FINANCIAL

MARKET AND
FINANCIAL
SERVICES

DALY COLLEGE OF
BUSINESS MANAGEMENT, INDORE
 • Unit I:
Financial System and its Components: financial markets and institutions; Financial
intermediation; Flow of funds matrix; Financial system and economic development; An
overview of Indian financial system.
• Unit II:
Financial Markets:
Money market: functions, organization, and instruments. Role of the central bank in the
money market; Indian money market - An overview
Capital Markets - functions, organization, and instruments. Indian debt market; Indian
equity market - primary and secondary markets; Role of stock exchanges in India.

SYLLABUS • Unit III:

Financial Institutions: Commercial banking introduction, its role in project finance and
working capital finance; Development Financial Institutions (DFIs) - An overview and role in
Indian economy; Life and non-life insurance companies in India; Mutual Funds -
Introduction and their role in capital market development. Non-banking financial
companies (NBFCs).
• Unit IV:
Financial Services: Overview of financial services industry: Merchant banking pre and post-
issue management, underwriting. Regulatory - framework relating to merchant banking in
India.
• Unit V:
Leasing and hire-purchase, Consumer, and housing finance; Venture capital finance;
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Factoring services, bank guarantees and letter of credit; Credit rating; Financial counseling.
Text Books &
References
• LM Bhole, and Jitendra Mahakud. Financial
Institution and Markets, McGraw-Hill (2017)
• Phathak. Indian Financial System, Pearsons
Education. (2014) Khan M.Y. Indian Financial
System: McGraw Hill Education. (2019- 11th
Edition)
• Sidhharth S.S. Indian Financial System:
Financial Market, Institutions and Services
McGraw Hill Education. (2020)
• Pathak Bharti Indian Financial System,
Pearsons Education (2018)
• Annual Reports of Major Financial
Institutions in India.
 Indian Financial System – An Overview
• The services that are provided to a person by the various Financial
Institutions including banks, insurance companies, pensions, funds, etc.
constitute the financial system.
• Given below are the features of the Indian Financial system:
• It plays a vital role in the economic development of the country as it
encourages both savings and investment
• It helps in mobilizing and allocating one’s savings
• It facilitates the expansion of financial institutions and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the one saving
• It is also concerned with the Provision of funds
• The financial system of a country mainly aims at managing and
governing the mechanism of production, distribution, exchange and
holding of financial assets or instruments of all kinds.
• Further below in this article, we shall discuss the various components
of the financial system in India.
Components of
Indian
Financial
System

Fundraising event plan 6

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1. Financial Institutions

The main functions of The best example of

the Financial Institutions
The Financial are as follows:
a Financial
Institutions act as a Institution is a Bank.
• A short term liability can be
mediator between the converted into a long term People with surplus
investor and the investment amounts of money
• It helps in conversion of a risky
borrower. The investment into a risk-free make savings in their
investor’s savings are investment accounts, and
mobilised either • Also acts as a medium of
convenience denomination,
people in dire need
directly or indirectly which means, it can match a of money take loans.
via the Financial small deposit with large loans
The bank acts as an
and a large deposit with small
Markets. loans intermediate
between the two.

