Financial Institutional Service concept basic theoretical concept

“Financial system refers to a set of complex and closely connected or intermixed institutions, agents, practices, markets, transactions, claims and liabilities in the economy”           -----L.M.Bhole

The financial system is concerned about money, credit and finance.

Money:- Money is a medium of exchange, usually in the form of currency and coins, cheques, drafts or credit and debit cards etc...

Credit:- Credit is an amount of money borrowed on a condition of repayment of principal amount along with the interest on a future date.

Finance :- Finance is a facility that bridges the gap between income and expenditure through transfer of instruments or ownership of funds.

                                                Financial system

Financial             Financial             Financial              Financial

Institutions         market             instruments               services

(Regulatory)  ( Intermediates)  ( non intermediates)  ( others)        ( primary)       ( secondary)

Banking               Non-Banking                                                         

                                              (Organized)        ( Un-organized)     (short-term)(medium)(long-term)

                                                (primary)             (secondary)                   

                                      (capital markets)       (money markets)

   

(Equity market)    (Debit market)   (Derivatives market)

                                                                                                    

Financial institutions:-

            A financial institution are business organizations that act as mobilizes and depositors of savings and provides credit of finance, they also provide various financial assistance to the community.

Intermediaries:-

            The financial institutions are also classified as intermediaries and non-intermediaries. The term intermediaries intermediate between savers and investors. They lend money as well as mobilise savings, their liabilities are towards the ultimate savers. Many non banking institutions also act as intermediaries and they are also called “NON BANKING FINANCIAL INTERMEDIARIES(NBFI)”

Ex:-UTI, LIC & GIC

Non intermediaries:-

            The non intermediary institution like IDBI, IFC and NABARD have come into existence because of governmental efforts to provide assistance for specific purpose sectors and regions they have been set up by the government. We would call them Non banking statutory financial organization.(NBSCO)

Banking and non-banking institutions:-

            Banking institutions they participate in the economic payments mechanism and their deposits liabilities constitute a major part of money  supply. They can also create deposit or credit which is money.

                        Non banking institutions are life insurance corporation(LIC), unit trust of India (UTI) and IDBI they provide legal reserve requirements can advance credit by creation claims against themselves.

Financial markets:-

            Financial markets are the centers or arrangement that provide facilities for buying and selling of financial claims and services these markets are financial claims and services. These markets are financial institutions, agents, brokers, dealers, borrowers, lenders, savers and others are inter linked  by the laws, contracts and communication networks.

Primary market:-

            Primary market it is also called as direct market. The primary markets deal in the financial claims or new securities and they are also known as new issue markets.

Secondary market:-

            Secondary markets deal in securities already issued or existing of outstanding. Stock markets have both primary and secondary market segments.

Capital markets:-

            Capital markets deal in long term claims with a period of maturity period above one year stock market and government bonds markets are the examples of capital markets. Equity market, debt market and derivatives markets can be said to be parts of capital market.

Money markets:-

            Money markets deal in short term claims with a period of maturity  period 1 year  or less  treasury bills market, call money market and commercial bills markets and examples of money market.

Financial instruments and services:-

            Financial system deal in “ financial services and claims or financial assets or securities or financial instruments” these services and claims are many and varied in character. This is because diversity or motives behind borrowing and leading.

Financial asset:

            The financial asset represents a claim to the payment of a sum of money sometime in future and or a periodic payment in the form of interest of dividend.

Financial securities:-

            Financial securities are classified as primary (direct) and secondary (indirect ) securities. The primary securities are issued by the ultimate investors directly to the ultimate savers as ordinary shares and debentures

            While the secondary securities issued by the financial intermediates to the ultimate savers as bank deposits, units and so on.

Financial services:-

            Hire purchase system, merchant banking portfolio management are the examples of financial services.

                                Reserve Bank of India{RBI}-1935

RBI as the central bank of the country and is the apex institution of Indian financial and monetary system. It is most powerful central bank. It has been guiding, monitoring, regulating, controlling and promoting the destiny of the India financial system [FIS]. Since its inception it is quite young compared with such central banks as the bank of England, Risks bank of Sweden and the Federal Reserve board of the US.

            It started functioning from April 1^st 1935 on the terms of the Reserve Bank of India act 1934. It was a private shareholders institution till January 1949. After which it became a state owned institution under the reserve bank of India act 1948.

Organization and management:-

            The central office of the bank located at Bombay. The bank is managed by two boards.

●      Central board.

●      Local board.

 Central boark:-

      The central board is at Bombay. This is chief policy making body and can exercise all the powers of the bank. The board consists of governor, the highest authority of the banks administration and four deputy governors. They are appointed by the government of India for the term of 5 years.

      The other members of the board are 14 directors and one government official nominated for a term of 4 years by central government.

 

Local boards:-

      There are four local boards representing the 4 regions of India. North, South, East and West located in New Delhi, Madras, Calcutta and Bombay respectively. Local problems to the central board they represent local problems to the central board.

Main functions of the RBI:-

●      To maintain monetary stability so that the business and economic life can deliver welfare gains of a properly functioning mixed economy

●      To maintain financial stability and ensure sound financial institutions.

●      To maintain stable payments systems.

●      To promote the development of financial infrastructure of markets and systems.

●      To regulate the overall volume of money and credit in the economy with a view to ensure a reasonable degree of price stability

Role of RBI:-

The RBI has since its inception, the bank issues currency notes of all denominations except one rupee notes and coins which are issued by the ministry of finance, the government of India but one rupee notes and coins are put into circulation only through the RBI.

            At present the RBI issuing notes following denominations. 10,20,50,100,500,1000 the bank can issue notes against the security of gold and gold bullion foreign securities, rupee coins.

Government Banker:-

            The  RBI is banker to the central and state government. It provides to the governments all banking services such as acceptance of deposit with drawl of funds by cheques, making payment as well as receipts and collection of payments on behalf of the government transfer of funds and management of public debt.

            As a banker to the government the bank can make “ways and means advances”. In order to bridge the temporary gap between receipts and payments to both central and state government.

Bankers Bank:-

            The RBI like all central banks can be called as bankers bank. Because it has a very special relationship with commercial and co-operative banks. And the major part of its business is with these banks. The banks controls the volume of reserves of commercial banks and these by determines the deposits, credit creating ability of the banks. The banks hold a part or all of their  reserves with the RBI.

Regulatory and supervisory authority:-

            The most significant provision of the act banking regulation act is the supervision and regulation of banks. Sec.35 of the act says that the RBI at any time can inspect that banks and also empowers the RBI to inspect branches of Indian banks located in India and outside also. Bank can inspect different aspects of bank activities such as deposit mobilization, investment policy, branch expansion ets..RBI can conduct irregularities and frauds reported against banks.

Exchange control authority:-

            One of the essential functions of the RBI is to maintain stability of the external value of the rupee it pursues this objective through its domestic policies to achieve that RBI has the following dimensions.

■    To administrate the foreign exchange control.

■    To interact or negotiate with the monetary authorities of the sterling area.

■    To manage exchange reserves.

Control of credit:-

            RBI as banker to other banks and leader of money market assumed a very important monetary regulating function, controller of credit. The credit created by banks leads to inflation or depression and disturbs the smooth working of the economy to check those trends the RBI uses both quantitative credit control methods and also selective credit control methods.

Promoter of the financial system:-

            The RBI has been rendering developmental or promotional services which have strengthened the banking and financial structure. This has helped in mobilizing savings and directing credit flows to derived channels, thereby helping to achieve the object of economically.