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Indian Financial System

-An Overview

Indian Financial System An Overview


FUNCTIONS

Collection of SAVINGS & Distribution for INDUSTRIAL INVESTMENT.

Stimulating CAPITAL FORMATION & ACCELERATING THE


ECONNOMIC GROWTH
STRUCTURES
1. Regulatory Bodies (RBI/SEBI/IRDA/PFRDA)
2. Financial Intermediotories
3. Financial Markets
4. Financial Assets / Instruments
PHASES
* Upto 1951
Pvt. Sector
* 1951 to 1990 Public Sector
* Early Ninties Privatisation
* Present Status Globalisation
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Indian Financial System An Overview


Process of Capital Formation
Involves three distinct, although inter-related activities.
(i) Savings: The ability by which resources are set aside and become
for other purpose.

available

(ii) Finance: The activity by which claims to resources are either assembled
from those released by domestic savings, obtained from abroad,
or
specially created usually as bank deposits or notes and then
placed in
the hands of the investor.
(iii) Investments: The activity by which resources are actually committed to
production.
The financial system is a link between the savers (savings surplus economic
units) and the investors (savings deficit economic units). It is made up of all
those channels through which savings become available for investment.
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Indian Financial System An Overview


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


ORGANISATION Financial System consists of
What they do

Who They Are

Financial Intermediotories

(a) Collect Savings


(b) Issue claim against themselves
(c) Use Funds, thus raised, to purchase
ownership or debt-claims
Notes: Characteristics of claims issued against
self & debt-claims are absolutely different.

(ii) Financial Markets

(a) Not a Source of funds


(b) Act as a facilitating organisation and link
saver & investor
(c) Based on nature of work they are classified
as (1) Money Market (2) Capital/Security
Markets.

Call Market
T-Bill Market
CP-Market
Report Market
Stock Exchange

(iii) Financial Asset/Instrument/


Security

(a) Financial Product innovation


(b) Three broad categories
(1) Direct/Primary e.g. Share, Debt.,
Pref. Share etc.
(2) Indirect MF, Security Receipts,
Securitized Debt Investment.
(3) Derivatives Forward, Future, Options.

Shares, Debt
Instruments
Debentures etc.

Banks, NBFC,
MF insurance
organisations etc.

Indian Financial System An Overview


Pre 1951
1.
2.
3.
4.
5.
6.
7.
8.
9.

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.e. Gold/Bullion/Metal but
largely linked to London Market)
Absence of intermediatory institutions in long-term financing of
industry
Industry had limited access to outside saving/resources

Indian Financial System An Overview


1951 to 1990
Moneylenders ruled till 1951. No worth-while Banks at that time.
Industries depended upon their own money. 1951 onwards
5 years
PLAN commenced.
PVT. SECTORS TO PUBLIC SECTOR MIXED ECONOMY
1st 5 year PLAN in 1951 Planned Economic Process. As part of
Alignment of Financial Systems Priorities laid down by Govt. Policies.

MAIN Elements of Fin. Organisations


i.
ii.
iii.
iv.
v.

Public ownership of Financial Institution


Strengthening of Institutional Structure
Protection to Investors
Participation in Corporate Management
Organisational Deficiencies.
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Indian Financial System An Overview


1951-1990
i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

Nationalisation
RBI

1948

SBI
LIC
Banks

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. 50
Crs.nationalised)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National
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Indian Financial System An Overview


1951-1990

i. Pu blic ownership of Financial Institution


ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

Development

Directing the Capital in confirmity 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-The Industrial Development Bank of India (1964) As subsidiary
of RBI to provide Project / Term Finance

ICICI-Industrial Credit and Investment Corporation of


India (1966) Channellising of Foreign Currency Loan
from World Bank to Pvt. Sector and underwriting of
Capital issues.
SIDCs-State Industrial Development Corporation & SIICSummer Institute for Intercultural Communication State
Level Corporations for SME sector
UTI (1964) to enable small investors to share Industrial
Growth
IRCI- International Research Chairs Initiative (1971) to
take care of rehabilitation of sick-mills promoted by IDBI,
Banks & LIC-Name changed to IIBI in 1997.

