Functions of Financial System

(1) Savings Function: The global system of financial markets and institutions provides a
channel for the public's savings. Bonds, stocks, and other financial claims sold in the money
and capital markets provide a profitable, relatively low-risk outlet for the public's savings,
which flow through the financial markets into investment so that more goods and services can
be produced (i.e., productivity will rise), increasing the world's standard of living. Circulation
of money in markets will promote savings.
(2) Wealth Function: Financial system also makes sure that one can liquidate his or her
savings whenever he or she wants it and therefore individuals can have both the things, which
involve return on investments as well as comfort that they can liquidate their investments
whenever they want. Thus it helps in creating wealth.
(3) Liquidity Function: Financial system also makes sure that one can liquidate his or her
savings whenever he or she wants it and therefore individuals can have both the things, which
involve return on investments as well as comfort that they can liquidate their investments
whenever they want.
(4) Transferring Resources Across Time and Space: A well- developed financial system
provides a way to transfer economic resources through time and across geographic regions and
industries. Loans help move funds from the future to today, and savings products help do the
opposite, but the underlying function for these two distinguish products reacts the same.
Student loans, borrowings to buy a house and saving for retirement are few of those actions
that shift resources from one point in time to another. The financial system also provides
mechanisms to shift resources from one place to another.
(5) Economic Development: The financial system is also particularly important in reallocating
capital and thus providing the basis for the continuous restructuring of the economy that is
needed to support growth. In countries with a highly developed financial system, we observe
that a greater share of investment is allocated to relatively fast growing sectors. India is a mixed
economy. The Government intervenes in the financial system to influence macro-economic
variables like interest rate or inflation. Thus, credits can be made available to corporate at a
cheaper rate. This leads to economic development of the nation.
(6) Payment Function: The financial system offers a very convenient mode of payment for
goods and services. The cheque system and credit card system are the easiest methods of
payment in the economy. The cost and time of transactions are considerably reduced.
(7) Risk Function: The financial markets provide protection against life, health and income
risks. These guarantees are accomplished through the sale of life, health insurance and property
insurance policies.
 Characteristics of Financial Services

Financial services have same characteristics as of those services offered in an economy. Following
are its characteristics:
(1) Intangibility: Services are those which cannot be seen, touched or heard. They are intangible
in nature. For financial services to be created and marketed successfully, financial institutions
should provide them with good confidence.
(2) Customer orientation: Financial services it could be satisfactorily provided only when it
studies needs of its customers in detail. Only with customer interaction, new innovative services
could be created and offered. Cost, maturity period, liquidity criteria could be decided only after
interacting with customers.
(3) Inseparability: Services are produced and consumed at same point. It cannot be stored and
consumed later on. Production and supply takes place simultaneously, which demands for perfect
understanding between financial service firms and their clients
(4) Perishability: Financial services have to be created and delivered to their target clients. They
cannot be stored. They need to be supplied as per the requirements of their customer. Thus a
supplier should match between demand and supply.
(5) Dynamism: Financial services have to be dynamic. They need to be change as per social needs.
Financial institutions must be proactive in nature and evolve new services by visualizing
expectations of the market.

Types of Financial Services

(1) Banks: A bank is an institution which accepts deposits from the public and in turn advances
loans by creating credit. It is different from other financial institutions. Banks are such institutions
who has sole authority in creating credit by accepting deposits and making advances. The Banks
are the main participants of the financial system in India. The Banking sector offers several
facilities and opportunities to their customers. All the banks safeguards the money and valuables
and provide loans, credit, and payment services, such as checking accounts, money orders, and
cashier's cheques. The banks also offer investment and insurance products. The organized banking
sector works within the financial system to provide loans, accept deposits and provide other
services to their customers.
(2) Insurance: Insurance is a way of reducing your potential financial loss or hardship. It can help
cover the cost of unexpected events such as theft, illness or property damage. It can also provide
with a financial payment upon death. Several insurances provide comprehensive coverage with
affordable premiums. Premiums are periodical payment and different insurers offer diverse
premium options. The periodical insurance premiums are calculated according to the total
insurance amount. Mainly insurance is used as an effective tool of risk management as quantified
risks of different volumes can be insured.
(3) Mutual Funds: A 'mutual fund' is an investment vehicle that allows several investors to pool
their resources to purchase stocks, bonds and other securities. These collective funds (referred to
as Assets under Management or AUM) are then invested by an expert fund manager appointed by
a mutual fund company (called Asset Management Company or AMC). The combined underlying
holding of the fund is known as the 'portfolio', and each investor owns a portion of this portfolio
in the form of units.
(4) Merchant Banking: Merchant banking implies investment management. Companies raise
capital by issuing securities in the market. Merchant bankers act as intermediaries between the
issuers of capital and the investors who purchase these securities. Merchant banking is the financial
intermediation that matches the entities that need capital and those that have capital for investment.
The services provided by merchant bankers includes management of mutual funds, public issues,
trusts, securities and international funds. It involves dealing with the corporate clients and advising
them on various issues like- mergers, acquisitions, public issues, etc.
(5) Venture Capital: Venture Capital is a form of "risk capital". In other words, capital that is
invested in a project (in this case-a business) where there is a substantial element of risk relating
to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather
than as a loan and the investor requires a higher "rate of return" to compensate him for his risk
(6) Factoring: Factoring is a financial option for the management of receivables. In simple
definition it is the conversion of credit sales into cash. In factoring, a financial institution (factor)
buys the accounts receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the
amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%-
finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from
the customer is done either by the factor or the client depending upon the type of factoring. The
account receivable in factoring can either be for a product or service. Example: IFCI Factors Ltd.,
a subsidiary of IFCI Ltd.
(7) Forfeiting: It is a source of trade finance. For many years, forfeiting has attracted people's
interest in the banking sector and international trade because forfeiting is the most efficient
instrument in the sector of export finance. Forfeiting is the purchase of exporter's receivables at a
discounted price by paying cash, in case of factoring it could be 80-90% but in case of forfeiting,
it is 100%. Here, the buyer is known as the forfeiter who undertakes all risks while collecting the
receivables. Forfaiting involves dealing with negotiable instruments like bills of exchange and
promissory note which is not in the case of Factoring. Forfeiting services are provided by GE
Capital, Gunsen & Co. and many such others.

