the indian financial system
DESCRIPTION
Indian Financial SystemTRANSCRIPT
The Indian Financial System
Meaning of the Financial System
A set of sub systems of financial institutions, markets, instruments and services
Intermediates with the flow of funds between savers and borrowers.
Facilitates transfer and allocation of scarce resources efficiently and effectively
Indian Financial System
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Indian Financial System
Formal (organized Financial system)
Regulators;MoF, SEBI, RBI, IRDA
Financial Institutions
(Intermediaries)
Financial Markets
FinancialInstrument
Financial Services
Informal(Unorganized
financial system)
Money lenders,Local bankers,
Traders
Formal and Informal Financial System
• The financial systems of most developing countries are characterized by co-existence and co-operation between the formal and informal financial sectors.
• The formal financial sector is characterized by the presence of an organized, institutional and regulated system which caters to the financial needs of the modern spheres of economy.
• The informal financial sector is an unorganized, non-institutional and non-regulated system dealing with traditional and rural spheres of the economy.
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Organised and un-orga
Non- Organized Organize
d Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Chit Funds
Regulators
Financial Institutions
Financial Markets
Financial services
Organized Indian Financial System
Money Market Instrument
Capital Market Instrument
Forex Market
Capital Market
Money Market
Credit Market
Primary Market
Financial Instruments
FinancialMarkets
FinancialIntermediarie
s
Secondary Market
Regulators
Regulators
Financial Institutions
Financial Markets
Financial Instruments
Financial Services
Components of the Financial System
Regulators
• The formal financial system comes under the regulations of the ministry of finance (MOF), reserve Bank of India (RBI), Securities and Exchange board of India (SEBI) and other regulatory bodies.
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Financial Institutions
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Financial Institutions
(Intermediaries)
Banking Institutions
Non-Banking Institutions
Mutual Funds
Public sector Private Sector
Insurance and
Housing Finance companies
Types of Financial Institutions
Banking: creators and purveyors of credit.Types
Commercial Banks Cooperative Banks Non-banking: purveyors of credit
TypesDevelopmental financial institutions
Mutual funds Insurance companies NBFCs
Functions of Financial Institutions
Provide three transformation services
Liability, asset and size transformation
Maturity transformation
Risk transformation
Financial Markets
Types Money Market – A market for short-term debt
instruments
Capital Market – A market for long-term equity
and debt instruments
Segments Primary Market – A market for new issues
Secondary Market – A market for trading
outstanding issues
Link Between Primary and Secondary Capital Market
A buoyant secondary market is indispensable for the presence of a vibrant primary market.
The secondary market provides a basis for the determination of prices of new issues.
Depth of the secondary market depends on the primary market.
Bunching of new issues affects prices in the secondary market.
Why Capital Markets Exist• Capital markets facilitate the transfer of
capital (i.e. financial) assets from one owner to another.
• They provide liquidity.– Liquidity refers to how easily an asset can
be transferred without loss of value.
• A side benefit of capital markets is that the transaction price provides a measure of the value of the asset.
Role of Capital Markets• Mobilization of Savings &
acceleration of Capital Formation• Promotion of Industrial Growth• Raising of long term Capital• Ready & Continuous Markets• Proper Channelisation of Funds• Provision of a variety of Services
Financial Instruments
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Financial Instruments
Primary Securities
Equity,Preference
shares, Debt
Secondary Securities
Time deposits,MF units
Insurance policies
Financial Services
Major Categories Funds intermediation
Payments mechanism
Provision of liquidity
Risk management
Financial engineering
Key Elements of a Well-functioning Financial System
A strong legal and regulatory environment
Stable money
Sound public finances and public debt
management
A central bank
Sound banking system
Information system
Well-functioning securities market
Indian Financial System – An Overview
PHASES
* Upto 1951 Pvt. Sector
* 1951 to 1990 Public Sector
* Early Nineties Privatisation
* Present Status Globalisation
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Pre 1951
1. Control of Money Lenders2. No Laws / Total Private Sector3. No Regulatory Bodies4. Hardly any industrialization5. Banks – Traditional lenders for Trade and that too short
term 6. Main concentration on Traditional Agriculture 7. Narrow industrial securities market (i.e. Gold/Bullion/Metal
but largely linked to London Market)8. Absence of intermediatary institutions in long-term
financing of industry9. Industry had limited access to outside saving/resources.
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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. Organisationsi. Public ownership of Financial Institutionii. Strengthening of Institutional Structureiii. Protection to Investorsiv. Participation in Corporate Managementv. Organisational Deficiencies.
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1951-1990
Nationalization RBI 1948 SBI 1956 (take-over of Imperial Bank of India) LIC 1956 (Merges of over 250 Life Insurance Companies) Banks 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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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 up to 58.46%)
ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moody’s 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 mobilize resources.• Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
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POST 1990INDUSTRIES• Rise & Growth of Service Sector industries.• Reliance & Dependence on technology.• E-mail & mobile made sea-change in communication, data collection etc.• Computerization – a catch phrase and inevitable need of an hour.• Dependent on Capital Market rather than only Debts dependency.• Scalability of operations through globally competitive size.• Broad basing of Board.• Professional Management.
NBFC• NBFC under RBI governance to finance retail assets and mobilize 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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