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Indian FinancialIndian Financial

SystemSystemDilipraj Dongre


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Financial SystemFinancial System

Existence of a well organized financialsystem

Promotes the well being and standardof living of the people of a country

Money and monetary assets

Mobilize the savingPromotes investment


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Financial SystemFinancial System

Financial System of any countryconsists of financial markets,financial intermediation and financialinstruments 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)


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Indian Financial SystemIndian Financial System

Non- Organized

Organized Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services


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Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks

Evolution of FinancialEvo ut on o F nanc a

SystemSystem


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Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking


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Financial System

Savers Lenders Households Foreign

Sectors

Investors

Borrowers

Corporate Sector

Govt.Sector

Un-organized

Sector

Economy

Interrelation--Financial system &Economy


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Organized Indian FinancialSystem

Money MarketInstrument

Capital MarketInstrument

Forex

Market

Capital

Market

Money

Market

Credit

Market

Primary Market

FinancialInstruments

FinancialMarkets

FinancialIntermediarie

s

Secondary Market

Regulators


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Financial MarketsFinancial Markets

Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates


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Why Capital Markets ExistWhy Capital Markets Exist

Capital markets facilitate the transfer ofcapital (i.e. financial) assets from one

owner to another.They provide liquidity.

Liquidity refers to how easily an assetcan be transferred without loss of value.

A side benefit of capital markets is that thetransaction price provides a measure ofthe value of the asset.


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Role of Capital MarketsRole of Capital Markets

Mobilization of Savings & acceleration ofCapital Formation

Promotion of Industrial GrowthRaising of long term CapitalReady & Continuous MarketsProper Channelisation of Funds

Provision of a variety of Services


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Indian Capital Market - HistoricalIndian Capital Market - Historical

perspectiveperspective

Stock Market was for a privileged fewArchaic systems - Out cry methodLack of Transparency - High tones costsNo use of TechnologyOutdated banking system

Volumes - less than Rs. 300 cr per dayNo settlement guarantee mechanism -

High risks


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Indian Capital markets -Indian Capital markets -

ChronologyChronology

1994-Equity Trading commences onNSE1995-All Trading goes Electronic1996- Depository comes in to existence1999- FIIs Participation- Globalisation

2000- over 80% trades in Demat form2001- Major Stocks move to Rolling Sett2003- T+2 settlements in all stocks2003 - Demutualisation of Exchanges


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Capital Markets - ReformsCapital Markets - Reforms

Each scam has brought in reforms - 1992 /2001

Screen based Trading through NSECapital adequacy norms stipulatedDematerialization of Shares - risks of

fraudulent paper eliminated

Entry of Foreign InvestorsInvestor awareness programsRolling settlementsInter-action between banking and

exchanges


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Reforms / Initiatives post 2000Reforms / Initiatives post 2000

Corporatisation of exchangemembershipsBanning of Badla / ALBMIntroduction of Derivative products -

Index / Stock Futures & Options

Reforms/Changes in the marginingsystemSTP - electronic contractsMargin Lending

Securities Lending


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MARKET STRUCTUREMARKET STRUCTURE(JULY 31, 2005)(JULY 31, 2005)

22 Stock Exchanges,22 Stock Exchanges,

Over 10000 Electronic Terminals at over 400Over 10000 Electronic Terminals at over 400

locations all over India.locations all over India.

9108 Stock Brokers and 14582 Sub brokers9108 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 to83 Registrars & Transfer Agents, 59 Bankers to

IssueIssue


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Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

BrokersInvestment BankersStock ExchangesUnderwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual


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Stock Exchanges in INDIAStock 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 StockExchange (NEW)

Madras Stock Exchange

Bombay Stock Exchange Madhya Pradesh Stock

Exchange Vadodara Stock Exchange

The Ahmedabad StockExchange

Magadh Stock Exchange Gauhati Stock Exchange Bhubaneswar Stock

Exchange

Jaipur Stock Exchange Delhi Stock ExchangeAssoc

Ludhiana Stock Exchange


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The role of the stockThe role of the stockexchangeexchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth


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The role of the stockThe role of the stockexchangeexchange

Corporate governance

Creates investment opportunities for smallinvestors

Government raises capital for development

projects

Barometer of the economy

Growth Pattern of the Indian Stock Market


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Growth Pattern of the Indian Stock MarketSl.No.As on 31st

December

1946 1961 1971 1975 1980 1985 1991 1995

1 No. of

Stock Exchanges

7 7 8 8 9 14 20 22

2 No. ofListed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3 No. of Stock

Issues of

Listed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4 Capital of Listed

Cos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5 Market value of

Capital of Listed

Cos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279 478121

6 Capital per

Listed Cos. (4/2)

(Lakh Rs.)

24 63 113 168 175 224 514 693

7 Market Value of

Capital per Listed

Cos. (Lakh Rs.)

