Indian Financial System An Overview Pre 1951 1. Control of Money Lenders 2. No Laws / Total Private Sector 3.

No Regulatory Bodies 4. Hardly any industrialization 5. 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 intermediatory institutions in long-term financing of industry 9. Industry had limited access to outside saving/resources 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. ii. iii. iv. v. Public ownership of Financial Institution Strengthening of Institutional Structure Protection to Investors Participation in Corporate Management Organisational Deficiencies.

1)Public ownership of Financial Institution

Nationalisation RBI SBI LIC Banks Crs.nationalised) 1948 1956 (take-over of Imperial Bank of India) 1956 (Merges of over 250 Life Insurance Companies) 1969 (14 major banks with Deposits of over Rs. 50

1980 (6 more Banks) Insurance 1972 (General Insurance Corp. GIC by New India, Oriental, united and National Development Directing the Capital in confirmity 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) Channellising 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.

2)Strengthening of Institutional Structure

NCC (1968) National Credit Council to assess the demand of Credit & determine priorities for grant of Loans, advances, investment & requirements of priority sector (presently 40%)

Credit Guarantee Scheme (1960) for SSI Finance upto 75% of defaulted amount or guarantee amount whichever is lower with ceiling of Rs. 7.5 Lacs for W/Cap & Rs. 2.5 Lacs for T/L per borrower. Agriculture Finance Corp. (AFC) for financing agriculture projects and help Banks. Lead Districts (580) Service Area Approach. Scrapped in 2006. ARC (1963) Agriculture Refinance Corp. for refinance of medium & long term loans. ECGC (1964) FOR Export Performance

Commercial Banks Continued old way of Deposit Banking & short term credit to trade Selective Credit Control (Control through quantum, rate of interest margin etc). Extensive Branch Expansion. (4000 in 1969 now over 5,00,000) Refinance Facility to share risk & also cost of Banks funds (Nationalisation. Objectives of Madame Indira Gandhi)  Better needs of Economic development  Create job opportunities  Fulfilment of Plan objectives  Servicing maximum population by Branch expansion  Setting up Committees. Tandon (1974) to regulate Bank Credit & follow-up  Bank Credit to Priority Sector. (substantial increase)

LIC

Mobilised massive long term funds & single largest organisation with large long term savings. Dominant role in underwriting issues and direct push of industrial activities. LIC helped in price stabilization during downswing (e.g. mid 2008 when market faced crisis due to turmoil in global finance market). Premium Amount (Rs. in Crs.) Rs. 87108 Crs.* Life Insurance Policies Nos. 5.09 Crs.

Nos. of Agents/Selling fore 10,00,000+ Rent Income Rs. 7000 Crs. p.a.

* The largest Pvt. Sector ICICI prudential is Rs. 6813 Crs. (less than 10%)

3) PROTECTION TO INVESTORS
Building up confidence of investors shattered due to distrust in Pvt. Ltd. Redesigning Legal & Administrative set up of Companies. * Ban on Forward Trading * Abolition of Managing Agency System STEPS TAKEN (LEGAL/ADMINISRTATIVE) Companies Act 1956 to regulate Companies, Capital Structure. Capital Issues (Control) Act, 1947 implemented through CCI in MOF to regulate Capital Issues & Foreign Investment (repealled in 1992) Securities Contract (Regulation) Act, 1956 enforced through Directorate of Stock Exchange under MOF to regulate Capital Market. MRTPA (1970) to avoid (a) concentration of economic power and monopolistic and restrictive trade practices. (b) Control

FERA (1973) to regulate foreign investment & foreign business

4) Participation of Corporate Management

By Financial Institutions (IDBI, IFCI, ICICI, IRBI, SFC, SIIC etc. By LIC By GIC Through conversion of Loans into Equity. (NOMINEE DIRECTORS enjoy protection)

5)Organisational Deficiencies
(i) Institutional Structure * Banks, LIC, UTI, Collected Savings directly from investors * DFI/PFI like IDBI, IFCI, ICICI, SFCs etc. got funds from sponsers like RBI/GOVT. * Term Finance moved to Big Industries (ii) Distributive Mechanism FIs were incapable of handling growing needs of industries (iii) Form of Financing * Term Loan (Debt) was main part of financial structure with little part of equity Capital * Sometimes Institution became more sympathetic & permitted more than desired finance in case of strain / default. * Position of IFCI, IDBI, ICICI, & most of the SFCs became precarious. Small & New Enterprises * System was unable to meet the financial requirements. * Very costly to raise funds from the market. New Issues Marketing / Management Absence of right type Merchant Banking Institutions.

POST 1990 Mutual Funds  Bifurcation of UTI and UTI (AMC) put under SEBI. Banks, Broking Houses, Finance Companies Insurance Companies, Pvt. Sector in Foreign collaboration, FII and Merchant Banks set up Mutual Funds with a varieties of schemes. Helps small investors in big way Backbone of Capital Markets Mutual Funds, AIG, Baroda Pioneer, Birla Sunlife, Canara Robeco, DBS Chola, Edelweiss, Fidelity, Fortis, Franklin, HSBC, HDFC, ICICI Prudential, IDFC, ING, JM, Kotak, LIC, Magnum, Mirae, Morgan, Quantum, Reliance, Religare, Sahara, Sundaram BNP, Tata Tourus, UTI etc. Mutual Funds Investment Schemes (over 1000 in Nos.) Balanced Funds Hybrid Equity Oriented Hybrid Debt Oriented Hybrid Asset Allocation Hybrid Arbitrage Bond Funds Debt Medium Term/Short Term Debt Medium Term/Short Term Institutional Hybrid Monthly Income Gilt Medium & Long Term Debt Liquid Plus Securities/Capital Market Primary Market Phenominal increase in number of investors.

Equity Equity Diversified Equity Index Equity Tax Planning Equity Banking Equity FMCG Equity Pharma Equity Technology Equity Speciality Cash Funds

New intermediatories i.e. Merchant Bankers, Lead Manager & Book-Builders, Underwriters, Bankers to Issue, Registrar to Issue, Share Transfer Agents, Portfolio Managers, Depositories, FIIs, Custodians, Rating Agencies, etc. are playing important role. FIIs are allowed to invest & participate in public issues of Debt & Equities within sectoral limits fixed by the Govt.

Secondary Market Over 90% Securities Dematerialised. Depository Act 1996; 2 Depositories NSDC & CDSL. Settlement Cycle reduced from 15 days to T + 2. Clearing & Settlement by Clearing Corp. Securities related derivatives introduced. Future, Option, Arbitrage, Hedging permitted.

Money Market Primary Dealers Money Market Mutual Funds came up Call/Notice Market Treasury Bills Market Commercial Paper Market (CP) Certificate of Deposit Market (CD) Repo Market FOREX Market

Organisational Structure Boards of PSU Banks reorganised. Regulation / guidelines for Statutory Auditors.

Most of the Banks entrusted Business Plan / Restructure of Organisations to Globally acclaimed Consultants like KPMG, PWC, E & Y etc.

9 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 Bonus Equity (with/without Voting Rights) Commercial Paper/Debentures etc. Euro & Petro Bonds. Gold/Silver Deep Discount Bond/Coss Border Bonds /instruments.