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Indian Financial System
Financial System• Existence of a well organized
financial system
• Promotes the well being and standard of living of the people of a country
• Money and monetary assets
• Mobilize the saving
• Promotes investment
Financial System
Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Suppliers of funds(Mainly households)Flow of financial services
Incomes , and financial claims
Seekers of funds (Mainly business firms
and government)
Flow of funds (savings)
Indian Financial System
Non- Organized Organize
d Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Chit Funds
Regulators
Financial Institutions
Financial Markets
Financial services
Barter
Money Lender
Nidhi's/Chit Funds
Indigenous Banking
Cooperative Movement
Societies Banks
Joint-Stock Banks
Evolution of Financial System
Consolidation
Commercial Banks
Nationalization
Investment Banks
Development Financial Institutions
Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions
Merchant Banking
Universal Banking
Financial System
Savers Lenders Households Foreign Sectors
Investors Borrowers
Corporate Sector Govt.Sector
Un-organized Sector
Economy
Interrelation--Financial system & Economy
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
Financial Markets• Mechanism which allows people to trade
• Affected by forces of supply and demand
• Process used
• In Finance, Financial markets facilitates
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
Indian Capital Market - Historical perspective
• Stock Market was for a privileged few• Archaic systems - Out cry method• Lack of Transparency - High tones costs• No use of Technology• Outdated banking system• Volumes - less than Rs. 300 cr per day• No settlement guarantee mechanism -
High risks
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 Sett• 2003- T+2 settlements in all stocks• 2003 - Demutualisation of Exchanges
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• Inter-action between banking and exchanges
Reforms / Initiatives post 2000
• Corporatisation of exchange memberships• Banning of Badla / ALBM • Introduction of Derivative products -
Index / Stock Futures & Options• Reforms/Changes in the margining system• STP - electronic contracts• Margin Lending• Securities Lending
MARKET STRUCTURE (JULY 31, 2005)
• 22 Stock Exchanges, 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 Over 10000 Electronic Terminals at over 400
locations all over India.locations all over India.
• 9108 Stock Brokers and 14582 Sub brokers 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies9644 Listed Companies
• 2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to 83 Registrars & Transfer Agents, 59 Bankers to
IssueIssue
• 4 Credit Rating Agencies4 Credit Rating Agencies
Indian Capital Market
Market Instruments Intermediaries
Primary Secondary
Equity DebtHybrid
Regulator
•Brokers •Investment Bankers •Stock Exchanges•Underwriters
SEBI
Players
Corporate IntermediariesCRABanks/FI FDI /FIIIndividual
Stock Exchanges in INDIA
• 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
• Bombay Stock Exchange • Madhya Pradesh Stock
Exchange • Vadodara Stock Exchange • The Ahmedabad Stock
Exchange • Magadh Stock Exchange • Gauhati Stock Exchange• Bhubaneswar Stock
Exchange• Jaipur Stock Exchange • Delhi Stock Exchange
Assoc • Ludhiana Stock Exchange
The role of the stock exchange
• Raising capital for businesses
• Mobilizing savings for investment
• Facilitate company growth
• Redistribution of wealth
The role of the stock exchange
• Corporate governance
• Creates investment opportunities for small investors
• Government raises capital for development projects
• Barometer of the economy
Growth Pattern of the Indian Stock MarketSl.No.
As on 31stDecember
1946
1961
1971
1975
1980
1985 1991 1995
1 No. ofStock Exchanges
7 7 8 8 9 14 20 22
2No. of Listed Cos.
1125
1203
1599
1552
2265
4344 6229 8593
3 No. of StockIssues of Listed Cos.
1506
2111
2838
3230
3697
6174 8967 11784
4 Capital of ListedCos. (Cr. Rs.)
270 753 1812
2614
3973
9723 32041 59583
5 Market value ofCapital of ListedCos. (Cr. Rs.)
971 1292
2675
3273
6750
25302
110279
478121
6 Capital perListed Cos. (4/2)(Lakh Rs.)
24 63 113 168 175 224 514 693
7
Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)
86 107 167 211 298 582 1770 5564
8
Appreciated value of Capital perListed Cos. (Lak Rs.)
