Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Role of financial system
1.
2.
3. Role of financial system
Serves as a link
between savers and
investors
Mechanism for
exchange of goods
and services
Mechanism of
transfer of
resources
Promotes process of
capital formation
6. Financial assets
Perform significant role in transferring funds from
lenders to borrowers
Each asset differs from each other
A financial asset is one which is used for production
or consumption or for future creation of assets.
Represent claim against future income and wealth of
others.
To suit different requirements, different securities
are issued.
8. Primary securities
• Issued directly by ultimate borrowers of the
funds to the ultimate savers or investors.
• Example: Equity shares, preference shares and
debentures.
9. Secondary securities
• Not issued directly by ultimate borrowers
• Issued by financial intermediaries to
ultimate savers
• Example: Insurance policy, Mutual funds
10. Financial Markets
• Market normally refers to a group of traders carrying on
business at a definite place, building or locality.
• A financial market is a market for the creation and
exchange of financial assets.
• Once engaged in buying or selling the financial assets,
indicates that you are participating in financial markets in
one way or the other.
• Institutional arrangement for dealing in financial assets of
different types
11. Functions of financial
market
o To facilitate creation and allocation of credit
o To serve as intermediary for mobilization of savings
o To assist the process of balanced economic growth
o To provide financial convenience
o To cater to various credit needs of the business houses
13. MONEY MARKET
“The centre for dealings, mainly for short term
character, in monetary assets, it meets the short
term requirements of the borrowers and provide
liquidity or cash to the borrowers.”
14. Money Market
• All transactions in near money
• Deal with short term funds in the economy
• Institutional arrangements for facilitating borrowing
and lending of short term funds
• Funds borrowed for a short period (less than a year)
• Sub markets are:
o Call money market
o Treasury bill market
o Commercial paper market
o Certificate of deposits market
15. Capital Market
• Institutional arrangements for facilitating the borrowing
and lending of long term funds
• Medium through which investor hand over money today
in exchange for promise of money far in the future.
16. Financial Intermediaries
• Facilitate smooth functioning of the financial system by
making investors and borrowers meet
• Mobilize savings of surplus units and allocate them in
productive activities promising a better return
• Act as a middlemen between savers and borrowers
18. REGULATORY FRAMEWORK
• Plays a critical role in ensuring the health, soundness,
reliability and stability of the financial system
• lays down the specific rules for behavior of participants
in the financial system
• necessary to generate, maintain and promote this trust of
the participants.
20. RBI
• RBI seeks to regulate the volume and direction of
the flow of bank credit
• Apex institution as the monetary authority of the
country
• Acts as a guide, regulator, controller and
promoter of the financial system.
21. 1
2
3
4
5
• Formulates and implements monetary and credit
policies
• Functions as banker’s bank
• Supervises the operations of credit institutions
• Controls the money supply and credit
• Considered as lender of last resort
Functions of RBI
22. RBI also performs several functions aimed at developing Indian
financial system:
Integrate the unorganized financial sector with organized
financial sector
Encourages extension of commercial banking system in the
rural areas
Influences allocation of credit
Promotes development of new institutions
23. Techniques of monetary
control
1. Open Market Operations:
o Through the open market sale and purchase of government securities
takes place.
o RBI can affect the reserves position of banks, yields on government
securities and the volume and cost of bank credit.
2. Bank Rate and Discretionary Control of Refinance:
o Bank rate is the standard rate at which the RBI is prepared to buy or
rediscount the B/E or other eligible commercial papers.
o Used to regulate the cost and availability of refinance and to change
the volume of lendable resources of banks and other financial
institutions.
24. 3. Cash Reserve Ratio(CRR): It refers to the cash which
banks have to maintain with the RBI as a certain percentage
of their demand and time liabilities.
4. Statutory Liquidity Ratio(SLR): It is the ratio of cash
in hand balances in current account with SBI, its
subsidiaries other nationalized banks and the RBI; gold and
unencumbered approved securities to total demand and time
liabilities of the banks.
25. 5. Direct Credit Allocation and Credit Rationing:
Through this the RBI has regulated the allocation/distribution
of credit among different sectors, borrowers and users and it
has facilitated in narrowing down the regional/geographical
imbalances.
6. Moral Suasion:
This is another most actively and
consistently used
technique of monetary control.
It takes the form of writing letters and holding discussions
between the RBI and the banks about trends in the economy
in general and in money, credit and finance in particular, and
about the measures which ought to be taken from time to
time in the light of national objectives.
26. SEBI
• SEBI has emerged as an important constituent of the
system
that
now
is
actively
engaged
in
regulating, controlling and monitoring the Indian
Financial System.
• Through SEBI, the regulation model which is sought to
be put in place in the country, is one in which every
aspect of securities market regulation is entrusted to a
single highly visible and independent organization, which
is backed by a statute, and which is accountable to the
Parliament and in which investors can have trust and
confidence.
27. Functions of SEBI
Regulates business in stock
exchanges
Register and regulate working of
mutual funds
Prohibit insider trading in securities
Register and regulate capital market
intermediaries
28. IDBI
IDBI was set up to accelerate the development of the
country
Was a wholly subsidiary of RBI
Was expected to coordinate the activities of the
institutions engaged in financing, promoting or
developing industry.
29. Functions of IDBI
• Act as an apex institution
• Provide refinance for term loans granted by banks and
financial institutions
• Coordinate the activities of institutions providing term
finance to industry
• Provide technical and administrative assistance
promotion, management and growth of industry
• Grant direct loans and advances to industrial concerns
for
30. NABARD for financing agricultural and
• Apex institution
rural sectors
• Main objectives are:
oTo provide credit for development of
agriculture, small scale industries and rural
areas
oTo provide short term refinance assistance
oTo Sanction refinance assistance for
government sponsored programs such as
rozgar yojna etc.
