Indian Financial System by Darshan Toprani Series 1

Indian Financial System

Presented By:

Pramod Tak (3- 11) Sibakanta Bal (12- 20) Subhadeep Ganguly (21-25 & 33-34) Bobby A Thomas (26-29) Arjun Soma ( 35-36) Mehebub Hasan (37 & 38)
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Flow of Funds (Savings)

Seekers of funds Suppliers of funds (Mainly business firms (Mainly households) and government) Flow of Financial Services

Incomes , and financial claims

Interrelation--Financial system & Economy

Financial System Households Foreign Sectors

Savers Lenders

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy
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FUNCTIONS OF THE FINANCIAL MARKETS: 1) Price discovery process which results from interaction of buyers & sellers in the market when they trade in assets. 2) Provision of liquidity by providing a mechanism for an investor to sell financial assets. 3) Low cost of transactions & information. 4) Optimizing the returns for the investors & ensuring flow of capital to the best user.

Indian Financial System

Organized Regulators Financial Institutions Financial Markets Financial services

Non- Organized Money lenders Local bankers Traders Landlords Pawn brokers Chit Funds
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NON ORGANIZED SECTOR : It consists of relatively less controlled indigenous bankers, pawn brokers, traders, landlords. This part of the financial system is not directly amenable to control by RBI . There are a host of financial companies, investment companies, chit funds which are not regulated by RBI or the government in a systemic manner. However they are also governed by the rules & regulations & therefore are in the orbit of monetary authorities.

Evolution of Financial System

Barter Money Lender Nidhi's/Chit Funds Indigenous Banking Cooperative Movement Societies Banks
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Joint-Stock Banks

Consolidation Commercial Banks Nationalization Investment Banks Development Financial Institutions Investment/Insurance Companies Stock Exchanges Market Operations Specialized Financial Institutions Merchant Banking Universal Banking
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STRUCTURE of the FINANCIAL SYSTEM: The Indian Financial system can be broadly classified into 2 broad groups: 1) Organized Sector 2) Unorganized Sector. ORGANIZED SECTOR: Organized financial sector comprises of the following : Banking system. Foreign Exchange Markets. Money Markets. Capital Markets. Financial Institutions.

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Banking System

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

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Indian Capital Market

Market

Instruments

Intermediaries Regulator
SEBI Brokers Investment Bankers Stock Exchanges Underwriters

Primary

Secondary

Equity

Debt

Players

Corporate Intermediaries

Individual

Banks/FI

FDI /FII
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Capital Market Instruments

Debt Equity Deep Discount Bonds

Equity Shares

Preference Shares

Debentures Zero coupon bonds

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Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a) High networth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks One time activity by the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

Helps in mobilising the funds for the investors in the short run.

 22 Stock

Exchanges,

Over 10000 Electronic Terminals at over 400 locations all over India. 9644 Listed Companies 2 Depositories and 483 Depository Participants 128 Merchant Bankers, 59 Underwriters 34 Debenture Trustees, 96 Portfolio Managers 83 Registrars & Transfer Agents, 59 Bankers to Issue 4 Credit Rating Agencies

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Indian Capital Markets - Chronology

1994-Equity Trading commences on NSE. 1995-All Trading goes Electronic. 1996- Depository comes in to existence. 1999- FIIs Participation- Globalisation. 2000- over 80% trades in Demat form. 2001- Major Stocks move to Rolling Settlement. 2003- T+2 settlements in all stocks. 2003 De mutualisation of Exchanges.
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Capital Markets - Reforms

Each scam has brought in reforms - 1992 / 2001, Screen based Trading through NSE, Capital adequacy norms stipulated, Dematerialization of Shares - risks of fraudulent paper eliminated, Entry of Foreign Investors, Investor awareness programs, Rolling settlements, Interaction between Banking and Exchanges.
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Reforms / Initiatives post 2000 Corporatization of Exchange memberships,

Introduction of Derivative products - Futures & Options, IRS, ETFs & Forward Contracts, STP -electronic contracts.

Margin Lending. Securities Lending.

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Stock Exchanges of INDIA

y Bombay Stock Exchange

y y y y y y y y y y y y y

Mangalore Stock Exchange Hyderabad Stock Exchange Uttar Pradesh Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange Bangalore Stock Exchange Saurashtra Kutch Stock Exchange Pune Stock Exchange National Stock Exchange OTC Exchange of India Calcutta Stock Exchange Inter-connected Stock Exchange (NEW) Madras Stock Exchange

y Madhya Pradesh Stock Exchange y Vadodara Stock Exchange y The Ahmedabad Stock Exchange y Magadh Stock Exchange y Guwahati Stock Exchange y Bhubaneswar Stock Exchange y Jaipur Stock Exchange y Delhi Stock Exchange Assoc y Ludhiana Stock Exchange
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Growth Pattern of the Indian Stock Market

Sl.No As on 31st . December 1 2 3 4 5 No. of Stock Exchanges No. of Listed Cos. No. of Stock Issues of Listed Cos. Capital of Listed Cos. (Cr. Rs.) Market value of Capital of Listed Cos. (Cr. Rs.) Capital per Listed Cos (Lakh Rs.) Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) Appreciated value 1946 7 1125 1506 1961 7 1203 2111 1971 8 1599 2838 1975 8 1552 3230 1980 9 2265 3697 1985 14 4344 6174 1991 20 6229 8967 1995 22 8593 11784

270 971

753 1292

1812 2675

2614 3273

3973 6750

9723 25302

32041

59583

110279 478121

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63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564
20

358

170

148

126

170

260

344

803

Money Market It is a place for Large Institutions and government to manage their short-term cash needs It is a subsection of the Fixed Income Market, It specializes in very Short-Term debt Securities, They are also called as Cash Investments.