FUND BASED SERVICES

(1) Equipment leasing/Lease financing: Leasing is a process by which a firm can obtain the use
of certain fixed assets for which it must pay a series of contractual, periodic, tax-deductible
payments. The lessee is the receiver of the services or the assets under the lease contract and the
lessor is the owner of the assets. A lease is a contract whereby the owner of an asset (the lessor)
grants to another person (the lessee) exclusive right to use the asset for an agreed period, in return
for the payment of a rent (called lease rental). Capital assets like land, buildings, equipment's,
machinery, vehicles are the usual assets which are generally acquired on lease basis. The lessor
remains the owner of the asset, but the possession and economic use of the asset is vested in the
lessee.
(2) Hire purchase: Hire purchase is another method of acquiring a capital asset for use, without
paying its price immediately. Under hire purchase arrangement goods are let on hire, the hirer
(user) is allowed been paid. Thus the ownership in the asset is passed on to the hirer on payment
of the last installment. The amount and number of installments is fixed at the time of delivering
the asset to the hirer. If the hirer makes default in making payment of any installment, the seller is
entitled to recover the asset from the hirer. The hirer may, on his own also, return the asset to the
hiree without any commitment to pay the remaining installments. The installments for this purpose
are treated as hire charges. Thus, the property in the asset remains vested in the seller (hiree) till,
the right of purchase is exercised by the hirer after making payment of all the installments.
(3) Bill discounting: Discounting of bill is an attractive fund based financial service provided by
the finance companies. In the case of time bill (payable after a specified period), the holder need
not wait till maturity or due date. If he is in need of money, he can discount the bill with his banker.
After deducting a certain amount (discount), the banker credits the net amount in the customer's
account. Thus, the bank purchases the bill and credits the customer's account with the amount of
the bill less discount. On the due date, the drawee makes payment to the banker. If he fails to make
payment, the banker will recover the amount from the customer who has discounted the bill. In
simple words, discounting of bill means giving loans considering bills of exchange as a collateral.
(4) Venture capital: Venture Capital is a form of "risk capital". In other words, capital that is
invested in a project (in this case a business) where there is a substantial element of risk relating
to the future creation of profits and cash flows. Risk capital is invested as shares (equity) rather
than as a loan and the investor requires a higher "rate of return" to compensate him for his risk.
Venture capital provides long-term, committed share capital, to help unquoted companies grow
and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a
business in which he works, turnaround or revitalize a company, venture capital could help do this.
Procurement of capital from venture firms is significantly different from raising debt or a loan
from a lender. Lenders have a legal right to interest on a loan and repayment of the capital,
irrespective of the success or failure of a business but here VC has to acquire an equity stake to
pay the purchase price in installments and enjoys an option to purchase the goods after all the
installments have in the business. As a shareholder, the venture capitalists return is dependent on
the growth and profitability of the business. This return is generally earned when the venture
capitalist "exits" by selling its shareholding when the business is sold to another owner.
(5) Housing finance: Housing finance simply refers to providing finance for house building. It
emerged as a fund based financial service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country. Till now,
several specialized financial institutions/companies have entered in the field of housing finance.
Some of the institutions are HDFC, LIC Housing Finance, Citi Home.
(6) Insurance services: Insurance is a contract between two parties. One party is the insured and
the other party is the insurer. Insured is the person whose life or property is insured with the insurer.
That is, the person whose risk is insured is called insured. Insurer is the insurance company to
whom risk is transferred by the insured. That is, the person who insures the risk of insured is called
insurer. Thus insurance is a contract between insurer and insured. It is a contract in which the
insurance company undertakes to indemnify the insured on the happening of certain event for a
payment of consideration. It is a contract between the insurer and insured under which the insurer
undertakes to compensate the insured for the loss arising from the risk insured against.
(7) Factoring: Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash payment to the
supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm (client)
are purchased by a financial institution or banker. Thus, the factor provides finance to the client
(supplier) in respect of account receivables. The factor undertakes the responsibility of collecting
the account receivables. The financial institution (factor) undertakes the risk. For this type of
service as well as for the interest, the factor charges a fee for the intervening period. This fee or
charge is called factorage.
8) Forfaiting: Forfaiting is a form of financing of receivables relating to international trade. It is
a non-recourse purchase by a banker or any other financial institution of receivables arising from
export of goods and services. The exporter surrenders his right to the forfaitor to receive future
payment from the buyer to whom goods have been supplied. Forfaiting is a technique that helps
the exporter sells his goods on credit and yet receives the cash well before the due date. In short,
forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill and pay
ready cash to the exporter. The exporter need not bother about collection of export bill. He can just
concentrate on export trade.
(9) Mutual fund: Mutual funds are financial intermediaries which mobilize savings from the
people and invest them in a mix of corporate and government securities. The mutual fund operators
actively manage this portfolio of securities and earn income through dividend, interest and capital
gains. The incomes are eventually passed on to mutual fund shareholders

