Indian Financial System

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Indian Financial System
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Indian Financial System

• Indian financial system consists of formal and
  informal financial system.
• Based on the financial system financial market,
  financial instruments and financial
  intermediation can be categorized depending upon
  functionality.

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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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Component of Formal Financial System

• Regulators
• Financial Institutions
• Financial Markets
• Financial Instruments
• Financial Services

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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 (SEB) and other
  regulatory bodies.

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Financial Institutions
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Financial Instruments
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Financial Markets
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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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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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Pre 1951

• 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 intermediatary institutions in
  long-term financing of industry
• 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. Organisations
• Public ownership of Financial Institution
• Strengthening of Institutional Structure
• Protection to Investors
• Participation in Corporate Management
• 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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1951-1990

• Development
• Directing the Capital in conformity 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 (1964) As subsidiary of RBI to provide
  Project / Term Finance
• ICICI (1966) Channelizing of Foreign Currency
  Loan from World Bank to Pvt. Sector and
  underwriting of Capital issues.
• SIDCs SIIC State Level Corporations for SME
  sector
• UTI (1964) to enable small investors to share
  Industrial Growth
• IRCI (1971) to take care of rehabilitation of
  sick-mills promoted by IDBI, Banks LIC-Name
  changed to IIBI in 1997

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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 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 mobilize resources.
• Reduction in holding of Govt. in Banks, i.e.
  Public Participation / Listing

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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.

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POST 1990

• Commercial Bank
• Mutual Funds
• Capital Market
• Secondary Market
• Money Market

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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 Multilateral Investment Guarantee Agency
  an affiliate of World
• (1988) Bank Provides guarantee for investment
  in needy countries.
• 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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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
• Equity
• Commercial Paper/Debentures etc.
• Euro Bonds.
• Gold/Silver
• Cross Border Bonds /instruments.

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STRUCTURE OF FINANCIAL MARKETS IN INDIA

• Financial Markets in India

Debt Market Primary / Secondary
Forex Market
Capital Market Primary / Secondary Depository
Insurance Life/General
Banks (including RRBs, co-op etc)
Mutual Funds, Venture Funds, Investment Bonds
RBI
RBI
SEBI
IRDA
RBI
RBI/SEBI
REGULATORY AUTHORITY