Financial Institution and Market

· Money
Money may be any commodity chosen by common consent as a medium or instrument of exchange of good and services, its widely accepted in a payment of a good and services and in settlement of debts.

· B. Money and near money
- Money in circulation consist”
a. Legal tender money à Notes, Coins.
b. Bank money or deposit withdrawable à Bank Cheque
- Near money is a certain assets which are highly liquid but not perfectly liquid as a money
Viz.”
Bill of exchange, Treasury bill, Debentures, Bond.
- Near money its also call as claim to money

· The pure meaning of finance :
Finance is the practice of manipulating and managing the money.
Finance is the capital involved in a project especially the capital that has to be raised to start a new business.
Finance is a loan of money for particular purpose especially by a finance house.

Financial system is a set of complex and closely inter-mixed financial institution, market, instrument, services, practices, procedures, etc.
Or
A set of institutional arrangement through which financial surplus ( or command over real resources ) in the economy are mobilized from surplus units and transferred to deficit spender’s.


· Main constitutional of financial system
1. Financial Assets à Bill, Bond, equities.
a. Primary/ Direct
b. Secondary/ Indirect
2. Financial Market à Currency, Cheque.
a. Functional
b. Institutional
c. Sectoral
3. Financial Institution à Financial intermediaries
a. Bank : Apex Bank
b. Non Bank : Development Bank, Investment.

· Bhole concept of financial market (1995)
a. Broad and Wide : Attract funds from inside and outside investor
b. Deep : sufficient order for buying and selling.
c. Shallow Market : Under-developed financial market





· Function of financial system
- Its help in production
- Capital Accumulation
And this is generally done through encouraging the saving and allocating fund among various alternative uses and users.
1. To facilitate creation and allocation of credit and liquidity
2. To serve as intermediaries in the process of mobilization of saving in the economy
3. To provide financial convenience to the people
4. To assist the process of economic development through a more balanced regional and sectoral distribution of investiable fund.
5. To establish a regular, smooth, efficient and cost effective link between servers and investor.
6. To improve quality and pace of economic development.

· Constituent of financial system.-
1. Financial institution
2. Financial services
3. Financial market
4. Financial instrument
5. Other.

· Function of Indian financial system
1. Accelerate the rate of economic development
2. Allocation of resources to different investment channel
3. It’s play the role of catalyst
4. Attempt to achieve the target of the plan
5. Lower risk and diversification of funds
6. Expert knowledge and professional guidance
7. Fosters industrial development
8. Investors education
9. Promotion of self –employment
10. Revival of sick units

· Role of finance system
1. Encourage saving
2. Helping hand for producer
3. Mobilization of saving
4. Capital formulation
5. Help in economic planning and development
6. Market borrowing possible
7. Globalize world economic
8. Institution
9. help in stabilizing foreign exchange rate
10. Help in international banking




· Inter-related function of Indian financial system in the modern economy (Chandra – 1997)
1. Payment system
2. Pooling of fund
3. Transfer of resources
4. Risk management
5. Price information for decentralized decision making
6. coping with information asymmetry

· Basic for managing risk
1. Hedging
2. Diversification
3. Insurance

· Measuring financial development
1. Financial ratio
2. Financial inter-relation ratio
3. New issue ratio
4. Inter-mediation ratio

· Type of risk
a. Commercial risk
b. Political risk
c. Risk arising out of foreign laws
d. Cargo risk
e. Credit risk
f. Exchange fluctuation risk

· Money market.-
Money market is a specialized market geared to cater to short term needs, dealing in this market call for specialized skill – or –
Money market is a market for short term financial assets which are near to substitute for money.

· Character of money market.-
1. Money market is basically over the phone-market. The transaction are conducted through oral communication
2. Dealing in money market may conducted with or without the help of broker
3. It’s a market for short term financial assets that are close substitute for money
4. Short term for this purpose is generally taken as a period up to one year
5. Financial assets which can be converted into money with ease
6. Money market consist of money, sub-market such as inter-bank call, money, bill rediscount, treasury bill, etc. collectively they consist the money market


· Objective of money market
1. It is provide an equilibrating mechanism for evening out short term surpluses and deficit.
2. The money market provide a focal point for the central bank intervention for influencing liquidity in the economy
3. It is provide reasonable access to users of short term money to meet their requirement at a realistic price.

