
• Discount and Finance Houses
• Mutual Funds (Money Market Funds)
• Insurance Companies and Pension Funds
• Primary Dealers (PDs)
 FUNCTIONS OF MONEY MARKET
INSTITUTIONS

• Liquidity Management:
• Interest Rate Regulation:
• Monetary Policy Implementation:
• Financing Trade and Industry:
• Risk Management:
 CAPITAL MARKET INSTITUTIONS

• Capital markets have evolved over centuries,

• facilitating the efficient allocation of capital and supporting economic
growth.
• The earliest forms of capital markets can be traced back to 17th-
century Amsterdam, where the Amsterdam Stock Exchange was
established in 1602 to trade shares of the Dutch East India Company.
CONTI….

• financial markets expanded globally, with the establishment of major

stock exchanges such as the London Stock Exchange (1801) and
the New York Stock Exchange (1792).
• In India, the Bombay Stock Exchange (BSE) was founded in 1875,
making it one of the oldest stock exchanges in Asia.
• The liberalization of financial markets in the 1990s led to increased
foreign investment, technological advancements, and regulatory
reforms that strengthened the role of capital market institutions.
 CHARACTERISTICS OF CAPITAL
MARKET INSTITUTIONS
1. Long-Term Financing
2. Liquidity
3. Risk Management
4. Regulation and Transparency
5. Market Efficiency
 FINANCIAL INSTITUTIONS UNDER CAPITAL
MARKET INSTITUTIONS
• Stock exchanges
• Equity markets
• Debt markets
• Options markets
• Derivative markets, including options, futures, and swaps
• Foreign exchanges
• Private markets, including venture capital, private equity, real assets, and other
alternative asset classes
• Public stock markets, like the Nasdaq
 FUNCTIONS OF CMI

1. Mobilization of Savings
2. Facilitation of Investment
3. Enhancement of Economic Growth
4. Risk Diversification
5. Foreign Investment Attraction
INDUSTRIAL FINANCE CORPORATION OF
INDIA(IFCI)
• Established in 1948 as the first Development Financial Institution (DFI)
in India to provide long-term financial assistance to industrial
enterprises.
• It played a crucial role in supporting infrastructure development,
capital-intensive projects, and emerging industries in India.
• Initially a government-owned institution, IFCI transitioned into a public
limited company in 1993 and has since evolved into a diversified
financial services provider.
 OBJECTIVES OF IFCI

•Promoting Industrial Growth

•Infrastructure Development
•Encouraging Entrepreneurship
•Enhancing Economic Stability
•Supporting Government Initiatives
 FUNCTIONS OF IFCI

•Long-Term Financing
•Project Assistance
•Investment in Capital Markets
•Advisory Services
•Support for MSMEs
INDUSTRIAL DEVELOPMENT BANK OF
INDIA(IDBI)
• The Industrial Development Bank of India (IDBI) was established in 1964 as a development
financial institution to promote and finance industrial growth in India.
• Initially functioning as a subsidiary of the Reserve Bank of India (RBI), it was later transferred to
government ownership to enhance its role in supporting industrialization.
• Over time, IDBI transformed into a full-fledged commercial bank while retaining its development
financing responsibilities.
• Today, IDBI Bank operates as a key player in the Indian financial sector, providing a range of
financial products and services to industries, businesses, and individuals.
 OBJECTIVES OF IDBI

• Promoting Industrial Growth

• Facilitating Infrastructure Development
• Enhancing Access to Credit
• Encouraging Entrepreneurship
• Supporting Small and Medium Enterprises (SMEs)
• Promoting Technological Upgradation
• Facilitating Industrial Modernization
 FUNCTIONS OF IDBI

• Providing Direct and Indirect Financial Assistance

• Project Financing
• Investment in Capital Markets
• Development of Financial Institutions
• Policy Formulation and Advisory Services
• Facilitating Foreign Investments
• Promoting Rural and Regional Development
 STATE FINANCE CORPORATION (SFC):

• State Finance Corporations (SFCs) are government-established

financial institutions that provide financial assistance to small and
medium-sized enterprises (SMEs) within their respective states.
• They were established under the State Financial Corporations Act,
1951, to promote regional industrial development by supporting
businesses that may not have access to commercial bank funding.
 OBJECTIVES OF STATE FINANCE CORPORATIONS

1. Promote Industrial Growth

2. Encourage Regional Development:
3. Facilitate Employment Generation
4. Support Entrepreneurship:
5. Enhance Technological Advancements:
6. Ensure Financial Inclusion:
 FUNCTIONS OF STATE FINANCE CORPORATIONS

1. Providing Term Loans:

2. Offering Working Capital Assistance:
3. Discounting Bills of Exchange:
4. Guaranteeing Loans:
5. Promoting Special Economic Zones (SEZs):
6. Encouraging Modernization:
7. Advisory Services:
INDUSTRIAL CREDIT AND INVESTMENT
CORPORATION OF INDIA(ICICI)
Introduction
• The Industrial Credit and Investment Corporation of India
(ICICI) was established in 1955 as a development financial institution
to support industrial growth in India. It played a crucial role in providing
medium- and long-term financial assistance to businesses, particularly
in the private sector. Over time, ICICI evolved into ICICI Bank, one of
India's leading private-sector banks, offering a wide range of financial
services.
OBJECTIVES

•Promoting Industrial Growth:

•Encouraging Private Sector Development:
•Technology and Innovation Support:
•Enhancing Financial Accessibility:
•Foreign Collaboration and Investment:
•Infrastructure Financing:
•Capital Market Development:
FUNCTIONS OF ICICI

•Providing Financial Assistance:

•Project Financing:
•Advisory Services:
•Promoting Small and Medium Enterprises (SMEs):
•Investment in Capital Markets:
•Foreign Exchange and International Trade Support:
•Infrastructure Development:
•Banking Services (Post Conversion to ICICI Bank):
EXIM BANK OF INDIA

Introduction
• The Export-Import Bank of India (EXIM Bank) was established in
1982 under the Export-Import Bank of India Act, 1981, as the
principal financial institution for promoting and financing international
trade in India. It plays a vital role in supporting Indian businesses in
expanding their global presence by providing financial assistance, risk
mitigation, and advisory services for exports and imports.
OBJECTIVES

•Promote Indian Exports:

•Provide Financial Assistance:
•Encourage International Trade Expansion
•Support Infrastructure Development:
•Facilitate Foreign Investments:
•Technology and Innovation Promotion:
•Risk Mitigation:
FUNCTIONS OF EXIM BANK OF INDIA

1.Export Credit and Finance:

2.Overseas Investment Support:
3.Trade Financing:
4.Project and Infrastructure Financing:
5.Export Promotion Programs:
6.Risk Management Services:
7.Support for SMEs:
NATIONAL SMALL INDUSTRIAL CORPORATION
(NSIC)
Introduction
• The National Small Industries Corporation (NSIC) is a government
enterprise established in 1955 under the Ministry of Micro, Small &
Medium Enterprises (MSME), Government of India. It plays a key
role in promoting, supporting, and fostering the growth of Micro,
Small, and Medium Enterprises (MSMEs) by providing various
financial, marketing, and technology-related services.
OBJECTIVES

•Promote MSME Growth:

•Provide Financial Assistance:
•Enhance Market Access:
•Encourage Technology Upgradation:
•Skill Development and Training:
•Facilitate Government Support Schemes:
FUNCTIONS

1.Credit Support:
2.Raw Material Assistance:
3.Marketing Support:
4.Technology Support:
5.International Trade Facilitation:
6.Performance and Credit Rating:
7.Cluster Development Programs:
NATIONAL INDUSTRIAL DEVELOPMENT
CORPORATION (NIDC)
Introduction
• The National Industrial Development Corporation (NIDC) was
established in 1954 as a public sector enterprise under the
Government of India. It played a vital role in promoting industrial
development across various sectors, particularly in financing and
facilitating new industries, infrastructure development, and technology
advancements
OBJECTIVES OF NIDC

•Industrial Growth:
•Infrastructure Development:
•Financial Assistance:
•Technology Advancement:
•Promotion of MSMEs:
•Research and Development:
•Export Promotion:
FUNCTIONS OF NIDC

1.Project Financing:
2.Technical Consultancy:
3.Policy Implementation:
4.Infrastructure Development:
5.Investment Promotion:
6.Support for MSMEs:
7.Employment Generation:
RBI MEASURES ON NBFCS

• The Reserve Bank of India (RBI) plays a crucial role in regulating

Non-Banking Financial Companies (NBFCs) to ensure financial
stability, consumer protection, and risk mitigation. Given the increasing
significance of NBFCs in India's financial ecosystem, the RBI has
implemented several measures to strengthen their governance, capital
adequacy, and risk management.
KEY RBI MEASURES ON NBFCS

1. Scale-Based Regulation (SBR) Framework (2021)

• Introduced a four-tier regulatory structure for NBFCs:
• Base Layer (NBFC-BL) – Least regulatory requirements (e.g., peer-to-peer lending platforms).
• Middle Layer (NBFC-ML) – Stricter norms for deposit-taking NBFCs and systemically important NBFCs.
• Upper Layer (NBFC-UL) – NBFCs with significant financial impact; stricter capital and governance norms.
• Top Layer (NBFC-TL) – For NBFCs showing higher risks, subject to bank-like regulations.

