INDIAN FINANCIAL SYSTEM

CIA 1.1

COMPARISON OF INDIAN FINANCIAL SYSTEM WITH THE

CHINESE FINANCIAL SYSTEM

Submitted to- Vanishree MR

On 7th August, 2021

BY-
Sashwat Agarwal (2020230)
Lavya Jain (2020269)
Tarun Rathi (2020272)
M.S. Sai Vishal (2020289)

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 INDEX
Sl No. Content Page No.
1 Introduction 3
2 Banking system 4-6
3 EXIM policy 7-9
4 Stock Exchange 9-11
5 FOREX policy 12-14
6 Bond Market 15-18
7 References 19

INTRODUCTION
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Financial system plays a crucial role in fostering economic growth. Financial systems achieve economic growth
by channelling savings into investments as well as improving allocative efficiency of resources. A well-
functioning financial system is now often recognized as a prerequisite for economic development. This shift in
focus, along with the opening of local economies to foreign competition, has prompted emerging market
economies (EMEs) like India and China to implement financial sector reforms.
However, in the aftermath of the financial crises of the 1990s, the role of the financial sector in growth has been
re-examined.
The danger of contagion has increased as a result of increased financial interconnectedness. The need of
financial system stability for long-term growth is now generally acknowledged.
In the 1990s, both India and China embarked on extensive banking sector reforms. It would be interesting to
learn more about the kind of financial sector reforms implemented in China and India, the differences in
financial sector performance between the two nations, and the difficulties that lay ahead for these two major
EMEs.

BANKING SYSTEM
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INDIAN BANKING SYSTEM

The banking system in India is regulated by the Reserve Bank of India (RBI), through the provisions of the
Banking Regulation Act, 1949. Some important aspects of the regulations that govern banking in this country,
as well as RBI circulars that relate to banking in India, will be explored below.

1. EXPOSURE LIMITS
It refers to the maximum limit a bank can lend to a particular business house. Multiple categories are
created wherein the lending is limited to a certain percentage of bank’s capital funds.
Single Borrower: 15% - (For Infrastructure Projects 20%)
Group Borrowers: 20% - (For Infrastructure Projects 30%)

2. CASH RESERVE RATIO (CRR) AND STATUTORY LIQUIDITY RATIO (SLR)

CRR is the percentage of money, which a bank has to keep with RBI in the form of cash. On the other
hand, SLR is the proportion of liquid assets to time and demand liabilities which the Banks need to keep
with themselves.
Cash Reserve Ratio: 4% (Does not earn interest)
Statutory Liquidity Ratio: 18% (Can be used for further borrowing)

3. PROVISIONING:
It refers to the mandatory requirement of the RBI to maintain a certain amount of the loans sanctions as
provisions to meet any future losses that might arise due to default. According to different categories,
different levels of provisioning is required.
Substandard NPA: NPAs for less than 12 months require 15% & 25% provisioning for secured and
unsecured loans respectively.
Doubtful Assets: NPAs for more than 12 months.
Loss: A loss asset is one for which the bank or auditor expects no repayment or recovery.

4. PRIORITY SECTOR LENDING

It is an important role played by the banks as per the directives of RBI wherein a specific portion of
bank’s lending should be given to priority sectors. These sectors may not get timely/adequate credit,
hence to protect such sectors regulations relating to priority sectors was launched.
The priority sector broadly consists of 8 sectors which includes 1) Agriculture (2) Micro, Small and
Medium Enterprises (3) Export Credit (4) Education (5) Housing (6) Social Infrastructure (7)
Renewable Energy (8) Others
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 5. NEW BANK LICENSE NORMS
According to these norms, a bank applying for a license must have the following requisites: -

 A successful track record of at least 10 years and the bank should be operated through a non-
operative financial holding company (NOFHC).
 The minimum paid-up voting equity capital has to be five billion rupees.
 The shares have to be listed within three years of the start of the bank’s operations.
 The foreign shareholding is limited to 49% for the first five years of its operation, after which
RBI approval would be needed to increase the stake to a maximum of 74%.

