SESSION 1 - F M & FIs (2)

7/28/2019 SESSION 1 - F M & FIs (2)

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Session I

Financial Market and Financial Institutions

Instructor:

Prof. (Dr.) Paresh Shah

FCMA., Ph.D. (Finance)., F.D.P.(IIMA)

Prof. (Dr.) Paresh Shah 1

7/28/2019 SESSION 1 - F M & FIs (2)


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.


7/28/2019 SESSION 1 - F M & FIs (2)


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.


7/28/2019 SESSION 1 - F M & FIs (2)


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.


7/28/2019 SESSION 1 - F M & FIs (2)


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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• 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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• 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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• 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


SESSION 1 - F M & FIs (2)

Documents

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