Indian Financial System

Anita C Raman

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Indian Financial System
 Indian financial system consists of formal and informal financial system.  Based on the financial system financial market, financial instruments and financial intermediation can be categorized depending upon functionality.

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RBI. SEBI. Local bankers.Indian Financial System Formal (organized Financial system) Informal (Unorganized financial system) Regulators. Traders 3 . MoF. IRDA Financial Institutions (Intermediaries) Financial Markets Financial Instrument Financial Services Money lenders.

 The informal financial sector is an unorganized. non-institutional and non-regulated system dealing with traditional and rural spheres of the economy. 4 . institutional and regulated system which caters to the financial needs of the modern spheres of economy.Formal and Informal Financial System  The financial systems of most developing countries are characterized by co-existence and co-operation between the formal and informal financial sectors.  The formal financial sector is characterized by the presence of an organized.

Component of Formal Financial System  Regulators  Financial Institutions  Financial Markets  Financial Instruments  Financial Services 5 .

Regulators  The formal financial system comes under the regulations of the ministry of finance (MOF). reserve Bank of India (RBI). 6 . Securities and Exchange board of India (SEBI) and other regulatory bodies.

Financial Institutions Financial Institutions (Intermediaries) Banking Institutions Non-Banking Institutions Mutual Funds Insurance and Housing Finance companies Public sector Private Sector 7 .

Debt Time deposits. Preference shares. MF units Insurance policies 8 .Financial Instruments Financial Instruments Primary Securities Secondary Securities Equity.

Call money Market.Financial Markets Financial Markets Capital Market Money Market Treasury Bills. Commercial Papers Certificates of deposit. Term money Primary Segment Secondary Segment 9 .. Commercial Bills.

Sector * 1951 to 1990 Public Sector * Early Nineties Privatisation * Present Status Globalisation 10 .Indian Financial System – An Overview PHASES * Upto 1951 Pvt.

 Mobilises the monetary resources/capital from surplus sectors.Indian Financial System – An Overview  Orderly mechanism & structure in economy.  Transformation of savings into investment & consumption.  Distributes resources to needy sectors.  Financial Markets – Places where the above activities take place 11 .

e. 5. 4. 6. 3. 2. 7. 12 9. 8. Gold/Bullion/Metal but largely linked to London Market) Absence of intermediatary institutions in long-term financing of industry Industry had limited access to outside saving/resources. Control of Money Lenders No Laws / Total Private Sector No Regulatory Bodies Hardly any industrialization Banks – Traditional lenders for Trade and that too short term Main concentration on Traditional Agriculture Narrow industrial securities market (i.Pre 1951 1. .

As part of Alignment of Financial Systems – Priorities laid down by Govt. Participation in Corporate Management 13 v. Protection to Investors iv. – Policies. Industries depended upon their own money. MAIN Elements of Fin. No worth-while Banks at that time.1951 to 1990 Moneylenders ruled till 1951. Organisational Deficiencies. Strengthening of Institutional Structure iii. Organisations i. Public ownership of Financial Institution ii. SECTORS TO PUBLIC SECTOR – MIXED ECONOMY 1st 5 year PLAN in 1951 – Planned Economic Process. . 1951 onwards 5 years PLAN commenced. PVT.

14 . united and National.1951-1990 Nationalization RBI SBI LIC Banks 1948 1956 (take-over of Imperial Bank of India) 1956 (Merges of over 250 Life Insurance Companies) 1969 (14 major banks with Deposits of over Rs. GIC by New India. Oriental. 50 Crs.nationalised) 1980 (6 more Banks) Insurance 1972 (General Insurance Corp.

1951-1990 Development • • • • • • • Directing the Capital in conformity with Planning priorities Encouragement to new entrepreneurs and small set-ups Development of Backward Region IFCI (1948) State Finance Corporation (1951) Purely Mortgage institution IDBI (1964) As subsidiary of RBI to provide Project / Term Finance ICICI (1966) Channelizing of Foreign Currency Loan from World Bank to Pvt. • SIDC’s & SIIC State Level Corporations for SME sector • UTI (1964) to enable small investors to share Industrial Growth • IRCI (1971) to take care of rehabilitation of sick-mills promoted by IDBI. Banks & LIC-Name changed to IIBI in 1997 15 . Sector and underwriting of Capital issues.

Cos. standard & poor acquires 9. FITCH a 100% subsidiary of FITCH Group.e. IDBI Ltd. Ser. And Moody’s CARE Set-up by IFCI/Banks. Public Participation / Listing 16 • • .46%) ICRA Set up in 1991 by leading FIs/Banks/Fin. Conversion into Banking / Merger into Banking Companies IDBI Bank & ICICI Bank Issuance of Bond by DFIs without Govt.POST 1990s IMPORTANT DEVELOPMENTS Development Financial Institutions : (DFIs) • Started providing Working Capital also • Set up CREDIT RATING AGENCIES CRISIL(IPO IN 1993-94. in Banks. Reduction in holding of Govt.. i.68% in 1996-97 S & P acquires shares / holding up to 58.. • • Privatisation of DFI Reduction in Govt. holding & Public Participation e.’s Guarantees to mobilize resources.g. IFCI Ltd. ICICI Ltd.

Tata Finance. Sundaram Finance. Reliance Finance. data collection etc. Professional Management. 17 . Scalability of operations through globally competitive size. Very large NBFCs are emerging (Shri Ram Transport Finance. NBFC • • NBFC under RBI governance to finance retail assets and mobilize small/medium sized savings. E-mail & mobile made sea-change in communication. Computerization – a catch phrase and inevitable need of an hour. Reliance & Dependence on technology.POST 1990 INDUSTRIES • • • • • • • • Rise & Growth of Service Sector industries. Religare etc. Dependent on Capital Market rather than only Debts dependency. Birla. Broad basing of Board. DLF.

POST 1990  Commercial Bank  Mutual Funds  Capital Market  Secondary Market  Money Market 18 .

both.N. agencies.GLOBAL FINANCIAL SYSTEMS IBRD (World Bank) Long-Term Capital Assistance IFCI IDA To finance PRIVATE enterprises in the form of loans & equity Affiliate of World Bank Soft – Loan window of the Bank. Re-payment period upto 50 years Govt. (Economic Commission for Asia & Far East) promote investment in Asia & Far East and also finance priority area. Multilateral Investment Guarantee Agency – an affiliate of World Bank Provides guarantee for investment in needy countries. Also co-ordinates with U. eligible. Mainly for developing & under-developed nations. & Private. MIGA (1988) ECAFE 19 .

Gold/Silver Cross Border Bonds /instruments. 20 .Global Financial System – An Overview Functions of Financial Market • • • • • Price Discovery Liquidity Cost of Transactions (saver search & information costs) Transfer of savings from one sector to other Reflects as Barometer for economic growth Financial Assets • • • • • • • Treasury Bonds Debt Equity Commercial Paper/Debentures etc. Euro Bonds.

Venture Funds. co-op etc) Mutual Funds.STRUCTURE OF FINANCIAL MARKETS IN INDIA Financial Markets in India Debt Market Primary / Secondary Forex Market Capital Market Primary / Secondary & Depository Insurance Life/General Banks (including RRBs. Investment Bonds RBI RBI SEBI IRDA RBI RBI/SEBI REGULATORY AUTHORITY 21 .

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