overview of indian financial systems and markets

8/12/2019 Overview of Indian Financial Systems and Markets

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BANKING AND INSURANCE

MBA 4TH SEM

UNIT 1

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INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economicunits, broadly classified into corporate sector, government and household sector. While

performing their activities these units will be placed in a surplus/deficit/balanced budgetarysituations.

There are areas or people with surplus funds and there are those with a deficit. A financialsystem or financial sector functions as an intermediary and facilitates the flow of funds from theareas of surplus to the areas of deficit. A Financial System is a composition of variousinstitutions, markets, regulations and laws, practices, money manager, analysts, transactions andclaims and liabilities.

Financial System

Overview of Indian financial systems and markets: Constituents and functioning,developments since 1991, recent trends, various financial intermediaries.

Reserve bank of India (RBI): Role, functioning, regulation of money and credit,monetary and fiscal policies.

Overview of financial services: Introduction, nature, scope and uses, regulatoryframework in financial services .


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The word "system", in the term "financial system", implies a set of complex and closelyconnected or interlined institutions, agents, practices, markets, transactions, claims, and liabilitiesin the economy. The financial system is concerned about money, credit and finance-the threeterms are intimately related yet are somewhat different from each other. Indian financial systemconsists of financial market, financial instruments and financial intermediation. These are briefly

discussed below.

Financial System refers to the financial needs of different sectors of the economy and the waysand means to meet such needs efficiently and economically. Funds are required for meetingvarious monetary needs.

The financial needs are met from different sources and agencies.

Indian financial system are given in the diagram below.

The formal financial system consists of four components :

1. Financial institutions,2. Financial markets,3. Financial instruments and4. Financial services.
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The financial system acts as a connecting link between savers of money and users of money andthereby promotes faster economic and industrial growth.

Thus financial system may be d efined as a set of markets and institutions to facilitate theexchange of assets and risks.

Efficient functioning of the financial system enables proper flow of funds from investors to productive activities which in turn facilitates investment.

Classification of Financial Market in India

Type of financial market are given in the diagram below.

The financial markets are classified into two groups:

Capital Market

1. Corprate Market Primary Market Secondary Market

2. Government Securities Markets3. Long Term Loans Markets

Term Loan Markets Mortgages Markets Financial Guarantees Markets

Money Market 1. Unorganized Market
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Money Lenders Indigenous Bankers Chit Funds

2. Organized Money Market Treasury Bills

Commercial Paper (CP) Certificate Of Deposit (CD) etc Call Money Market Commercial Bill Market

Capital Market

A capital market is an organized market. It provides long term finance for business. According toShri, K.S. Capital Market refers to the facilities and institutional arrangements for borrowingand lending long- term funds.

Capital Market is divided into three groups:

1. Industrial / Corporate Securities Market

It is a market for industrial securities. Corporate securities are equity and preference shares,debentures and bonds of companies. Industrial security's market is very Sensitive and ActiveFinancial Market.

It can be divided into two groups: Primary and Secondary Market

Primary Market : It is a market for new issue of securities, which are issued to the public

for first time. It is also called as New Issue Market. Secondary Market : In the secondary market, there is a sale of secondary securities. It isalso called as Stock Market. It facilitates buying and selling of securities.

2. Government Securities Market

In this market, government securities are bought and sold. It is also called as Gilt-EdgedSecurities Market. The securities are issued in the form of bonds and credit notes. The buyers ofsuch securities are Banks, Insurance Companies, Provident funds, RBI and Individuals. Thesesecurities may be of short-term or long term.

3. Long-Term Loans Market

Banks and Financial institutions provide long-term loans to firms, for modernization, expansionand diversification of business.

Long- Term Loan Market can be divided into:
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Term Loans Market : Banks and Financial Institutions provide term loans to companiesfor a period of one year. The financial institutions help in recognizing investmentopportunities to motivate emerging businessmen. They also give encouragement tomodernization.

Mortgages Market : It provides loans against securities of immovable assets like land

and buildings. Financial Guarantees Market : Financial Institutions (FIS) and banks provide financialguarantees on behalf of their clients to third parties.

