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Chapter 1:

Period

Indian Financial System in the Post 1950

INTRODUCTION:1) Banking sector is one major factor for promoting


financial market in India.
2) System operates through markets & institutions
3) Gap between receipt & expenditure, can be bridge by
borrowing through the network of financial system.
4) Currency & exchange from an essential part.
5) Business can operate only with economic development.
INDIAN FINANCIAL SYSTEM:a) CURRENCY AND MONEY SUPPLY:-Planning-50 yrs
-silver then gold
-England abandoned gold standard & sterling exchange
standard was established.
- Currency notes issued by banks & use limited.
-1861, government acquired monopoly of issuing notes.
- Major increased in the Second World War.
-supply increased from 57% in 1935 to 67% in 1952.
b) BANKING SECTOR:After 1910 - Indigenous bankers played a dominant role.
'Hundis'
- Modern bank in 19th century 3 presidency banks, bank
of Bengal 1806, bank of Bombay 1840, bank of madras

1846 - In 1900- 9 joint stock banks increase 8 exchange


banks & 3 presidency banks.
- Presidency banks 1921- Amalgamated and imperial bank
of India.
- RBI established in 1935.
- all functions transferred to SBI.
- 1950 - banking company comprised RBI, SBI, COOPERATIVE BANKS, EXCHANGE BANKS & INDIAN
JOINT
c) SMALL SAVINGS:- Old form
- Huge population & low income- Post offices.
d) INSURACE FUNDS:- Indian life insurance companies act 1912.
- Provident societies post and telegram
- Apart from mobilization, also supply of funds to capital
market.
e) STOCK MARKET:- Public sector raised huge amount through stock market.
- First stock exchange 1887 BSE.
- World war, industrialization increases the market.
- Equity, then not popular.
f) PUBLIC DEPOSITS:- 1 to 7 yrs

-11% to 39% of total finance and Ahmadabad mills in


1930.
- Interest rates decreased than common banks.
g) GOVT. SECURITIES AND TREASURY BILLS:- GILT GDGED
-participants, banks, state banks and private trusts.
-treasury bills 1st issued in Oct 1917
-RBI was the main supporter.
h) INTEREST RATES:-different for different banks and periods.
-IBI did not pay but exchange banks and Indian stock
banks payed on current accounts
-organized sector increased interest rates.
COMPONENTS OF INDIAN FINANCIAL SYSTEM:1) FINANCIAL INSTITUTIONS:Agencies which provide credit n the financial system are
financial institutions.
-makes available uninterrupted supply of capital
-possess professional knowledge and enterprise
-contribute to individual development. IFCI, IDBI, SFC.
2) FINANCIAL MARKETS:- Facilitates the exchange of financial instruments.
- Special locations like stock exchange
- Place where wanting money and surplus funds are meeting

each other.
- To allow lenders to earn interests
- To allow for productive use of funds borrowed
- provide mechanism for selling financial assets
3) FINANCIAL INSTRUMENTS:Claims to the payment of sum of money in future.
E.g.:-bonds, fixed deposits, etc, shares
- Regular payment of dividends to investors
- Helps in borrowing and lending money.
4) FINANCIAL SERVIES:- Any industry of service of financial nature offered by
service provider.
- All the banking and insurance related services
-wide range of economic activities
-e.g.: share transfer, pledging of shares, mutual funds,
discounting, credit cards.
-in India financial services was started in 1980s
A recent estimate contained in Rakesh Mohan committee
report states India needs 7,50,000 crores to assemble a
medium infrastructure
-First leasing company in India was in 1973.
GROWTH OF INDIAN FINANCIAL MARKET:-enormously grown since 1950 size, diversity, innovation,
complexity and sophistication.
-money supply, savings, bank deposits, credit, primary,
etc.

Bank deposits increased 909 in 1951 to 12,80,853 crores


in 2003.
Acompanied by diversification and innovation.
COMPOSITION IN POST 1950 PERIOD:1) INSTITUTIONS: - IFCI, ICICI, IDBI, EXIM,
SIDBI, NABARD, IRBD
2) INTERMEDIARIES:a) Banking intermediaries- RBI, Commercial Banks, COOPERATIVE BANKS, POST OFFICE, FOREIGN BANKS.
b) Non-banking intermediaries- GC, LIC, UTI, FINANCE
COMPANIES, PROVIDENT AND PENSION FUNDS, HDFC,
MUTUAL FUNDS.
C) Regulatory bodies-SEBI, RBI, BOARD OF IFC, ECGCI,
SHCIL, DFHI, Merchant Bankers.
d) instrumentsInstruments used in financial system
-equity shares & preference
-debentures & bonds
-NSC
-postal vikas patra
-fixed deposits certificates
e) Financial marketsSince independence developed
-call money market
-commercial bill market
-stock market, individual securities market
-govt. securities market

-foreign exchange market


-OTCET
f) servicesIndian financial system provides following services
-underwriting
-funds transfer
-credit cards
-ATM
-loan syndicating
-merchant banking
-broking
-portfolio management
FACTORS RESPONSIBLE FOR THE DEVELOPMENT OF
CAPITAL MARKET IN INDIA:1) Rapid industrialization
2) Use of new technology
3) Regulatory frame work-favorable govt. policies
4) Tax incentives
5) Corporate performance
6) Dominance of private sector
7) Development of financial institution
RECENT POLICY DEVELOPMENTS:1) Removal of ceiling on interest rates-base lending rate decreased to 16%.
-later removed
2) Liberal housing finance-

Period of repayment 20 yrs


7 to 9%
3) Competition in banking system-RBI freedom to borrowers to transfer A/cs & funds
4) Participation certificate:Vaghuls committee
-to even out liquidity in banking system
5) Interest on deposits-decreased to 5% to 4.5%p.a in 1994-95
6) invest on shares debentures:7) Narasimhan committee report- Nov 1991 is a blue
print report giving dimension for banking and financial
system liberalisation.