P. M. Kuchar 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.
2 3 Indian Financial System Formal (organized Financial system) Informal (Unorganized financial system) Regulators; MoF, SEBI, RBI, IRDA Financial Institutions (Intermediaries) Financial Markets Financial Instrument Financial Services Money lenders, Local bankers, Traders Landlor Formal and Informal Financial System The 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. 4 Component of Formal Financial System Regulators Financial Institutions Financial Markets Financial Instruments Financial Services
5 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 (SEB) and other regulatory bodies.
6 Financial Institutions 7 Financial Institutions (Intermediaries) Banking Institutions Non-Banking Institutions Mutual Funds Insurance and Housing Finance companies Public sector Private Sector Financial Instruments 8 Financial Instruments Primary Securities Equity, Preference shares, Debt Secondary Securities Time deposits, MF units Insurance policies Financial Markets 9 Financial Markets Capital Market Money Market Treasury Bills, Call money Market, Commercial Bills,, Commercial Papers Certificates of deposit, Term money Primary Segment Secondary Segment Indian Financial System An Overview PHASES * Upto 1951 Pvt. Sector * 1951 to 1990 Public Sector * Early Nineties Privatisation * Present Status Globalisation
10 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 11 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 intermediatary institutions in long-term financing of industry 9. 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 1 st 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.
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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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1951-1990
Development
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. SIDCs & 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 15
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 Moodys 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 / Listing 16 POST 1990 INDUSTRIES 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.
17 POST 1990 Commercial Bank Mutual Funds Capital Market Secondary Market Money Market
18 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.
19 Global Financial System An Overview 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 Equity Commercial Paper/Debentures etc. Euro Bonds. Gold/Silver Cross Border Bonds /instruments.
20 21 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