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Session I
Financial Market and Financial Institutions
Instructor:
Prof. (Dr.) Paresh Shah
FCMA., Ph.D. (Finance)., F.D.P.(IIMA)
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INTRODUCTION
• System stands for a set of bodily organs likecomposition or concurring in function, ascheme of classification and a method of
organisation.• Finance holds the key to all human activities.
• Finance is the study of money – its nature,
creation, behaviour, regulation andadministration.
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FINANCIAL SYSTEM
• A set of inter-related activities or services
working together to achieve some
predetermined purpose or goals.
• Includes indifferent markets, institutions,
instruments, services and mechanism which
influence the generation of savings,
investment, capital formation and growth.
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FINANCIAL SYSTEM
• Van Horne : the purpose of financial markets to
allocate savings efficiently in an economy to ultimate
users either for investment in real assets or for
consumption.• Robinson: To provide a link between savings and
investment for the creation of new wealth and to
permit portfolio adjustment in the composition of
the existing wealth.
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FIs
• Tailor made products
• Financial intermediaries
– Accepting funds from one entity and lending to
another entity
– Borrow from net savers and on lend the funds
borrowed to the net borrowers
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Securities
• Primary securities – securities issued by final
users of funds to the fund giver
• Secondary securities – securities issued by
financial intermediaries to the fund giver
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Financial intermediation
• Net borrowers create financial assets
• Net savers create financial liabilities
•
BROKERS – Arranges for net saver and net borrowers
– Does not issue any securities nor receive any
security
– Pocketing commission or brokerage for
matchmaking
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Financial intermediary
• Receive interest from net borrowers
• Pay interest to net savers
•
Difference is Interest spread• Also earns brokerage and underwriting
commission
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Types of assets
• Real assets
– Tangible useful to generate future benefits for
their owners
• Financial assets
– Securities and loans are contracts that promise
future monetary benefits
– Financial assets dominates assets of the fundassociated firm
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Role of financing
• Equity is not an important
• Deposits are major source
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Rationale of Financial Intermediation
• Help to overcome a market imperfections
• Reduce the transactions costs
– Saver – monitoring
– Borrower – lower fund procurement costs
• Diversification benefits
– Small investment denomination
– Allow investors to invest in all the stocks of an
index
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Rationale of Financial Intermediation
• Maturity and liquidity transformation
– Housing finance sector -Short maturities liabilities
may be converted in to long term financial
institutions
– Pension funds and Insurance companies – long
term liabilities with long term assets – also invest
in short term securities
– Liquidity – savings accounts – channel into
investments
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Disintermediation
• The trend of net borrowers and net savers in
an economy bypassing intermediaries in their
attempt to invest and borrow money
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Categories of Financial Institutions
• Depository institutions
– Commercial bank
– Cooperating banks
– Credit societies
Fair proportion of these deposits are repayable on
demand
Fund accepted are invested by these institutions inloans and securities
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Categories of Financial Institutions
• Non-depository Institutions
– Finance companies
• Primary business – lending and investing
• Funds comes from borrowings or bond and debenture
issues
The Development financial institutions, HFCs and NBFCs
covered in this category
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Categories of Financial Institutions
• Contractual Institutions
– Formal agreement with customers for long term
use of funds
– Insurance companies and pension funds
– Risk protection and old age security
– Medium maturities
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Categories of Financial Institutions
• Mutual funds
– Vehicles
– Invest in equity and debt market on behalf of their
unit holders
– Opportunities of diversified investments yielding
low risks with returns that are closely linked to
returns in the market in which they invest – With higher returns and risks in compare to bank
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Regulations
• FIs are heavily regulated
• Supervision
•
Safety and soundness of individual firms andthe industry as a whole and to protect the
consumer
• PRUDENTIAL AND CONDUCT OF BUSINESS
REGULATION
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FUNCTIONS
• Mobilisation of savings
• Distribution for industrial investment
•
Stimulating capital formation• THE VERY OBJECTIVE IS ECONOMIC GROWTH.
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PROCESS
• The process of savings, finance, and
investment involves financial institutions,
markets, instruments and services.
• Supervision, control and regulation are equally
significant.
• FINANCIAL MANAGEMENT IS AN INTEGRAL
PART OF THE FINANCIAL SYSTEM.
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FINANCIAL ASSETS AND INTERMEDIARIES
• Financial assets with attractive yield, liquidity, andrisk characteristics encourage savings in financialform.
• By evaluating alternative investments and monitoringthe activities of borrowers, financial intermediariesincrease the effciency of resource use.
• The efficient use of resources, saving and risk taking
are the corner stones of a growing economy.
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USERS OF FIANCIAL SERVICES
• House hold sector viz., unregulated firms andindividuals. The seek convenience, liquidity,and security.
• Businesses –
complicated needs. Needs shortterm credit to finance inventories and longterm funds to finance capital expansion.
•
Government –
use payment services, netborrowers
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