INDIAN FINANCIAL SYSTEM

IFS and its Functions

• System that allows the transfer of money between savers and borrowers

• It channels household savings to the corporate sector

• Allows “asset - liability” transformation • It helps in risk transformation by diversification

IFS

Capital market

Money market

Banking sector

Structure of Banking in India

Scheduled bank

Commercial bank

Public sector (27)

Nationalized banks (19)

State bank of India & its

associates (8)

Private sector (30)

Foreign banks (40)

Regional Rural banks

(196)

Co-operative bank

Commercial banks

Public sector banks are those where government holdings are more than 50% while nationalized banks are those banks which were nationalized on July 19, 1969. Thus all nationalized banks are public sector banks.

so one can say public sector bank=Nationalized bank+ SBI + SBI associates + IDBI Thus in total 27 PSB’s are there.

• As on December 31st , Public sector banks recorded a rise of 24.1% when compare to 16.9% in the last year.

Private sector Banks

• Private sector banks are those banks in which majority of stake is held by private individuals and not by government

• The first private bank in India was Induslnd Bank• IDBI ranks the 10th largest development bank in the

world as private banks in India • As on December 31st , Private sector banks

recorded a rise of 28% when compare to 8.4% in the last year.

Foreign Bank

• Banks from other countries which have branches in a country.

• Citi Bank opened its branch in India in 1902

• The foreign banks have brought forth some innovations and changes in the banking industry of the country. The banking industry is now more competitive and customer friendly than before.

• As on December 31st , Foreign banks recorded a rise of 19.8% when compared to a decline of 8% in the last year.

Regional rural bank

• The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers and small entrepreneurs

• RRB’s was set up by the government of India on October 2, 1975

• The total authorized capital was earlier fixed at Rs. 1 crore which is now raised to Rs. 5 crore

• The RRB’s are under control of NABARD which is in charge of laying down policies for the RRB’s

Funds flow from commercial bank

STRONG DEMANDCREDIT FLOW FROM SCHEDULED COMMERCIAL BANKS (RS CRORE)Item Outstanding as

onMarch 26, 2010

As on March 27, 2009

As on March 26, 2010

Amount Per cent Amount Per cent

Public Sector Banks 27,93,705 3,25,608 16.9 5,41,737 24.1

Foreign Banks 1,90,766 -14,028 -8.1 31,474 19.8

Private Banks 6,89,232 41,424 8.4 1,51,618 28.2

All Scheduled Commercial Banks*

37,63,213 3,66,914 13.8 7,38,641 24.4

*: Including Regional Rural Banks                                                                                                                             Source:RBI

Capital market

Capital Market in India

Government security (Gill-

edged market)

Industrial security market

New issues market

and

Old issue market

Development financial

Institution

IFCI

ICICI

SFC’s

IDBI

IIBI

UTI

Financial Intermediaries

Merchant banks

Mutual funds

Leasing companies

Venture capitalist

Gilt Edged Market And Types

• This market refers to the market for government securities which are “of the best quality”.

• Credible instrument used by government for meeting its financial requirement.

• Types:-

I. Dated Securities with a fix maturity date.

II. Zero coupon bonds

III. Partly paid stock

IV. Treasury Bills

Industrial security market• An initial public offering (IPO), referred to simply

as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time.

• India’s largest IPO is from Coal India Ltd which raised upto Rs.15000 crore

•  A stock exchange is an entity that provides "trading" facilities for stock brokers and traders to trade stocks, bonds, and other securities.

Recent changes by SEBI

• Investment limit in IPO is increased from 1 lakh to 2 lakh

• SEBI decides IPO’s should be listed with in 12 days

• SEBI introduced spot delivery system for derivatives from April 1st 2011

• Pre open market introduced by SEBI

Development financial Institutions

• It was developed by “The Narasimham committee”in 1991

• These institutions provide a crucial role in providing credit in the form of higher risk loans, equity positions and risk guarantee instruments to private sector investments in developing countries

Merchant banks

• Merchant bankers assist corporate in raising capital.

• They assist in issue of Shares, syndicating loans, public issue of debentures. They do not provide funds.

• They only assist. They also actively arrange working capital, appraisal Projects scrutinize & persuade merger proposals

Merchant bankers as lead managers

Sl.no Size of the issue Maximum number of lead managers

1 Less than 50 crores 2

2 50 – 100 crores 3

3 100 – 200 crores 4

4 200 – 400 crores 5

5 Above 400 crores 5 or more as prescribed by SEBI

Mutual Funds

• A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities. 

• Types of mutual Funds

I. Open - ended schemes

II. Close – ended schemes

Bank v/s Mutual Fund

particulars BANKS MUTUAL FUNDS

Returns Low Better

Administrative Expenses

High Low

Risk Low Moderate

Investment Options Less More

Quality of assets Not transparent Transparent

Interest calculation Minimum balance between 10th & 30th of every year

Everyday

Lease financing and hire purchase

• Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay a series of contractual, periodic, tax deductible payments.

• A hire-purchase contract allows the buyer to hire the goods for a monthly rent.

• A hire purchase is termed an installment plan.

 

Venture capital Financing

• Venture capital is risk financing available in the form of equity

• A venture capitalist also provides management support and acts as a partner and advisor to the entrepreneur

• Methods of venture financing

I. Equity – Contribute 49% of the total equity capital

II. Conditional loan – Amount repayable in form of royalty, No interest charged

III. Income notes – Charges both interest and royalty on sales

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