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Unit 1: Indian Financial System

Debt Securities Market (commercial paper, private bonds and debentures). Another distinction Notes
can also be drawn between primary and secondary markets. The Primary Market is the market
for new issues of shares and debt securities, while the Secondary Market is the market in which
existing securities are traded.
The Reserve Bank of India through its conduct of monetary policy influences the different
segments of the Financial Market in varying degrees. The Reserve Bank's policy interest rates
have the greatest impact on a segment of the Money Market called the inter-bank call money
market and a segment of the Fixed Income Securities Market, i.e. the Government Securities
Market.

Financial Instruments

The main financial instruments can be categorized as under:

Deposits

Deposits are sums of money placed with a financial institution, for credit to a customer's account.
There are three types of deposits - demand deposits, savings deposits and fixed or time deposits.

Loans

A loan is a specified sum of money provided by a lender, usually a financial institution, to a
borrower on condition that it is repaid, either in instalments or all at once, on agreed dates and
at an agreed rate of interest. In most cases, financial institutions require some form of security
for loans.

Treasury Bills and Bonds

Treasury bills are government securities that have a maturity period of up to one year. Treasury
bills are issued by the central monetary authority (the RBI), on behalf of the Government of
India. Treasury bills are issued in maturities of 91 days, 182 days and 364 days.

1.2 Functions of Financial System

A resilient and robust financial system is an adjunct to economic and industrial development of
a country because of the following critical functions that it performs.

1.2.1 Linking Surplus and Deficit Spending Units

A financial system facilitates transfer of funds from Surplus Spending Units (SSUs) to deficit
spending units (DSUs) by providing means and mechanism to link the two groups. Surplus
spending units, according to Goldsmith, 10 are those who have surplus of income over
expenditure for a given period. Households are the main type of surplus units. Business enterprises
and the government as well as foreigners and their governments also find themselves with
excess funds. Deficit spending units represent those whose expenditures for the period exceed
receipts. The most important deficit spending units are businesses, local and state governments
and sometimes foreigners.
The financial system seeks to funnel funds from SSUs to DSUs in two basic ways: (i) Direct
financing and (ii) Indirect financing.
1. Direct Financing: In the direct financing route, DSUs issue financial claims on themselves
and sell them for funds to SSUs. The SSUs hold the financial claims in their portfolios on

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