358 170 148 126 170 260 344 803
Capital Market Instruments
ADR / GDR
Equity Debt
EquityShares
PreferenceShares
Debentures Zero coupon bonds
Deep DiscountBonds
Hybrid
Factors contributing to growth of Indian Capital
Market • Establishment of Development banks &
Industrial financial institution.• Legislative measures• Growing public confidence • Increasing awareness of investment
opportunities
Factors contributing to growth of Indian Capital
Market
• Growth of underwriting business• Setting up of SEBI• Mutual Funds • Credit Rating Agencies
Indian Capital Market deficiencies
• Lack of transparency • Physical settlement • Variety of manipulative practices • Institutional deficiencies • Insider trading
Money Market• Market for short-term money and
financial assets that are near substitutes for money.
• Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost
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
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
Money Market Instruments
• Treasury Bills
• Commercial Paper
• Certificate of Deposit
• Money Market Mutual Funds
• Repo Market
Segment
Issuer Instruments
Government
Central Government
Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.
Public Sector
Government Agencies / Statutory Bodies
Govt. Guaranteed Bonds, Debentures
Public Sector Units
PSU Bonds, Debenture, Commercial Paper
Private Corporate Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits
Banks Certificate of Deposits, Bonds
Financial Institutions
Certificate of Deposits, Bonds
Financial Regulators
Financial Regulators
• Securities and Exchange Board of India (SEBI)
• Reserve Bank of India
• Ministry of Finance
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
Functions Of SEBI
• Regulates Capital Market.
• 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
Functions Of SEBI
Objectives of SEBI
• It tries to develop the securities market.
• Promotes Investors Interest.
• Makes rules and regulations for the securities market.
The Recent Initiatives Undertaken
• Sole Control on Brokers
• For Underwriters
• For Share Prices
• For Mutual Funds
Reserve Bank of India• Established on April 1, 1935 in accordance
with the provisions of the RBI Act, 1934.
• The Central Office of the Reserve Bank has been in Mumbai.
• It acts as the apex monetary authority of the country.
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.
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.
Functions Of RBI
Developmental role:
• Performs a wide range of promotional functions to support national objectives.
Related Functions:
• Banker to the Government: performs merchant banking function for the central and the state governments.• Maintains banking accounts of all scheduled banks.
Functions Of RBI
Monetary Measures
(a) Bank Rate: The Bank Rate was kept unchanged at 6.0
per cent. (b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent.(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.
Reforms in the Financial System
• Pre-reforms period
• Steps taken
• Objectives
• Conclusion
Pre-Reforms Period • The period from the mid 1960s to the early
1990s.
• Characterized by:
– Administered interest rates– Industrial licensing and controls– Dominant public sector– Limited competition– High capital-output ratio
• Banks and financial institutions acted as a deposit agencies.
• Price discovery process was prevented.
• Government failed to generate resources for investment and public services.
• Till 90s it was closed, highly regulated, and segmented system.
Pre-Reforms Period
Steps Taken• Economic reforms initiated in June 1991.
• The committee appointed under the chairmanship of M Narasimham.
• He submitted report with all the recommendations
• Government liberalized the various sectors in the economy.
• Reform of the public sector and tax system.
Objectives• Reorientation of the economy
• Macro economic stability
• To Increase competitive efficiency in the operations
• To remove structural rigidities and inefficiencies
• To attain a balance between the goals of financial stability & integrated & efficient markets
Recommendations
• Reduce the level of state ownership in banking
• Lift restrictions on foreign ownership of banks
• Spur the development of the corporate-bond market
• Strengthen legal protections
• Deregulate the insurance industry
• Drop proposed limits on pension reforms
• Increase consumer ownership of mutual-fund products
• Introduce a gold deposit scheme
Recommendations
• Speed up the development of electronic payments.
• Separate the RBI's regulatory and central-bank functions
• Lift the remaining capital account controls
• Phase out statutory priority lending and restrictions on asset allocation
Recommendations
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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