CHINESE BANKING SYSTEM

The Chinese banking system used to be monolithic, with the People's Bank of China (PBoC), its central bank,
as the main entity authorized to conduct operations in the country. However with time, the government opened
up the banking system which led to setup of various government controlled, city commercial banks and joint-
stock commercial banking institutions to operate in the country.

REGULATIONS
The main regulatory body that oversees the Chinese banking system is the China Banking Insurance Regulatory
Commission (CBIRC). The CBIRC is charged with writing the rules and regulations governing the banking and
insurance sectors in China. It also conducts examinations and oversight of banks and insurers, collects and
publishes statistics on the banking system, approves the establishment or expansion of banks, and resolves
potential liquidity, solvency, or other problems that might emerge at individual banks. 

CHINA’S DEPOSIT INSURANCE

Deposit insurance is provided to protect depositors from the loss of their funds and to eliminate the possibility
of a run on the bank if negative rumours spread about problems associated with a particular bank. The agency is
also intended to help failed banks exit the industry with the least amount of negative impact possible.

LICENSING OF BANKS
In terms of licensing, banks in the PRC are divided into two general categories: Chinese-funded banks and
foreign-funded banks. Foreign funded banks need separate approval from CBIRC.

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MANAGEMENT OF BANKS
The CBIRC closely controls the appointment and removal of the directors and senior executives of banks. All
directors and senior executives shall meet the requirements specified by the CBIRC and be approved by the
CBIRC or its local counterparts before taking office.

RELATIONSHIP WITH THE PRUDENTIAL REGULATOR

All banks in the PRC shall strictly observe the rules of prudent operation, including risk management, internal
control, capital adequacy, asset quality, loan loss provisioning, risk concentration, connected transactions and
liquidity management of assets. The CBIRC conducts off-site and on-site supervision of business operations
and assesses the risk profile of banks

CAPITAL ADEQUACY RATIO

Each bank according to different Tiers is required to maintain a certain amount of capital as percentage of the
bank’s risk-weighted credit exposures. It helps to establish a fact that baks have enough capital to absorb losses
before being at a risk for insolvency.

COMPARISON

SAFETY MEASURES:

The world’s top three most profitable banks are all Chinese. But in a top 10 of banks making the largest losses,
six are Indian. This makes us understand that despite of various measures to safeguard the customers and
bank’s rights, there are greater loss-making units in India. This signifies the stricter measures the Chinese
Banks need to go through.

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EXIM POLICY:

Foreign trade policies are government actions, especially tariffs, import quotas, and export subsidies, designed
to increase net exports by promoting exports or restricting imports.

INDIA
The Foreign Trade Policy or Export Import policy is regulated by The Foreign Trade Development and
Regulation Act, 1992. The DGFT (Directorate General of Foreign Trade) has the main regulatory authority for
EXIM policy. The policy deals with a multitude of elements like export promotion strategies, policies, rules and
regulations. In other words, it aims at improving export performance and creating a favorable balance of
payments situation by promoting foreign trade.

Objectives of EXIM Policy

1. Accelerating economic activity by making the most of Global market prospects.
2. Strengthening all three sectors of Indian economy, agriculture, manufacturing and services.
3. Maximizing job opportunities.
4. Improving customer satisfaction by providing consumer goods at a fair price.
5. Improving product quality to raise worldwide quality standards.

The present trade policy focusing on increasing India’s performance in existing markets has been considered
progressive due to the following reasons:-
1. Various qualifying requirements have been combined along with several export incentives into two
schemes: Merchandise Exports from India Scheme (MEIS) and the Services Exports from India Scheme
(SEIS)
2. Under these two schemes, transferrable duty credit slips are provided which could be used to pay import
duties.

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 3. Under the Export Promotion Capital Goods Scheme (EPCG), the export obligation for capital goods
produced has been reduced from 90% to 75%.
4. It advocates the use of electronic technology to process various DGFT licences and applications.

