Financial Sector 1: Basics Video Lecture | General Knowledge (GK) for LIC AAO Exam (English) - Banking Exams

everyone this isn't good Chaudhary from
pit bulls i.com
and in this video lecture I'll be
talking to you about a basic
introduction or for the financial system
its various components and also we'll be
having a detailed discussion on the
money market and its various instruments
in India so first let's just let us try
and understand what exactly is a
financial system so financial system is
a system which provides a mechanism by
which savings are transformed into
investments so whatever surplus incomes
that individuals or companies or even
the government that they have the
financial system provides a mechanism by
which these savings can be invested into
formal market of India
further it plays a significant role in
the economic growth of the country by
mobilizing surplus funds and utilizing
them effectively for productive purposes
now if the surplus income or the savings
that we have we are not able to invest
this money into a formal market then we
keep it with ourselves and these this
money or this saving rather becomes a
dead asset for us so through the
financial system it is begin a formal
channel an effective channel so that
this money can be used for productive
purposes now let us look at what exactly
constitutes the financial system of any
country first are the financial markets
in this we talk about primary market and
the secondary market the primary market
of course is where new shares are issued
the secondary market again with many
good shares are traded amongst different
entities other divisions of financial
markets are of course money market
capital market etc next we have
financial institutions so we have
institutions which are regulatory in
nature for example CP and formerly mcx
etcetera also we have other institution
like dfhi which we'll see in the
subsequent slides the next component of
a financial system includes financial
instruments so we have shares debentures
etc assets and
securities including government
securities through which government
borrows from funds from individuals or
other entities next we have financial
services in this we include services
like mutual funds hedge funds etc so now
that we understand the various
components of the financial system let
us now see what are the various
functions that the financial system
performs in an economy which serves as a
link between savers and investors right
so the people who are saving may be
geographically located far apart from
the people who can actually invest your
money so through this financial system
somebody located in let us say sending
it can easily invest in a company which
is located in Bombay so the financial
system acts as a link between the savers
and investors it provides a macaque
payment mechanism for exchange of goods
and services so we will see that various
derivative instruments like forward
futures or options again provide this
particular function next it provides a
mechanism for the transfer of resources
across geographical boundaries next it
helps in lowering the cost of
transaction and increases returns now
for example if you talk about the mutual
fund since the mutual fund is
aggregating money from a lot of people
and investing it all together because
the money from so many people is
aggregated and invested in the market
together again the cost of transaction
becomes lower and nature it naturally
increases returns for individuals as
well as mutual funds now we look at the
first component of the financial system
that is the financial market right so
these are mechanisms enabling
participants to deal in financial claims
by the term market we do not mean that
the market exists at one single place
however this market is a platform which
can even exist on the internet or in the
digital form is worth the various
participants in financial markets of
course are financial institutions like
banks individuals
companies and also the government right
so this participant deal with various
kind of financial claims using the
instruments of financial markets
financial market creates a facilitates
creation and allocation of credit as
well as liquidity in the economy so as I
said earlier there are two types of
financial markets first money market so
this is broadly the market in which
short-term debt instruments are traded
or sold next is capital market in which
only long-term debt instruments are
involved again the next division of
financial markets is of course between
primary market and secondary market in
primary market new shares or fresh or
initial shares are issued by any company
seeking to raise equity from the market
next as far the secondary market is
concerned the issue the shares which
have already been issued by our various
companies they are traded in the
secondary market that is it deals in
trading of outstanding issues so now
that we understand the various
components of money markets let us take
each one in detail so first one is the
money market so it is market for
borrowing and lending of short term debt
funds as far as short term is concerned
it includes all the funds with a
maturity period which is ranging between
one day to one year so it caters to the
short term financial needs of the
economy and also helps the RBI in
effective implementation of monetary
policies the major participants of money
market are of course banks non banking
financial corporations and other
financial institutions now let us look
at the structure of Indian money market
so Indian money market is divided into
two broad parts first is organized money
market and second is unorganized money
market under organized money market
these are this this include instruments
components as well as institutions which
have been established by law or work
under Sir
rules and regulations given by
institutions like RBI
Sebby etc as far as the unorganized
money market is concerned they are not
formally recognized or do not work under
certain rules and regulations set by any
authority so as far as organized money
market is concerned it has certain
instruments under it so Treasury bills
call nor this term money market
commercial paper commercial bills
certificate of deposits Lee Purchase
Agreements bankers acceptance etc I'll
be talking about each of these in
