Indian Financial System

Introduction
Financial System is a type of organization which provides huge supply of money . The word Finance means not just money but a source of providing funds for a particular activity. The word system implies a set of closely connected institutions, agents, markets, transactions, liability in the economy. It performs major functions of providing liquidity, mobilizing funds. The financial system in any country operates through its financial markets and institutions. Regulation is another aspect of the financial system (RBI, SEBI) Financial system not only encourages the investment but also efficiently allocates the resources in different investment channel.

Organinsed
Regulators Financial Institutions Financial Markets Financial Instruments Financial Services

Unorganised
Money Lenders Chit Funds Local Bankers Indigenous Bankers

Financial Institutions
Includes institutions and mechanisms which Affect generation of savings by the community Mobilisation of savings Effective distribution of savings Institutions are banks, insurance companies, mutual funds- promote/mobilise savings Individual investors, industrial and trading companies- borrowers

Special Institution in India

Industrial Finance Corporation Of India (IFCI). Industrial Credit and Investment Corporation of India (ICICI). Industrial Reconstruction Bank of India (IRBI). EXIM Bank. National Bank for Agriculture And Rural Development of India. Risk Capital and Technology Finance Corporation. National Industrial Development Corporation. Rural Electrification Corporation. National Small Scale Industries Corporation. National Cooperative Development Corporation. Small Industries Development Bank of India. State Industrial Development Corporations. State Industrial Investment Corporation. State Small Industries Development Corporation.

Financial Markets
 Defined as the market in which financial assets are created or transferred. These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend. Classified as :-

o Money Market (Short-term Investment) o Capital Market (Long-term Investment)

 The most important distinction between the two:

 The difference in the period of maturity.

Money Market Instruments

 Call Money Market  Treasury Bills Market  Markets for Commercial Paper  Certificate of Deposits  Bills of Exchange  Money Market Mutual Funds  Promissory Note

 Its Main Function is to channelize savings into short term productive investments like working capital

Capital Market
Primary Market Secondary Market

Primary Market
When companies need financial resources for its expansion, they borrow money from investors through issue of securities Securities issued :- Preference Shares, Equity Shares, Debentures etc.. Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: High net worth individual, Retail investors, Employees, Financial Institutions, Mutual Fund Houses, Banks etc. One time activity by the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house. Securities that are traded,are traded by the retail investors. Helps in mobilising the funds for the investors in the short run.

Financial assets/instruments
Equity Shares & Preference shares. Debentures and bonds. Government Securities(Gilt-Edged). National Savings Certificates. Insurance Plans Mutual Funds Postal Vikas Patra (Indira and Kisan) Fixed Deposits Certificates.

The Important Characteristics are liquidity, transferability, volatility, maturity, risk and return.

Financial Services
Financial and Performance Guarantors. Merchant banking Underwriting. Credit rating Stock holding Discounting and Rediscounting. Funds transfer Issue and Portfolio management Loan Syndicating Technical and Economic Consultancy Broking Safe Deposit Vaults/lockers. Factoring

Indian Banking System

Central Bank (Reserve Bank of India) Commercial banks Co-operative banks Banks can be classified as: Scheduled (Second Schedule of RBI Act, 1934) Non-Scheduled Scheduled banks can be classified as: Public Sector Banks Private Sector Banks (Old and New) Foreign Banks Regional Rural Banks

Progress of banking in India

Nationalisation of banks in 1969: 14 banks were nationalised. Branches expansion: Increased from 8260 in 1969 to 70,000 in 2009. Population served per branch has come down from 80,000 to 30,000. A rural branch office serves 40 to 50 villages within a radius of 20 kms. Still only 90,000 villages out of 10 lakh have been covered. Deposit mobilisation: 1951-1971 (20 years)- 700% or 7 times 1971-1991 (20 years)- 3260% or 32.6 times 1991- 2009 (18 years)- 2000% or 20 times

 Expansion of bank credit: Growing at 40-50% thanks to rapid growth in industrial and agricultural output. Development oriented banking: priority sector lending. Diversification in banking: Banking has moved from deposit and lending to Merchant banking and underwriting Mutual funds Retail banking ATMs Anywhere banking Internet banking Venture capital funds RTGS/NEFT/ECS/EFT. Etc.

Intermediaries
Banking Intermediaries
Reserve Bank of India (RBI). Commercial Banks. Cooperative Banks.