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Indian Financial System An Overview


i. Pu blic ownership of Financial

Institution

ii. Strengthening of Institutional Structure


iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

NCC (1968) National Credit Council to assess the demand of Credit &
determine priorities for grant of Loans, advances, investment &
requirements of priority sector (presently 40%)
Credit Guarantee Scheme (1960) for SSI Finance upto 75% of
defaulted amount or guarantee amount whichever is lower with ceiling
of Rs. 7.5 Lacs for W/Cap & Rs. 2.5 Lacs for T/L per borrower.

Agriculture Finance Corp. (AFC) for financing agriculture projects


and help Banks. Lead Districts (580) Service Area Approach.
Scrapped in 2006.
ARC (1963) Agriculture Refinance Corp. for refinance of medium &
long term loans.
ECGC- Export credit Guarantee corporation(1964) FOR Export
Performance
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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution

ii. Strengthening of Institutional Structure


iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

Commercial Banks

Continued old way of Deposit Banking & short term credit to trade
Selective Credit Control (Control through quantum, rate of interest margin etc).
Extensive Branch Expansion. (4000 in 1969 now over 5,00,000)
Refinance Facility to share risk & also cost of Banks funds (Nationalisation.
Objectives of Madame Indira Gandhi)

Better needs of Economic development


Create job opportunities
Fulfilment of Plan objectives
Servicing maximum population by Branch expansion
Setting up Committees. Tandon (1974) to regulate Bank Credit & follow-up
Bank Credit to Priority Sector. (substantial increase)

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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution

ii. Strengthening of Institutional Structure


iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies.

LIC
Mobilised massive long term funds & single largest organisation with
large long term savings. Dominant role in underwriting issues and direct push
of industrial activities.
LIC helped in price stabilization during downswing (e.g. mid 2008 when
market faced crisis due to turmoil in global finance market).
Premium Amount (Rs. in Crs.) Rs. 87108 Crs.*
Life Insurance Policies
Nos. 5.09 Crs.
Nos. of Agents/Selling fore 10,00,000+
Rent Income
Rs. 7000 Crs. p.a.
* The largest Pvt. Sector ICICI prudential is Rs. 6813 Crs. (less than 10%)

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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure

iii. Protection to Investors


iv. Participation of Corporate Management
v. Organisational Deficiencies.

PROTECTION TO INVESTORS

Building up confidence of investors shattered due to distrust in Pvt. Ltd.


Redesigning Legal & Administrative set up of Companies.
* Ban on Forward Trading
* Abolition of Managing Agency System
STEPS TAKEN (LEGAL/ADMINISRTATIVE)
Companies Act 1956 to regulate Companies, Capital Structure.
Capital Issues (Control) Act, 1947 implemented through
to regulate
Capital Issues & Foreign Investment (repealled in 1992)
Securities Contract (Regulation) Act, 1956 enforced through Directorate of
Stock Exchange under MOF to regulate Capital Market..
FERA - Foreign Exchange Regulation Act)(1973) to regulate foreign
investment & foreign business.
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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors

iv. Participation of Corporate Management


v. Organisational Deficiencies.

Participation of Corporate Management


By Financial Institutions (IDBI, IFCI, ICICI, IRBIIndustrial Reconstruction Bank of India, SFC, SIIC etc.
By LIC
By GIC- General Insurance Corporation of India
Through conversion of Loans into Equity.
(NOMINEE

DIRECTORS enjoy protection)


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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation of Corporate Management

v. Organisational Deficiencies.

Organisational Deficiencies
(i) Institutional Structure
* Banks, LIC, UTI, Collected Savings directly from investors
* DFI/PFI like IDBI, IFCI, ICICI, SFCs etc. got funds from sponsers like
RBI/GOVT.
* Term Finance moved to Big Industries
(ii)

Distributive Mechanism
FIs were incapable of handling growing needs of industries

(iii) Form of Financing


* Term Loan (Debt) was main part of financial structure with little part of
equity Capital
* Sometimes Institution became more sympathetic & permitted more than
desired finance in case of strain / default.
* Position of IFCI, IDBI, ICICI, & most of the SFCs became precarious.
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Indian Financial System An Overview


i. Pu blic ownership of Financial Institution
ii. Strengthening of Institutional Structure
iii. Protection to Investors
iv. Participation of Corporate Management
v. Organisational Deficiencies .