Money Market

Money Market is the market for short term funds i.e. for a period up to one year.

The money market is divided into two: Unorganized and Organized Money Market.

1. Unorganized Market

Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc.

Money Lenders : Money Lenders lend money to individuals at a high rate of interest. Indigenous Bankers : They operate like money lenders. They also accept deposits from

public. Chit Funds : These collect funds from members and provide loans to members and

others.

2. Organized Money Market

Organized Markets work as per the rules and regulations of the RBI. RBI keeps a strict controlover the Organized Financial Market in India.

Organized Market consists of: Treasury Bills, Commercial Paper (CP), Certificate OfDeposit(CD), Call Money Market, Commercial Bill Market .

Treasury Bills : To raise short term funds treasury bills are issued by Government. It is purchased by Commercial Banks. At present, Government issues 91 days and 364 daystreasury bills.

Commercial Paper (CP): Commercial paper is issued by companies who are listed onStock Exchange. CP is issued at discount and repaid at face value. The maturity period

ranges from 7 days to one year. CP's are issued in multiple of 5 lakh. The companyissuing CP must have tangible net worth of at least 4 crore. Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial

Institutions to raise finance from the market. The maturity period for CD's is between 7days to 1 year. CD's is issued at a discount and repaid at face value. CD's is issued for aminimum of 25 lakhs.


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Call Money Market : A loan which is taken or given for a very short period, that is forone day is called Call Money Market. It involves lending and borrowing of money on adaily basis. No security is required for these very short-term loans.

Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawerof the bill can get the bills discounted with Commercial Banks. The Commercial Banks

can get the bills rediscounted with Financial Institutions.

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created ortransferred. As against a real transaction that involves exchange of money for real goods orservices, a financial transaction involves creation or transfer of a financial asset. Financial Assetsor Financial Instruments represents a claim to the payment of a sum of money sometime in thefuture and /or periodic payment in the form of interest or dividend.

Money Market - The money market ifs a wholesale debt market for low-risk, highly-liquid,

short-term instrument. Funds are available in this market for periods ranging from a single dayup to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. Thetransactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met bythe exchange of currencies. Depending on the exchange rate that is applicable, the transfer offunds takes place in this market. This is one of the most developed and integrated market acrossthe globe.

Credit Market - Credit market is a place where banks, FIs and NBFCs purvey short, mediumand long-term loans to corporate and individuals.

Constituents of a Financial System


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FINANCIAL INSTRUMENTS

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets that are

near substitutes for money. The term short-term means generally a period upto one year and nearsubstitutes to money is used to denote any financial asset which can be quickly converted intomoney with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

1. Call/Notice Money2. Treasury Bills3. Term Money4. Certificate of Deposit5. Commercial Papers

1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. Whenmoney is borrowed or lent for a day, it is known as Call (Overnight) Money. Interveningholidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day andrepaid on the next working day, (irrespective of the number of intervening holidays) is "CallMoney". When money is borrowed or lent for more than a day and up to 14 days, it is "NoticeMoney". No collateral security is required to cover these transactions.

2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term moneymarket. The entry restrictions are the same as those for Call/Notice Money except that, as perexisting regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. Itis an IOU of the Government. It is a promise by the Government to pay a stated sum after expiryof the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They areissued at a discount to the face value, and on maturity the face value is paid to the holder. The

rate of discount and the corresponding issue price are determined at each auction.4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued indematerialised form or as a Usance Promissory Note, for funds deposited at a bank or othereligible financial institution for a specified time period. Guidelines for issue of CDs are presentlygoverned by various directives issued by the Reserve Bank of India, as amended from time to
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time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks(RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have

been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDswithin the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments

viz., term money, term deposits, commercial papers and intercorporate deposits should notexceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper thedebt obligation is transformed into an instrument. CP is thus an unsecured promissory note

privately placed with investors at a discount rate to face value determined by market forces. CPis freely negotiable by endorsement and delivery. A company shall be eligible to issue CP

provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, isnot less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the

banking system is not less than Rs.4 crore and (c) the borrowal account of the company isclassified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by otheragencies. (for more details visit www.indianmba.com faculty column)

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zerocoupon bonds, deep discount bonds etc.

Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instruments iscalled as hybrid instruments. Examples are convertible debentures, warrants etc.

FINANCIAL INTERMEDIATION

Having designed the instrument, the issuer should then ensure that these financial assetsreach the ultimate investor in order to garner the requisite amount. When the borrower offunds approaches the financial market to raise funds, mere issue of securities will not

suffice. Adequate information of the issue, issuer and the security should be passed on totake place. There should be a proper channel within the financial system to ensure suchtransfer. To serve this purpose, Financial intermediaries came into existence. Financialintermediation in the organized sector is conducted by a widerange of institutionsfunctioning under the overall surveillance of the Reserve Bank of India. In the initialstages, the role of the intermediary was mostly related to ensure transfer of funds fromthe lender to the borrower. This service was offered by banks, FIs, brokers, and dealers.However, as the financial system widened along with the developments taking place in
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the financial markets, the scope of its operations also widened. Some of the importantintermediaries operating ink the financial markets include; investment bankers,underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers,mutual funds, financial advertisers financial consultants, primary dealers, satellitedealers, self regulatory organizations, etc. Though the markets are different, there may be

a few intermediaries offering their services in move than one market e.g. underwriter.However, the services offered by them vary from one market to another.

Intermediary Market Role

Stock Exchange Capital Market Secondary Market tosecurities

Investment Bankers Capital Market, Credit Market Corporate advisory services,Issue of securities

Underwriters Capital Market, MoneyMarketSubscribe to unsubscribed

portion of securities

Registrars, Depositories,Custodians Capital Market

Issue securities to theinvestors on behalf of thecompany and handle sharetransfer activity

Primary Dealers SatelliteDealers Money Market

Market making in governmentsecurities

Forex Dealers Forex Market Ensure exchange inkcurrencies

RESERVE BANK OF INDIA

The Reserve Bank of India is the central banking system of India and controls the monetary policy of therupee as well as US$3 00.21 billion (2010 of currency reserves. The institution was established on 1 April1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 [2] and plays an important part in the development strategy of the government. It is a member bank of theAsian Clearing Union.

Main function

1.Monetary authority:- he Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates,

implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes anexpansive monetary policy to push the private sector since the financial market reforms of the 1990s .[26]

The institution is also the regulator and supervisor of the financial system and prescribes broad parametersof banking operations within which the country's banking and financial system functions. Objectives areto maintain public confidence in the system, protect depositors' interest and provide cost-effective banking
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services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank ofIndia (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetarysupply, monitors economic indicators like the gross domestic product and has to decide the design of therupee banknotes as well as coins .[27]

2,Manager of exchange control:- The central bank manages to reach the goals of the Foreign ExchangeManagement Act, 1999. Objective: to facilitate external trade and payment and promote orderlydevelopment and maintenance of foreign exchange market in India.

3.Issuer of currency:- The bank issues and exchanges or destroys currency and coins not fit forcirculation. The objectives are giving the public adequate supply of currency of good quality and to

provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are toissue bank notes, to maintain the currency and credit system of the country to utilize it in its bestadvantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it canachieve the objective of price stability as well as economic development, because both objectives arediverse in themselves.

4. Developmental role:- The central bank has to perform a wide range of promotional functions to supportnational objectives and industries .[7] The RBI faces a lot of inter-sectoral and local inflation-related

problems. Some of this problems are results of the dominant part of the public sector .[28]

5. Related functions:- The RBI is also a banker to the government and performs merchant bankingfunction for the central and the state governments. It also acts as their banker. The National Housing Bank(NHB) was established in 1988 to promote private real estate acquisition .] The institution maintains

banking accounts of all scheduled banks, too.

There is now an international consensus about the need to focus the tasks of a central bank upon central

banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above.The recent financial turmoil world-over, has however, vindicated the Reserve Bank's role in maintainingfinancial stability in India.

