Final FMS Unit 1 (1) PDF

FINANCIAL MARKETS AND SERVICES III SEMESTER B.COM 1 COURSE OBJECTIVES CO1 Understand the structure of the Indian Financial system. CO2 Illustrate the role and functions of various Indian Financial Institutions. CO3 Identify different elements of financial markets. CO4 Recognize the...

FINANCIAL MARKETS AND SERVICES III SEMESTER B.COM 1 COURSE OBJECTIVES CO1 Understand the structure of the Indian Financial system. CO2 Illustrate the role and functions of various Indian Financial Institutions. CO3 Identify different elements of financial markets. CO4 Recognize the role of financial intermediaries in the capital market. CO5 Explain the role of regulatory bodies towards the financial system  Course Contents ▪ Module 1: Introduction to Financial Markets ▪ Overview of Indian Financial System, Structure of Financial System, Features, Constituents of Indian Financial System: Financial Services, Financial Institutions, Financial Markets. Innovative financial products, Financial Engineering ▪ Module 2: Financial Institutions ▪ Financial Institutions: Classification ▪ Banking Institutions: Meaning and features of Financial Institutions, ▪ Commercial banking – introduction, classification, its role in financing - commercial and consumer : Classification/Types of Banks, Functions/Role of Commercial Banks, Lending by Commercial Banks, Recent developments- ▪ Non -banking financial companies (NBFCs). Overview and Classification/Types of NBFCs: HFCs, IFCI, SFC, ICICI, IDBI, EXIM Bank. ▪ Life and non -life insurance companies in India: public and private. ▪ Life Insurance Corporation of India (LIC) – Overview, Objectives, and Role. ▪ General Insurance Corporation of India (GIC) – Overview, Objectives, and Functions.  Course Contents ▪ Module 3: Financial Markets ▪ Introduction to Financial Markets, Primary and Secondary Markets, Difference between Primary and Secondary markets, Money Market Instruments: Call Money market, Treasury Bill market, Commercial Papers, Certificate of Deposits, G-Securities markets and discount markets, Capital market: New Issue and Secondary markets, Introduction to Derivatives: financial derivatives, Commodity derivatives,, Currency derivatives, ▪ Module 4: Financial Services by Intermediaries ▪ Meaning, features of financial services, Merchant Banking, Leasing and Hire purchase (Problems on Leasing & HP) , Factoring and forfaiting, Venture capital and private equity, Depository and Depository services, Credit rating, Innovative Financial services Fintech, Insurtech etc. ▪ Mutual Funds – Introduction and their role in capital market development. Types of mutual fund schemes (open ended vs close ended, Equity, Debt, Hybrid schemes and ETFs.  FMS ▪ Module 5: Regulatory Authorities: ▪ RBI: Functions, Objectives, Role ▪ IRDA: Functions, Objectives, Role ▪ SEBI: Objectives, Powers and Functions of SEBI, Committees of SEBI, SEBI guidelines for Primary and Secondary Markets, SEBI as a regulator in protecting the Investor’s Interest. ▪ PFRDA: Functions, Objectives, Role  Reference Books: 1. My Khan, “Indian Financial System”, McGraw Hill, 11th edition 2020. 2. Natarajan and E Gordon, “Financial Markets and Services”, Himalaya Publishing house, 11th revised edition, 2018 3. Bhole L.M- “Financial Institutions and Markets”, Tata McGraw Hill Publishing Co. Ltd., New Delhi, 6th edition 4. Khan. M.Y. Financial Services, Vikas, 11th edition, 2020, McGraw Hill 5. H.R Machiraju: Indian Financial System, Vikas Pub. House. 6. Dr Punithavathy Pandian, “Financial Services and Markets”, Vikas publishing house Pvt Ltd, 1 st edition 2014. 7. Pathak Bharti,” Indian Financial System”, Pearson Education, 5th edition, 2018 8. L.M Bhole, Jitendra Mahakud, “Financial Institutions and Markets: Structure, Growth & innovation, McGraw Hill Education, 6th edition, 2017. 9. Guruswamy S, “Financial Markets and Services”, 2015, 4th ed 10. Avadhani V.A, “Financial services in India”, Himalaya publishing house 2015 3rd ed.  Overview of Indian Financial System ▪ Economic growth and development of any nation depends upon a well developed financial system. ▪ The term financial system includes financial institution, financial markets, financial instruments and financial services which help in generation of savings leading to capital formation. ▪ A good financial system facilitates the transfer of economic resources between different sections of a nation. ▪ A well knit financial system should be characterised by the presence of an organised, specialised, integrated and regulated financial markets, financial institutions, instruments and services that meets both short term and long term financial needs of both household and corporate sector of an economy.  