Small & New Enterprises


* System was unable to meet the financial requirements.
* Very costly to raise funds from the market.

New Issues Marketing / Management


Absence of right type Merchant Banking Institutions.

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Indian Financial System An Overview


POST 1990s
IMPORTANT DEVELOPMENTS
Development Financial Institutions : (DFIs)
Started providing Working Capital also
Set up CREDIT RATING AGENCIES
CRISIL(IPO IN 1993-94; standard & poor acquires 9.68% in 1996-97
S & P acquires shares / holding upto 58.46%)
ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moodys
CARE Set-up by IFCI/Banks.
FITCH a 100% subsidiary of FITCH Group.

Privatisation of DFI
Reduction in Govt. holding & Public Participation e.g. IFCI Ltd., IDBI Ltd.,
ICICI Ltd.
Conversion into Banking / Merger into Banking Companies IDBI Bank &
ICICI Bank
Issuance of Bond by DFIs without Govt.s Guarantees to mobilise
resources.
Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
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Indian Financial System An Overview


POST 1990
INDUSTRIES

Rise & Growth of Service Sector industries.


Reliance & Dependance on technology.
E-mail & mobile made sea-change in communication, data collection etc.
Computerisation a catch phrase and inevitable need of an hour.
Dependent on Capital Market rather than only Debts dependancy.
Scalability of operations through globally competitive size.
Broad basing of Board.
Professional Management.

NBFC

NBFC under RBI governance to finance retail assets and mobilise


small/medium sized savings.
Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.
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Indian Financial System An Overview


POST 1990
Commercial Bank

Govt. holding reduced even by upto 40%


Setting up of Universal Banks (from CASA to Corp. Finance)
One-stop Banking.
Capital Adequacy. (Basel II accepted) 9%
Assets classification (Regular, Problem, Anxiety, Causing, Non-Performing)
and Provisioning norms identified/reviewed & revised.
NPA classification substandard, Doubtful & Loss Assets.
Focus on Non-Fund Business like L/C, Guarantees, Acceptance, FOREX
etc.
Promoting Signature-based and consultancy services like Project
Counselling, Merchant Banking, New Issues Management, Capital Market
related activities, Merger & Acquisitions, debt syndication, trusteeship of
debts, sponsoring Mutual Funds, Wealth Management, Sales & Services of
insurance (both life & non-life) products etc.
New Private Sector Banks (AXIS, YES, HDFC, KOTAK MAHINDRA etc.)
CAMELS Rating (C-Capital Adequacy, A-Asset Quality, M-Management, EEarning, L-Liquidity, & S-Systems & controls).

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Indian Financial System An Overview


POST 1990
Mutual Funds

Bifurcation of UTI and UTI (AMC) put under SEBI.


Banks, Broking Houses, Finance Companies Insurance Companies, Pvt. Sector in Foreign
collaboration, FII and Merchant Banks set up Mutual Funds with a varieties of schemes.
Helps small investors in big way
Backbone of Capital Markets
Mutual Funds,
AIG, Baroda Pioneer, Birla Sunlife, Canara Robeco, DBS Chola, Edelweiss, Fidelity, Fortis,
Franklin, HSBC, HDFC, ICICI Prudential, IDFC, ING, JM, Kotak, LIC, Magnum, Mirae, Morgan,
Quantum, Reliance, Religare, Sahara, Sundaram BNP, Tata Tourus, UTI etc.
Mutual Funds Investment Schemes (over 1000 in Nos.)
Equity
Equity Diversified
Equity Index
Equity Tax Planning
Equity Banking
Equity FMCG
Equity Pharma
Equity Technology
Equity Speciality
Cash Funds

Balanced Funds
Hybrid Equity Oriented
Hybrid Debt Oriented
Hybrid Asset Allocation
Hybrid Arbitrage
Bond Funds
Debt Medium Term/Short Term
Debt Medium Term/Short Term Institutional
Hybrid Monthly Income
Gilt Medium & Long Term
Debt Liquid Plus