RBI has various tools to control which are listed below

(a) Bank Rate : RBI (Reserve Bank of India) lends to the commercial banks through its discount windowto help the banks meet depositors demands and reserve requirements. The interest rate the RBI chargesthe banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supplyin the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in thesystem, it will increase the bank rate. The current rate is 6%.

(b) Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum cashreserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decreasethe reserve requirement depending on whether it wants to affect a decrease or an increase in the moneysupply. An increase in CRR will make it mandatory on the part of the banks to hold a large proportion oftheir deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they willlend less. This will in turn decrease the money supply. The current rate is 6%.
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2. Controlled Expansion Of Bank Credit :-One of the important functions of RBI is thecontrolled expansion of bank credit and money supply with special attention to seasonalrequirement for credit without affecting the output.

3. Promotion of Fixed Investment :-The aim here is to increase the productivity of

investment by restraining non essential fixed investment.4. Restriction of Inventories :- Overfilling of stocks and products becoming outdated due to

excess of stock often results is sickness of the unit. To avoid this problem the centralmonetary authority carries out this essential function of restricting the inventories. Themain objective of this policy is to avoid over-stocking and idle money in the organization

5. Promotion of Exports and Food Procurement Operations :-Monetary policy pays specialattention in order to boost exports and facilitate the trade. It is an independent objectiveof monetary policy.

6.

Desired Distribution of Credit:-Monetary authority has control over the decisionsregarding the allocation of credit to priority sector and small borrowers. This policydecides over the specified percentage of credit that is to be allocated to priority sector andsmall borrowers.

7. Equitable Distribution of Credit :-The policy of Reserve Bank aims equitable distributionto all sectors of the economy and all social and economic class of people

MONETARY POLICY

Monetary policy is the process by which the monetary authority of a country controls the supplyof money, often targeting a rate of interest for the purpose of promoting economic growth andstability.The official goals usually include relatively stable prices and low unemployment. Monetary economics provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being expansionary or contractionary, where anexpansionary policy increases the total supply of money in the economy more rapidly than usual,and contractionary policy expands the money supply more slowly than usual or even shrinks it.Expansionary policy is traditionally used to try to combat unemployment in a recession bylowering interest rates in the hope that easy credit will entice businesses into expanding.Contractionary policy is intended to slow inflation in order to avoid the resulting distortions anddeterioration of asset values.

Monetary policy differs from fiscal policy, which refers to taxation, government spending, andassociated borrowing.

TOOLS

Monetary base :- Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base. The central bank
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buys or sells reserve assets (usually financial instruments such as bonds) in exchange for moneyon deposit at the central bank. Those deposits are convertible to currency. Together suchcurrency and deposits constitute the monetary base which is the general liabilities of the central

bank in its own monetary unit. Usually other banks can use base money as a fractional reserveand expand the circulating money supply by a larger amount.

Reserve requirements :- The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold inreserve with the central bank. Banks only maintain a small portion of their assets as cashavailable for immediate withdrawal; the rest is invested in illiquid assets like mortgages andloans. By changing the proportion of total assets to be held as liquid cash, the Federal Reservechanges the availability of loanable funds. This acts as a change in the money supply. Central

banks typically do not change the reserve requirements often as it can create volatile changes inthe money supply and may disrupt the banking system.

Discount window lending :- Central banks normally offer a discount window, where commercial

banks and other depository institutions are able to borrow reserves from the Central Bank tomeet temporary shortages of liquidity caused by internal or external disruptions. This creates astable financial environment where savings and investment can occur, allowing for the growth ofthe economy as a whole.

The interest rate charged (called the 'discount rate') is usually set below short term interbankmarket rates. Accessing the discount window allows institutions to vary credit conditions (i.e.,the amount of money they have to loan out), thereby affecting the money supply. Through thediscount window, the central bank can affect the economic environment, and thus unemploymentand economic growth.

