FINANCIAL SYSTEM

 Financial Concept

 

To know more about the financial system we need to require the knowledge of the financial concepts.

The financial concepts are

• Financial asset
• Financial institutions or intermediaries
• Financial market

Financial asset

Financial asset is one which is intended for production or consumption or further creation of assets. For example, an investor subscribing to the equity shares is acquiring a financial asset. He can expect an income from the company in the future. So financial instruments are indispensable for capital formation and faster economic development. There is a difference between financial assets and physical assets. Financial assets are intended or acquired for earning income. Physical assets are not useful for further production of goods or earning incomes generally.   

Classification of Financial Assets

Financial assets Can be Classified differently from different points of view. Usually, they are classified as.

• Marketable assets and nonmarketable assets.
• Cash assets, debt assets, and stock assets.

Marketable assets.

Marketable assets or securities are the hose which can be easily transferred from one person to another without any legal formalities, or botheration. Shares of public limited companies, bonds, debentures, Mutual fund units, etc. are examples of marketable assets.

Nonmarketable assets.

If the assets are securities that cannot be transferred easily, they are called nonmarketable assets. That Bank deposits, provident fund deposits, LIC schemes, etc. are examples of nonmarketable assets.

Cash Assets

All coins and currencies issued by the Government or Central Bank are cash assets. Besides commercial banks can also make money using creating credit.

Debt Assets

Several organizations, whether they are private or public issue debt assets for raising debt capital. There are different methods for raising debt capital. Issue of debentures, raising of term loans, advances for working capital, etc. are examples of debt assets.

Stock Assets

Stock or share is issued by business organizations to mobilize fixed capital. There are two types of stock - equity stock and preference stock.

Financial Institutions

 The financial institution includes all kinds of organizations that act as an intermediary between the servers and the borrowers. These institutions are intermediaries that facilitate financial transactions of both individuals as well as corporate people. All kinds of financial institutions and investing institutions facilitate. Financial transactions in financial markets come under the head of financial intermediaries or institutions they can be classified into two

• Capital markets intermediaries 
• Money market intermediaries

Capital market intermediaries

These intermediaries are mainly supply long term funds to individuals and corporate customers. LIC, GIC, etc. are commander capital market intermediaries.

Money market intermediaries

Money market intermediaries are provided only show time funds to individuals and corporate customers. Commercial banks Corp corporative banks etc. are come under this category.

 Types of financial institutions

financial institutions can also be classified into two categories they are

1. Banks
2. Non banking financial institutions

1. Banks

Banks in India are of a wide variety. Mainly banks can be categorized as commercial banks and cooperative banks. In commercial banks category there are State Bank of India and its associates,, nationalized banks, private sector banks.

2. Non banking institutions

non banking institutions may be classified into 2

• Organized financial institutions
• Unorganized Financial institutions

• Organized financial institutions

Non banking institutions under the head organized financial institutions include

Development Finance institutions development financial institutions made specific sexual needs and also provide for long term capital needs of the corporate sector on concessional terms as opposed to commercial banks which confined to the core function of accepting deposits from the public and providing short term loans

Investment institutions in collect savings of the public through various schemes and deploy these funds in corporate and government securities.

• Unorganized financial institutions

These are provide a number of financial services like leasing, higher purchase factoring etc. come under this category.

Financial markets

Financial markets and institutions or arrangement that facilitates the exchange of financial instruments including deposits and loans corporate stocks and bonds government bonds and more exotic instruments such as options and futures contracts. The market which deals with trading of financial instruments like financial claims assets and securities is known as financial market.

Types of financial market

On the basis of credit requirement. Financial markets may be classified as

• Money market
• Capital or securities market

 Money market :- Money market is a market where money is bought and sold. It is a market for short term money and financial asset that are close substitutes for money.

Capital market :- The capital market is a market for financial assets which have a long term maturity. Usually above one year.

Capital market may be divided into three

1. Industrial securities market
2. Government securities market
3. Long term loans market

Industrial Securities Market 

Industrial securities, like equity shares, differential use and debentures or bonds or dealt by the industrial securities market. Industrial houses raise their capital or procure debt by issuing suitable instruments. The industrial securities market may be divided into two .They are,

• Primary market :- The main function of primary market is to facilitate the transfer of sources From savers to entrepreneurs or businessman Seeking to establish existing ones. Primary market deals with those securities which are issued to the public for the first time. Primary market is a market for new issues or new financial claims. That is why primary market is also known as new issues market.
• Secondary market :- The shares and the benchers which are already issued by the issuers are permitted to trade in the secondary market. In this market, the air share or bond or debenture issue which is already sold to the public is traded between current and potential owners ( existing owner would be the owner). The secondary market involves the trading of securities initially sold in the primary market. Thus secondary market provides liquidity to the individuals who acquired the securities via the primary market.