Despite of it’s salient features, it has been criticized by the World Trade Organization at certain domains
1. India’s export subsidy policies are in violation to WTO principals and must be removed. Since the
country’s GNP exceeds $1000 per year, it no longer needs to grand tax subsidies based on export
performance under the MEIS and SEIS schemes.

2. The country has not been benefitted by Free Trade Agreements as it was supposed to. Due to this India
did not join the Regional Comprehensive Economic Partnership which costed India a good opportunity
to become a significant exporter.

CHINA:
China’s trade development strategy can be divided into two major phases i.e. pre-accession-to-WTO and post-
accession-to-WTO.

OBJECTIVES:
1. Accelerate opening to the outside world
2. Develop foreign trade
3. Promote sound economic development

STEPS TAKEN TO MEET OBJECTIVES:

1. Increase manufacturing value added
2. Ensure continued growth in Exports
3. Import energy, raw materials, technologies and equipment.
4. Encouraging FDI in new and high-technology industries.

ASSESSMENT OF TRADE POLICY MEASURES:

TARIFFS:-
Since China joined WTO, the average tarrif rates have been close to its bound rates. The tarrif continues to be
higher for agricultural products as compared to non-agricultural products. Besides this, there is low duty-free
share of imports which makes it very competitive for exports of industrialized countries. Thus, there is still a
long way to increase openness.

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NON-TARIFF BARRIERS:-
The imports in the country can be categorized as permitted items, restricted items and prohibited items. Even
when most of the items fall in the permitted category, these import are subject to automatic licenses to monitor
the volume.

TRADE FACILITATION:
In order to facilitate trace, a series of reforms to make custom procedures efficient and streamlined for both,
exports and imports has been launched. Under this, custom clearance has switched to electronic mode which
provides hassle free clearing.

SERVICES:
As per evaluations conducted over transfer of various services across different countries, China;s service trade
restrictiveness is higher than global average in all sectors. The least restricted sectors fall still fall above the
global averages in terms of restrictiveness. Despite of China’s huge market and leadership to promote the
growth of China’s service sectors, China needs to relax regulations on the service sector.

COMPARISON:
OPENNESS TO TRADE:
Despite both countries aim to accelerate amalgamation with the outside world, each country is at a different
stage in its regards. On contrary to commitments made at the WTO by China, the country fails to have an open-
free for all economy, instead it has an inward looking trade strategy.

SWIFT PROCEDURES:
Both the countries, India and China have adopted multiple ways to provide a hassle free experience to both
exporters and importers. India has switched to electronic mode of processing DGFT licenses and applications,
whereas China shifted to electronic mode for custom clearance.

STOCK EXCHANGE 

INDIA

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 Although India's exchanges accounted for less than 2.2 percent of the world market value as of January 2020, a
closer examination reveals the same characteristics as any potential market. India has two main stock
exchanges, the Bombay Stock Exchange(BSE) and the National Stock Exchange(NSE) where most of the
trades take place. The BSE was founded in 1875. The NSE was founded in 1994. Although BSE has more listed
companies than the NSE, all the firms of significance are listed on both exchanges. 
The two prominent indexes of the Indian markets are Sensex and the Nifty. Sensex consists of 30 firms listed
on the BSE which form 47% of the free-float market capitalization.  Standard and Poor's CNX Nifty is the other
prominent index that includes 50 shares listed on the NSE, representing 46.9% of the free-float market
capitalization of the exchange. 
The market is regulated by the Securities and Exchange Board of India(SEBI), formed in 1992. SEBI lays down
the market rules in order to ensure fair market practices. India did not permit foreign investments before the
1990s. For making portfolio investments in India, one should be registered as a foreign institutional investor.
Currently, India does not allow foreign institutional investors to invest directly into the stocks listed on the
stock exchanges. 
An FDI limit has been prescribed by the Indian Government for different sectors and the ceilings have been
increasing over time. The range for the Ceilings falls between 26% to 100%. Foreign Portfolio Investments
have an aggregate limit fixed at 24% of the Paid Capital but can be raised at the approval of the company’s
board and shareholders. Secondly, any investment by an FII shouldn’t be more than 10% of the paid-up capital
of the company. When foreign corporations or individuals investing as a sub-account
the ceiling is reduced to 5%.
 
