In todays fast-changing environment knowledge

was power and power be it regulatory or supervisory

without knowledge was a subject of ridicule.
Dr.Y.V.Reddy

Financial System in
Indiaa Brief Overview
Dr. Ajit Kumar, AGM & MoF,

Financial System?
Financial System encompasses a group of

intermediaries which facilitates the flow of funds

from the areas of surplus to the areas of deficit. It
is a composition of various institutions, markets
and laws, practices, money managers, analysts,
transactions and claims and liabilities. This
facilitates the exchange of financial instruments
like deposits and loans, corporate stocks and
bonds, government bonds etc.

Financial System

Financial System

Financial Market
A financial market can be defined as the

market in which financial assets are

created or transferred. As against a real
transaction that involves exchange of
money for real goods or services, a
financial transaction involves creation or
transfer of a financial asset.

Financial Market
The place where people and organisations

wanting to borrow money are brought

together with those having surplus funds is
called financial market. It may or may not
have a particular physical existence.

Major Intermediaries of Financial

System
F in a n c ia l S ta b ility D e v e lo p m e n t C o u n c il

A s u b c o m m itte e h e a d e d b y R B I G o v e rn o r

R e s e rv e B a n k o f In d ia

F in a n c ia l In s titu tio n s
(IF C I,S ID B I,IIB I)
(IV C F ,IC IC I V e n ,T F C I)

B anks

M a jo r P la y e rs
N A B A R D , S ID B I,N H B
E X IM B a n k , e tc .

N e x t S lid e ...

NBFCs
(1 2 ,3 8 5 )

D e p o s it
T a k in g

N o n -D e p o s it
T a k in g
(2 7 1 )

P rim a ry
M a rk e t

SEBI

IR D A

C a p ita l M a rk e t

In s u ra n c e C o m p a n ie s

S e c o n d a ry
M a rk e t

L ife
In s u ra n c e

G e n e ra l
In s u ra n c e

Intermediaries of Indian
Financial System contd...
B anks
C o m e rc ia l B a n k s

P u b lic S e c to r P riv a te S e c to r F o re ig n B a n k s R e g io n a l R u ra l
B anks
B anks
(4 1 )
B anks
(2 6 )
(7 + 1 3 )
(8 6 )

C o o p e ra tiv e C re d it
In s titu tio n s
LAB
(4 )

N e x t S lid e ...

Intermediaries of Indian
Financial System contd...
C o o p e r a tiv e C r e d it In s titu tio n
(9 6 ,4 1 9 )
R u r a l C o o p e r a tiv e
C r e d it In s titu tio n
(9 4 ,5 3 1 )
S h o r t T e r m S tr u c tu re
(9 4 ,5 3 1 )
S ta te
C o o p e r a tiv e
B anks
(3 1 )

D is r tic t
C e n tr a l
C o o p e r a tiv e
B a n k s (3 7 0 )

U r b a n C o o p e r a tiv e B a n k s
(1 6 1 8 )
(5 2 + 1 5 6 6 )
L o n g T e r m S tr u c tu r e
(7 1 7 )

P r im a r y
A g r ic u ltu r a l
C r e d it S o c ie tie s
(9 3 ,4 1 3 )

S ta te C o o p e r a tiv e
A g r ic u ltu r e
a n d R u ra l
D e v e lo p m a n t B a n k s (2 0 )

P r im a r y C o o p e r a tiv e
A g r ic u ltu r e a n d
R u r a l D e v e lo p m e n t
B a n k s (6 9 7 )

Segments of Financial Market

Money Market: A market where short term funds

are borrowed and lent is called money market.

Funds are traded for a maximum period of one
year e.g. bills rediscounting, commercial papers,
treasury bills etc. It is liquid and provides an
avenue for equilibrating the short-term surplus
funds of lenders and the requirements of
borrowers.
Short term Money market is the focal point of
monetary policy actions.

Bill Market
Bill

Market: A commercial bill of

exchange is drawn to evidence the
commercial transactions between two
parties, the buyer and the seller, the seller
drawing the bill and the buyer accepting to
make payment of the bill on or before the
date of maturity. The seller may get the bill
discounted with his banker.

Comercial Paper Market

Commercial

Paper Market: CP is an
unsecured money market instrument issued
in the form of promissory notes. Corporates,
PDs and select FIs are eligible to issue CP. It
was introduced in 1990.
Corporates issuing CP should have (a) a
minimum tangible net worth to the extent of
Rs.4.00 cr.

Commercial Paper
(b) company has been sanctioned working

capital limit by bank/s or all-India FI/s; and

(c) the borrowal account of the company is
classified as Standard Asset.
This is issued at a discount to face value in
multiples of Rs.5.00 lakh.The CPs can be
issued for a maturity period ranging from 7
days to one year.