IFS ▪ Both financial markets and financial institutions play a significant role in the financial system by operating in close combination with each other in order to render various financial services to the needy. ▪ A financial system acts as a link between savers and investors. It helps in mobilization of savings and promotion of investment in an effective manner. ▪ The financial system serves as an intermediator between investors and institutions promoting investment leading to greater financial development which is essential for faster economic developments. ▪ A financial system acts as a link between savers and investors. It helps in mobilization of savings and promotion of investment in an effective manner. The financial system serves as an intermediator between investors and institutions promoting investment leading to greater financial development which is essential for faster economic developments.  SIGNIFICANCE AND ROLE OF FINANCIAL SYSTEM ▪ The financial system of our country plays a very important role in the economic development. The financial system perform a number of functions. Some of the important functions are as follows: ▪ a) It ensures effective allocation of resources to different investment channels: An effective financial system always enables proper allocation of resources to different investment avenues. ▪ b) It plays the role of a catalyst: The financial system plays the role of a catalyst by creation of credit and providing finance and credit facilities to different investment opportunities. ▪ c) It accelerates the rate of economic development: Financial system mobilises the savings and also the investment. By doing so capital formation is achieved which in turn leads to allocating resources to productive activities, which at last leads to the economic development.  Continued.., ▪ d) It fosters industrial development: It is because of Indian financial system, institutions like IDBI, IFCI, KSFC, ICICI etc. have been developed to foster industrial development. These institutions help industries by providing financial, technical, marketing assistance ▪ e) It is a guide for investors education: The financial system play a very important role of providing all necessary investment opportunities to the investors. The financial institutions, banks etc. from time to time publish the necessary investors guide with required details about investments to enlighten the investors. ▪ f) It promotes self employment: The development banks and financial institutions are primarily established with the objective of promoting self employment. By providing a means of self employment to young educated men and women, it indirectly solves the problem of unemployment  Objectives of financial system 1. To mobilize the resources. 2. To create link between savers and investors. 3. To establish a regular smooth and efficient markets. 4. To create assets for the use of people. 5. To encourage savings and investment. 6. To facilitate economic development of the country. 7. To facilitate for expansion of financial markets. 8. To promote for efficient allocation of financial resources. 9. To make sound decisions based on cash flow and available resources. 10. To establish financial control and clear accounting procedures which ensure that funds are used for intended purposes.  Continued.., ▪ g) It helps in the revival of sick units: The financial institutions in our country have specially designed loans schemes to assist the revival of sick units. These loans are provided to sick units at reasonable rate of interest. ▪ h) It acts as the mobiliser of savings: The financial system mobilises and channelises the small savings to productive activities. In other words, the financial system acts as the transformer of savings into investment. ▪ i) It is a provider of liquidity: The term liquidity refers to cash or money and other assets which can be converted into cash within a short duration. Almost all the activities of a financial system, are liquidity oriented i.e. there is either provision of liquidity or one can see trading in liquidity.  PURPOSE OF FINANCIAL SYSTEM The several purposes of financial system are as follows: a) Financial system is required for mobilisation of savings and converting it into investments. b) Financial system is essential for providing required capital to the business organisations to carry out their activities. c) It is required for generating income or profit for both household and corporate sector. d) It is necessary for increasing the productivity of capital through efficient and effective allocation of funds and resources. e) It is essential to accelerate the rate of economic growth and development. f) It is helpful in providing mechanism to control risk and uncertainties in financial transactions. g) It is required to transfer the resources from one section or part of the economy to another through effective allocation of resources to different investment channels.  