· Constituent of money market –
1. Call money market
2. Collateral loan market
3. Acceptance market
4. Bill market

· Money market instruments operated in India.-
1. Monet at call and short notice (call loan)
2. Treasury bill’s
3. Gilt edged securities
4. Municipal bond
5. Commercial bill
6. Debt securitization
7. Certificate of deposit
8. Commercial paper
9. Money market mutual fund
10. Other.

· Institution of money market -
1. Central bank
2. Commercial bank
3. Indigenous financial institution
4. Discount house
5. Acceptance loan

· Structure of Indian money market.-
1. Organized sector
2. Un-organized sector
a. Money – lender
b. Indigenous banker

· Drawback of Indian money market
1. Dichotomy
2. Overall shortage of fund in money market
3. Seasonal shortage of fund
4. Inefficient and inadequate banking facilities
5. lack of co-ordination
6. Divergence of lending rates and policies
7. Inadequate control by the reserve bank
8. Inelasticity and instability
9. Under-developed bill market
10. Improper care of rural finance
11. Non-banker acceptance
12. Blending of lending and trading activities



· Measure for improvement of Indian money market
1. Legislative measure
2. Co-operative movement
3. Agricultural refinance and development co operation
4. Agricultural credit board
5. Rural bank
6. Extension of credit guarantee scheme
7. Link between indigenous banker and commercial banks
8. Bill market scheme
9. Nationalization of bank
10. Lead bank scheme
11. Spread of post office saving bank
12. Uniform chit fund legislation

· Important of money market.-
1. Money market is an important source of financing trade and industry through a bill, commercial paper.
2. Availability of fund in the money in the money market
3. Money market offers an avenue to the commercial bank for investing short term surpluses of fund.
4. Money market facilitates affective implementation of monetary policy of the central bank of a country.
5. Money market serves as an important guide to the government in formulating, revising and implementing it’s monetary policy.
6. Money market offers to the government an important non-inflationary avenue of raising short term fund through bill which are subscribed by commercial bank and the public.

· Financial market consist.-
A. Unorganized market and Organized market
B. Money market and Capital market
C. Primary and Secondary market
D. Broad, Deep and shallow financial market


· Financial institutions are”
A - Money Market
Is concern with the supply and the demand for investiable fund. Its reservoir short-term funds.
Including – Central bank, Commercial bank, Indegenious, Financial institution, Accepting houses.

B - Capital Market
It’s a place where the medium and long term financial need of business and other undertaking are met. By financial institution which supply medium and long term resources to borrowers.
Including – Bank, Merchant bank, Mutual fund, Life insurance companies, development bank.


· Central Bank
The Reserve Bank of India was inaugurated 1st April 1935 and nationalized 1949

· Function of Reserve bank of India according to Sundharam and Dutt :
1. Monetary function
2. Non-Monetary function
3. Promotional and development function
Then Added by Vasant Desai (1996)
1. Issuing currency notes / Currency authority
2. Serving a banker to the government
3. Acting as a banker to the government
4. Monetary regulation and management
5. Exchange management and control
6. Collection of data and their publication
7. Miscallanious development and promotional function and activities
8. Agricultural finance
9. Industrial function
10. Export finance


· Monetary policies is a policy which influence the public’s stock of money substitute or the public demand for such assets or both.
· Monetary policy of the RBI refer to a regulatory policy where by the central bank maintain its control over the supply of money for the realization of general economic goal


· Indian monetary policy important objective are :
(The issue in Chakravarty committee)
a. Price stability
b. Growth
c. Equity and social justice
d. Promoting and nurturing new financial institution

· Credit control by the RBI are:
1. The bank rate policy
2. Open market operation
3. The cash reserve ratio
4. The statutory liquidity ratio
5. Selective credit control

· Feature of monetary policy an important objective by RBI
1. Credit restriction
3. Expantion of money supply and bank credit
4. Price stability
4. Growth equity and social justice
5. Promoting and nurturing new monetary and financial institution



· Deficiencies Indian money market
1. Existence of unorganized money market
2. Absence of integration
3. Diversity in money rate of interest
4. Seasonal stringency of money
5. Absence of the bill market
6. Absence of well organized banking system

· Rate of interest
Rate of Interest it is the rate which commercial bank and money market institution agrees to give discount facilities or advances loan.

· Monetary and money measure by RBI
A. qualitative measures
1. Bank rate
2. Open Market Operation (OMO)
3. Cash Reserve Ratio (CRR)
4. Statutory Liquidity Requirement (SLR)
B. Qualitative measures
1. Credit ceiling
2. Margin requirement
3. Variable interest rate
4. Regulation of consumer credit
5. Moral suasion
6. Licensing