1. TRENDS IN INDIAN FINANCIAL SYSTEM
BY: SRIBATSA PATTANAYAK
M.B.A
ACADEMY OF BUSINESS ADMINISTRATION, BALASORE
INTRODUCTION :
EVERY MODERN ECONOMY IS BASED ON A SOUND FINANCIAL SYSTEM, WHICH HELPS IN PRODUCTION, CAPITAL &
ECONOMIC GROWTH BY ENCOURAGING SAVINGS HABITS, MOBILISING SAVINGS FROM HOUSEHOLDS & OTHER
SEGMENTS & ALLOCATING SAVINGS INTO PRODUCTIVE USAGE, SUCH AS : TRADE, COMMERCE, MANUFACTURE ETC.
THE ECONOMIC DEVELOPMENT OF A NATION IS REFLECTED BY THE PROGRESS OF THE VARIOUS ECONOMIC UNITS,
BROADLY CLASSIFIED INTO CORPORATE SECTOR, GOVT. SECTOR & HOUSEHOLD SECTOR. ACCORDING TO THEIR
ACTIVITIES THEY ARE PLACED EITHER IN A SURPLUS/ DEFICIT/ BALANCED BUDGETARY SITUATIONS. THERE ARE
AREAS OR PEOPLE WITH SURPLUS FUNDS & THERE ARE THOSE WITH DEFICIT. A FINANCIAL SYSTEM OR FINANCIAL
SECTOR FUNCTIONS AS AN INTERMEDIARY & FACILITATES THE FLOW OF FUNDS FROM THE AREAS OF SURPLUS TO
THE AREAS OF DEFICIT.
THUS THE PRINCIPAL AIM OF A FINANCIAL SYSTEM IS TO TRANSFORM SURPLUS INCOME & SAVINGS INTO
INVESTMENTS.
FLOW OF FUNDS
FLOW OF FINANCIAL SERVICES
INDIAN FINANCIAL SYSTEM
INDIAN FINANCIAL SYSTEM CONSISTS OF 3 MAJOR PARTS :
 FINANCIAL MARKETS.
 FINANCIAL INSTRUMENTS.
 FINANCIAL INTERMEDIARIES.

2. 1. FINANCIAL MARKET :
EFFICIENT TRANSFER OF RESOURCES FROM THOSE HAVING IDLE RESOURCES TO OTHERS WHO HAVE A PRESSING
NEED FOR THEM IS ACHIEVED THROUGH FINANCIAL MARKETS. FINANCIAL MARKETS PROVIDE CHANNELS FOR
ALLOCATION OF SAVINGS TO INVESTMENT. IT IS A MARKET WHERE FINANCIAL ASSETS ARE CREATED OR
TRANSFERRED THROUGH BUYING & SELLING OF FINANCIAL ASSETS.
TYPES OF FINANCIAL MARKET :
A. MONEY MARKET :
IT REFERS TO THE MARKET, WHERE BORROWERS & LENDERS EXCHANGE SHORT TERM FUNDS TO SOLVE THEIR
LIQUIDITY NEEDS. FUNDS ARE AVAILABLE IN THIS MARKET FOR PERIODS RANGING FROM A SINGLE DAY UPTO A
YEAR. THE FINANCIAL CLAIMS HERE HAVE LOW RISK, HIGH LIQUIDITY & MATURITIES UNDER ONE YEAR.
B. CAPITAL MARKET :
THE CAPITAL MARKET IS DESIGNED TO FINANCE THE LONG TERM INVESTMENTS. THE TRANSACTIONS TAKING PLACE
IN THIS MARKET WILL BE FOR PERIODS OVER A YEAR.
AGAIN THE CAPITAL MARKET CAN BE CLASSIFIED ON THE BASIS OF CLAIMS REPRESENTING NEW ISSUES OR
OUTSTANDING ISSUES AS PRIMARY & SECONDARY .
I. PRIMARY MARKET :
IT IS THE MARKET WHICH PROVIDES THE CHANNEL FOR SALE OF NEW ISSUES. RESOURCES ARE REQUIRED FOR
BOTH NEW AS WELL AS EXISTING PROJECTS WITH A VIEW TO EXPANSION, MODERNISATION, DIVERSIFICATION &
UPGRADATION. IT IS THE MARKET WHERE RESOURCES ARE MOBILISED BY COMPANIES THROUGH ISSUE OF NEW
SECURITIES.