NON-FUND BASED/FEE BASED FINANCIAL SERVICES

(1) Merchant banking: Merchant banking implies investment management. Companies raise
capital by issuing securities in the market. Merchant bankers act as intermediaries between the
issuers of capital and the investors who purchase these securities. Merchant banking is the financial
intermediation that matches the entities that need capital and those that have capital for investment.
The services provided by merchant bankers include management of mutual funds, public issues,
trusts, securities and international funds. It involves dealing with the corporate clients and advising
them on various issues like- mergers, acquisitions, public issues, etc."
(2) Credit rating: Credit rating means giving an expert opinion by a rating agency on the relative
willingness and ability of the issuer of a debt instrument to meet the financial obligations in time
and in full. It measures the relative risk of an issuer's ability and willingness to repay both interest
and principal throughout the rated instrument. It is a judgment about a firm's financial and business
prospects. In short, credit rating means assessing the creditworthiness of a company by an
independent organization.
(3) Stock broking: Now stock broking has emerged as a professional advisory service. Stock
broker is a member of a recognized stock exchange. He buys, sells, or deals in shares/securities.
Each stock broker must get himself/herself registered with SEBI to act as a broker. As a member
of a stock exchange, he will have to abide by its rules, regulations and bylaws.
(4) Custodial services: In simple words, the services provided by a custodian are known as
custodial services (custodian services). Custodian is an institution or a person who is handed over
securities by the security owners for safe custody. Custodian is a caretaker of a public property or
securities. Custodians are intermediaries between companies and clients (i.e. security holders) and
institutions (financial institutions and mutual funds). There is an arrangement and agreement
between custodian and real owners of securities or properties to act as custodians of those who
hand over it. The duty of a custodian is to keep the securities or documents under safe custody.
The work of custodian is very risky and costly in nature. For rendering these services, he gets a
remuneration called custodial charges. Thus custodial service is the service of keeping the
securities safe for and on behalf of somebody else for a remuneration called custodial charges.
(5) Loan syndication: Loan syndication is an arrangement where a group of banks participate to
provide funds for a single loan. In loan syndication, a group of banks comprising 10 to 30 banks
participate to provide funds wherein one of the banks is the lead manager. This lead bank is decided
by the corporate enterprises, depending on confidence in the lead manager. A single bank cannot
give a huge loan. Hence several banks join together and form a syndicate. This is known as loan
syndication. Thus, loan syndication is very similar to consortium financing.
(6) Securitization of debt: Securitization is a financial innovation. It is conversion of existing or
future cash flows into marketable securities that can be sold to investors. It is the process by which
financial assets such as loan receivables, credit card balances, hire purchase debtors, lease
receivables, trade debtors etc. are transformed into securities. Thus, any asset with predictable cash
flows can be securitized. Securitization is defined as a process of transformation of illiquid asset
into security which may be traded later in the opening market. In short, securitization is the
transformation of illiquid, non- marketable assets into securities which are liquid and marketable
assets. It is a process of transformation of assets of a lending institution into
negotiable instruments.
 Classification of Financial Markets

Financial markets are classified in different ways, which are given below:
1. On the Basis of Claim on Financial Assets
The claims traded in a financial market may be for either a fixed amount or a residual amount.
Based on claim on financial assets, financial markets are following two types: Equity market and
Debt Market.
(a) Equity Market: Securities are conventionally divided into equities and debt securities.
Financial markets in which equity instruments are traded are known as equity market. This market
is also referred to as the stock market. Two types of securities are traded in an equity market
namely equity shares and preference shares. Preferred stock represents an equity claim that entitles
the investors to receive a fixed amount of dividend. An important distinction between these two
forms of equity securities lies in the degree to which they may participate in any distribution of
earnings and capital and the priority given to each in the distribution of earnings.
(b) Debt Market: Financial markets in which debt instruments are traded are referred as debt
market. Debt instruments represent contracts whereby one party lends money to another on pre-
determined terms and based on rate of interest to be paid by the borrower to the lender, the
periodicity of such interest payment and the repayment of the principal amount borrowed. Debt
securities are normally issued for fixed term and are redeemable by the issuer at the end of that
term. Debt securities include debentures, bonds, deposits, notes or commercial papers. Debt market
is other wise called fixed income market.
Generally, debt securities and preferred stock are classified as part of the fixed income market.
That sector of the stock market which does not include preferred stock is called the common stock
market.

