Financial system, Financial Management

Assignment Help:

Financial System:

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.

While the corporates will have a surplus arising from the retained earnings, their need for funds will be for investment in new projects, for expansion/ diversification/modernization, etc. On the other hand, the government which is always in a deficit budgetary situation will be in need of funds for public expenditure, to finance its developmental projects and other Public Sector Undertakings (PSUs), etc. Apart from these two economic units, even the household sector will require funds for varied purposes for example, for acquiring assets. However, the surplus funds of the households will normally be more when compared to the other units.

Hence, it can be observed that, at any given point of time there would be some units having idle funds and a few others which would be in need of funds. The volume of funds required for the investment activity of the corporates and for the public expenditure of the government is very large when compared to the household requirements. And if funds are not provided for these activities, it will hinder economic progress. On the other hand, there are surplus budget units which have excess funds in the form of savings.

Mere act of saving will, however, not guarantee economic progress. This is due to the fact that savings and investments will usually be carried out by different groups, savings come from the household sector and the investments are being made by the corporate sector. Hence, there should be a mechanism to ensure that savings flow from those who save to those who wish to invest. This process would enable the utilization of excess idle funds, thereby enhancing their value.

Enabling such a transfer of funds from the savers to the borrowers is the Financial System. The financial system represents a channel through which savings are mobilized from the surplus units and routed to the deficit units. The role of the financial system can be broadly classified into the following:

Savings Function: Mobilize savings in a way to provide a potentially profitable and low risk outlet.

Policy Function: Through the policy function, the government ensures a smooth flow of funds from savings into investments in order to stabilize the economy.

Credit Function: After mobilizing, the savings and laying down the necessary policies for the transfer of these funds, the credit function of the financial system, will then ensure that these savings will transform into the necessary credit for investment and spending purposes.

Complexities may arise while performing these functions, especially when the requirements of the savers and those of the borrowers do not match. The main considerations of the savers will be with regard to the safety of funds, returns and liquidity. On the other hand, the needs of the investors will be relatively diversified. Their concerns will relate to the term for which the funds are available and the cost of funds.

 


Related Discussions:- Financial system

Inventory turnover ratio or stock turnover ratio, I need a report on the to...

I need a report on the topic Inventory Turnover Ratio. Can you please assist me for Inventory Turnover Ratio report for about 2500 words?

Explain sunk cost and opportunity cost in npv, In the NPV analysis, sunk co...

In the NPV analysis, sunk cost is not relevant whereas opportunity cost is for project evaluation. Requirements: Explain and justify the above statement about sunk cost and

Inventory is sometimes thought of as a necessary evil, Inventory is sometim...

Inventory is sometimes thought of as a necessary evil.  Explain. Inventory ties up funds and these funds aren't earning an unambiguous return.  Some inventory is habitually nec

Describe the direct costs and variable costs, Question : (a) A project ...

Question : (a) A project must have a useful purpose. Therefore, as a project is evaluated, the team should determine the requirements of the local community and industry. These

Determine the fields of finance, Determine the Fields of Finance Academ...

Determine the Fields of Finance Academic discipline of financial management may be viewed as made up of five specialized fields. In every field, financial manager is dealing wi

13 basic ratios, What its the net income? Total current assets, plant and e...

What its the net income? Total current assets, plant and equipment, net plant and equipment, our net account receivable?

What do you mean by collateralized mortgage obligation, Q. What do you mean...

Q. What do you mean by Collateralized Mortgage Obligation? Collateralized Mortgage Obligation (CMO) - SECURITY whose cash flows equal the difference between cash flows of colla

Qualitative analysis, Does your company have a cutting-edge product idea th...

Does your company have a cutting-edge product idea that will blaze new trails in its industry? Is it properly retiring out-of-date products and keeping current with new consumer de

Under armour finance, I need a paper on the financial status of the company...

I need a paper on the financial status of the company under armour with ratios using information from yahoo.com finances. & Id like to provide a document with further details

Profit and loss, how is financial management relevant to profit and loss?

how is financial management relevant to profit and loss?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd