BCom 3rd Year Financial System Meaning Components Importance Study Material Notes in hindi

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BCom 3rd Year Financial System Meaning Components Importance Study Material Notes in Hindi

BCom 3rd Year Financial System Meaning Components Importance Study Material Notes in Hindi: Features of Financial System Financial Instruments Money Market Instruments Capital Market Instruments Exercise Questions Long Answer Type Questions Short Answer Questions  Objective Type Questions Choose Correct Options ( Most Important Notes For BCom 3rd Year Examinations )

Meaning Components Importance
Meaning Components Importance

BCom 3rd Year Nature Importance Financial Money Study Material notes in Hindi

FINANCIAL SYSTEM: MEANING, 

COMPONENTS AND IMPORTANCE

Financial System prevailing in any country plays an important role in rapid economic development of a country. The economic history of all developed countries of the world accept the fact that their journey from an under developed countries to a developing country and from a developing country to a developed country, it was possible only due to strong financial system.

Financial system refers to that financial discipline in which the country’s financial institutions, financial markets, financial instrument and financial services jointly contribute and they are all related to the financial system in some way or the other.

FEATURES OF FINANCIAL SYSTEM 

As per the above discussion, the features of the financial system are as follows:

(1) Financial Institutions : Under financial system there are numerous institution and these institution collect the public saving with themselves and encourage the public for saving and also provide credit to the needy persons

(2) Financial Process : Under Financial system, capital is formed by the process of finance. This process can be explained in this way :

Income → Saving → Investment → Capital Formation.

(3) Parts of Financial System : Banks, insurance companies, Unit Trust of India and other such financial institutions are a part of financial system. Through these institution using various plans and medium, interest are created among the people. Financial system renders its services to both lender and borrower.

(4) Stability in Money Market : Just like commodity, fluctuation also takes place in the value of money. Due to maximum fluctuation the prosperity of the country can be damaged. Thus strong financial system brings stability in money market.

(5) Liquidity : Through financial system wealth is converted into liquid money and is used in those areas where maximum profit can be extracted.

COMPONENTS OF FINANCIAL SYSTEM

Components of financial system refer to those components which extend their full contribution in complete arrangement of financial system. They include financial institutions, financial market, financial instruments and financial services. It can be diagrammatically be represented as follows:

Components                                                  A. Financial Institutions

of Financial                                                    B. Financial Market

System                                                           C. Financial Instruments                                                                                            D. Financial Services

(A) Financial Institutions : Commonly financial institutions are those institutions which are Involved in the exchange or transaction of money and credit. In other words financial institutions also work as a business house where it deposits savings of public and according to certain rule and regulation it! distributes maximum part of the saving in the form of loan. The public avails various types of financial services from these institutions. Financial Institutions are divided as follows:

Financial Institutions

1 Regulatory Institutions 2. Financial Intermediaries

            (i) Banking                        (ii) Non-Banking

(1) Regulatory Institutions:Bank is included as an important institutions of financial system. On the top of banking and financial sector area is a regulatory institution which is called a central bank. It has the right to control and regulate all banking systems. Every country has a central bank which is known by a special name in every country. In India, it is called Reserve Bank of India, in England it is called Bank of England, in America it is called Federal Reserve System, in France it is called Bank of France, Russia it is called Bank of Russia and in Germany it is called Reichs Bank of Germany etc.

(2) Financial Intermediaries : Financial Intermediaries are financial institutions which act as an intermediary between the ultimate lenders and ultimate borrowers. Flow of fund is directed through the medium of Financial Intermediaries from the ultimate lenders to the ultimate borrowers directly or indirectly. Financial Intermediaries include commercial bank, co-operative credit societies and co-operative banks, mutual funds, mutual saving bank, building construction society, insurance companies, merchant bank, Unit Trust of India etc.

Financial Intermediaries are divided into two groups :

(i) anking Intermediaries: Different banking institutions are included under banking intermediaries. They are as follows: commercial banks. Regional Rural Banks, co-operative bank etc.

(ii) Non-Banking Intermediaries: In the field of finance there are many such institutions which are not involved in banking activities and hence they are called non-banking intermediaries.

Financial System : Meaning, Components and Importance 79 (B) Financial Market : Financial Market means that market where financial properties are produced and exchanged. In other words financial market is a wide market where financial assets like equity shares, debentures, bonds, treasury bills, commercial papers etc. are created and exchanged

From the above mentioned table it is clear that financial market has two parts-supplying part and demanding part.

Financial Market

1 Money Merket                             2. Capital Market

        (i) Organised Capital Market               (ii) Unorganised Capital Market

(1) Money Market: It refers to that market which deals with short termed financial assets. It brings two types of people close i.e., the one who passes extra money but it remains with him fewer period of time and the other who require money for fewer period of time. In this market the time period of loan may be from 1 day to one year. According to Crowther, “Money market is the collective name given to the various firms and institutions that deal in various grades of near money.”

Thus money market deals in short termed securities. Since the time between which payments of financial assets is less, therefore it is also called near money. These securities include treasure bills, demand money, money at call and short notice, commercial bill, deposit certificate, commercial paper etc.