2. On the Basis of Maturity of the Claims

Another way of classifying financial markets is on the basis of maturity/period of the claims. Based
on this, financial markets are following two types: Money market and Capital market.
(a) Money Market: A financial market for short-term financial assets is called the money market.
It is a market for dealing in monetary assets of short-term nature. The traditional cut off period for
short term and long term claim is one year. Financial asset with a maturity of one year or less than
one year is considered short term and therefore part of the money market. It is the central wholesale
market for short-term debt securities, or for the temporary investment of large amounts of short-
term funds. Money market is a collective name given to various firms and institutions that deal
with various grades of near-money. It includes trade bills, promissory notes and government
securities. Money market instruments have the characteristics of quick liquidity and minimum
transaction cost.
The instruments in money markets are relatively risk-free and the relationship between the lender
and borrower is largely impersonal. Borrowers in the money market are the central government,
state governments, local bodies, traders, industrialists, farmers, exporters, importers and the public.
The money market comprises several sub-markets, which are listed below.
(1) Call Money Market: Call Money means the amount borrowed and lent by commercial banks
for a very short period i.e. for one day to a maximum of two weeks. It is also called as inter bank
call money market, because the participants in the call money market are mostly commercial
banks. Call money market is the core of the Indian money market, which supply short-term funds.
Call money market plays an important role in removing the routine fluctuations in the reserve
position of the individual banks and improving the functioning of the banking system in the
country.
(ii) Treasury Bill Market: For meeting its short-term financial commitments government issues
these bills. The treasury bills market is a market, which deals in treasury bills issued by the Central
Government for a short period of not more than 365 days. It is a permanent source of funds for the
government. Regular treasury bills are sold to the banks and public, which are freely transferable.
(iii) Commercial Bill Market: Commercial bills are important device for providing short-term
finance to the trade and industry. Commercial bill market deals in commercial bills issued by the
firms engaged in business. These bills are generally issued for a period of three months. After
acceptance, the bill becomes a legal document. Such bills can be transferred from one person to
another by endorsement. The holder of the bill can discount the bills in a commercial bank for
cash.
(iv) Certificate of Deposit Market: Certificate of deposit market deals with the certificate of
deposits issued by commercial banks. A certificate of deposits is a documents of title to a time
deposit. The minimum amount of investment should not be less than One lakh and in the multiplies
of 1 lakh thereafter. The maturity period of CDs issued by banks should not be less than seven
days and not more than one year. They are freely transferable be endorsement and delivery.
Certificate of deposits provide greater flexibility to an investor in the deployment of their short-
term funds.
(v) Commercial Paper Market: Commercial paper refers to unsecured promissory notes issued
by credit worthy companies to borrow funds on a short-term basis. Commercial papers will be
issued in denominations of ₹5 lakh or multiplies thereof. They are transferable by endorsement
and delivery. Maturity period of commercial paper lies between 7 days and 365 days.
vi) Collateral Loan Market: This market deals with loans, which are backed by collateral
securities. Commercial banks provide short-term loans against government securities, share and
debentures of the government etc.

(b) Capital Market: Capital market is a market that specializes in trading long-term and relatively
high risk securities. A financial asset with a maturity of more than one year is part of the capital
market. It is a market for long-term capital. The capital market provides long-term debt and equity
finance for the government and the corporate sector. Capital market comprises two segments
namely the new issue market and secondary market. The various constituents of capital market are
viz. equity market, debt market, government securities market, mutual funds etc.

3. On the Basis of Existing Claim or New Claim

A third way of classifying financial markets is based on whether the financial claims are issued
newly or not. On the basis of issue of a security financial markets are following two types: Primary
market and Secondary market.
(a) Primary Market: The market for newly issued financial assets is called the primary market.
Primary market provides opportunity to issuers of securities, Government as well as corporate, to
raise resources to meet their requirements of investment and/or discharge some obligation. They
may issue the securities at face value, or at a discount/premium and these securities may take a
variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or
international market. Primary market consists of corporate securities. Central and state government
securities.

(b) Secondary Market: The market where buying and selling of existing securities takes place is
referred as secondary market. Secondary market, which is also referred as stock market
predominantly, deals in stock or equity shares. The distinguishing difference between the primary
and secondary markets is that in the primary market, the issuer of those securities from investors
receives the money for the securities, whereas in the secondary market, the money flows from one
investor to the other. The primary as well as the secondary markets is dependent on each other and
changes in one market affect changes in the other.