2. Capital Adequacy Norms

• Minimum Net Owned Fund (NOF) requirement for NBFCs raised to ₹10 crore to ensure financial
strength.
• Stricter capital-to-risk weighted assets ratio (CRAR) requirements to prevent systemic risks.
3. Liquidity Risk Management Framework
• Implementation of Asset Liability Management (ALM) guidelines to address liquidity
mismatches.
• Introduction of Liquidity Coverage Ratio (LCR) for large NBFCs to maintain sufficient
liquidity buffers.
4. Strengthening Governance and Compliance
• Board and Senior Management Oversight: Mandatory risk management
committee for large NBFCs.
• Appointment of Independent Directors to improve transparency and accountability.

5. Prudential Norms on Loan Classification & Provisioning

• Harmonization of NPAs classification for NBFCs in line with banks.
• Stricter provisioning norms to cover credit risks adequately.
6. Customer Protection and Fair Practices Code
• Regulatory guidelines for digital lending by NBFCs to prevent mis-selling and
fraud.
• Enhanced transparency in loan agreements, grievance redressal mechanisms,
and borrower rights.
7. Tightening of Shadow Banking Risks
• Restrictions on NBFCs engaging in risky lending practices, such as unsecured
lending or high-risk exposure to specific sectors.
8. Supervision and Reporting Compliance
• Stronger regulatory reporting for NBFCs to ensure timely detection of risks.
• Enhanced monitoring of systemically important NBFCs (NBFC-SI) to avoid
financial instability.
 INTRODUCTION TO FINANCIAL MARKETS

• Financial markets are platforms or systems where financial assets such as

stocks, bonds, currencies, derivatives, and other securities are bought and sold.
• These markets act as a bridge between savers who have surplus funds and
borrowers who need funds for productive purposes.
• Financial markets help in the mobilization and efficient allocation of financial
resources, contributing to the overall economic development of a country.
• financial markets are places where people, companies, and governments
trade financial instruments to meet their financial needs, whether for
investment, raising capital, or managing risk.
ROLE OF FINANCIAL MARKET

• 1. Mobilization of Savings
2. Efficient Allocation of Resources
3. Liquidity Provision
4. Price Discovery
5. Risk Sharing and Diversification
6. Information Dissemination
7. Facilitating Economic Development
 FUNCTIONS OF FINANCIAL MARKETS

1. Capital Formation

2. Liquidity Provision:

3. Price Determination:

4. Risk Management:

5. Efficient Allocation of Resources:

6. Facilitation of Savings and Investments:

7. Economic Stability:

Integration of Global Markets:

 CONSTITUENTS OF FINANCIAL MARKETS

1. Capital Market
o Deals with long-term securities like stocks and bonds.
o Includes Primary Market (for new securities) and Secondary Market (for trading existing
securities).
2. Money Market
o Deals with short-term instruments like Treasury bills, commercial papers, and certificates of deposit.
o Provides liquidity and short-term funding.
3. Foreign Exchange (Forex) Market
o Facilitates currency trading and international trade settlements.
o Includes spot, forward, and derivative currency markets.
1. Derivatives Market
o Deals with finncial instruments like futures, options, swaps, and forwards.
o Helps in risk management and speculation.

2. Commodity Market
o Facilitates trading of commodities like gold, silver, oil, and agricultural products.
o Includes spot and futures markets.

3. Insurance Market
o Provides risk coverage through various insurance products.
o Helps individuals and businesses mitigate financial losses.

4. Debt Market
o Enables trading of fixed-income securities like government bonds and corporate bonds.
o Plays a key role in raising funds for public and private entities.
 MONEY MARKET INSTRUMENTS:

• The money market is a segment of the financial market

that deals with short-term borrowing and lending, typically
with maturities of one year or less. It provides high liquidity
and low-risk investment opportunities. Below are the key
money market instruments used for short-term financing
and investment:
 1. TREASURY BILLS (T-BILLS)
Definition: Treasury Bills are short-term debt instruments issued by the Government of India to raise
funds for short durations. They are considered the safest money market instruments since they
carry zero default risk.
 Issued by: Reserve Bank of India (RBI) on behalf of the government.
 Tenure: 91 days, 182 days, and 364 days.
 Nature: Issued at a discount and redeemed at face value upon maturity.
 Purpose: Used to manage short-term government borrowing and control money supply.
 Example: A 91-day T-Bill with a face value of ₹100 may be issued at ₹98 and redeemed at ₹100,
giving the investor a profit of ₹2.
 2. COMMERCIAL PAPERS (CPS)

