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Indian Financial System

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 SystemThe 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 SystemRegulatorsFinancial InstitutionsFinancial MarketsFinancial InstrumentsFinancial 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 (SEBI) 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

1. Control of Money Lenders2. No Laws / Total Private Sector3. No Regulatory Bodies4. Hardly any industrialization5. Banks – Traditional lenders for Trade and that too

short term 6. Main concentration on Traditional Agriculture 7. Narrow industrial securities market (i.e.

Gold/Bullion/Metal but largely linked to London Market)8. Absence of intermediatary institutions in long-term

financing of industry9. 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

i. Public ownership of Financial Institution

ii. Strengthening of Institutional Structure

iii. Protection to Investors

iv. Participation in Corporate Management

v. Organisational Deficiencies.13

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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1951-1990Development

• 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.• SIDC’s & 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 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 / Listing16

POST 1990INDUSTRIES• 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 BankMutual FundsCapital MarketSecondary MarketMoney 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 OverviewFunctions 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