BCOM / BCOM (Honours)
FINANCIAL SYSTEMS AND SERVICES
Unit-1
Introduction to Financial System
Financial System, Financial Assets, Financial Intermediaries, Financial Markets, Classification, Components of
Financial Market, Financial Instruments, Multiplicity of Financial Instruments, Formal and Informal Financial Sectors,
Key Elements of well-functioning Financial System, New Financial Instruments. Financial Sector Reforms:
Narasimham Committee Report 1991 and 1998. Indicators of Financial Development.
,Financial System - A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges, that permit the exchange of funds or, The financial system is an organized and regulated structure where an
exchange of funds takes place between the lender and the borrower. The financial system refers to the network of
institutions, markets, and intermediaries that facilitate the transfer of funds in an economy. This includes banks,
insurance companies, pension funds, investment banks, stock exchanges, and other entities involved in the creation,
trade, and management of financial products. The financial system plays a critical role in allocating capital and credit to
individuals, businesses, and governments and thus supports economic growth and development.
Components
The components of a financial system can be broadly categorized into the following:
1. Financial Institutions: Banks, insurance companies, pension funds, investment banks, and other financial
institutions that provide various financial services to consumers and businesses.
2. Financial Markets: Capital markets, money markets, and derivative markets where financial instruments such as
stocks, bonds, currencies, and commodities are traded.
3. Financial Intermediaries: Entities such as brokers, dealers, and asset managers that connect buyers and sellers of
financial assets and help facilitate transactions.
4. Central Bank: The central bank of a country that manages the monetary policy and regulates the financial
system.
5. Regulatory Authorities: Government agencies responsible for overseeing and regulating the financial system and
its participants to ensure stability and fairness.
6. Financial Infrastructure: The technology, systems, and processes that support the functioning of the financial
system, such as clearinghouses, payment systems, and settlement systems.
Financial institutions
The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised
either directly or indirectly via the Financial Markets.
The main functions of the Financial Institutions are as follows:
● A short term liability can be converted into a long term investment
● It helps in conversion of a risky investment into a risk-free investment
, ● Also acts as a medium of convenience denomination, which means, it can match a small deposit with large
loans and a large deposit which small loans
The financial institutions can further be divided into two types:
● Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect
money from the public against interest provided on the deposits made and lend that money to the ones in need
● Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage
companies fall under this category. They cannot ask for monetary deposits but sell financial products to their
customers.
Further, Financial Institutions can be classified into three categories:
● Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
● Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB,
PNB, etc.
● Non-Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD,
SIBDI, etc.
Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds,
shares and other assets is called a financial market.
The financial market can be further divided into four types:
● Capital Market – Designed to finance the long term investment. It is a venue where savings and investments
are channeled between suppliers who have capital and those who are in need of capital. The capital market can
further be divided into 2 types:
1. Primary market - where the securities are floated for the first time
2. Secondary market - where the existing securities are traded among interested parties
● Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is
authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly
liquid instruments. The money market can further be divided into two types:
(a) Organised Money Market
(b) Unorganised Money Market
, Financial Instruments
A financial instrument is a monetary contract between parties. We can create, trade, or modify them. We can also settle
them. A financial instrument may be evidence of ownership of part of something, as in stocks and shares. Bonds, which
are contractual rights to receive cash, are financial instruments
Derivative instruments
Derivative instruments are instruments who’s worth we derive from the value and characteristics of at least one
underlying entity. Assets, interest rates, or indexes, for example, are underlying entities.
Cash instruments
Cash instruments are instruments that the markets value directly. Securities, which are readily transferable, for
example, are cash instruments. Deposits and loans, where both lender and borrower must agree on a transfer, are also
cash instruments.
Debt-based financial instruments reflect a loan the investor made to the issuing entity.
Equity-based financial instruments reflect ownership of the issuing entity.
Financial Services
Services provided by Asset Management and Liability Management Companies. They help to get the required funds
and also make sure that they are efficiently invested.
The financial services in India include:
● Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing
debit/credit cards, opening accounts, etc.
● Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages,
etc. are all a part of the Insurance services
● Investment Services – It mostly includes asset management
● Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange
services
The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing
payments and settlements and lending and investing.