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Indian Financial System An


Overview
Securities/Capital Market
Primary Market
- Phenominal increase in number of investors.
- New intermediatories i.e. Merchant Bankers, Lead
Manager & Book-Builders, Underwriters, Bankers to
Issue, Registrar to Issue, Share Transfer Agents,
Portfolio Managers, Depositories, FIIs, Custodians,
Rating Agencies, etc. are playing important role.
- FIIs are allowed to invest & participate in public issues of
Debt & Equities within sectoral limits fixed by the Govt.
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Indian Financial System An Overview


Secondary Market
- Over 90% Securities Dematerialised.
- Depository Act 1996; 2 Depositories NSDC & CDSL.
- Settlement Cycle reduced from 15 days to T + 2.
- Clearing & Settlement by Clearing Corp.
- Securities related derivatives introduced.
- Future, Option, Arbitrage, Hedging permitted.

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Indian Financial System An Overview


Money Market
-

Primary Dealers
Money Market Mutual Funds came up
Call/Notice Market
Treasury Bills Market
Commercial Paper Market (CP)
Certificate of Deposit Market (CD)
Repo Market
FOREX Market
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Indian Financial System An Overview


POST 1990
Organisational Structure

Boards of PSU Banks reorganised.


Regulation / guidelines for Statutory Auditors.
Most of the Banks entrusted Business Plan / Restructure of Organisations to Globally
acclaimed Consultants like KPMG, PWC, E & Y etc.

CAPITAL MARKET

NSE set up as FIRST automated Exchange.(turnover now is Rs. 65000 Crs. p.d.)
Total 2500 + V-SATs in 191 cities; 1242 Members (1096 Corporates)
Depositories Promoters
Participants Centers
No. of Clients
NSSDL
IDBI, UTI, NSE, SBI etc.
282
1015
1 Cr.
CDSL
BSE, HDFC, SBI, BOI, BOB etc. 483
6469
60.37 Lacs

Custodian

* Stock Holding Corp. of India.

OTC
Regional Stock Exchanges

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Indian Financial System An Overview


GLOBAL FINANCIAL SYSTEMS
IBRD (World Bank) Long-Term Capital Assistance
IFCI

To finance PRIVATE enterprises in the form of loans & equity

IDA

Affiliate of World Bank Soft Loan window of the Bank. Mainly for
developing & under-developed nations. Re-payment period upto 50
years Govt. & Private, both, eligible.

MIGA
(1988)

Multilateral Investment Guarantee Agency an affiliate of World Bank


Provides guarantee for investment in needy countries.

ABD
(1966)

Under the aegis of ECAFE (Economic Commission for Asia & Far East)
promote investment in Asia & Far East and also finance priority area.
Also co-ordinates with U.N. agencies.

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Indian Financial System An Overview


GLOBAL FINANCIAL SYSTEMS
International Financial Markets

MONEY

STOCK

BOND

LOAN

Main Players
Commercial Banks
Corporations
Non Bank Financial Institutions.
Central Bank and other Govt. Agencies.
Venture Funds/PE Funds
Hedge Funds
University Funds
Trusts & Foundations and charitable Societies
Endowments.
HNI.

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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 Bonus
Equity (with/without Voting Rights)
Commercial Paper/Debentures etc.
Euro & Petro Bonds.
Gold/Silver
Deep Discount Bond/Coss Border Bonds /instruments.
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July 1944

GLOBAL FINANCIAL SYSTEMS


Briton Woods Conference

UNO

GATT (now WTO)

IMF

To Settle
Political
disputes/
Conflicts.
Bilateral
dialogues.

To regulate global
To promote international monetary cotrade & services.
operation, exchange stability and to
address to temporary liquidity problems
of members.

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Indian Financial System An Overview


STRUCTURE OF FINANCIAL MARKETS IN INDIA
Financial Markets in India

Debt Market
Primary /
Secondary

RBI

Forex
Market

RBI

Capital Market
Primary /
Secondary &
Depository

SEBI

Insurance
Life/General

IRDA

Banks (including
RRBs, co-op etc)

RBI

Mutual Funds,
Venture Funds,
Investment
Bonds

RBI/SEBI

REGULATORY AUTHORITY

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