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 1. Financial
Institutions
The financial institutions can further be divided into two
types:
• Banking Institutions or Depository Institutions – This includes banks and
other credit unions which collect money from the public against interest
provided on the deposits made and lend that money to the ones in need
• Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual
funds and brokerage companies fall under this category. They cannot ask for
monetary deposits but sell financial products to their customers.
• Further, Financial Institutions can be classified into three categories:
• Regulatory – Institutes that regulate the financial markets like RBI, IRDA,
SEBI, etc.
• Intermediates – Commercial banks which provide loans and other financial
assistance such as SBI, BOB, PNB, etc.
• Non Intermediates – Institutions that provide financial aid to corporate
customers. It includes NABARD, SIBDI, etc. 9
 2. Financial Assets
The products which are traded in the Financial Markets are called
Financial Assets. Based on the different requirements and needs
of the credit seeker, the securities in the market also differ from
each other.
Some important Financial Assets have been discussed briefly
below:
• 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 – It is a dematerialised form
(Electronically generated) for funds deposited in the bank for a
specific period of time.
• Commercial Paper – It is an unsecured short-term debt
instrument issued by corporations.
 3. Financial Market
The marketplace where buyers and sellers interact with each other and
participate in the trading of money, bonds, shares, and other assets is called
a financial market.
The financial market can be further divided into four types:
• Capital Market – Designed to finance long-term investment, the Capital
market deals with transactions which are taking place in the market for
over a year. The capital market can further be divided into three types:
(a)Corporate Securities Market
(b)Government Securities Market
(c) Long-Term Loan Market
• Money Market – Mostly dominated by Government, Banks, and other
Large Institutions, the type of market is authorized for small-term
investments only. It is a wholesale debt market that works on low-risk
and highly liquid instruments. The money market can further be divided
into two types:
(a) Organized Money Market
(b) Unorganized Money Market
• Foreign exchange Market – One of the most developed markets across
the world, the Foreign exchange market, deals with the requirements
related to multi-currency. The transfer of funds in this market takes place
based on the foreign currency rate.
• Credit Market – A market where short-term and long-term loans are
granted to individuals or Organizations by various banks and Financial
and Non-Financial Institutions is called a Credit Market.
 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 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
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.
 Flow of Funds
In 1952, renowned American economist Prof. Morris Copeland developed the Flow of Funds (FOF) theory as a
supplement to the national income accounting followed earlier.

The national income fell short in illustrating the financial transactions corresponding to the economic activities
that took place within an entire economy.

What is the Flow of Funds?

The flow of funds is essentially a financial report or account that illustrates fund inflow and outflow in an
economy across different sectors operating within it on a whom-to-whom basis.
Where national income accounting fell short was it did not enumerate any list of funds that came into an
economy and how the amount was used.
This system of macroeconomic accounting addresses the problems adequately by showing sector-wise fund
inflow and sector-wise usage of such funds.
The flow of funds follows a double-entry bookkeeping system. The central bank of an economy publishes
the flow of fund data sourced from these accounts periodically.
 Flow of Fund Matrix
The flow of funds matrix is the form in which FOF of an economy is represented. It primarily shows six economic sectors.
These are –

Each of these sectors consists of two divisions highlighting

the sources and uses of funds side by side in the form of a
matrix.
 Flow of Funds Example
The following table illustrates the Flow of Funds data in the Indian economy in the Financial Year 1995 – 96.
Note: Here, a negative value is represented within brackets ().

Other financial Private corporate

Particulars Households Banking Government Rest of the world Total
institutions business
Uses (in Sources Sources Sources Sources Sources Sources
Sources (in Rs. Uses (in Uses (in Uses (in Uses (in Uses (in Uses (in
Rs. (in Rs. (in Rs. (in Rs. (in Rs. (in Rs. (in Rs.
Crore) Rs. Crore) Rs. Crore) Rs. Crore) Rs. Crore) Rs. Crore) Rs. Crore)
Crore) Crore) Crore) Crore) Crore) Crore) Crore)
Household Nil Nil 56,615 22,642 42,197 2,207 5,976 342 20,198 275 Nil Nil 124.986 25,466
Banking 22,462 56,615 Nil Nil 11,909 7,091 54,694 4,450 30,823 4,290 (10,001) (2,066) 110,067 70,380

Other financial
2,207 42,197 11,274 (1337) Nil Nil 45,673 (457) 8,384 2,344 (9) 5,128 67,529 47,875
institutions

Private
corporate 342 5,976 2,156 22,082 (754) 62,736 Nil Nil Re. 1 2,319 Nil 11,978 1,745 105,091
business