4. On the Basis of Domicile

Another way of classifying financial markets is one the basis of domicile. Based on domicile
financial markets can be divided into two viz. International Market and Domestic Market.
(a) International Market: International market is also referred as the external market or offshore
market or more popularly as the Euro market. International market is the markets where the
issuances of securities are offered simultaneously to investors of a number of countries and are
issued outside the jurisdiction of any single country. As a result of globalization, deregulation and
liberalization of financial markets the companies and the investors in any country seeking to raise
funds are not limited to the financial assets issued in their domestic market.
(b) Domestic market: Domestic market is that part of a nation's internal market representing the
mechanisms for issuing and trading securities of entities domiciled within that nation. It is a market
where issuers who are domiciled in the country issue securities and where those securities are
subsequently traded. It is otherwise called national or internal market. Domestic financial markets
can be divided into different sub type like:
(i) Gilt-edged Market: It is a market for government and semi government securities, which
carries fixed interest rates. Major players in the gilt-edged securities market in India are the
Reserve Bank of India, State Bank of India, private and public sector commercial banks, co-
operative banks and financial institutions.
(ii) Housing Finance Market: Housing finance market is characterized as a mortgage market,
which facilitates the extent of credit, to the housing sector. National housing bank is an apex bank
in the field of housing finance in India. It is a wholly owned subsidiary of the RBI. The primary
specialized housing finance institutions to mobilize resources and extent credit for housing
building
(iii) Foreign Exchange Market: Foreign exchange market or Forex market facilitates the trading
of foreign exchange. RBI is the regulatory authority for foreign exchange business in India. The
foreign exchange market in India prior to the 1990s was characterized by strict regulations,
restrictions on external transactions, barriers to entry, low liquidity and high transaction costs.
Foreign exchange transactions were strictly regulated and controlled by the Foreign Exchange
Regulations Act (FERA), 1973. With the rupee becoming fully convertible on all current account
transactions in August, 1994, the risk-bearing capacity of banks increased and foreign exchange
trading volumes started rising. This was supplemented by wide-ranging reform undertaken by the
Reserve Bank of India (RBI) in conjunction with the reforms by the Government to remove market
distortions and strengthen the foreign exchange market. The reform phase ensued with the Sodhani
Committee (1994) which, in its report submitted in 1995, made several recommendations to relax
the regulations with a view to vitalizing the foreign exchange market. With the replacement of the
Foreign Exchange Regulation Act (FERA) by the market friendly Foreign Exchange Management
Act (FEMA), 1999, the Reserve Bank delegated powers to authorized dealers to release foreign
exchange for a variety of purposes, Capital account transactions were also liberalized in a
systematic manner.
(iv) Futures Market: Futures markets provide a way for business to manage price risks. A future
contract is an agreement that requires a party to the agreement to either buy or sell something at a
designated future date at a predetermined price. The basic economic function of futures market is
to provide an opportunity for market participants to hedge against the risk of adverse price
movement. Buyers can obtain protection against rising prices and sellers can obtain protection
against declining prices through future contracts. Future contract can be either commodity futures
or financial futures. Commodity futures involve traditional agricultural commodities and industrial
commodities. Futures contract based on financial instruments or a financial index are known as
financial futures.
 Types of Financial Instruments

i. Mutual Funds: It is a kind of pool formed by coming together of number of small

investors. Who invests out of their small savings & collected funds are handed over to
professional organization to manage funds. More than 46 asset management companies are
recently running mutual funds markets in India. RBI & SEBI act as a regulator of mutual
fund markets. As mutual funds require small investments are popular among investing class
as in small investments can attract benefits of economies of scale. Main function of mutual
funds is to mobilizes the savings of general public & invest in stocks of the companies
which provide good return on investments through stock markets. In India, Mutual Funds
started with the establishment of Unit Trust of India (UTI) in 1963 by special act of a
parliament. With establishment of UTI had an undue advantage of virtual monopoly from
1964 to 1987. Later on private sector players were also allowed to enter in
mutual funds market.

ii. Post Office Schemes: In India post office operates as a financial institution. The Indian
postal services had around 1, 55,500 post offices which served almost 7000 persons on
average. Due to easy access, faith in post office department, easy to understand schemes
have boosted to popularity of post office in ancient times. With rapid growth of modem
banking in India popularity of post office has reduced. Slow functioning & lethargic
approach of bureaucracy are also responsible for downfall in investment in post office
schemes. Government security like KVP, NSC etc... are sold through post offices. It
provides benefits like stable returns, security, safety & tax exemptions. Still in rural areas
majority of investments is done through post offices. Loan facility also provided in some
schemes. As per RBI's Report on currency & Finance at end of March, 2005 amount of
savings deposited in post offices per account was Rs. 2,500 as compared to deposits of
Rs.15,000 with banks.

iii. Gilt Edge Security: Gilt edge securities are also known as G-sec. G sec is issued by central
or state government institutions like IDBI, SFC and SIDBI etc... This kind of securities
bears a long-term maturity of 10 to 20 years. It can be also issued by public sector
enterprises such as electricity boards, port trusts etc... G-sec is highly liquid asset with
heavy tax benefits. G-sec bears low risk & is generally issued in order to meet short term
liability. Say for meeting obligations of paying dividends or interest on loans or bonds.

iv. Treasury Bills: It is a short-term money market instruments issued by the government for
meeting its short-term liquidity requirements by borrowing funds from the markets. These
bills are also popularly known as "T-Bills" T- Bills are issued for six months. They are
issued at discount & repayable at par. For e g. if face value of T. Bills is Rs. 100 & are
issued at 20% discount. Buyer will have to pay Rs.80 while buying the security. On
maturity the buyer will receive Rs.100. RBI looks after the buying & selling of T-Bills on
behalf of the government. It bears the surety of the government for repayment of deposits.
They are not as popular as they carry low rate of interest. Government in order to meet
 heavy expenditure of infrastructural projects, it is an easy way to meet short term funds
requirement for uninterrupted working of government project.

v. Commercial Papers (CP's): It is a short-term promissory note for loan taken by firm. It
is money market instrument. It is usually issued for 180 days. CP's are sold at discount &
redeemable at par or face value of the security. CP's are issued in denomination of Rs.5
lakhs. Further can be issued in denomination of Rs.1 lakhs. Due to heavy investment
requirements CP's are not so popular among individual investors, but are popular among
the institutional investors as Good Avenue to invest for short term. Any firm willing to
issue CP's must have minimum size of the issue of Rs.1 crore. While issuing CP's all the
expenses related issue like stamp duty, dealership fees & other charges are to be paid by
the firm. Any people, NRI, Bank, and Institutions are allowed to invest in CP's. CP's were
introduced firstly to India in 1987.