(2) Capital Market : Capital market refers to that market which deals with long term securities. Shares and debentures are mainly included in this market. Thus capital market does the work of collecting long term finance for industries as well as for government. In this market the transactions of such ninancial assets are done whose maturity period is very long. Here financial assets are referred to as bonds, shares, debentures etc. Indian Capital market has been divided into two groups :

(i) Organised Capital Market : Organised capital market refers to the market which is controlled by lots of rules and regulations of any organisation or board. Indian capital market is controlled by Securities Exchange Board India (SEBI), Indian Reserve Bank and Central Government. Organised capital market is divided into two parts:

(a) Primary Market : This market is also known as Initial Issue Marl Shares of companies are issued by the primary market by themselves.

(b) Secondary Market : Secondary market refers to the market whe dealing of those securities which were issued earlier are done. Stock exchan is an example of secondary market.

(i) Unorganised Capital Market : Unorganised capital market is an uncontrolled market. It includes moneylenders, pawn brokers etc. They do not have mutual relations among themselves. The rate of interest which they charge is very high and also unsimilar. In this market, loan for working capital is provided. Various steps are being taken by the Reserve Bank of India and Security Exchange Board of India (SEBI) to control unorganised capital market.

(C) Financial Instruments : Financial instruments refer to those documents which promise to return the amount with interest or dividend. Claims are shown on financial assets through these documents.

Financial instruments are classified in the following manner :

Financial Instruments

           Money Market Instruments             Capital Market Instruments

(i) Money Market Instruments : Important instruments of the money market are the following:

(a) Money at call and short notice

(b) Treasury bills for 14 days to 1 year

(c) Commercial bills under rediscount

(d) Deposit certificate

(e) Commercial paper

(ii) Capital Market Instruments : Capital market instruments include marketable securities and non-marketable securities. Marketable securities include government bonds, shares and debentures issued by the companies, mutual funds of Unit Trust of India etc. The dealing of these securities is done through the stock exchanges. On the contrary, non-marketable securities include various deposits and loans and advances of bank, post offices and other financial organisations which are not transferable.

(D) Financial Services : Some financial institutions provide a lot of financial services in conducting the financial system in a well organised manner. These institutions make this system easy and convenient. Among these financial institutions there are Merchant Bank, Leasing companies etc.

IMPORTANCE OF FINANCIAL SYSTEM


The importances of the financial system in the economy of any country are as follows:

(1) Increase in Savings: Strong financial system encourages savings. The people attracted towards the financial system always prefer to save a certain spart of their income. They plan their future depend on the basis of these savings.

(2) Capital Formation : Capital is formed on the basis of small savings. In other words the basis of capital formation is savings. More capital formation makes a country prosperous.

(3) Public Confidence : In order to establish the public confidence, the financial system of a country plays a major role. This is why at the creeping! inflation, people start losing their confidence in money. Thus a strong financial system is very essential in the interest of the nation.

(4) Development of Economy : For the development of the economy, a financial system is very important. Financial discipline lies in financial system due to which there is a right and continual flow of finance in the country.

(5) Basis of Credit : Today most of the business is run on the basis of credit. Financial System plays a vital role in the creation and exchange of credit. Financial institutions are a part of the financial system.

(6) Monetary Control: This is true that money is a boon for any economy. But it can not be allowed to run freely. If done so, it can create inflation or deflation. Thus financial system is also important for monetary control.

(7) Help of Government : Financial system is equally helpful to both central and state governments. It is also important for the implementation of the different program of the public.

Thus it is clear that for the development of the economy strong financial system is necessary.

EXERCISE QUESTIONS

Long Answer Type Questions

1 What do you mean by financial system ? Explain its features and importance.

2. Describe the components of financial system.

Short Answer Type Questions

1 What is financial system?

2. What are the features of financial system ?

3. What is the importance of financial system ?

4. Write a note on financial institutions.

5. What is financial market ?

6. What do you mean by organised capital market ?

7. What are the main instruments of money market ?

8. What are the instruments of capital market ?

III. Objective Type Questions

Choose the correct option

1. The component of financial system is/are :

(a) Financial Institutional

(b) Financial Market

(c) Financial Instruments

(d) All of the above

2. The regulatory institution of financial institution is/are :

(a) Reserve Bank of India

(b) SEBI

(c) Commercial bank

(d) All of the above

3. Supply side of Finance include (s) :

(a) family

(b) Commercial bank

(c) Insurance Commpanies

(d) All of the above

4. Dearling of short term financial assets are in ?

(a) Money Market

(b) Capital market

(c) Both of the above

(d) None of the above

5. which market does not issue intial securities ?

(a) Primary Market

(b) Seconday Market

(c)  Money Market

(d) None o the Above

6. commercial Paper is the Instrument of :

(a) Mone Markey

(b) Capital market

(c)  Produce exchange

(d) None of the Above

7. Which one is the instrument of Capital market ?

(a) Deposit certificate

(b) Commercial bill

(c) Treasury bill

(d) Government bonds

Financial System Meaning Components

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