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The indian financial system
- 1. The Indian FinancialSystem
- 2. Meaning of theFinancial 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
- 3. Indian Financial System Indian Financial System Formal (organized Financial system) Regulators; MoF,SEBI, RBI, IRDA Financial Institutions (Intermediaries) Financial Markets Informal (Unorganized financial system) Financial Instrument Financial Services Money lenders, Local bankers, Traders 3
- 4. Formal and InformalFinancial 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, noninstitutional and non-regulated system dealing with traditional and rural spheres of the economy. 4
- 5. Organised and un-orga Organized Non-Organized Money lenders Regulators Financial Institutions Financial Markets Financial services Local bankers Traders Landlords Pawn brokers Chit Funds
- 6. Organized Indian FinancialSystem Regulators Financial Instruments Forex Market Financial Markets Capital Market Money Market Primary Market Secondary Market Money Market Instrument Capital Market Instrument Financial Intermediaries Credit Market
- 7. Components of theFinancial System Regulators Financial Institutions Financial Markets Financial Instruments Financial Services
- 8. Regulators • The formalfinancial 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. 8
- 9. Financial Institutions Financial Institutions (Intermediaries) Banking Institutions Non-Banking Institutions Mutual Funds Publicsector Insurance and Housing Finance companies Private Sector 9
- 10. Types of FinancialInstitutions Banking: creators and purveyors of credit. Types Commercial Banks Cooperative Banks Non-banking: purveyors of credit Types Developmental financial institutions Mutual funds Insurance companies NBFCs
- 11. Functions of FinancialInstitutions Provide three transformation services Liability, asset and size transformation Maturity transformation Risk transformation
- 12. Financial Markets Types MoneyMarket – 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
- 13. Link Between Primaryand 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.
- 14. Why Capital MarketsExist • 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.
- 15. Role of CapitalMarkets • 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
- 16. Financial Instruments Financial Instruments Primary Securities Secondary Securities Equity, Preference shares, Debt Timedeposits, MF units Insurance policies 16
- 17. Financial Services Major Categories Fundsintermediation Payments mechanism Provision of liquidity Risk management Financial engineering
- 18. Key Elements ofa 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
- 19. Indian Financial System– An Overview PHASES * Upto 1951 Pvt. Sector * 1951 to 1990 Public Sector * Early Nineties Privatisation * Present Status Globalisation 19
- 20. Pre 1951 1. 2. 3. 4. 5. 6. 7. 8. 9. Control ofMoney 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 intermediatary institutions in long-term financing of industry Industry had limited access to outside saving/resources. 20
- 21. 1951 to 1990 Moneylendersruled 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. Public ownership of Financial Institution ii. Strengthening of Institutional Structure iii. Protection to Investors iv. Participation in Corporate Management v. Organisational Deficiencies. 21
- 22. 1951-1990 Nationalization RBI 1948 SBI 1956 (take-over ofImperial 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. 22
- 23. POST 1990s IMPORTANT DEVELOPMENTS DevelopmentFinancial 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 23
- 24. POST 1990 INDUSTRIES • • • • • • • • 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. 24
- 25.