Definition: A Commercial Paper is an unsecured, short-term promissory note issued by large

corporations to raise funds for working capital requirements.
 Issued by: Corporates, financial institutions, and primary dealers.
 Tenure: Ranges from 7 days to 1 year.
 Nature: Issued at a discount to face value and redeemed at full value.
 Purpose: Provides companies with a cheaper alternative to bank loans.
 Example: A company like Tata Motors may issue a CP with a face value of ₹1,00,000 at ₹98,000
and pay ₹1,00,000 upon maturity.
 3. CERTIFICATE OF DEPOSIT (CDS)
Definition: A Certificate of Deposit (CD) is a negotiable term deposit issued by banks and financial
institutions to individuals, companies, or other banks for short-term investment.
 Issued by: Scheduled Commercial Banks and financial institutions.
 Tenure: 7 days to 1 year (for banks); up to 3 years (for financial institutions).
 Nature: Issued at a discount and redeemed at face value.
 Purpose: Helps banks raise short-term funds.
 Example: An investor can buy a CD from HDFC Bank for ₹95,000 and redeem it for ₹1,00,000 after
six months.
 4. CALL MONEY & NOTICE MONEY
Definition: These are very short-term money market instruments used for interbank borrowing and
lending.
 Call Money: Loans with a tenure of one day (overnight borrowing).
 Notice Money: Loans with a tenure between 2 to 14 days.
 Issued by: Commercial banks and financial institutions.
 Nature: Highly liquid and used for maintaining cash reserve requirements.
 Purpose: Helps banks manage their liquidity and reserve requirements.
 Example: SBI may borrow call money from ICICI Bank for 24 hours at an agreed interest rate.
5. REPURCHASE AGREEMENTS (REPO & REVERSE REPO)

Definition: A Repo Agreement (Repurchase Agreement) is a short-term borrowing instrument where

one party sells securities (like government bonds) to another with an agreement to repurchase
them at a predetermined price.
 Repo Rate: The interest rate at which the RBI lends to commercial banks through repo
transactions.
 Reverse Repo Rate: The rate at which RBI borrows from commercial banks.
 Issued by: RBI and commercial banks.
 Tenure: 1 day to 14 days (overnight repo is common).
 Purpose: Used by RBI to control liquidity in the economy.
 Example: RBI may enter a repo agreement with HDFC Bank, where the bank sells ₹1,00,000 worth
of bonds to RBI and agrees to repurchase them after 7 days for ₹1,00,500.
 6. BANKER’S ACCEPTANCE (BA)

Definition: A Banker’s Acceptance (BA) is a short-term credit instrument issued by a company and
guaranteed by a commercial bank, making it highly secure.
 Issued by: Corporations and guaranteed by banks.
 Tenure: 30 days to 180 days.
 Nature: Works like a post-dated cheque, where the bank promises to pay at maturity.
 Purpose: Facilitates international and domestic trade transactions.
 Example: A company may issue a BA for ₹5,00,000 to pay for raw materials, and the bank guarantees
payment on maturity.
 7. INTERBANK MARKET INSTRUMENTS

Definition: These include borrowing and lending among banks to manage short-term liquidity needs.
 Types:
o Interbank Loans (unsecured loans between banks).
o Term Money Market (loans for more than 14 days).
o Market Stabilization Scheme (MSS) (to absorb excess liquidity in the economy).
 Issued by: Banks and financial institutions.
 Purpose: Helps maintain financial stability and liquidity in the banking system.
 CAPITAL MARKET

The Capital Market is a financial market where long-term securities, such as

stocks and bonds, are bought and sold. It facilitates the raising of capital for
businesses and governments while providing investment opportunities for
individuals and institutions.
Capital markets are regulated by the Securities and Exchange Board of India
(SEBI) to ensure transparency and investor protection.
 IMPORTANCE OF CAPITAL MARKETS

 Facilitates Economic Growth: Provides funds for business expansion.

 Encourages Savings & Investments: Offers investment options with varying risks and returns.
 Ensures Liquidity: Allows easy buying and selling of securities.
 Supports Government Borrowing: Helps in financing infrastructure and welfare projects.
 CAPITAL MARKET INSTRUMENTS

Capital market instruments can be broadly classified into Equity Instruments,

Debt Instruments, and Hybrid Instruments.
1. Equity Instruments (Shares)
 Represent ownership in a company.
 Shareholders receive dividends and have voting rights.

Types of Equity Instruments:

 Common (Equity) Shares: Holders have voting rights and dividends but no
fixed returns.
 Preference Shares: Fixed dividends but limited or no voting rights.
2. Debt Instruments (Bonds & Debentures)
 Representing loans taken by corporations or governments from investors.
 Investors earn fixed interest (coupon payments).
Types of Debt Instruments:
 Corporate Bonds: Issued by companies for long-term funding.
 Government Bonds (G-Secs): Issued by the government to finance public projects.
 Debentures: Unsecured corporate debt instruments.
3. Hybrid Instruments
 Combining features of both equity and debt.
 Examples:
o Convertible Debentures: Can be converted into equity after a fixed period.
o Warrants: Warrants give the holder the right to purchase shares at a pre-determined price.