CHINA
The Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange are the two primary stock exchanges
in mainland China (SZSE). Hong Kong is home to another important stock exchange in China. For government
and regulatory reasons, the Hong Kong Special Administrative Region (HKSAR) is treated as if it were a
separate country, despite its close ties. The Hong Kong Stock Exchange (HKSE) has expanded to trade a
significant number of "H-shares," shares of Chinese companies that have been granted authorization to sell
stocks in Hong Kong. These companies are normally majorly held by the government. H-shares are generally
not allowed to be exchanged on the mainland or converted into mainland-tradable shares. Because Hong Kong
is a significant global financial hub with investors from all over the world participating in its markets, listing in
Hong Kong has been the primary avenue for Chinese companies to obtain international equity financing. 
Other types of shares are also listed on the SHSE and SZSE. B-shares, for example, are Chinese company
shares that are permitted to be owned by foreigners and are frequently denominated in US dollars.
Individual investors in China mostly invest in the stock market through their accounts. Institutional investors in
China have a turnover rate roughly 40% lower than individual investors, implying less speculation. However,
some significant institutional investors, such as insurance companies and pension funds, are not permitted to

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trade in the stock markets. Institutional investors, on the other hand, dominate the stock market in the United
States.
 
COMPARISON
a.     Institutional Investors 
India- Institutional investors can provide exposure to Indian stocks to foreign businesses and people. Retail
investors are increasingly interested in India-focused mutual funds. Participatory notes (PNs), depositary
receipts (ADRs) and global depositary receipts (GDRs), exchange-traded funds (ETFs), and exchange-traded
notes (ETNs) are some of the offshore products that can be used to make investments (ETNs).
China- Individual investors in China mostly invest in the stock market through their accounts. Institutional
investors in China have a turnover rate roughly 40% lower than individual investors, implying less speculation.
However, some significant institutional investors, such as insurance companies and pension funds, are not
permitted to trade in the stock markets. Institutional investors, on the other hand, dominate the stock market in
the United States.

b.     Speculation trading 
India- The Securities and Exchange Board of India (SEBI), India's market regulator, has recently taken
initiatives to reduce speculative trades. Since the SEBI increased margins and imposed short-selling
restrictions, the average daily exchange turnover in derivatives has decreased by half. Since then, the average
daily exchange turnover in derivatives contracts has decreased.
 China- In the Chinese stock markets, investors invest in particular stocks primarily because they anticipate that
other investors will buy them at a greater price later, regardless of the firm's fundamental underlying value.
When speculative activity like this is taken to extremes, it is widely regarded to have negative consequences for
the stock market's role in optimally allocating funds. (A certain amount of speculative activity is beneficial to
markets; the problem arises when the level becomes excessive.) This type of speculation can lead to bubbles
and sudden crashes, especially when combined with a trading mechanism that discourages or prohibits short
sales, which would otherwise repress excessive price rises. (Short-sale restrictions are being loosened, so this
element may become less important over time.) There are various reasons why China's stock market is more
speculative.’

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FOREX POLICY
Foreign trade strategy characterizes the arrangement of rules and activities characterized by a worldwide
organization working in a few unfamiliar monetary standards that are intended to limit the effect of
unfavourable swapping scale variances on their main concern.
India
 SECTION 4 – Restrains any individual inhabitant in India from gaining, holding, claiming, having or
moving any unfamiliar trade, unfamiliar security or any steadfast property arranged external India
besides as explicitly gave in the Act. The expressions "unfamiliar trade" and "unfamiliar security" are
characterized in areas 2(n) and 2(o) separately of the Act. The Central Govt. has made Foreign
Exchange Management (Current Account Transactions) Rules, 2000.
 SECTIONS 10 and 12 – manages obligations and liabilities of the approved people. Approved
individual has been characterized in Sec.2(c) of the Act which implies an approved vendor, cash

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 transformer, seaward financial unit or some other individual for the time being approved to bargain in
unfamiliar trade or unfamiliar protections.
 SECTION 36 to 37 – relates to the foundation of Directorate of Enforcement and the forces to research
the infringement of any arrangements of Act, rule, guideline, notices, headings or request gave in
exercise of the forces under this Act. The Director of Enforcement and different officials of
Enforcement not underneath the position of Asstt. Chief have been enabled to take up examinations.