Functions of Financial System ▪ A Financial System serves the following functions: ▪ Savings function ▪ Payment function ▪ Liquidity function ▪ Risk function ▪ Policy Function ▪ Provides Financial Services ▪ Lowers the Cost of Transactions ▪ Financial Deepening and Broadening  Functions of Financial System ▪ Savings Function: ▪ Public savings find their way into the hands of those in production through the financial system. Financial claims are issued in the money and capital markets which promise future income flows. The funds with the producers result in production of goods and services thereby increasing society living standards. This is one of the important functions of a financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings efficiently and effectively. By acting as an efficient conduit for allocation of resources, it permits continuous up-gradation of technologies for promoting growth on a sustained basis. ▪ Liquidity Function: ▪ The term liquidity refers to ready cash or money and other financial assets which can be converted into cash without loss of value and time. It provides liquidity in the market through which claims against money can be resold by the investors and thereby assets can be converted into cash at any time. This function allows for easy and fast conversion of securities into cash. Thus, the major function of any financial system is the provision of money and monetary assets for the purpose of production of goods and services. Therefore all the financial activities are subjected to either provision of liquidity or trading in liquidity.  Functions ▪ 3. Payment Function ▪ The financial system offers a very convenient mode for payment of goods and services. Cheque system, credit card system etc. are the easiest methods of payments. The cost and time of transactions are drastically reduced. A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries. ▪ 4. Risk Function ▪ The term risk and uncertainty can be defined as the probability of happening of an unexpected event due to which the investors may be under loss in future. Whenever the mobilised savings are invested into different productive activities, the investors are exposed to lower risk. This is mainly because of the benefits of ‘diversification’ that is available to even small investors. Every investor’s preference will be influenced by considerations such as convenience, lower risk, liquidity etc. Financial intermediaries enable the investors to diversify investments widely which helps in reducing the risk of capital depreciation and poor dividends. Hence, a combination of financial assets will help in minimising risk.  Functions ▪ 5. Policy Function ▪ The government intervenes in the financial system to influence macroeconomic variables like interest rates or inflation. So if country needs more money government would cut rate of interest through various financial instruments and if inflation is high and too much money is available in the system, then government would increase the rate of interest. It makes available price-related information which is a valuable assistance to those who need to take economic and financial decisions. ▪ 6. Provides Financial Services ▪ A financial system minimizes situations where the information is an asymmetric and likely to affect motivations among operators or when one party has the information and the other party does not. It provides financial services such as insurance, pension etc. and offers portfolio adjustment facilities. Example: It provides fee based or advisory based financial services such as issue management, portfolio management, corporate counselling, credit rating, stock broking etc. and fund based or asset based financial services such as hire purchase, equipment leasing, bill discounting, housing finance, insurance service, venture capital etc  Functions ▪ 7. Lowers the Cost of Transactions ▪ A financial system helps in the creation of a financial structure that lowers the cost of transactions. This has a beneficial influence on the rate of returns to saver. It also reduces the cost of borrowings. Thus, the system generates an impulse among the people to save more. ▪ 8. Financial Deepening and Broadening ▪ A well-functioning financial system helps in promoting the process of financial deepening and broadening. Structure of IFS  Financial Institutions ▪ Financial