subsequent slides now coming to the
unorganized money market as I said
earlier these are not governed by any
formal Authority or do not work with
under work under certain rules and
regulations so these are indigenous
bankers and moneylenders so you can find
such people who are giving out loans but
without any formal Authority so this is
a huge problem in India especially in
the rural sector leading to farmer
indebtedness next we have other non
banking financial companies and in the
form of chit funds or nathie's so these
are nothing but a form of kitty's in
which people contribute money in lieu of
some return but again these are not
recognized by any authority in the
country now the India money market is
unique in the sense that it is still
having a large proportion of unorganized
sector the various reasons are that the
money market is still underdeveloped and
there is a huge lack of penetration and
presence of organized money market in
all areas of the country so as far as
the money market is concerned it is only
concentrated in urban areas and this has
not penetrated ducted rural areas of
India so naturally there are many
needful customers who need short-term
fundings however they do not have any
access to formal or organized money
markets that leave space for unorganized
money market in India
also another limitation is that there
are large number of barriers of entry in
the organized money market of India so
for example if a company wants to open a
bank it has to have very high levels of
qualifying criterias to even become
eligible so not not no large number of
companies are able to open banks in the
country that easily so that is why
there's a lot of space for unorganized
moneylenders or money market in the
country in the next few slides I'll
explain the major or the more important
instruments under money market the first
one is the related to call money market
so it is basically an interbank money
market that is banks generally lend or
borrow money from other banks in order
to match their assets and liabilities by
the end of the day so these short-term
transactions come under call money
market this is a market for trading very
short term liquid financial assets
between - so it is repayable on demand
and its maturity period varies between 1
day so this is known as corn money and
then - a fortnight which is known as
notice money the rate of interest paid
on corn money is also known as the call
rate so commercial bills are in stood by
all India financial institutions that is
a IFIs non-banking financial companies
NBF sees and shedule commercial banks
merchant banks cooperative banks mutual
funds etc to borrow short term funds
from the market so these are nothing but
trade bills arising out of genuine trade
and commercial transactions these are
also short term negotiable and
self-declared aiding money market
instruments however another important
characteristic of commercial bills is
that they have considerably low risk as
compared to other instruments they are
purchased and discounted by commercial
banks and re discounted by financial
institutions like CB IDBI
Bank etc however commercial bill market
in India is very limited when you
compare India's market with what
occurred developed country like USA in
USA of course commercial bills are very
popular next is an instrument that is
known as certificate of deposits so cds
are issued by banks and to the depositor
for a fixed period so you go to go bank
and deposit your money and for a short
period of time of course and then the
bank issues a certificate of deposit
they are negotiable and also are
treatable in the money market they work
organized in 1986 that was that is they
were brought under formal rules and
regulation in the year 1986 and since
1993 idea has also allowed financial
institutions to operate in it for
example
IFC IID VI Exim Bank etc which can also
now issue certificate of deposits beyond
the commercial banks next one is a very
important instrument used by the
government to raise short-term funds
from the market so this is Treasury
bills are also known as T bills
these are promissory notes issued by the
central government for a fixed period
extending up to one year and the device
for raising short-term funds the RBI
also uses Treasury bills in the monetary
policy to control liquidity in the
market now of course if RBI is selling
Treasury bills in the market it is
connecting money from people and when
people are parking their funds with the
RBI so naturally the money supply goes
down the liquidity of in the economy
goes down so as a result demand will
fall and then it will bring down
inflation so these are highly liquid and
very safe investments and give
attractive yield and thus banks and
financial institutions invest in them so
because government is borrowing funds
from you and the government is
considered to be a very safe borrower
hence of course these are absolutely
Lloris or no risk
instruments there are three types of
Treasury
with with maturity periods from 91 180
200 364 days they were 14-day Treasury
bills as well which were discontinued in
2001 next instrument is commercial paper
it is very popular as it is used by
companies to pick up short-term funds
from the market to finance their working
capital or the money that they need not
on a day-to-day basis so it is an
unsecured instrument issued in the form
of a promise promissory note it can be
transferred to other individuals various
maturity periods arranged between seven
days to one year from the date of issue
right however not all companies can
issue commercial paper this company
needs to obtain a specified credit
credit rating from credit rating
agencies like christen icre
etc so the company has to be a
financially strong company and has to be
certified by various credit rating
agencies like vessel only then will it
be able to will it be allowed to issue
commercial paper
so during the course of this video
presentation first we saw the definition
of a financial system next we understood
what are the various constituents of a
financial system in a country beyond
that we saw the various functions
performed by a financial system in an
economy next we took a detailed
discussion on money market and its
various instruments so that's all as far
as this video is concerned thank you