CHINA

The main bodies responsible for overseeing the flow of foreign exchange is the State Administration of Foreign
Exchange (SAFE) and the People’s Bank of China (PBOC), the central bank. SAFE is the administrative
agency responsible for managing foreign exchange activities in China, setting relevant regulations, and
administering China’s foreign exchange reserves. SAFE’s approval or record-filing is required for a range of
transactions involving inbound and outbound forex payments.

In the Chinese foreign exchange system, there are two main accounts: the current account and the capital
account. The current account applies to ordinary recurring business transactions, including trading receipts and
payments, payment of interest on foreign debt, and repatriation of after-tax profits and dividends, amongst other
transactions.The capital account, on the other hand, deals with capital import and export, direct investments,
and loan and securities, including principal repayment on foreign debts, overseas investments, investment in
FIEs, and more.

According to SAFE rules, incorporated foreign-invested enterprises (FIEs) are subject to the general debt to
equity ratio requirement. This means that out of the total investment of an FIE, a certain percentage must be
comprised of capital contributed by the investors. Previously, SAFE required all FIEs to submit a statement of
foreign investors’ equity in order to clarify and demonstrate the proposed outflow and inflow of foreign
currency. Additionally, an authorized domestic CPA firm had to issue a foreign exchange annual inspection
report. However, with the issuance of the notice on further simplifying and improving the foreign exchange

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management policies for direct investment on June 1, 2015, the foreign exchange annual inspection for foreign
investors was cancelled. Instead, investors must submit an “existing right registration” before September 30 of
each year.

If the FIE fails to comply with SAFE requirements, the foreign exchange bureaus can take over the capital
account information, and banks will refuse to process any foreign exchange business under the FIE’s capital
account. Furthermore, if the FIE does not meet SAFE’s conditions, then banks will not allow the FIE to
distribute profits to foreign shareholders.

Comparison

 In India the foreign exchange policy formed by the government was in 29th December 1999 and in China
foreign exchange trade started from 1st January 1994

 Foreign exchange reserves inched up to USD 3.236 trillion in July of 2021 from USD 3.214 trillion in
June, slightly higher than forecasts of USD 3.217 trillion. Meanwhile, the value of the gold reserves
increased to USD 114.37 billion from USD 110.45 billion.

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  Foreign Exchange Reserves in India increased to 620580 USD Million in July 30 from 611150 USD
Million in the previous week.

BOND MARKET

Indian Bond Market:

In 2020, India stood out with $13.7 billion worth of outflows from its bond market even as most of its Asian
peers saw record inflows. The country’s equity market continues to see record dollar inflows but foreign
investors are still exiting bonds
Regulators- RBI SEBI
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Settlement in the Indian Bond Market;
 All trades in corporate bonds available in demat form which are reported on any of the following
platforms provided viz., FIMMDA, NSE-WDM and NSE web site shall be eligible for settlement
through NSE Clearing.
 In order to facilitate settlement of corporate bond trades through NSE Clearing, both buy and sell
participants shall be required to explicitly express their intention to settle the corporate bond trades
through NSE Clearing.
 The trades will be settled at participant level on DVP I basis i.e., on gross basis for securities and funds.
The settlements shall be carried out through the bank and DP accounts specified by the participants.
 On the settlement date, during the pay-in, participants shall be required to transfer the securities to the
Depository account specified by NSE Clearing and transfer the funds to the bank account specified by
NSE Clearing within the stipulated cut-off time.
 On successful completion of pay-in of both securities and funds, the securities / funds shall be
transferred by NSE Clearing to the depository / bank account of the counter-part

Platform Operations Timings: 9:30 a.m to 17:30 hrs

 All trades will take place on a particular day upto 17:30 hrs can be reported between 10:00 hrs to 17:30
hrs.