institutions are the intermediaries which facilitate smooth functioning of the financial system by making investors and borrowers meet. ▪ They mobilize savings of the surplus units and allocate them in productive activities promising a better rate of return. ▪ Financial institutions also provide services to entities seeking advice on various issues ranging from restructuring to diversification plans. ▪ They provide whole range of services to the entities who want to raise funds from the markets elsewhere. ▪ Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers, where these financial institutions may be banking or non-banking institutions. ▪ TYPES OF FINANCIAL INSTITUTIONS ▪ Financial institutions can be classified into two categories: ▪ A. Banking Institutions ▪ B. Non - Banking Financial Institutions  BANKING INSTITUTIONS ▪ Indian banking industry is subject to the control of the Central Bank. ▪ The RBI as the apex institution organises, runs, supervises, regulates and develops the monetary system and the financial system of the country. ▪ The main legislation governing commercial banks in India is the Banking Regulation Act, 1949. ▪ The Indian banking institutions can be broadly classified into two categories: ▪ 1. Organised Sector ▪ 2. Unorganised Sector.  Organised Sector ▪ The organised banking sector consists of ▪ commercial banks, ▪ cooperative banks and the ▪ regional rural banks. ▪ (a) Commercial Banks: The commercial banks may be scheduled banks or non – scheduled banks. All other banks are schedule banks. The commercial banks consist of public sector banks, private sector banks and foreign banks. Prior to 1969, all major banks with the exception of State Bank of India in the private sector. An important step towards public sector banking was taken in July 1969, when 14 major private banks with a deposit base of 50 crores or more were nationalised. ▪ (b) Co-operative banks: An important segment of the organized sector of Indian banking is the co-operative banking. The segment is represented by a group of societies registered under the Acts of the states relating to cooperative societies. In fact, co-operative societies may be credit societies or non-credit societies. Rural co-operative societies & Urban co-operatives societies  Organised banking institutions ▪ Regional Rural Banks (RRBs): Regional Rural Banks were set by the state government and sponsoring commercial banks with the objective of developing the rural economy. ▪ Regional rural banks provide banking services and credit to small farmers, small entrepreneurs in the rural areas. ▪ The regional rural banks were set up with a view to provide credit facilities to weaker sections. ▪ Foreign Banks: Foreign banks have been in India from British days. Foreign banks as banks that have branches in the other countries and main Head Quarter in the Home Country. With the deregulation (Elimination of Government Authority) in 1993, a number of foreign banks are entering India.  Unorganised banking sector ▪ 1. Indigenous Bankers Indigenous Bankers are private firms or individual who operate as banks and as such both receive deposits and given loans. Like bankers, they also financial intermediaries. They should be distinguished professional money lenders whose primary business is not banking and money lending. The indigenous banks are trading with the Hundies, Commercial Paper. ▪ 2. Money Lenders: Money lenders depend entirely to on their one funds. Money Lenders may be rural or urban, professional or non-professional. They include large number of farmer, merchants, traders. Their operations are entirely unregulated. They charge very high rate of interest.  Non Banking Finance Institutions ▪ 1. Development Non-Baning Fis: ▪ The institutions like IDBT, ICICI, IFCI, IIBI, IRDC at all India level. ▪ The State Finance Corporations (SFCs), State Industrial Development Corporations (SIDCs) at the state level. Agriculture Development Finance Institutions as NABARD,LDBS etc. Development banks provide medium and long term finance to the corporate and industrial sector and also take up promotional activities for economic development ▪ 2. Investment Institutions. ▪ These include those financial institutions which mobilise savings at the public at large through various schemes and invest these funds in corporate and government securities. These include LIC, GIC, LTT, and mutual funds.  