Government securities market

It is also known as a gilt-edged securities market. it is a market where government securities are traded. government securities may be short-term and long-term. Usually, long-term securities are traded in this market. Short-term securities are traded in the money market.

Long term loans Market

Development banks and commercial banks play an important role in the long term loans market by supplying long term loans to corporate houses. Long term loans market can be classified into

Term loans
Mortgages
Financial Guaranty markets.

Classification on the basis of structure of market

Financial markets may be classified into 

• Unorganized markets 
• Organized markets 

Unorganized markets:- There are a number of moneylenders indigenous bankers local traders etc., who lent money to the public and collect deposits from the public. there are also private finance companies chit funds etc., who are very active especially in rural areas. These people are players are not controlled by the RBI. they don't have a formal structure of organization. Recently RBI has introduced several measures to bring this unorganized sector into the organized one. 

Organized markets :- Standard rules, regulations and statues for governing the financial dealings are there in organized markets. High degree of institutionalization and innovative instruments are seen in organized markets. All aspects of organized markets are regulated by regulatory bodies like RBI, SEBI etc. there is no room for ambiguity or confusion or manipulation in these markets due to the strict supervision and control by the regulators.

Financial instruments

Financial instruments form another important element of a financial system. Financial instruments are financial contracts of different nature made between institutional units. The concept of financial instruments is wider than the concept of financial assets. financial assets are contracts that do not contain contingency. Financial asset it’s defendants any contact from which financial claim may derive for one party and a financial liability or participation in equity for another.

Financial instruments may be classified from different angles. One classification is 

Financial instruments may be classified from different angles. One classification is 

• Financial asset 
• Other financial instruments

 

Financial Assets

Financial asset include currency, deposits securities under Dan shares sales and other goodies Lance and borrowings other accounts receivable or payable financial derivatives

Other financial instruments may include letters of guarantee letters of credit financial commitments and blood sugar financial assets

 

1. Currency :- Currency is a liquid financial asset. it didn't presents notes and coins in circulation which are of fixed nominal values and have no dates of repayment. Issued notes and coins are considered liabilities of the RBI. 
2. Deposits:- Deposits are another important liquid natural asset. Deposits include all claims on the RBI and other depositor corporations represented as bank deposits. 

• Securities other than shares :- Securities are negotiable instruments in the financial market. These securities include government treasury bills government bonds corporate bonds dentures commercial paper certificates of deposits etc. this securities serves as an evidence that the issuer assumes the obligation to settle the issue by paying cash or in exchange of other financial instrument or any other item with an economic value. The popular securities in practice can be 
• Coupon basis securities :- Coupon interest payments are made during the life of the instrument. The principal repayment is made on maturity. 
• Amortized basis securities :- Interest payments and principal payments are made in installments during the life of the instruments. 
• Discount or zero coupon basis securities :- Securities issued at a price below the face value and prepared on face value at maturity. 
• Deep discount basis securities :- Securities issued at a big or deep discount below the face value and the principal and the substantial part of the interest is paid at maturity. 
• Indexed basis securities :- Securities which tie the amount of interest and or principal payment to a reference index such as consumer price index or an exchange rate index. 
• Masala securities :- It would be denominated borrowings by Indian entities in overseas market. This new instrument is to tempt the global investors. 
• Green securities :- Debt instruments that raise money to fund clean energy projects only. Companies that raise money through these securities have no invest it only in areas that are environment friendly suggests renewable energy waste management plane transport or sustainable land use. 

       Preference that offer a fixed set preference dividend income is also treated as securities other than shares. Pressures do not provide ownership right to the subscriber or holder.

      Securities other than shares can be classified further a Showtime securities medium term securities and long term securities.

1. short term securities :- Securities with maturity period of one year or less. 
2. Medium term securities :- Securities with maturity from one to five years. 
3. Long term securities :- Securities with maturity of more than five years. 

Shares other than equity :- Equity shares present ownership rights of the holders or subscribers. Once the creditors liability is settled what is remaining is up to the equity shareholders to share. Find separating preference share is also included in this category of shares and other equity. 

Loans and borrowing :- Loans are financial assets. This asset is created when a creditor lands once directly to the debtor. There will be an evidence of a non negotiable document for the creation of the set.

Loans can be classified further into short time loans medium term loans and long term loans.

1. Short term loan :- Loans with maturity of one year or less. 
2. Medium term loan :- Loans with maturity from one to five years. 
3. Long term loan :- Loans with maturity of more than five years. 

Financial leasing factoring arrangements which are treated as substitute for borrowing money come under the head lands and borrowings.