Interest rates : The contraction of the monetary supply can be achieved indirectly by increasingthe nominal interest rates. Monetary authorities in different nations have differing levels ofcontrol of economy-wide interest rates. In the United States, the Federal Reserve can set thediscount rate, as well as achieve the desired Federal funds rate by open market operations. Thisrate has significant effect on other market interest rates, but there is no perfect relationship. In theUnited States open market operations are a relatively small part of the total volume in the bondmarket. One cannot set independent targets for both the monetary base and the interest rate

because they are both modified by a single tool open market operations; one must choosewhich one to control. A meta-analysis of 70 empirical studies on monetary transmission findsthat a one-percentage-point increase in the interest rate typically leads to a 0.3% decrease in

prices with the maximum effect occurring between 6 and 12 months .[43]

In other nations, the monetary authority may be able to mandate specific interest rates on loans,savings accounts or other financial assets. By raising the interest rate(s) under its control, amonetary authority can contract the money supply, because higher interest rates encouragesavings and discourage borrowing. Both of these effects reduce the size of the money supply.

Currency board :- A currency board is a monetary arrangement that pegs the monetary base ofone country to another, the anchor nation. As such, it essentially operates as a hard fixed
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exchange rate, whereby local currency in circulation is backed by foreign currency from theanchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount offoreign currency must be held in reserves with the currency board. This limits the possibility forthe local monetary authority to inflate or pursue other objectives. The principal rationales behinda currency board are threefold:

1. To import monetary credibility of the anchor nation;2. To maintain a fixed exchange rate with the anchor nation;3. To establish credibility with the exchange rate (the currency board arrangement is the

hardest form of fixed exchange rates outside of dollarization).

In theory, it is possible that a country may peg the local currency to more than one foreigncurrency; although, in practice this has never happened (and it would be a more complicated torun than a simple single-currency currency board). A gold standard is a special case of acurrency board where the value of the national currency is linked to the value of gold instead of aforeign currency.

The currency board in question will no longer issue fiat money but instead will only issue a setnumber of units of local currency for each unit of foreign currency it has in its vault. The surpluson the balance of payments of that country is reflected by higher deposits local banks hold at thecentral bank as well as (initially) higher deposits of the (net) exporting firms at their local banks.The growth of the domestic money supply can now be coupled to the additional deposits of the

banks at the central bank that equals additional hard foreign exchange reserves in the hands ofthe central bank. The virtue of this system is that questions of currency stability no longer apply.The drawbacks are that the country no longer has the ability to set monetary policy according toother domestic considerations, and that the fixed exchange rate will, to a large extent, also fix acountry's terms of trade, irrespective of economic differences between it and its trading partners.

Hong Kong operates a currency board, as does Bulgaria. Estonia established a currency board pegged to the Deutschmark in 1992 after gaining independence, and this policy is seen as amainstay of that country's subsequent economic success (see Economy of Estonia for a detaileddescription of the Estonian currency board). Argentina abandoned its currency board in January2002 after a severe recession. This emphasized the fact that currency boards are not irrevocable,and hence may be abandoned in the face of speculation by foreign exchange traders. Followingthe signing of the Dayton Peace Agreement in 1995, Bosnia and Herzegovina established acurrency board pegged to the Deutschmark (since 2002 replaced by the Euro).

Unconventional monetary policy at the zero bound :- Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation ordeflation is occurring, are referred to as unconventional monetary policy . These include crediteasing, quantitative easing, and signaling. In credit easing, a central bank purchases privatesector assets to improve liquidity and improve access to credit. Signaling can be used to lowermarket expectations for lower interest rates in the future. For example, during the credit crisis of2008, the US Federal Reserve indicated rates would be low for an extended period, and theBank of Canada made a conditional commitment to keep rates at the lower bound of 25 basis

