CONSUMER FINANCE

 Consumer finance

• Consumer credit provides short term/medium term loans to finance purchase of goods or services for personal use. There are four important sources of consumer finance viz manufacturers/sellers/dealers, finance companies, banks and credit card companies. In the past, banks provided finance to manufacturing organizations.
•  The consumers borrowed money from the sellers/dealers directly. Finance companies too entered this arena while credit card entitles with the support from banks started operating with substantial success. Both nationalized and private sector banks have started marketing aggressively for a large slice of the market share in this consumer finance segment. 
• Employers also provide loan facilities to salary earners as a part of welfare scheme for their employees. In big concerns, employees organize themselves into co-operative credit societies and funds raised by its members through periodical contributions are used as loan assistance at low rate of interest.

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CHARACTERISTICS OF FINANCIAL INSTRUMENTS

Characteristics of Financial Instruments

The important characteristics of financial instruments are enumerated as below:

a) Liquidity: Financial instruments provide liquidity. These can be easily and quickly converted into cash.

b) Marketing: Financial instruments facilitate easy trading on the market. They have a ready market.

c) Collateral value: Financial instruments can be pledged for getting loans.

d) Transferability: Financial instruments can be transferred from one person to another.

d) Maturity period: The maturity period of financial instruments may be short term, medium term or long term.

e) Transaction cost: Financial instruments involve buying and selling cost. The buying and selling costs are called transaction costs.

f) Risk: Financial instruments carry risk. Equity based instruments are riskier in comparison to debt based instruments because the payment of dividend is uncertain. A company may not declare dividend in a particular year. However, payment of principle or interest is more or less certain unless the company gets insolvent.

g) Future trading: Financial instruments facilitate future trading so as to cover risks arising out of price fluctuations, interest rate fluctuations etc.

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FINANCIAL INSTRUMENTS

 Financial Instruments
Financial instruments are those instruments which have a monetary value. These instruments can be classified into debt based securities and equity based securities. Equity based securities consist of equity share capital which is ownership based securities and represents risk capital. Debt based securities consists of bonds and debentures. Debenture is an acknowledgement of debt which has to be repaid in full in certain number of years mentioned at the time of issue of debenture itself. On the other hand, bonds are financial instruments issued by companies which are basically a financial contract between a company (borrower) and investors (lenders). Bonds are generally used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders or creditors of the issue.

Short-term debt-based financial instruments are issued for one year or less. Securities of this kind come in the form of T-bills and commercial paper. Long-term debt-based financial instruments are issued for more than one year. These are bonds, debentures and loans.

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FUNCTION OF FINANCIAL MARKETS

Functions of Financial Markets: The main functions of financial markets are enumerated as below:

1) To facilitate creation and allocation of credit and liquidity.

2) To serve as intermediaries for mobilization of savings.

3) To help in the process of balanced economic growth.

4) To provide financial convenience.

5) To provide information and facilitate transactions at low cost.

6) To cater to the various credits needs of the business organizations.

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FINANCIAL MARKETS

 Financial Markets

• The financial market is a market where trading of securities including equities, bonds, currencies and derivatives takes place. Financial market can be divided into money market and capital market. Money market is a market for short term securities having a maturity period of less than one year. 
• Capital Market is a market for long term securities having a maturity period of more than one year. Further, capital market can be divided into primary market and secondary market.
•  In primary market, securities (shares, bonds, debentures) are issued to the public for the first time. While in secondary market, trading (purchase and sale) takes place in those securities are already issued to the public.

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BANKING FINANCIAL INSTITUTIONS

 Banking Financial Institutions

• Banking institutions are those institutions, which participate in the country’s payment system, i.e. they provide transaction services. 
• They play an important role in the mobilization of deposits and distribution of credit to various sectors of the economy. 
• A sound banking system ensures that deposits accumulated from people are productively utilized. Banking sector is dominant in India as it accounts for nearly half of the total financial assets in the financial sector.

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INFORMAL FINANCIAL SYSTEM

Informal Financial System From the above diagram, it can be easily understood that the Indian Financial System can be categorized into formal and informal financial system. The Informal financial system consists of moneylenders; Associations, funds, clubs, committees etc. These people have a system and they have their own rules on how they should function in their day to day activities.

Moreover, informal financial system responds quickly to short term financing opportunities and allowed low income people access to service not available to them through the formal channel. Another advantage is that in informal financial system, loans were given quickly to the lenders. Also, informal financial markets are not subject to interest rate regulation. They do not incur legal expenses and their cost of lending and deposit taking tends to be lower than that of formal financial institutions. However, the formal financial system is always preferable because it is systematic and transparent and offers numerous benefits.

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INTER-RELATIONSHIP IN THE FINANCIAL SYSTEM

 Inter-relationship in the Financial System

• A financial system provides services that are essential in a modern economy. Financial instruments (equity, debt etc.) with attractive return and liquidity encourage saving in financial form. By evaluating alternative investments and monitoring the activities of borrowers, financial institutions increase the efficiency of resource use.
•  Access to a variety of financial instruments enables an organization to pool resources in the markets. Further, trade, the efficient use of resources, saving and risk taking are the cornerstones of a growing economy.
•  In fact, the country could make this feasible with the active support of the financial system. Thus, the financial system has been identified as the most refurbishing factor for growth of the economy, making it one of the important inputs for development.

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SIGNIFICANCE AND DEFINITION

 Significance and Definition
Financial system is a system of interrelated activities that work together to achieve a predetermined goal. It includes financial market, financial institutions, financial services and financial instrument which influence the generation of savings, investment, capital formation and growth.

Van Horne defined the financial system as the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption. Christy has opined that the objective of the financial system is to "supply funds to various sectors and activities of the economy in ways that promote the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires." According to Robinson, the primary function of the system is "to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth."

From the above definitions, it may be said that the primary function of the financial system is the mobilization of savings, their effective utilization for investment in various sectors of the economy and stimulating capital formation to accelerate the process of economic growth.

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INTRODUCTION TO FINANCIAL SYSTEM

INTRODUCTION TO FINANCIAL SYSTEM

India has seen vast changes in its economic setup post independence. However, the first three decades saw India’s GDP growth rate hovering between 3-4% per annum. Some initiatives were taken in 1980’s for the upliftment of the economy that actually pushed the GDP to 5.6%. But, to obtain overall growth and development of the economy that can put India on the Global Map, India needs efficient financial systems. In this respect, efforts were made in 1991 through the policy of Liberalization, Privatization and Globalization. That has, indeed, put India on the global platform.

The financial system is possibly the most important institutional and functional vehicle for economic transformation. Further, for mobilization of savings and their efficient, effective and equitable allocation for investment, it is the success with which financial system performs its functions that sets the pace for the achievement of economic growth and development of a nation.

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OVERVIEW OF FINANCIAL SYSTEM

OVERVIEW OF FINANCIAL SYSTEM

• Efficient financial systems are indispensable for speedy economic development. The more vibrant and efficient the financial system in a country, the greater is its efficiency of capital formation. The more diversified and broad based the institutional structure of the financial system, the more active and vibrant is the financial system. 
• The overall macro level policies of the government, scope of services and operations of financial intermediaries, global outlook regarding the economy, diversity in investment avenues, income and saving levels of households and business and overall regulatory setup affect the process of capital formation in the country. 
• They facilitate conversion of savings into investments by overcoming the geographical and technical limitations.

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