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FINANCIAL SYSTEM A financial system is a set of : * markets * institutions, * instruments which foster savings and channels them to their most efficient use. The major stakeholders: * savers * intermediaries * users
Role of Financial System in An Economy
Linking saving and investment Accelerating the rate of savings & investment by offering diversified financial services and instruments Assisting in larger production of goods and services Boosting Economic Growth
Indian Financial System
Formal / Organized Financial System
Informal / Unorganized Financial System
Major Players Financial Markets
Financial Intermediaries Financial Instruments
Extent of Development Developed
Japan, Germany, France, Italy India Argentina, Pakistan, Sri Lanka, Bangladesh
US, UK, Singapore, Korea
Developing Under Developed
Brazil Mexico, Philippines, Turkey
FUNCTIONS OF FINANCIAL MARKET Mobilize and allocate savings Provides payment and settlement system Monitor corporate performance Price discovery process Provision of liquidity Low cost of transactions and information. Limits and reduces the risk
Asset Transformation activity is provided by institutions issue claims against themselves which differ from the assets they acquire. size transformation maturity transformation risk transformation
FINANCIAL SYSTEM AND ECONOMY Economic activity and growth are greatly facilitated by the existence of a financial system developed in terms of the efficiency of the market in mobilizing savings and allocating them among competing users. Basic elements of sound financial system * strong legal and regulatory environment * stable money * good integration between various market segments It is essential that financial institutions are developed sufficiently and the market operations be ** free ** fair ** competitive ** transparent Market Efficiency would be reflected in : * wide dissemination of information * reduction of transaction cost * allocation of capital to the most productive uses
Integration of financial markets is a process of unifying markets and enabling convergence of risk-adjusted returns on the assets of similar maturity across the markets. The process of integration is facilitated by : access of participants to various market segments deregulation capital has become more mobile technological developments changes in the operating framework harmonization of prudential regulations
Importance of integrated financial markets serve as a channel for authorities to transmit important price signals constitute an important vehicle for promoting domestic savings, investment and consequently economic growth fosters the necessary condition for a country¶s financial sector to emerge as an international or a regional financial centre by enhancing competition and efficiency of intermediaries in their operations and allocation of resources, contributes to financial stability lead to innovations and cost effective intermediation, thereby improving access to financial services for members of the public, institutions and companies alike induce market discipline and informational efficiency promotes the adoption of modern technology and payment systems to achieve cost effective financial intermediation services.
RECENT REFORMS IN THE INDIAN FINANCIAL SYSTEM
THE REGULATORS IN THE INDIAN FINANCIAL SYSTEM
RESERVE BANK OF INDIA
The RBI was established on April 1,1935 under the Reserve Bank of India Act,1934.
Rationale : safety of public money ensure productive use of funds ensure sound and healthy banking system stable monetary position maintain value of rupee ensure effective coordination and control among various participants of Indian financial system control overall credit and price level in the country
RBI acts as watchdog of the entire financial system. It is the sponsor bank for top ranking bank and financial institutions like SBI,NABARD, NHB etc. It counsels the Central and State Govt. and all public sector institutions on monetary matters. Major role of RBI is to regulate and supervise financial intermediaries Regulates the quantity of money supply and availability of credit for industry , business and trade .
The central bank¶s basic functions are : Issue note Banker¶s bank Government bank Promote the growth of economy Controller of foreign exchange
* Efficiency of resource allocation * Ensure priority sector lending * Act as debt manager for govt.
Stability of external value of Rupee Generate confidence in monetary and exchange rate policies Maintain foreign exchange liquidity *Determine foreign exchange rates *Regulate inter bank dealings
*Regulate capital inflow and outflow *Regulate liquidity position
* Promote liquidity * Supervise money market activities
Two Major Charters are: Reserve Bank of India Act , 1934 Banking Regulation Act ,1949
Monetary Policy refers to the use of instruments of control to regulate money supply and credit with a view to influence the level of aggregate demand for goods and services.
The objectives of monetary policy are:
Price stability and growth Maintain orderly conditions in foreign exchange market Curb destabilizing speculative activities Check undue volatility in the exchange rates
RBI influences three intermediate targets to implement monetary policy , they are :
broad money expansion in line with the expected rate of growth of GDP exchange rate inflation These takes into account : * reserve money expansion * movement in interest rates and availability of credit * net foreign exchange reserves * net RBI credit to government
The central bank makes use of two types of instruments : Direct Instruments Reserve Requirements : CRR ; SLR Administered Interest rates : changes in bank rates Credit Control : priority sector lending Indirect Instruments Open Market Operation Repos
SECURITIES AND EXCHANGE BOARD OF INDIA The Securities and Exchange Act of 1992, provides for the establishment of a board to protect the interests of investors in securities and to promote the development and regulation of the securities market. The Board consists of : A Chairman Two members from Government of India, Ministry of Law and Finance One member from RBI and Two other members The head office is at Bombay.
FUNCTIONS of the Board regulate business in stock exchanges and any other securities market register and regulate the working of stockbrokers, sub-brokers, share transfer agents, bankers to issue , trustees of trust deeds , registrars to issue , merchant bankers ,underwriters, portfolio managers, investment advisors and other intermediaries associated with securities market register and regulate the working of depositories, custodians of securities ,FIIs, credit rating agencies register and regulate the working of venture capital funds and collective investment schemes, including mutual funds
prohibit fraudulent and unfair trade practices relating to securities market promoting investor¶s education and training intermediaries of securities market prohibiting insider trading in securities regulating substantial acquisition of shares and takeover of companies calling for information from the corporates, undertaking inspection , conducting inquiries and audits of stock exchanges, mutual funds, intermediaries and self regulatory organizations in the securities market
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA) ACT, 1999 The IRDA Act was enacted in 1999 , to provide for the establishment of the IRDA : to protect the interests of policy holders, to regulate , promote and ensure orderly growth of the industry and for matters connected therewith/incidental thereto and also to amend the Insurance Act 1938, the LIC Act 1956 and the GIC Act 1972.
The IRDA consists of : A chairperson Five full time members , to be appointed by the government from amongst persons of ability, integrity and standing who have knowledge/experience of life insurance/general insurance/actuarial service, finance/economics/law/accountancy/administration/ any other discipline which in the opinion of the government would be useful to it. Four members to act between the chairperson and the five full time directors .
Powers and Functions : These powers and functions would enable the IRDA to perform the role of an effective watchdog and regulator for the insurance sector in India: Issue certificate of registration; review; modify; withdraw; suspend or cancel such registration. Protection of interest of the policy holders by controlling and regulating the terms and conditions offered by insurer ; settlement of insurance claim ; insurable interest etc
Specifying requisite qualifications and practical training for insurance intermediaries and agents. Specifying code of conduct for surveyors and loss assessors Promoting efficiency in conduct of insurance business Regulating investment of funds by insurance companies; regulating maintenance of margin of solvency Adjudication of disputes between insurers and intermediaries
Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries Calling for information from, undertaking inspection of, conducting enquiries Bring about speedy and orderly growth of the insurance industry To set, promote, monitor and enforce high standards of integrity, transparency, financial soundness, fair dealing and competence of those it regulates;
To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery ; To take action where such standards are inadequate or ineffectively enforced.
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