Trade Finance
Financial Markets & Role of
Banks in Financial Sector
Agenda
In this session, you will learn about:
•
Financial System
•
Constituents of Financial System
•
Role of Commercial banks in
economic development
Financial System
What is a Financial System?
Q
What is a financial system?
Components of a Financial System
A Financial System is a system that brings together Financial Participants,
Markets, Products, and Services.
PARTICIPANTS
MARKETS
PRODUCTS
FINANCIAL SYSTEM
SERVICES
Goal of Financial System
The primary goal of a financial system is
accelerated growth of an economy.
Objectives of Financial System
Saving Mobilization
Investments
National Growth
Prices in a Financial Market
MARKET
DEMAND
External SocioPolitical Factors
Prices
MARKET
SUPPLY
Functions of Financial System
Functions of a Financial System
Facilitate the flow of
funds to finance
investments
Play the role of
intermediaries to
determine the flow of
funds
Monitor and regulate
the participants in the
financial system
How Financial System Works?
Indirect Finance
Financial
Intermediaries
Funds
Funds
Funds
Lenders
Savers
Households
Business
Governments
Foreigners
Funds
Financial
markets
Direct Finance
Funds
Borrowers
Spenders
Households
Business firms
Governments
Foreigners
Structure of the Modern Financial System
Financial System
Financial
Market
Financial
Instruments
Financial
Participants
Financial
Regulator
Financial
Services
Participants of the Financial System
Sell Side
Buy Side
Sell assets
to get
financing
Invest in assets
to gain more
profit
ONES WITH
SURPLUS FUNDS
ONES WITH
DEFICIT FUNDS
Financial System
Financial Market
A market where financial instruments
are traded in order to raise capital.
What is Financial Market?
A market where investors and borrowers can trade in financial securities,
commodities and other financial instruments at prices that reflect the market demand
and supply.
Shares
FINANCIAL
MARKET
Company
Investor
Cash
Financial Market
The market for such securities could be short term,
medium term or long term capital.
Short
Term
Capital
Role of
Facilitator
Financial
Market
Medium
Term
Capital
Long
Term
Capital
Functions of Financial Market
Financial markets have five major economic functions:
Price Discovery
Regulating
Intermediaries
Liquidity
Reduction of
Transaction Costs
Settlement of
Transactions
Types of Financial Markets
Order
Driven
Market
Secondary
Market
Quote
Driven
Market
Primary
Market
Capital
Market
Money
Market
Instruments Offered In Financial Markets
Stocks
Foreign exchange
Commodities
Financial Instruments
Bonds
Derivatives
17
Instruments Offered In Financial Markets
Money Market
Instruments
Insurance And Pension
Financial Instruments
Government Securities
Debentures
18
Financial Instruments
Stocks
 Includes examples such as equity shares
 Fixed Income Instruments which provides a coupon as
income
Insurance

And Pension
Protection for short term and long term investments
 Securities issued by the Government for various purposes
(Municipal bonds, T-Bills)
Debentures
Bonds
Government
Securities
 : Bonds which are unsecured are known as Debentures
Financial Instruments
Foreign
Exchange
 Foreign Exchange: Exchange of one currency for another
using an exchange rate
 Instruments which derive their value from an underlyer.
Money
Market
Instruments
Derivatives
 Short term instruments which have maturities less than a
year. E.g. T-Bills Repo, Certificate of Deposit, Commercial
Papers
 Can be traded directly or using derivative products.
Commodities
Financial Services
Financial
Services
Mergers &
Acquisition
Research &
Advise
Underwriting
Asset
Management
Specialized
Financial
Solutions
Sales &
Trading
Market
Making
Financial Services
Mergers and
Acquisitions
 Equity valuation of a company, research on the sector, target
companies, when to pay, how much to pay, how to pay etc
 Provide specialized market research reports on the trends
and views of the market (not just equity, but global
underlyers)
Underwriting
Research and
Advice
 Provide a guarantee that a company will be able to raise the
capital from the public
Financial Services
Sales &
Trading
 Create structured products per client requirements
 Publish prices in the market to entice the other participants
to trade against them, which in turn increases liquidity
Asset

Management
Market
Making
Manage the assets of global clients and allow them to trade
and invest in all the large financial centres of the world
Importance of Financial System
Vital to the functioning of the industry as the instruments help raise long term capital.