(5/2)

86 107 167 211 298 582 1770 5564

8 Appreciated value

of Capital per

358 170 148 126 170 260 344 803


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Capital MarketCapital Market

InstrumentsInstruments

ADR / GDR

Equity Debt

Equity

SharesPreference

SharesDebentures Zero coupon

bonds

Deep

Discount

Bonds

Hybrid


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Factors contributing toFactors contributing to

growth of Indian Capitalgrowth of Indian CapitalMarketMarket

Establishment of Development banks &Industrial financial institution.Legislative measuresGrowing public confidenceIncreasing awareness of investment

opportunities


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Factors contributing toFactors contributing to

growth of Indian Capitalgrowth of Indian CapitalMarketMarket

Growth of underwriting businessSetting up of SEBIMutual FundsCredit Rating Agencies


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Indian Capital MarketIndian Capital Market

deficienciesdeficiencies

Lack of transparency

Physical settlementVariety of manipulative practicesInstitutional deficiencies

Insider trading


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Money MarketMoney Market

Market for short-term money and financialassets that are near substitutes for

money.

Short-Term means generally period uptoone year and near substitutes to money is

used to denote any financial asset whichcan be quickly converted into money withminimum transaction cost


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Money MarketMoney Market

It is a place for Large Institutions andgovernment to manage their short-termcash needs

It is a subsection of the Fixed IncomeMarket

It specializes in very short-term debtsecurities

They are also called as Cash Investments


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Defects of Money MarketDefects of Money Market

Lack of Integration

Lack of Rational Interest Rates structureAbsence of an organized bill market

Shortage of funds in the Money Market

Seasonal Stringency of funds andfluctuations in Interest rates

Inadequate banking facilities


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Money Market InstrumentsMoney Market Instruments

Treasury Bills

Commercial Paper Certificate of Deposit

Money Market Mutual Funds

Repo Market


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Segment

Issuer Instruments

Governm

ent

Central

Government

Zero Coupon Bonds, Coupon Bearing Bonds,

Capital Index Bonds, Treasury Bills.

PublicSector

GovernmentAgencies /StatutoryBodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

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

FinancialInstitutions Certificate of Deposits, Bonds


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FinancialFinancial

RegulatorsRegulators


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Financial RegulatorsFinancial Regulators

Securities and Exchange Board of

India (SEBI)

Reserve Bank of India

Ministry of Finance


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Security Exchange Board ofSecurity Exchange Board ofIndiaIndia

(SEBI)(SEBI)

Securities and Exchange Board of

India (SEBI) was first established inthe year 1988Its a non-statutory body for

regulating the securities marketIt became an autonomous body in

1992


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Functions Of SEBIFunctions Of SEBI

Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securitiesmarket.


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Functions Of SEBIFunctions Of SEBIIt enhances investor's knowledge on

market by providing education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation


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Objectives of SEBIObjectives of SEBI

It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the

securities market.


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The Recent InitiativesThe Recent Initiatives

UndertakenUndertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds


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Reserve Bank of IndiaReserve Bank of India

Established on April 1, 1935 in accordancewith the provisions of the RBI Act, 1934.

The Central Office of the Reserve Bankhas been in Mumbai.

It acts as the apex monetary authority ofthe country.


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Functions Of RBIFunctions Of RBI

Monetary Authority:Formulation and Implementation of monetary

policies.Maintaining price stability and ensuring

adequate flow of credit to the Productivesectors.

Issuer of currency:Issues and exchanges or destroys currency andcoins.

Provide the public adequate quantity of

supplies of currency notes and coins.


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Regulator and supervisor of the financialsystem:

Prescribes broad parameters of bankingoperations

Maintain public confidence, protect depositors'interest and provide cost-effective bankingservices.

Authority On Foreign Exchange:Manages the Foreign Exchange Management Act,

1999.Facilitate external trade, payment, promote

orderly development and maintenance of foreignexchange market.

Functions Of RBI


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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 stategovernments.Maintains banking accounts of all scheduledbanks.

Functions Of RBI


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Monetary MeasuresMonetary 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 andReverse repo rate is around 6.10 per cent.

(c) Cash Reserve Ratio:The cash reserve ratio (CRR) of scheduledbanks is currently at 5.0 per cent.


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Reforms in the FinancialReforms in the Financial

SystemSystem

Pre-reforms period

Steps taken

Objectives

Conclusion


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Pre-Reforms PeriodPre-Reforms Period

The period from the mid 1960s to the early1990s.

Characterized by:

Administered interest rates

Industrial licensing and controls

Dominant public sector Limited competition

High capital-output ratio


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Pre-Reforms PeriodPre-Reforms Period

Banks and financial institutions acted as adeposit agencies.

Price discovery process was prevented.

Government failed to generate resourcesfor investment and public services.

Till 90s it was closed, highly regulated,and segmented system.


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Steps TakenSteps 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 inthe economy.Reform of the public sector and tax system.


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ObjectivesObjectives

Reorientation of the economy

Macro economic stability

To Increase competitive efficiency in theoperations

To remove structural rigidities and

inefficienciesTo attain a balance between the goals of

financial stability & integrated & efficientmarkets


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RecommendationsRecommendations

Reduce the level of state ownershipin banking

Lift restrictions on foreign ownershipof banks

Spur the development of the

corporate-bond market

Strengthen legal protections


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Deregulate the insurance industry

Drop proposed limits on pensionreforms

Increase consumer ownership of

mutual-fund productsIntroduce a gold deposit scheme


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Speed up the development ofelectronic payments.

Separate the RBI's regulatory andcentral-bank functions

Lift the remaining capital accountcontrols

Phase out statutory priority lendingand restrictions on asset allocation


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ConclusionConclusion

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 exchangereserves have increased but absorption offoreign capital is low.


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