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Money Market Instruments Treasury Bills, Commercial Paper, Certificate of Deposit, Money Market Mutual Funds, Repo Market.

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Defects of Money Market

Lack of Integration. Lack of Rational Interest Rates structure. Absence of an organized bill market. Shortage of funds in the Money Market. Seasonal Stringency of funds and fluctuations in Interest rates. Inadequate banking facilities.
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Call Money Market

Part of the national money market, Day-to day surplus funds mainly of banks are traded, Short term in nature, Maturity of these loans vary from 1 to 15 days, Lent for 1 day: Call Money Lent for more than 1 day but less than 15 days: Notice Money Convenient interest rate. Highly liquid loan repayable on demand.

Segment Issuer Govern ment Central Government

Instruments Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.

Public Sector

Government Agencies / Statutory Bodies Public Sector Units

Govt. Guaranteed Bonds, Debentures

PSU Bonds, Debenture, Commercial Paper Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, InterCorporate Deposits Certificate of Deposits, Bonds Certificate of Deposits, Bonds
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Private

Corporate Banks Financial Institutions

Indian Banking System

Central Bank (Reserve Bank of India) Commercial banks (222) Co-operative banks Banks can be classified as:
Scheduled (Second Schedule of RBI Act, 1934) - 218 Non-Scheduled - 4

Scheduled banks can be classified as:

Public Sector Banks (28) Private Sector Banks (Old and New) (27) Foreign Banks (29) Regional Rural Banks (133)

Indigenous Bankers
Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. combine trading and other business with money lending. Vary in size from petty lenders to substantial shroffs. Act as money changers and finance internal trade through hundis (internal bills of exchange). Indigenous banking is usually family owned business employing own working capital. At one point it was estimated that IBs met about 90% of the financial requirements of rural India.

Progress of Banking in India Deposit Mobilisation:

1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2006 (11 years)- 1100% or 11 times

Expansion of Bank Credit: Growing at 20-30% p.a. thanks to rapid growth in industrial and agricultural output. Development Oriented Banking: Priority Sector Lending.

Progress of Banking in India Diversification in banking: Banking has moved from deposit and lending to
Merchant banking and underwriting Mutual funds Retail banking ATMs Internet banking Venture capital funds

Financial Intermediaries (1)

Mutual Funds- Promote savings and mobilise funds which are invested in the stock market and bond market Indirect source of finance to companies. Pool funds of savers and invest in the stock market/bond market. Their instruments at saver s end are called UNITS. Offer many types of schemes: growth fund, income fund, balanced fund Regulated by SEBI.

Financial Intermediaries (2)

Merchant banking- manage and underwrite new issues, undertake syndication of credit, advise corporate clients on fund raising. Subject to regulation by SEBI and RBI. SEBI regulates them on issue activity and portfolio management of their business. RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks. Have to adopt stipulated capital adequacy norms and abide by a code of conduct.

Financial Regulators Securities and Exchange Board of India (SEBI). Reserve Bank of India. IRDA. Ministry of Finance.

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Functions Of RBI
Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations Maintain public confidence, protect depositors' interest and provide cost-effective banking services. Authority On Foreign Exchange: Manages the Foreign Exchange Management Act, 1999. Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.

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Functions Of RBI
Monetary Authority: Formulation and Implementation of monetary policies. Maintaining price stability and ensuring adequate flow of credit to the Productive sectors. Issuer of currency: Issues and exchanges or destroys currency and coins. Provide the public adequate quantity of supplies of currency notes and coins.

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Security Exchange Board of India (SEBI) Securities and Exchange Board of India (SEBI) was first established in the year 1988. Its a non-statutory body for regulating the securities market. It became an autonomous body in 1992.

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Functions Of SEBI Regulates Capital Markets. Checks Trading of securities. Checks the malpractices in securities market. It enhances investor's knowledge on market by providing education. It regulates the stockbrokers and sub-brokers. To promote Research and Investigation of frauds.

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CONCLUSION
There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and Leasing Companies, etc. India s financial system is quite huge and caters to every kind of demand for funds. Banks are at the core of our financial system and therefore, there is greater expectation from them in terms of reaching out to the vast populace as well as being competitive.

Conclusion
The financial system is fairly integrated, stable, efficient.

Weaknesses need to be addressed.

The reforms have been more capital centric in nature.

Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.
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