Overview and Evolution

Financial Dualism
Formal Informal

Money lenders
Institutions Markets Instruments Services
Pawn brokers
Insurance & Housing
Banking Non banking Mutual Funds
Companies Traders

Landlords
Informal sector
• It was estimated in 2013 that 2 billion working-age adults globally had
no access to the types of formal financial services delivered by
regulated financial institutions.
• On June 25, 2013, CRISIL, India's leading credit rating and research
company launched an index to measure the status of financial
inclusion in India.
• The index- ‘Inclusix’- along with a report was released by the then
Finance Minister of India, P. Chidambaram at a widely covered
program at New Delhi.
Informal sector
Taking this forward, the next government in power announced this
scheme for comprehensive financial inclusion. The scheme was
formally launched on 28 August 2014 with a target to provide 'universal
access to banking facilities' In a run up to the formal launch of this
scheme, the Prime Minister personally mailed to CEOs of all banks to
gear up for the gigantic task of enrolling over 7.5 crore (75 million)
households and to open their accounts. In this email he categorically
declared that a bank account for each household was a "national
priority".
Can the informal sector not be regulated?

Do we need an informal sector

Success story of the PMJDY

Formal Sector

FORMAL
( Regulators at one end of the spectrum and the players at the other end)

Institutions Markets Instruments Services

Insurance & Housing

Banking Non banking Mutual Funds
Companies

The basic elements of a strong and well - functioning financial system are
strong legal and regulatory environment, stable money, sound banking system,
a well oiled information system, a well functioning securities market.
Design of a Financial System

• The structure of the economy; its pattern of evolution; political, technical

and cultural differences affect the design of financial system.
• Demirguc Kunt and Levine, using the databases of 150 countries , have
classified countries according to their structure and level of financial
development. Two prominent polar designs exist.
• At one end is the bank dominated system and at the other the market
based.
• In bank based, banks play a pivotal role in mobilizing savings, allocating
capital etc., while in market based, the securities market share center stage
with banks in mobilizing the society’s savings. There is a general tendency
for financial systems to become more market oriented as the countries
become richer.
Per capita income Development of the Financial System

• At low end of the development, most investments are self financed

and financial intermediaries do not exist as the costs of financial
intermediation are high compared to the benefits.
• As countries develop and per capita income increases, bilateral
borrowing and lending takes place leading to the birth of financial
intermediaries.
• With further increase in per capita income, the number of financial
intermediaries grow, but banks remain large and prominent.
Per capita income Development of the Financial System

• As countries expand economically, non banking institutions and stock

markets grow in size and become more active and efficient while
compared to banks.
• Countries with well structure laws, less corruption, strong protection
of shareholders rights tend to be more market based.
Extent of Development Bank based Market based

Developed Japan, Germany, France, Italy US, UK, Singapore, Malaysia,

Korea

Under- Developed Argentina, Pakistan, Sri Lanka, Brazil, Mexico, the Philippines,
Bangladesh Turkey
Formal Sector
FORMAL
( Regulators at one end of the spectrum and the players at the other end)

Institutions Markets Instruments Services

Insurance & Housing

Banking
Banking Non banking Mutual Funds
Companies

The scope of this course is restricted only to the banking system and its
regulations
Transformational Services of banks
As financial intermediaries, banks provide three transformational
services

• Liability, asset and size transformation – mobilizing funds, allocation

by providing large loans on the basis of numerous small deposits
• Maturity transformation- by offering savers tailor made short term
claims or liquid deposits and offering borrowers long term loans
matching their requirements based on cash flows
• Risk transformation- transforming and reducing risks involved in
direct lending by acquiring diversified portfolios.
Financial institutions in India
Evolution of Banks in India
Period Phases Remarks

Before 1913 Victorian Era Evolution of banks in India

1914- 1946 World wars Expansion of the banking

sector
1947-1969 Pre- nationalisation Class banking
period
1970-1985 Post nationalization Mass banking
period
1985-1990 Pre – reformative era Consolidation phase

1991 onwards Reformative era Banking sector reforms were

introduced
• Roots of the financial sector –Hundi system and the money lenders
• John Maynard Keynes report – Bank of Hindostan and Presidency
Banks
• Swadeshi movement – Mushrooming of banks- Indian companies Act
1913
• Central Banking Enquiry Committee -1929 – Formation of RBI in 1935
• Banking Companies Act- Banking Regulation Act 1949
• Formation of SBI- 1955 and its subsidiaries- 1960
• Nationalisation - 1969
15 Years following nationalisation

• Branch expansion
• Spread out to unbanked areas
• Ate into the share of assets of the informal sector