Government 275 20,198 7587 39,959 3,304 48,912 7,372 7,935 Nil Nil 324 1,169 18,862 118,173

Rest of the
Nil Nil 4,850 (5,933) 11,990 4,226 4,549 389 12 97 Nil Nil 21,401 (1,221)
world
Classified
Nil Nil 6,709 45,145 21,279 13,025 28,395 28,607 31,610 5,849 1,725 (5,851) 89,718 86,775
sector
Total 25,466 124,986 89,191 122,558 89,925 138,197 146,659 41,266 91,028 15,174 (7,961) 10,358 434,308 452,539

Sources – Uses (99,520) (33,367) (48,272) 105,393 75,854 18,319 (18,231)

 FUNCTIONS OF FINANCIAL SYSTEM

The financial system plays a very important role in our economy. In fact, it is difficult to
imagine our economic system without an efficient financial system. The functions of the
financial system is the sum total of functions of various financial intermediaries. The functions
extend from the creation of money to proper management, which rest with socio-economic
development. It touches all aspects of the economy.

The functions of the financial system can be viewed under two broad categories:
• Regulatory Functions
• Developmental Functions
 • Banker's Bank • Channelizing flow of funds
I. Regulatory Functions

II. Developmental Functions

• Supervision of financial Institutions • Credit guarantee
• Regulations of all fraudulent and unfair • Credit information
trade practices • Training of intermediaries
• Regulation of stock exchange • Investors Education: Promotion of four
Implementing monetary control practices
• Controlling foreign exchange Directing • Collection of data and Publications
Investments • Conducting research
• Licensing, Inspection and Control • Institutional building and development
Creating financial awareness
• Management update
• Upgrading managerial skills
• Revival of sick units
• To promote self-employment schemes.
 FUNCTIONS OF FINANCIAL MARKET
Creation of Economy and Transfer of
Money Saving Fund

Landing Investment Capital Formation Entrepreneurship

Agriculture Industry Trade Services Consumption

Employment Income Generation Env. Development Institutional Building

Rural Development Poverty Alleviation Social Growth Standard of Living

Socio-Economic Growth
 Financial Systems and Economic Development
Financial institutions and markets are together called the financial system. This financial system is the
backbone of the national economy. This is because the efficiency with which the financial system works plays
a very important role in the economic development of a nation. The role of the financial system may not be
apparent since we assume its existence to be a given. However, when we do start paying attention to the
financial system, it is easy to see why it plays a foundational role in the economic development of a country.

Financial systems play an important role in the

economic development of a nation:

Aids Trade Aids Aids in Aids Help in

Interest Rates
and International Attracting Infrastructure Employment
Stabilization:
Commerce: Trade: Capital: Development: Creation:
 Role of Financial System in Economic Development of India

The Financial System plays a significant role in the process of Economic Development of a Country. The Financial
System comprises of a network of Commercial Banks, Non-Banking Companies, Development Banks and other
financial and investment institutions offer a variety of Financial Products and Services to suit to the varied
requirements of different categories of people. Since they function in a Developed Capital and Money Markets,
they play a crucial role in spurring economic growth in the following ways:

• Mobilizing Savings.
• Promoting Investments
• Encouraging Investment in Financial Assets
• Allocating Savings on the Basis of National Priorities
• Creating Credit
• Providing a Spectrum of Financial Assets
• Financing Trade, Industry and Agriculture
• Encouraging Entrepreneurial Talents
• Providing Financial Services
• Developing Backward Areas
 Financial Service Sector Problems & Reforms
Lack of Qualified Personnel:
The Financial
Service Sector Lack of Transparency:
has to face
many Lack of Specialization:
challenges in
its attempted Lack of Investor Awareness:
to fulfill the
ever growing Lack of Recent Data:

Financial
Lack of Co-ordination between different Financial Institutions:
Demands of
the Economy. Monopolistic Market Structures:
Thank you