3. II. SECONDARY MARKET :
A MARKET WHERE INVESTORS TRADE OUTSTANDING SECURITIES/ ISSUES ARE CALLED SECONDARY MARKET.
SECONDARY MARKET COMPRISES OF STOCK EXCHANGES, WHICH PROVIDE PLATFORM FOR PURCHASE & SALE OF
SECURITIES BY INVESTORS, WHERE THE TRADING IS ACCESSIBLE ONLY THROUGH BROKERS & TRADING IS CONFIED
ONLY TO STOCK EXCHANGES.
C. FOREX MARKET:
THIS MARKET DEALS WITH THE MULTICURRENCY REQUIREMENTS, WHICH ARE MET BY THE EXCHANGE OF
CURRENCIES. DEPENDING ON THE EXCHANGE RATE THAT IS APPLICABLE, THE TRANSFER OF FUNDS TAKES PLACE IN
THIS MARKET. THIS IS ONE OF THE MOST DEVELOPED & INTEGRATED MARKET ACROSS THE GLOBE.
D. CREDIT MARKET:
IT IS A PLACE WHERE BANKS, FINANCIAL INSTITUTIONS & NBFC’S RENDER SHORT, MEDIUM & LONG TERM LOANS
TO CORPORATE & INDIVIDUALS.
2. FINANCIAL INSTRUMENTS :
A. MONEY MARKET INSTRUMENTS :
THE MONEY MARKET IS A MARKET FOR SHORT TERM MONEY & FINANCIAL ASSETS THAT ARE CLOSER SUBSTITUTES
OF MONEY. HERE THE TERM SHORT TERM MEANS GENERALLY A PERIOD UPTO ONE YEAR & CLOSER SUBSTITUTES
OF MONEY MEANS ANY ASSET WHICH CAN BE QUICKLY CONVERTED INTO MONEY WITH MINIMUM TRANSACTION
COST.
THE IMPORTANT MONEY MARKET INSTRUMENTS ARE :
CALL/NOTICE MONEY, TREASURY BILL, TERM MONEY, COMMERCIAL PAPERS ETC.
I. CALL/NOTICE MONEY:
IT IS THE MONEY BORROWED OR LENT ON DEMAND FOR A VERY SHORT PERIOD. WHEN MONEY IS BORROWED OR
LENT FOR A DAY, IT IS KNOWN AS CALL/ OVERNIGHT MONEY. HOLIDAYS & SUNDAYS ARE EXCLUDED HERE. THUS
MONEY BORROWED ON A DAY & REPAID ON THE NEXT WORKING DAY IS “CALL MONEY”. BUT WHEN MONEY LENT
OR BORROWED FOR MORE THAN A DAY & UPTO 14 DAYS, IT IS NOTICE MONEY.
II. TERM MONEY :
INTER BANK MARKET FOR DEPOSITS OF MATURITY BEYOND 14 DAYS IS REFERRED TO AS THE TERM MONEY
MARKET.

4. III. TREASURY BILL :
IT IS A SHORT TERM BORROWING INSTRUMENT OF THE UNION GOVT. IT IS AN IOU I.e. ACKNOWLEDGEMENT OF
DEBT OF THE GOVT. TO PAY A STATED SUM OF AFTER EXPIRY OF STATED PERIOD FROM THE DATE OF ISSUE.(LESS
THAN 1 YEAR).
IV. COMMERCIAL PAPERS :
IT REPRESENTS SHORT TERM UNSECURED PROMISORY NOTES ISSUED BY FIRMS THAT ARE GENERALLY CONSIDERED
TO BE FINANCIALLY STRONG. COMMERCIAL PAPERS USUALLY HAS A MATURITY PERIOD OF 90 - 180 DAYS. IT IS
GENERALLY SOLD AT DISCOUNT & REDEEMED AT PAR.
IT IS EITHER DIRECTLY PLACED WITH THE INVESTORS OR SOLD THROUGH DEALERS. BUT IT DOES NOT PRESENTLY
HAVE A WELL DEVELOPED SECONDARY MARKET IN INDIA.