vi. Certificate of Deposits (CD's): CD's are generally issued by commercial banks & can be
negotiated. It is a kind of time deposit receipt issued by the bank. Most important thing to
be noted is it is bearer document. Maturity of this document varies from 15 days to one
year. CD's are highly liquid & easily marketable instrument. There is no prescribed rate of
interest & banks are given liberty to issue CD's at discounted rate on face value. Minimum
denomination for issuing CD's to single investor is Rs. 5 lakhs, further issue can be in
multiples of Rs. 1 lakh.

vii. Life Insurance: In most of countries majority of population does not have accesses to
formal insurance. In India approximately 40% of population does not have insurance &
approximately 65% of population does not have adequate insurance out of total population
having insurance cover. IRDA has been actively working towards encouraging insurance
in India. In India till 1956, insurance was nationalized business in India. LIC is responsible
for life insurance business in India. It is heavy investment instrument which requires
compulsory saving for protecting life. Even post offices also provide postal life insurance
schemes. With arrival of LPG in India private players are also allowed to participate in
insurance business. Foreign players can enter in Indian markets but after entering into joint
venture with Indian company.

viii. Public Deposits: It is a vital instrument for companies. In times of financial troubles or in
emergency on temporary situations companies can accept deposits from public are known
as Public Deposits. It is also known as companies fixed deposits. It bears interest rates of
9-12% on an average. It is popular among the investing class & middle class investors. On
maturity the amount taken by the company is repaid against Public Deposit Receipt.
Companies can appoint collecting agents or issue managers to raise funds through public
deposits. On maturity these receipts can be renewed for the further period.
 The administrative cost of deposits for the company is lower than that involved in the issue
of shares and debentures. The procedure of inviting public deposits is also simpler.
o It involves lesser formalities.
o The rate of interest payable by the company on public deposits is lower than the interest on
loans from banks and other financial institutions
o Interest paid on Public Deposits is a tax deductible expense.
o It helps the company to borrow funds from a larger segment of public and thus reduces the
dependence of the company upon financial institutions.
o It also enables the company to create contact with a large number of investors.
o There is no dilution of shareholders' control as the depositors have no voting rights and
cannot interfere with the internal management of the company.
o RBI issues directives from time to time for regulating public deposits. These regulations
are aimed at safeguarding the interest of the public and to give investors a feeling of
security in investing in the public deposits.

FACTORS AFFECTING FINANCIAL MARKET

Important factors, which affect the movement of prices of securities in the market are the
following:
A. Actions of Investors: Actions of individuals, institutions and mutual funds investors will
instantly affect the prices of stocks, bonds, and futures in the securities market. For example, if a
large number of people want to buy a certain stock its price will go up, similarly if many people
were bidding on an item of stock, its price will crash.
B. Business Conditions: Both the condition of an individual business and the strength of the
industry will affect the price of its stock. Profits earned volume of sales, and even the time of year
all will determine how much an investor wants to invest in stock.
C. Government Actions: The government makes all kinds of decisions that affect both how much
an individual stock may be worth (new regulations on a business) and what sort of instruments
people want to buy. The government's interest rates, tax rates, trade policy and budget deficits all
have an impact on prices.
D. Economic Indicators: General trends that signal changes in the economy are watched closely
by investors to predict what is going to happen next. Such indicators include the Gross National
Product (GNP), the inflation rate, the budget deficit and the unemployment rate. These indicators
point to changes in the way ordinary people spend their money and how the economy is likely to
perform.
E. International Events: Events around the world, such as changes in currency values, trade
barriers, wars, natural disasters, and changes in governments will affect the price of securities,
which ultimately influence the amount of investment.
 Securities Related services