 If any trade that should have been reported by 17:30 hrs, but could not be reported on the day of the
trade, has to be reported between 9:30 to 10:00 hrs the next day.

 All trades that take place after 17:30 hrs and hence are not reported on the trade reporting platform on
the day of the trade, should be reported between 9:30 to 10:00 hrs the next day.

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Chinese Bond market:
China’s onshore bond market is the world’s second largest, while its onshore FX market is Asia’s fourth largest
and growing steadily. With CIBM Direct and the opening of Bond Connect in 2017, foreign investors have
more restriction-light, documentation-free avenues to access China’s onshore markets than ever before. The
inclusion of Chinese bonds in major bond indices and the inclusion of RMB in SDR currency basket also boost
foreign investors’ interest in China’s bond/FX market. 

China’s domestic bond market is currently the second largest in the world, just after the US. Outstanding
market size stood at CNY117tn at the end of 2020 (115% of GDP), a 18% rise from the previous year.

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The PBOC directly regulates the interbank trading platform – CFETS, while SAFE oversees both the
interbank and retail markets. All FX transactions are classified under China's current control system under two
categories: capital account and current account items.

The issuers of China’s bond market are dominated by the public sector – central government, local government,
policy banks, and government-backed institutions (60% of the total bond market). 

Local governments are the largest issuer. Meanwhile, policy bank bonds are backed by the central government
and perceived by investors to be risk free.

Investors

Investors in China’s bond market are dominated by commercial banks. Commercial banks hold the vast
majority of treasury bonds, local government bonds and policy bank bonds (60-80%).

The remainder of investor base is mainly made up of policy banks, insurance institutions, and brokerages.

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Trading and settlement platforms

China’s bond market is comprised of an over-the-counter (OTC) market and an exchange market. The OTC
market includes an interbank market and a commercial bank OTC market, while the exchange market consists
of the Shanghai Stock Exchange and the Shenzhen Stock Exchange.

The China Foreign Exchange Trade System

Trading hours (cash bonds, repo, bond forwards, bond lending): 9:00-12:00, 13:30-16:50 CST (T+0); 9:00-
12:00, 13:30-17:00 CST (T+1)

 Trading hours (interest rate swaps): 9:00-12:00, 13:30-17:00

 Trading hours (forward rate agreements): 9:00-12:00, 13:30-16:30  

Regulatory Authorities

China’s bond market is regulated by multiple agencies: the People’s Bank of China (PBOC), the China Banking
and Insurance Regulatory Commission (CBIRC), the China Securities Regulatory Commission (CSRC), the
Ministry of Finance (MOF), the National Development and Reform Commission (NDRC), and the National
Association of Financial Market Institutional Investors (NAFMII).

Each of these regulatory authorities is responsible for different types of bond issuances, a regulatory strategy
known as “multi-head”. The PBOC is mainly responsible for interbank and financial bonds. The CBIRC shares
regulatory authority with the PBOC in overseeing policy bank and other financial bonds. The MOF mainly
covers central and local government bonds, while the NDRC assumes responsibility for enterprise bonds. The
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CSRC regulates corporate and financial bonds and the NAFMII is responsible for medium-term notes and
commercial papers.

REFERENCES

 https://www.cvs.edu.in/upload/Basics-of-Indian-Financial-System.pdf
 https://www.brookings.edu/wp-content/uploads/2016/06/chinese-financial-system-elliott-
yan.pdf
 https://ww3.lawschool.cornell.edu/research/ILJ/upload/Allen-Qian-final.pdf
 https://www.cvs.edu.in/upload/Basics-of-Indian-Financial-System.pdf
 https://www.indexmundi.com/factbook/compare/india.china
 https://www.nap.edu/read/12873/chapter/3

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