points (0.25%) until the end of the second quarter of 2010.
http://en.wikipedia.org/wiki/Gold_standardhttp://en.wikipedia.org/wiki/Fiat_moneyhttp://en.wikipedia.org/wiki/Bank_vaulthttp://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Deposit_%28finance%29http://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Estoniahttp://en.wikipedia.org/wiki/Economy_of_Estoniahttp://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Quantitative_easing#Credit_easinghttp://en.wikipedia.org/wiki/Quantitative_easing#Credit_easinghttp://en.wikipedia.org/wiki/Quantitative_easinghttp://en.wikipedia.org/wiki/Signalling_%28economics%29http://en.wikipedia.org/wiki/Signalling_%28economics%29http://en.wikipedia.org/wiki/Quantitative_easinghttp://en.wikipedia.org/wiki/Quantitative_easing#Credit_easinghttp://en.wikipedia.org/wiki/Quantitative_easing#Credit_easinghttp://en.wikipedia.org/wiki/Speculationhttp://en.wikipedia.org/wiki/Argentinahttp://en.wikipedia.org/wiki/Economy_of_Estoniahttp://en.wikipedia.org/wiki/Estoniahttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/Hong_Konghttp://en.wikipedia.org/wiki/Foreign_exchange_reserveshttp://en.wikipedia.org/wiki/Money_supplyhttp://en.wikipedia.org/wiki/Deposit_%28finance%29http://en.wikipedia.org/wiki/Balance_of_paymentshttp://en.wikipedia.org/wiki/Bank_vaulthttp://en.wikipedia.org/wiki/Fiat_moneyhttp://en.wikipedia.org/wiki/Gold_standard


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FISCAL POLICY

In economics and political science, fiscal policy is the use of government revenue collection(taxation) and expenditure (spending) to influence the economy. The two main instruments offiscal policy are changes in the level and composition of taxation and government spending in

various sectors. These changes can affect the following macroeconomic variables in aneconomy:

Aggregate demand and the level of economic activity; The distribution of income; The pattern of resource allocation within the government sector and relative to the private

sector.

Fiscal policy refers to the use of the government budget to influence economic activity.

Methods of funding

Governments spend money on a wide variety of things, from the military and police to serviceslike education and healthcare, as well as transfer payments such as welfare benefits. Thisexpenditure can be funded in a number of different ways:

Taxation Seigniorage, the benefit from printing money Borrowing money from the population or from abroad Consumption of fiscal reserves Sale of fixed assets (e.g., land)

Borrowing

A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edgedsecurities. These pay interest, either for a fixed period or indefinitely. If the interest and capitalrequirements are too large, a nation may default on its debts, usually to foreign creditors. Publicdebt or borrowing refers to the government borrowing from the public.

Consuming prior surpluses

A fiscal surplus is often saved for future use, and may be invested in either local currency or anyfinancial instrument that may be traded later once resources are needed; notice, additional debt is

not needed. For this to happen, the marginal propensity to save needs to be strictly positive.
http://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Political_sciencehttp://en.wikipedia.org/wiki/Macroeconomichttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Income_distributionhttp://en.wikipedia.org/wiki/Resource_allocationhttp://en.wikipedia.org/wiki/Government_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Government_expenditurehttp://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Taxationhttp://en.wikipedia.org/wiki/Seignioragehttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Consumption_%28economics%29http://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Government_bondhttp://en.wikipedia.org/wiki/Treasury_billshttp://en.wikipedia.org/wiki/Consolshttp://en.wikipedia.org/wiki/Gilt-edged_securitieshttp://en.wikipedia.org/wiki/Gilt-edged_securitieshttp://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Default_%28finance%29http://en.wikipedia.org/wiki/Gilt-edged_securitieshttp://en.wikipedia.org/wiki/Gilt-edged_securitieshttp://en.wikipedia.org/wiki/Consolshttp://en.wikipedia.org/wiki/Treasury_billshttp://en.wikipedia.org/wiki/Government_bondhttp://en.wikipedia.org/wiki/Real_estatehttp://en.wikipedia.org/wiki/Saleshttp://en.wikipedia.org/wiki/Consumption_%28economics%29http://en.wikipedia.org/wiki/Debthttp://en.wikipedia.org/wiki/Moneyhttp://en.wikipedia.org/wiki/Seignioragehttp://en.wikipedia.org/wiki/Taxationhttp://en.wikipedia.org/wiki/Revenuehttp://en.wikipedia.org/wiki/Transfer_paymenthttp://en.wikipedia.org/wiki/Government_expenditurehttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Private_sectorhttp://en.wikipedia.org/wiki/Government_sectorhttp://en.wikipedia.org/wiki/Resource_allocationhttp://en.wikipedia.org/wiki/Income_distributionhttp://en.wikipedia.org/wiki/Aggregate_demandhttp://en.wikipedia.org/wiki/Macroeconomichttp://en.wikipedia.org/wiki/Political_sciencehttp://en.wikipedia.org/wiki/Economics