Indian securities market was started with the establishment of Bombay Stock Exchange (BSE). In
Indian securities market were used to follow paper based system of trading securities which was
time consuming as well as risk of loss in transit. In earlier years transfer procedure of transfer was
time consuming. The person intending to sell share will send share with transfer application to the
company & company after complying with necessary requirements the name of the old member
will be changed. Then shares will be transferred. Generally, this period will take 15 days to
months’ time including postage time as well. With introduction of depository system there no
actual physical shares are in existence. All the shares are now traded in electronic form. This
replaced the way trading was used to take place in earlier period i.e. for e.g. In BSE. there was ring
in which transactions were used to take place now this trade can be done through particular brokers
office. There is no need to go to BSE for trading of securities. Development in economic structure
gave birth to many stock exchanges throughout country. Overall development in securities market
created opportunities to provide various services.
a. Securities lending Services: Many of the banks have started depository services in order to
provide securities related services to their consumers. Securities lending services are provided by
banks to people who carry on the trading in stock markets. For providing these services banks
charge fees. This facility is in provided in order to carry out settlement procedure in time.
b. Securities Clearing Services: In paperless means dematerialized trading this clearing of the
securities has huge role to play. National Stock Exchange (NSE) has floated National securities
Clearing Corporation Ltd. For carrying on clearing of securities with the help of banks. This
facility has also been initiated by many other stocks exchanges.
c. Settlement Services: From April, 2003 Indian stock market shifted T+2 trading system. This
rolling settlement procedure could be possible due to separation of dematerialization & clearing &
settlement procedure. These change brought Indian to compete with international standard. This
change was possible due to radical changes in IT sector Banks act as an intermediary in settlement
procedure for which they charge fees or commission.
d. Securities Trading Services: Like big broking & securities trading firms, some banks also
entered into securities trading. Unlike any other broker or trading firm they act as an intermediary
to carry out buying & selling of securities on behalf of the customer. Now days they also provide
online trading of securities to their consumers.
e. Private Placements: A company makes offer to sell its securities to institution investors
privately without issuing prospectus & inviting public. It saves cost of issue & time consumed for
issuing shares to the institutional investors like Banks &FI's. This can be a valuable service to
small & medium companies. Banks hold the securities for some period of time, after that period
banks can sell of their securities making profit on the investment.
f. Underwriting Services: It is an assured promise by the agent in event of not being able to sell
securities at established price. As per mandatory requirement 90% of the securities must be
subscribed compulsorily for carrying on the issue of capital to public. In event of non receipt of
minimum subscription, the entire amount received in IPO shall be refunded to public. In
underwriting, agents take the responsibility to company of achieving minimum of 90% of total
capital available for subscription. Many of the banks operate as underwriting agent. They get
commission for providing services to the company
g. Insurance Related Services: In India insurance sector provides services to its customers in
three layers. The three layers are made up of brokers, insurance company & re-insurance business.
In India. insurance business is controlled by IRDA (Insurance Regulatory & Development
Authority) IRDA lays down the path for how to carry on the business of insurance in country.
Brokers are person licensed by IRDA, who facilitates insurance contracts between Insurance
contract between company & customer on behalf of customer. For running business of insurance,
one has to obtain license from IRDA. Insurance companies have to follow timely guidelines issued
by IRDA. Even when company wants to bring in any new kind of policy or scheme to public,
necessary approval of IRDA must be obtained by the company. In simple words Re-insurance
means insurance of insurance. It is kind of insurance cover obtained by the insurance company by
paying premium.
h. Other Financial Services: With continuous up gradation in technology, the scope of financial
services is going to increase only. Other financial services include various facilities provided by
banks like project finance & treasury management etc.... for carrying on the infrastructure projects
private companies require finance for long span of time. Banks help them by providing continuous
assistance & helping in arranging finance from public. Treasury management means dealing with
or managing funds or money. This service is generally required by finance companies, mutual
funds, PSU's (Public Sector Undertaking) It is special kind of financial service provided by few
banks running Asset Management Companies.

Banking Services
Banks provide various financial services, other than their main banking functions of accepting
deposits & lending of money. These other services contribute heavily to the revenue & profit
generation of the banks. In this kind of service, banks provide agency functions to their clients.
a. Money Transfer: Money transfer is considered an important service rendered by the banks.
Money transfer in recent times can be in form of Demand drafts, Pay orders, Traveller's cheque
etc... Demand drafts & Pay order is a facility whereby transferor has to deposit amount to be
transferred with commission of the bank, the bank will issue a cheque in form of demand draft or
pay order. This DD or PO is sent to the transferor to transfree. On deposit of that DD or PO, the
amount will be paid to the transfree It is safe & oldest form of transfer of money Traveller's cheques
are issued by the bank on deposits of some money When the person is travelling abroad these
cheques can be encashed at any branch while travelling abroad banks do take some commission
or charge fees for providing this services. With the arrival of new technological development like
internet banking, mobile banking telephonic banking etc... have made it easier to transfer money
at brisk speed. Various payment & settlement systems like RTGS, NEFT etc. have reduced the
cost as well as the time taken to transfer money
b. Safe Deposit Locker: This is part of banks custodial services provided by the banks. It is a
service whereby the customer can keep their valuables like gold, silver ornaments etc... other then
cash. It is kept in safe vault of the bank, provided to its customers on a rental basis. One key of
safe remains with the manager & other keys will remain with the customer. For operating safe or
to open safe both keys are required. This service is vital for customers these days.
c. Credit Cards: It is one of the trendy financial services as well as one of the most popular form
of plastic money. It is a plastic card of visiting card size having magnetic strip. It helps consumer
to buy goods today & pay tomorrow. Banks do provide this facility by charging some fees & must
receive at least 5% of the total amount due from the customer. Credit cards contain certain limits
on purchasing according to earning capacity of an individual. This plastic culture has been rapidly
growing in India Credit cards allows less carrying of hard cash. It is one of the most profitable
service for the banks.
d. Letter of Credit: A letter of credit is a document issued by a financial institution, assuring
payment to a seller of goods or services provided certain documents have been presented to the
bank. This document proves that the seller has performed the duties under an underlying contract
(e.g., sale of goods contract) and the goods or services have been supplied as agreed. In retum for
these documents, the beneficiary receives payment from the financial institution that issued the
letter of credit. The letter of credit serves as a guarantee to the seller that he will be paid regardless
of whether the ultimate buyer fails to pay. The letter of credit can also be used to ensure that all
the agreed upon standards and quality of goods are met by the supplier, provided that these
requirements are reflected in the documents described in the letter of credit. Letters of credit are
used primarily in international trade for transactions between a supplier in one country and a
customer in another. It can be used for domestic purpose as well. It helps to promote foreign trade
as well as helps domestic seller to expand its activities. For issuing such letter of credit banks do
charge some commission.
e. Guarantees: It is a security given by the bank on behalf of its customer to the third party. It is
a promise to perform or discharge liability in case of default of its customer. Banks charge fees for
providing guarantee to their customers. It is required by the business, firms etc...for carrying out
various work or projects. In such event banks act as a surety. The person to whom guarantee is
given is called creditor & a customer in respect of who guarantee is called a principal debtor. Being
guarantor bank will have to pay in case of default to complete work or make payment. Banks act
cautiously while accepting guarantee on behalf of its customers.
 Microfinance
Meaning:
According to Otero "Microfinance is "the provision of financial services to low-income poor and
very poor self- employed people."
According to Schreiner and Colombet "Microfinance is the attempt to improve access to small
deposits and small loans for poor households neglected by banks."
Advantages of micro finance:
 Development Tool: It acts as a vital tool of development tool for developing and
underdeveloped. Development is vital for growing economy. It meets the requirement of
weaker section and their small financial requirement of MSME's.
 Women Oriented Financing: It helps to empower women in socio- economic upliftment in
developing economy. Balancing between various issues like alcoholisms and other even
Financial Institutions prefers to finance women for financing.
 Tool for Rehabilitation: It helps to uplift the social and economic rehabilitation of the small
entrepreneurs. It acts as a tool of rehabilitate the financial balance as well as help to create
more employment opportunities which will empower economic balance of society.
 Commercialization of Micro Finance Institution: It is one of the most important aspect of
financing and moving towards commercialization will improve the benefit reaching more
sections in the society and promoting MSME organizations and unorganized segment of
business.
 Opportunity for Commercial Banks: It gives opportunity for commercial banks to cater to
uncatered sections of the society which have been heavily dependent on unorganized segment
of financing requirements
 Automation of Microfinance System: It is a need for an hour for moving towards automation
of microfinance system. It will only help to improve the operation of the system. It will
also help of expand
Disadvantages of micro finance