FINANCIAL MARKETS 2010
$ 1643 Trillion
Role of Commercial banks in
Economic Development
Capital Formation
Capital Formation is the process of building capital stock
of a country by Investing in productive plants and
equipment's. In other words capital formation is
increasing of capital assets by efficient use of existing
resources of the country.
 Generally, the higher the capital formation of an economy, the faster an economy
can grow its aggregate income. Increasing an economy's capital stock also increases
its capacity for production, which means an economy can produce more. Producing
more goods and services can lead to an increase in national income levels.
 The banks are, therefore, not only the store houses of the country’s wealth, but also
provide financial resources necessary for economic development.
 Banks are swiftly able to mobilise the funds from Surplus to Deficit creating value
and in the process increasing capital
Promotion of Trade and Industry
 With the growth of commercial
banking, there is vast expansion in
trade and industry.
 The use of bank draft, check, bill of
exchange, credit cards and letters of
credit etc. has revolutionized both
national and international trade.
 Acting as lenders, the banks offer startup loans and financing for capital
equipment purchases.
Influencing Economic Activity
 The banks can also influence the
economic activity of the country
through its influence on:
a. Availability of credit
b. The rate of interest
 If the commercial banks are able to
increase the amount of money in
circulation through credit creation or
by lowering the rate of interest, it
directly affects economic development.
 Development banks set up as a term
lending institution not only provide
funds but also provide advisory,
promotional and entrepreneurial
services.
Development of Agriculture
 A large number of formal institutional agencies like Co-operative banks,
Regional Rural Banks (RRB), Scheduled Commercial Banks, Non Banking
Financial Institutions (NBFI) and Self help groups (SHG’s) etc. are involved in
meeting short term and long term needs of the farmers.
 Several others initiatives have been taken to strengthen the institutional
mechanism of rural credit.
 The provision of credit to agriculture sector has greatly helped in raising
agriculture productivity and income of the farmers.
Monetisation by Support to Rural Areas
 An underdeveloped economy is characterized by the existence of a large nonmonetized sector , particularly , in the backward and inaccessible areas of the
country . The existence of this non monetized sector is a hindrance in the
economic development of the country .
 The banks, by opening branches in rural and backward areas , can promote
the process of monetisation in the economy
Implementation of Monetary Policy
 Monetary policy refers to actions taken by central banks to affect monetary
and financial conditions with the aim of achieving the broader macroeconomic policy objectives of low inflation and sustainable economic growth.
 The central bank of the
country controls and
regulates volume of credit
through the active
cooperation of the banking
system in the country.
 It helps in bringing price
stability and promotes
economic growth with in the
shortest possible period of
time.
Role of Commercial Banks
in 21st Century
Role of Commercial Banks in 21st Century
 The commercial banks are now not
confined just to local banking.
 They are fast changing into global
banking i.e., understanding the
global customer, using latest
information technology, competing
in the open market with high
technology system, changing from
domestic retail banking to
investment banking etc.
 The commercial bank are now
considered the nerve system of all
economic development in the
country.
 The advent of Direct Banking
Channels and Virtual banking has
made a huge difference with
customers being able to transact at
the click of a button.
Role of Commercial Banks in 21st Century
Today’s commercial banking is characterised by three basic characters:
Multiple
Products
Multiple
channels of
distribution
Multiple
customer
groups
Deposits, Credit cards, Insurance, Investments and
Securities
Call centres, Branch banking, online marketing,
Channel partners etc.
Consumer, Small and Medium scale, corporate
banking, Personal banking, Preferred banking, NRI
Services
Thank You
For Your
Attention
&