• Other Accounts Receivable / Payable :- Other accounts receivable or payable includes trade credits,advances and other receivables or payable. Trade credit means the suppliers of goods or services extended credit to the buyer. Advances are prepayments made for work which is in progress or for purchase of goods and services        
• Financial Derivatives :- Financial derivatives are financial instruments that are linked to specific asset. by nature, these instruments are similar Single condition instruments. Claims and liabilities related to financial instrument will arise after a specific period of time. Derivative instruments are not considered financial claim or liability for the holder thereof at the given moment. but financial derivatives can be traded in the market and they will obtain a market value which will depend upon the market price of the underlying financial or non financial asset.  

Other classifications

On the basis of issue of securities whether it is directly or indirectly securities can be grouped as 

• Primary securities 
• Secondary securities.

 

•  Primary securities family securities are securities issued directly to the public. Those who save can purchase these securities from the sellers or issuers directly. Hence primary securities are also called direct securities. These securities include equity shares preference shares and debentures or bonds.
• Secondary securitiessecondary securities issued indirectly to the public. Financial intermediaries like banks or non banking finance companies accept their surplus of servers and lend to the needy people. secondary securities include insurance policies mutual fund units bank deposits receipts etc. 

     On the basis of marketability of the instruments securities can be divided into two 

• Marketable securities
• Non marketable securities

• Marketable securities Securities that can be transferred from one person to another easily are called marketable securities. shares of public limited companies bonds revengers mutual fund units etc. are examples.
• Non marketable securitiesSecurities that cannot be transferred from one person to another are called non marketable securities. Bank deposits Provident fund deposits LLC schemes company fixed deposits poster with saving certificates are example. 

      On the basis of innovative approach adapted for taking money from the servers or investors financial instruments may be classified as 

1. Old financial instruments  
2. New / innovative / modern financial instruments.

1. Older traditional financial instruments :- up to 9090 Indian business houses mainly resorted to traditional financing instruments. they are called traditional financial instruments.  
2. New / innovative / modern financing instruments :- he new financing instruments poses the potential to overcome the severe financial problems in Indian industry faces.

The important innovative instruments are

• Zero coupon bond :- Zero coupon bond is a bond that pays no interest while the investor holds it. It is sold originally at a discount from its eventual maturity value. The investor gets the full face value when it becomes do. 
• Deep Discount Bond :- For the first time issued deep discount bond. The advantage of baby DDB is the elimination of investment risk. DDB is a sales solid and liquid investment. The investor can sell the bond in the Stock Exchange. the difference between the sale price and original cost of acquisition will be treated as capital gain.   
• Floating rate bonds or notes :- In 1993 State Bank of India issued the floating interest rate on non convertible debenture issue. Floating rate notes are callable after two or three years at par 
• Convertible debentures :- Companies can issue convertible debentures in which an option is given to the debenture holder to convert the debentures into equity or preference shares at stated rates of exchange after a certain period. Debentures once converted into shares cannot be re converted into debentures. 
• Warrant an options contract is often sold with another security corporate bonds may be sold with warrants to buy common stock of that corporate house. Warren’s are generally detachable 
• Equity warrant it is a paper attached to a bond or preference share that gives the holder the right to buy a fixed number of companies equity shares at a credit demand price at any future date. this offer will enhance the popularity of the debtor preference issue. 
• Commodity bondsit is allow investors to share the risk in upside potential of future commodity prices with the issuer. Petro bonds silver bonds gold bonds and call bonds are usually issued. 
• Naked bondsthese bonds are another form of warrants. That I should do English the risk of the owners in the company to keep untouched control. 
• Secured premium notesit is a tradable instrument with separable warrant against which the holder gets security shares actor fixed period of time. That iron and steel company trade this fund racing method.   
• Callable bond  it is a bond that can be called in and paid off by the issuing company at a price called the core price shown in the bond contract.
• Commutative convertible preference shares  a type of preference shares were the dividends payable on the same accumulate if not paid. After a specified date, these shares will be converted into equity capital of the company.
• No voting rights shares  These are introduced in India by the 1996 nineteen 7 union budget. These shares are closely similar to preference shares which do not carry any voting right. Non voting rights shares do not carry a predetermined dividend.
• Differential voting rights say  The Companies Act permits a company to issue differential voting rights shares when, among other conditions, the company has distributable profits and has not defaulted in filing annual accounts and returns were. At least three financial years. The issue of Satisfiers cannot exit 25% of the total issued share capital of the company.
• Securitized Asset Trading Securitization is a process under which any asset with a long term cash flow can be converted into a security and sold to investors. Thus, housing loans and automobile loans were the House or the car is the underlying asset, and. Can be repackaged as a security. The Securitized assets are managed by special purpose vehicles which are trust specially formed for the purpose and function like the asset management companies of mutual funds.
• Inflation Index Bond. Or inflation indexed national security certificates.To protect savings of the poor and middle classes, this new instrument is proposed by the Finance Minister in the budget for 2013 fourteen. The instrument will incentivize the households and corporates to save rather than investing in gold to beat inflation. If inflation is moving. Northwards Dara turn from the bond. Also in grace, investors will be protected.