212COM2109 – FINANCIAL MARKETS
AND INSTITUTIONS
By:
HEMAMEENA S
Introduction to Financial System
•Definition: A financial system refers to the structures,
institutions, and markets that facilitate the flow of funds
between savers, investors, and borrowers in an economy.
•Importance: It ensures the efficient allocation of resources,
fosters economic growth, and maintains economic stability.
•Components:
• Financial Markets
• Financial Intermediaries
• Financial Instruments
Functions of Financial System
•Resource Mobilization: Facilitates the transfer of funds from
savers to investors.
•Efficient Allocation of Resources: Directs funds to the most
productive uses.
•Risk Diversification: Allows individuals and businesses to
spread financial risks.
•Liquidity: Provides liquid assets, enabling transactions in the
economy.
•Price Discovery: Helps in determining the prices of financial
assets and securities.
Financial Concepts
•Financial Assets: Assets that represent a claim to future cash
flows (e.g., stocks, bonds).
•Financial Intermediaries: Institutions that facilitate the flow of
funds between savers and borrowers (e.g., banks, insurance
companies).
•Financial Markets: Platforms where financial assets are bought
and sold (e.g., stock exchanges).
•Financial Rate of Return: The profit or loss generated on an
investment, usually expressed as a percentage of the original
investment.
Financial Assets
•Types of Financial Assets:
• Equity: Shares or stock in a company, representing
ownership.
• Debt: Bonds, loans, or other forms of credit.
• Derivatives: Contracts whose value depends on the price of
underlying assets.
•Purpose: These assets allow individuals and institutions to
diversify their investments and manage risk.
Financial Assets
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Financial Intermediaries
•Definition: Entities that channel funds between savers and
borrowers.
•Types:
• Commercial Banks: Provide loans and accept deposits.
• Investment Banks: Help raise capital for companies and
governments.
• Insurance Companies: Provide financial protection against
risks.
• Pension Funds: Manage retirement savings and
investments.
• Mutual Funds: Pool investor money to invest in stocks,
bonds, or other securities.
Financial Markets
•Definition: Markets where financial assets (stocks, bonds, etc.) are
traded.
•Types of Financial Markets:
• Capital Markets: For long-term securities (e.g., stocks, bonds).
• Money Markets: For short-term, high-liquidity investments
(e.g., Treasury bills).
• Forex Markets: For trading currencies.
• Commodity Markets: For trading physical goods (e.g., gold,
oil).
•Importance: Financial markets facilitate price discovery, liquidity,
and capital formation.
Financial Rate of Returns
•Definition: The percentage gain or loss on an investment over a
period of time.
•Formula:
• Rate of Return = (Final Value - Initial Value) / Initial Value *
100
•Factors Influencing Returns:
• Market conditions
• Risk level
• Investment time horizon
Financial Instruments
•Definition: Contracts or securities that represent financial assets.
•Types:
• Equity Instruments: Common stocks, preferred stocks.
• Debt Instruments: Bonds, certificates of deposit.
• Derivative Instruments: Futures, options.
•Purpose: Used for investment, financing, and risk management.
Classification of Financial Markets
•By Maturity:
• Short-Term Markets (Money Markets)
• Long-Term Markets (Capital Markets)
•By Type of Instrument:
• Primary Markets: New securities issued.
• Secondary Markets: Existing securities traded.
•By Function:
• Auction Markets: Centralized, like stock exchanges.
• Dealer Markets: Decentralized, like over-the-counter
markets.
Development of Financial System in India
•Pre-Independence: Limited banking and underdeveloped
capital markets.
•Post-Independence:
• Nationalization of banks in 1969.
• Establishment of key financial institutions (e.g., RBI,
SEBI).
• Reforms in the 1990s to liberalize and modernize the
financial sector.
•Recent Developments:
• Introduction of digital banking and mobile payments.
• Growth of capital markets and insurance sectors.
Strengths of the Indian Financial System
•Diverse Financial Institutions: A wide range of institutions
catering to different financial needs.
•Strong Regulatory Framework: Institutions like RBI and
SEBI regulate financial activities.
•Robust Growth: India’s financial markets have grown
rapidly, attracting international investors.
•Digitalization: Advancements in digital banking, fintech, and
financial inclusion.
•Increased Foreign Investments: India has attracted
significant foreign capital, especially in the stock market.
Weaknesses of the Indian Financial System
•Non-Performing Assets (NPAs): High levels of bad loans in
public sector banks.
•Credit Accessibility: Limited access to credit for small businesses
and rural areas.
•Financial Literacy: Lack of financial education among the
population.
•Regulatory Challenges: Complex regulations that may hinder
ease of business.
•Over-reliance on Public Sector Banks: Dominance of public
sector banks reduces competition and efficiency.
Conclusion
•Summary: The Indian financial system has come a long way,
evolving from a limited and underdeveloped system to a
growing, diverse, and increasingly digital financial
environment.
•Future Prospects: The system continues to face challenges
but has significant potential for growth, especially in the areas
of financial inclusion, digital payments, and green finance.