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FINANCIAL SERVICES: INTRODUCTION

Financial Services is a term used to refer to the services provided by the finance market.Financial Services is also the term used to describe organizations that deal with the management

of money. Examples are the Banks, investment banks, insurance companies, credit cardcompanies and stock brokerages.

These are the types of firms comprising the market, that provide a variety of money andinvestment related services. Financial services are the largest market resource within the world,in terms of earnings.

Defining Financial Services can also be termed as, any service or product of a financial naturethat is the area under discussion to, or is governed by a measure maintained by a Party or by a

public body that exercises regulatory or supervisory authority delegated by law.

Understanding Financial ServicesFinancial Services are generally not limited to the field of deposit-taking, loan and investmentservices, but is also present in the fields of insurance, estate, trust and agency services, securities,and all forms of financial or market intermediation including the distribution of financial

products.

Aligned with a background of sharp risk, market and regulatory pressures, Financial Servicesorganizations are striving to grow and enhance their shareholder values.

Day by day the customer needs and expectations are growing. Thus, making the mark in

increasing personal wealth, a mature population and the desire that can more easily be reached tothe personalized financial products and services. Intense competition has squeezed marketmargins and forced most companies to cut costs while enhancing the quality of customer choiceand service.

As Financial Services organizations strive to become more innovative and entrepreneurial, thewar for talent is intensifying. The risks increase as the products become more complex, theorganizations and the business environment ever more uncertain.

At the same time, regulation is the tightening highlight within the reach of public andgovernment pressure for improved supremacy, transparency and accountability.

In this environment, the winners will be companies that can turn the challenges intoopportunities to build stronger and more enduring customer relationships, sharpen their processefficiency, unlock talent and creativity, use improved risk management processes to deliver moresustainable returns and use used regulatory demands as a catalyst for strengthening the businessand enhancing market confidence.


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The fast pace of change aspect element within the global Financial Services market has createdthe need for a new generation of solutions that can operate in real time with a very flawlessreliability.

The challenges faced by the Financial Services market are forcing market participants to keep

pace with technological advances, and to become more proactive and efficient while keeping inmind to reduce costs and risks.

The Financial Services have been able to represent an increasingly significant financial driver,and a significant consumer of a wide range of business services and products. The currentFortune 500 has listed 40 commercial banking companies with revenues of almost a $341trillion, up a modest 3% since last year.

Another $700 trillion or so comes from the 57 companies comprising the savings institutions,insurance and diversified financial companies.

The market in Financial Services is not only a powerful economic force, but can also beconsidered as a driver of other industries' success, standards, and operations. Virtually each andevery company uses financial services institutions for not only their own, but their customers

business purposes, and the practices, regulations and standards that the market adopts affects theway that their own customers.

To have an effective network strategy in place enables the Financial Services organizations to become more customer-oriented. This helps to increase their profitability, enhance the alertnessfactor, also lessen total ownership costs, and deal with used business challenges.

There are many companies working with financial organizations worldwide to develop a sound

networking strategy for connecting companies with customers, suppliers, partners, andemployees too.

Thus concluding here that the Financial Services market is diverse and dynamic. An ever-changing versatile, high-growth market, Financial Services consist of everything from individualor group consultants to banks, credit cards and alternative financing providers.

Businesses that have differing needs and the diversity and range of the financial services markethas several selections available to better suit them all.

There is a lot you can learn about the Financial Services industry. It is an exciting, important

industry that has a direct impact on the way businesses operate and grow, and subsequently, theeconomy of our nation too.

overview of indian financial systems and markets

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