Fund based services – services that are used to acquire assets or funds for a customer
Fee based services – when financial institutions operate in specialised fields to earn income in form of fees,
commissions, brokerage and likes it is called fee-based services
FINANCIAL SYSTEMS AND SERVICES
Unit-1
Introduction to Financial System
Financial System, Financial Assets, Financial Intermediaries, Financial Markets, Classification, Components of
Financial Market, Financial Instruments, Multiplicity of Financial Instruments, Formal and Informal Financial Sectors,
Key Elements of well-functioning Financial System, New Financial Instruments. Financial Sector Reforms:
Narasimham Committee Report 1991 and 1998. Indicators of Financial Development.
,Financial System - A financial system is a set of institutions, such as banks, insurance companies, and stock
exchanges, that permit the exchange of funds or, The financial system is an organized and regulated structure where an
exchange of funds takes place between the lender and the borrower. The financial system refers to the network of
institutions, markets, and intermediaries that facilitate the transfer of funds in an economy. This includes banks,
insurance companies, pension funds, investment banks, stock exchanges, and other entities involved in the creation,
trade, and management of financial products. The financial system plays a critical role in allocating capital and credit to
individuals, businesses, and governments and thus supports economic growth and development.
Components
The components of a financial system can be broadly categorized into the following:
1. Financial Institutions: Banks, insurance companies, pension funds, investment banks, and other financial
institutions that provide various financial services to consumers and businesses.
2. Financial Markets: Capital markets, money markets, and derivative markets where financial instruments such as
stocks, bonds, currencies, and commodities are traded.
3. Financial Intermediaries: Entities such as brokers, dealers, and asset managers that connect buyers and sellers of
financial assets and help facilitate transactions.
4. Central Bank: The central bank of a country that manages the monetary policy and regulates the financial
system.
5. Regulatory Authorities: Government agencies responsible for overseeing and regulating the financial system and
its participants to ensure stability and fairness.
6. Financial Infrastructure: The technology, systems, and processes that support the functioning of the financial
system, such as clearinghouses, payment systems, and settlement systems.
Financial institutions
The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised
either directly or indirectly via the Financial Markets.
The main functions of the Financial Institutions are as follows:
● A short term liability can be converted into a long term investment
● It helps in conversion of a risky investment into a risk-free investment
, ● Also acts as a medium of convenience denomination, which means, it can match a small deposit with large
loans and a large deposit which small loans
The financial institutions can further be divided into two types:
● Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect
money from the public against interest provided on the deposits made and lend that money to the ones in need
● Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage
companies fall under this category. They cannot ask for monetary deposits but sell financial products to their
customers.
Further, Financial Institutions can be classified into three categories:
● Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
● Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB,
PNB, etc.
● Non-Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD,
SIBDI, etc.
Financial Markets
The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds,
shares and other assets is called a financial market.
The financial market can be further divided into four types:
● Capital Market – Designed to finance the long term investment. It is a venue where savings and investments
are channeled between suppliers who have capital and those who are in need of capital. The capital market can
further be divided into 2 types:
1. Primary market - where the securities are floated for the first time
2. Secondary market - where the existing securities are traded among interested parties
● Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is
authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly
liquid instruments. The money market can further be divided into two types:
(a) Organised Money Market
(b) Unorganised Money Market
, Financial Instruments
A financial instrument is a monetary contract between parties. We can create, trade, or modify them. We can also settle
them. A financial instrument may be evidence of ownership of part of something, as in stocks and shares. Bonds, which
are contractual rights to receive cash, are financial instruments
Derivative instruments
Derivative instruments are instruments who’s worth we derive from the value and characteristics of at least one
underlying entity. Assets, interest rates, or indexes, for example, are underlying entities.
Cash instruments
Cash instruments are instruments that the markets value directly. Securities, which are readily transferable, for
example, are cash instruments. Deposits and loans, where both lender and borrower must agree on a transfer, are also
cash instruments.
Debt-based financial instruments reflect a loan the investor made to the issuing entity.
Equity-based financial instruments reflect ownership of the issuing entity.
Financial Services
Services provided by Asset Management and Liability Management Companies. They help to get the required funds
and also make sure that they are efficiently invested.
The financial services in India include:
● Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing
debit/credit cards, opening accounts, etc.
● Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages,
etc. are all a part of the Insurance services
● Investment Services – It mostly includes asset management
● Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange
services
The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing
payments and settlements and lending and investing.
Fund based services – services that are used to acquire assets or funds for a customer
Fee based services – when financial institutions operate in specialised fields to earn income in form of fees,
commissions, brokerage and likes it is called fee-based services