B. CAPITAL MARKET INSTRUMENTS :
THE CAPITAL MARKET GENERALLY CONSISTS OF THE FOLLOWING LONG TERM PERIOD i.e. MORE THAN 1 YEAR
PERIOD. THE MAJOR FINANCIAL INSTRUMENTS USED FOR A CAPITAL MARKET ARE :
EQUITY SEGMENTS : DEBT SEGMENTS :
EQUITY SHARES . DEBENTURES .
PREFERENCE SHARES . ZERO-COUPON
CONVERTIBLE PREFERENCE SHARES . DEEP DISCOUNT BONDS-
NON-CONVERTIBLE PREFERENCE SHARES .
C. HYBRID INSTRUMENTS :
HYBRID INSTRUMENTS HAVE BOTH THE FEATURES OF EQUITY & DEBENTURE. THIS KIND OF INSTRUMENT IS
CALLED AS HYBRID INSTRMENTS. EXAMPLES ARE: CONVERTIBLE DEBENTURES. WARRANTS, ETC.
3. FINANCIAL INTERMEDIATION :
AFTER DESIGNING THE INSTRUMENTS, THE ISSUER SHOULD THEN ENSURE THAT THESE FINANCIAL ASSETS
REACH THE ULTIMATE INVESTOR IN ORDER TO HARVEST THE REQUISITE AMOUNT. WHEN THE BORROWER OF
THE FUNDS APPROACHES THE FINANCIAL MARKET TO RAISE FUNDS, ADEQUATE INFORMATION OF ISSUE,
ISSUER & THE SECURITY SHOULD BE PROVIDED. SO THERE SHOULD BE A PROPER CHANNEL TO ENSURE SUCH
TRANSFER WITHIN THE FINANCIAL SYSTEM. FOR THIS PURPOSE FINANCIAL INTERMEDIARIES CAME INTO
EXISTENCE. IN INDIA FINANCIAL INTERMEDIATION IN THE ORGANISED SECTOR IS CONDUCTED BY VARIOUS
INSTITUTIONS UNDER THE VIGILANCE OF R.B.I. IN THE INITIAL STAGE THE ROLE OF INTERMEDIARIES WAS
MOSTLY RELATED TO ENSURE TRANSFER OF FUNDS FROM THE LENDER TO THE BORROWER. THIS SERVICE WAS

5. OFFERED BY BANKS, INANCIAL INSTITUTIONS, BROKERS & DEALERS. HOWEVER, AS THE FINANCIAL SYSTEM
WIDENED ALONG WITH THE DEVELOPMENTS TAKING PLACE IN THE FINANCIAL MARKETS, THE SCOPE OF ITS
OPERATION TOO WIDENED.
SOME OF THE IMPORTANT INTERMEDIARIES OPERATING IN THE FINANCIAL MARKETS INCLUDE :
I. INVESTMENT BANKERS
II. STOCK EXCHANGES
III. MUTUAL FUNDS
IV. FINANCIAL ADVISORS
V. FINANCIAL CONSULTANTS
VI. PRIMARY DEALERS, ETC.
EVOLUTION, GROWTH & FUNCTIONS OF FINANCIAL SYSTEM IN INDIA
INDIAN FINANCIAL SYSTEM WAS CHARACTERISED BY :
 ABSENCE OF ORGANISED CAPITAL MARKET
 DEPENDENCE OF INDUSTRIES & OTHER USERS ON INTERNAL SOURCES.
 RARE CASES OF PUBLIC ISSUES OF CAPITAL FOR EXPANSION & MODERNISATION.
 FEW FINANCIAL INSTITUTIONS & PLAYERS IN THE MARKET.
 AWKWARD & VERY STRICT CONDITIONS FOR LOAN ASSISTANCE TO COMPANIES .
NATIONALISATION OF BANKS IN 1969 WAS A MAJOR STEP TO ENSURE THAT TIMELY AND ADEQUATE CREDIT
SUPPORT WAS AVAILABLE.
GRANT OF CREDIT TO AGRICULTURAL & SMALL INDUSTRIES BY EXPANSION OF RURAL BANKING PROVED TO BE
A BOON OFFERED BY THE NEW POLICY.
THE INDIAN FINANCIAL SYSTEM HAS MADE COMMANDABLE PROGRESS IN EXTENDING ITS GEOGRAPHIC SPREAD
& FUNCTIONAL REACH. THE SUDDEN BRST OF ACTIVITIES OF BANKING SYSTEM HAS BEEN A MAJOR FACTOR IN
PROMOTING FINANCIAL INTERMEDIATION IN THE ECONOMY & GROWTH OF FINANCIAL SAVINGS.
INDIAN MONEY MARKET CONSISTS OF FORMAL & INFORMAL SEGMENTS. THE FORMAL MARKET COMPRISES OF
RBI, VARIOUS COMMERCIAL BANKS, COOPERATIVE BANKS, UTI ETC. INFORMAL MARKET CONSISTS OF
CHITFUNDS, NIDHIS, INDEGENOUS BANKERS ETC. THE MONEY MARKET INSTRUMENTS INCLUDES TREASURY
BILLS, COMMERCIAL PAPERS ETC.

6. MONEY MARKET HAS GAINED GREATER STRENGTH WITH THE RECENT WORLD WIDE LIBERISATION OF
MONETARY & TRADE POLICIES. WITH THE ARRIVAL OF WTO & REMOVAL OF ARTIFICIAL BARRIERS AMONG
COUNTRIES BOOSTING FREE FLOW OF GOODS & SERVICES, CAPITAL MARKETS HAVE GROWN MULTIFOLD & THE
POTENCIAL OF FUTURE IS EVEN MORE LARGER. WITH THE INCREASING INDUSTRIAL & TRADE ACTIVITIES AFTER
LIBERALISATION,THE DEMAND FOR CAPITAL MOBILISATION FROM THE MARKET HAS CROSSED ALL ESTIMATES &
GIVING RISE TO MANY INNOVATIONS & REFORMS.
THE MARKET PLAYERS IN THE INDIAN CAPITAL MARKET ESSENTIALLY CONSISTS OF VARIETY OF INVESTORS
FROM DIFFERENT SECTORS, SUCH AS :SMALL INVESTORS, BANKS, MUTUAL FUNDS, COMPANIES, FINANCIAL
INSTITUTIONS & SO ON.
THE INVESTORS ARE EXPECTED TO ENQUIRE & INFORM THEMSELVES ABOUT THE STRENGTHS & WEAKNESSES
OF DIFFERENT INSTRUMENTS & THE INSTITUTIONS IN WHICH THEY INVEST OR PLANNING TO INVEST. THEY
SHOULD ALSO BE FAMILIAR WITH THE PREVAILING RULES & REGULATIONS OF THE COUNTRY APPLICABLE TO
SUCH INVESTMENTS & INSTITUTIONS .THE CONCEPT OF SAFETY, LIQUIDITY & PROFITABILITY OF THE
INVESTMENT SHOULD BE CLEAR BEFORE THE INVESTOR MAKES ANY DECISSION TO INVEST.
CONCLUSION :
IN INDIA MONEY MARKET IS REGULATED BY RESERVE BANK OF INDIA & SECURITIES EXCHANE BOARD OF INDIA/
SEBI REGULATES CAPITAL MARKET. CAPITAL MARKET CONSISTS OF PRIMARY MARKET & SECONDARY MARKET.
ALL INITIAL PUBLIC OFFERINGS/IPO’S COMES UNDER THE PRIMARY MARKET, & ALL SECONDARY MARKET
TRANSACTIONS DEALS IN SECONDARY MARKET. SECONDARY MARKET REFERS TO A MARKET WHERE SECURITIES
ARE TRADED AFTER BEING INITIALLY OFFERED TO THE PUBLIC IN THE PRIMARY MARKET & ARE LISTED ON THE
STOCK EXCHANGE. SECONDARY MARKET COMPRISES OF EQUITY MARKET & DEBT MARKETS. IN THE SECONDARY
MARKET TRANSACTIONS BSE & NSE PLAYS A GREAT ROLE IN EXCHANGE OF CAPITAL MARKET INSTRUMENTS.