FINANCIAL MARKET ▪ It is through financial markets and institutions that the financial system of an economic works. ▪ Financial markets refer to the institutional arrangements for dealing in financial assets and credit instruments of different types such as currency, cheques, bank deposits, bills, bonds etc. ▪ Functions of financial markets are: ▪ (i) To facilitate creation and allocation of credit and liquidity ▪ (ii) To serve as intermediaries for mobilization of savings. ▪ (iii) To assist the process of balanced economic growth. ▪ (iv) To provide financial convenience. ▪ (v) To cater to the various credit needs of the business houses. ▪ These organized markets can be further classified into two they are ▪ (i) Capital Market ▪ (ii) Money Market  CAPITAL MARKET ▪ The capital market is a market for financial assets which have a long or indefinite maturity. ▪ Generally, it deals with long term securities which have a maturity period of above one year. ▪ Capital market may be further divided into three namely: ▪ (I) Industrial securities market ▪ (II) Government securities market and ▪ (III) Long term loans market ▪ 1. INDUSTRIAL SECURITIES MARKET: As the very name implies, it is a market for industrial securities namely: ▪ (i) Equity shares or ordinary shares, ▪ (ii) Preference shares and ▪ (iii) Debentures or bonds.  Capital Market ▪ It is a market where industrial concerns raise their capital or debt by issuing appropriate instruments. ▪ It can be further subdivided into two. ▪ They are: ▪ (i) Primary market or New issue market ▪ (ii) Secondary market or Stock exchange ▪ Primary Market Primary market is a market for new issues or new financial claims. Hence, it is also called New Issue market. The primary market deals with those securities which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long term funds. Thus, primary market facilitates capital formation. There are three ways by which a company may raise capital in a primary market. ▪ They are: ▪ (i) Public issue ▪ (ii) Rights issue ▪ (iii) Private placement  Secondary Market ▪ Secondary market is a market for secondary sale of securities. ▪ In other words, securities which have already passed through the new issue market are traded in this market. ▪ Generally, such securities are quoted the Stock Exchange and it provides a continuous and regular market to buying and selling of securities. ▪ This market consists of all stock exchanges recognized by the Government of India. ▪ The stock exchanges in India are regulated under the Securities Contracts (Regulation) Act 1956. ▪ The Bombay Stock Exchange is the principal stock exchange in India which sets the tone of the other stock markets  Markets ▪ II. GOVERNMENT SECURITIES MARKET ▪ It is otherwise called Gilt - Edged securities market. It is a market where Government securities are traded. ▪ In India there are many kinds of Government Securities - short term and long term. Long term securities are traded in this market while short term securities are traded in the money market. ▪ Securities issued by the Central Government, State Governments, Semi Government authorities like City Corporations, Port Trusts etc. Improvement Trusts, State Electricity Boards, All India and State level financial institutions and public sector enterprises are dealt in this market. ▪ III. LONG TERM LOANS MARKET ▪ Development banks and commercial banks play a significant role in this market by supplying long term loans to corporate customers. ▪ Long term loans market may further be classified into: ▪ (1) Term loans market ▪ (ii) Mortgages market ▪ (iii) Financial Guarantees market FINANCIAL ENGINEERING ▪ Financial engineering encompasses a broad, multidisciplinary field of study and practice that, essentially, applies an engineering approach and methodology to the world of finance. ▪ It integrates and utilizes information obtained from different fields, such as economics, mathematics, computer science, and financial theory. ▪ The field focuses on developing models and techniques to develop and test investment strategies, to envision and create new financial products, to manage risk, and to produce scenarios and forecasts for both short- and long-term perspectives on the markets. ▪ An example of financial engineering in practice is the work of quantitative analysts – usually referred to as “quants” – who develop things such as algorithmic or artificial intelligence trading programs that are used in the financial markets. USES OF FINANCIAL ENGINEERING ▪ Financial engineering is used across a broad range of tasks in the financial world. Some of the areas where it is most commonly applied are the following: Corporate Finance Arbitrage Trading Technology and Algorithmic Finance Risk Management and Analytics Pricing of Options and other Financial Derivatives Behavioral Finance Creation of Structured Financial Products and Customized Financial Instruments Quantitative Portfolio Management Credit Risk and Credit Management