Commercial Paper
All eligible participants are required to obtain the

credit rating from either CRISIL or ICRA or

CARE or the FITCH Ratings India Pvt. Ltd. and
must have the prescribed minimum credit rating.
An FI can issue CP within the overall umbrella
limit fixed by the RBI, i.e. issue of CP together
with other instruments (term money borrowing,
term deposit, CDs, ICDs) should not exceed 100%
of its net owned funds as per the latest B/S.

Certificate of Deposit
It is a negotiable money market instrument and

issued in dematerialised form or as a Usance

Promissory Note, for funds deposited at a bank or
other eligible financial institution for a specified
time period.
CDs can be issued by (i) SCBs excluding RRBs
and LABs(ii) Select all-India Fis to raise short term
resources.
Banks- Any amount
FIs-within the overall umbrella limit fixed by

Certificate of Deposit
..RBI (not to exceed 100% of its NOF).
Minimum amt of CD- Rs.1.00 lakh.
Maturity- not < 7 days, not >one year.
Issued on a discount on face value.
Banks req. to maintain CRR/SLR on CDs.
Banks can not buy back their own CD

before maturity and can not grant loans

against CD.

Treasury Bills
Treasury Bills: These are a kind of finance

bills (do not reflect any trade transaction),

which are in the nature of promissory
notes, issued by the government under
discount for a fixed period, not exceeding
one year. TBs were first issued in India in
October 1917 aimed at raising resources
for financing the First World War.

Call & Notice Money Market

Call Money Market: This market deals with

extremely short-period uncollateralised loans.

Funds are borrowed or lent for a day (overnight).
Notice Money: When money is borrowed for more
than a day and up to 14 days, it is called as
Notice Money market.
Transactions on a call money market are generally
conducted over the telephone. Lenders issue RBI
cheque in favour of the borrowing bank.

Limit on Call lending/

borrowing
Partcipant

Borrowing

Lending

SCBs

Not to exceed 100%

Not to exceed 25% of
Of capital fund on a fortnightly their capital fund on
mnly basis (50%)
basis.(125%)

Co-op Bk.

Not to exceed 2% of the

deposit on day-to day basis.

PDs

Not to exceed 200% of NOF on Not to exceed 25% of

fortnightly basis
NOF

FI/MF/Ins

Not permitted

No Limit

Completely phased out

w.e.f. Aug 6,2005

Forex Market
A market for the purchase and sale of foreign

currencies is called a foreign exchange market.

It is the largest market in the world and is a 24
hour market. The daily turnover of the market
stands at about 2 trillion dollars, with at least
80% of all the deals being represented by
transactions for the purpose of earning profit
from gambling on the exchange rate differences.
The forex market is an over the counter market
and there is no single market place.

Forex Market- Types of

transactions
Spot Transactions: An inter-bank transactions

whereby the purchase of foreign exchange, and

delivery and payment for the same takes place
between banks on the following second business
day is referred to as spot transaction and the rate
quoted in such transaction is called spot rate.
The date of settlement is known as value date.
Forward Transaction: Where a specified amount
of one currency is exchanged for a specified
amount of another currency at a future value

Forex Market- Types of

transactions
date is known asforward transaction.Under

this transaction exchange rate is determined at the

time of agreement.The rate quoted is called as
forward rate, normally quoted for value dates of
one, two,three, six and twelve months.
Swap Transaction: The simultaneous sale and
purchase of a given amount of foreign exchange
for different value dates is referred to as swap
transactions.

Derivatives
Derivatives

are fundamentally contingent

contracts/ instruments whose values are derived
from some underlying instruments like currency,
bonds, stock indices, interest rates, commodities
etc. There are generally three main players
involved in a derivative transaction: Hedgers,
Traders and Speculators.
Derivatives perform an important economic
function of price discovery.

Types of Derivatives
Foreign exchange derivatives (forward,

foreign exchange swap, currency swap,

currency options)
Interest rate derivatives (forward rate
agreement, interest rate swap, interest rate
options, interest rate caps/ floor/ collar)
Equity and stock index derivatives

Types of Derivatives
Commodity derivatives
Credit derivatives (credit default swap,

credit linked notes)

What are futures?
What is option?
Types of Option:

Types of Option
European Option: The option which can be

exercised by the buyer only on the date of

maturity is called European option.
American Option: This can be exercised on
any working day before the maturity date.
The price agreed to by the buyer with the
seller is known as strike price.

Derivatives
For a buy option:
If S.P.=Current Price,It is at the money call
If Strike Price< C.P., It is in the money call
If S.P.>C.P., It is out of the money call
THE REVERSE WILL APPLY FOR PUT

OPTION.

Thank
You
for your kind attention.