 High interest rate and high Transaction cost: Due to low amount of financing and less
volume of transaction the burden can be seen on interest charged by institution are on higher
side. The low volume increases the cost of operation. It reduces the people opting for the
microfinance.
 Barriers for Conventional Banking: Conventional Banking requires to follow the procedure
documentation etc... It also requires signature on various papers. Literacy issues and other
issues like unorganized segment help with less procedure, time consuming which is a barrier
for Conventional banking to control with.
 Inadequate investment in Agricultural and Rural Development: It has been always an
area of concern that even though Indian economy having more contribution to GDP from
agricultural and rural segment still some rural areas are not having presence of Banking
 System and more of farmers opting to other business or committing suicide raised serious
questions on the inadequate finance for rural and agricultural development.
 Technical Understanding of Banking and Finance: Rate of literacy and financial literacy
is one of the problem in microfinance. Poor and lack of knowledge relating to b Banking and
Finance pasts huge challenge for the success of microfinance in country like India.
 No Innovation: Lack of Innovation and lack of product mix is a problem that financial
institution can deal with by offering wide range of products under microfinance will help to
improve the customer base and interest.

Self Help Groups

The Self Help Group (SHG)- Bank linkage programme was launched by NABARD in 1992 with
the policy support of the RBI. The programme has been designed and nurtured by NABARD for
over 15 years. The main objective of this programme has been financial inclusion by extending
outreach to poor households in rural areas, making available credit services at their door step with
easy and self-managed access to formal financial services on a sustainable basis and cost-effective
manner. Rules of the group are decided by members themselves.
A SHG group is a small, economically homogeneous and affinity group of 10-20 poor persons
which come together to;
o Save small amounts regularly
o Mutually agree to contribute to a common goal
o Meet their emergency needs
o Have collective decision making
o Provide collateral free loans on terms decided by the group at market driven rates.
o Self-help group is a method of organizing the poor people and the marginalized to come
together to solve their individual problem
Characteristics of Self-Help Groups
1. Voluntary Participation: Members join willingly to improve their situation.
2. Shared Goals: The group is centered around a common issue or need.
3. Member-Driven: Decisions and actions are usually taken collectively.
4. Mutual Support: Members help each other by sharing experiences, advice, or resources.
5. Sustainability: Many SHGs strive to be self-reliant through financial contributions or
external support.
Types of Self-Help Groups
1. Support Groups
 o Focus on emotional and psychological support.
o Common for people dealing with similar issues like addiction, grief, or illness (e.g.,
Alcoholics Anonymous, cancer survivor groups).
2. Economic SHGs
o Often seen in rural areas, especially in developing countries.
o Members pool resources and save collectively to access loans for income-
generating activities.
o Popular among women for financial independence.
3. Skill Development Groups
o Aim to empower members by teaching new skills or improving existing ones.
o Examples include groups for artisans, farmers, or small business owners.
4. Therapeutic SHGs
o Help members manage specific health conditions like depression, anxiety, or
chronic illnesses.
o Often guided by trained facilitators.
5. Advocacy and Awareness Groups
o Unite members to address societal issues like domestic violence, disability rights,
or environmental concerns.
Benefits of SHGs
 Emotional Support: Reduced isolation and increased sense of belonging.
 Empowerment: Members gain confidence, leadership skills, and independence.
 Financial Growth: Economic SHGs help improve livelihoods and reduce poverty.
 Knowledge Sharing: Members learn from each other's experiences and expertise.
 Social Change: Advocacy groups often bring about awareness and policy changes.