Post Office Savings Banks. Private Banks. Foreign Banks. Non-Banking Intermediaries
LIC, UTI, HDFC, Investment Companies and Trusts, Finance Companies, Provident and Pension Funds, Small Savings Organisations, General Insurance Corporation, Mutual Funds, Chit Funds, Hire Purchase and Leasing Companies, National Housing Banks, Venture Capital Funds, Joint Stock Companies, Housing and Urban Development Corporation.

Profitability of Banks
Reforms has shifted the focus of banks from being development oriented to being commercially viable Prior to reforms, banks were not profitable and in fact made losses for the following reasons: Declining interest income Increasing cost of operations Declining interest income was for the following reasons: High proportion of deposits impounded for CRR and SLR, earning relatively low interest rates System of directed lending Political interference- leading to huge NPAs Rising costs of operations for banks was because of several reasons: economic and political environment.

 As per the Narasimham Committee (1991 & 1998), the reasons for rising costs of banks were: Uneconomic branch expansion Heavy recruitment of employees Growing indiscipline and inefficiency of staff due to trade union activities Low productivity Declining interest income and rising cost of operations of banks led to low profitability in the 90s

Bank profitability: Suggestions

Some suggestions made by Narasimham Committee are: Set up an Asset Reconstruction Fund to take over doubtful debts SLR to be reduced to 25% of total deposits CRR to be reduced to 3 to 5% of total deposits Banks to get more freedom to set minimum lending rates Share of priority sector credit be reduced to 10% from 40% All concessional rates of interest should be removed. Banks should go for new sources of funds such as Certificates of Deposits Branch expansion should be carried out strictly on commercial principles. Diversification of banking activities.

NPA(Non Performing Assets)

Non Performing Asset means an assets or account of borrower, which has been classified by a Bank or FI as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. DEFINITION: An asset becomes non-performing when it ceases to generate income for the bank on actual realization basis. Asset Classification : The RBI has issued guidelines to banks for classification of assets into four categories. 1. Standard Assets. 2. Substandard Assets. 3. Doubtful Assets. 4. Loss Assets.

NPA Management
The Narasimham Committee recommendations were made, among other things, to reduce the NonPerforming Assets (NPAs) of banks To tackle this, the government enacted the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act (SARFAESI) Act, 2002 Enabled banks to realise their dues without intervention of courts

SARFAESI ACT
Enables setting up of Asset Management Companies to acquire NPAs of any bank or Financial institutions. NPAs are acquired by issuing debentures, bonds or any other security. As a second creditor can serve notice to the defaulting borrower to discharge his/her liabilities in 60 days. Failing which the company can take possession of assets, takeover the management of assets and appoint any person to manage the secured assets. Borrowers have the right to appeal to the Debts Tribunal after depositing 50% of the amount claimed by the second creditor.

Net NPA/Net Advances

Years Categories Public Sector Bank Private Sector Bank Foreign bank 6.74% 5.82% 4.53% 2.98% 2006 2007 2008 2009

2.27%

2.49%

2.32%

1.32%

1.82%

1.89%

1.76%

1.49%

Table indicates reducing trend in net NPAs of public and private sector banks but its still more than the foreign banks

Non Performing Asset(Con'td)

 NPA TO TRIPLE BY 2011,BUT IT WONT ENDANGER THE INDIAN BANKING SECTOR, SAYS CRISIL.  Indian banking sector faces serious problem of NPA. It is highly impossible to have 0% NPA, but Indian banks can try competing with foreign banks to maintain International Standards

Regulatory bodies
Security and Exchange Board Of India (SEBI) Reserve Bank Of India (RBI) Board of Industrial And Finance Corporation. Company Law Board. Deposit Insurance Credit Guarantee Corporation. Export Credit Guarantee Corporation. Stock Holding Corporation Of India. Credit Rating Information Service Of India. Discount And Finance House Of India. Infrastructure Leasing and Finance Services Limited. Technology Development and Information Company Limited. Merchant Bankers. Factoring Companies.

Conclusion
Indias financial system is quite huge and caters to every kind of demand for Funds and Liquidity Banks are at the core of our financial system and therefore, there is greater expectation from them in terms of reaching out to the vast populace as well as being competitive. Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. Financial system is An information system, comprised of one or more applications, that is used for any of the following: collecting, processing, maintaining, transmitting, and reporting data about financial events supporting financial planning or budgeting activities; accumulating and reporting cost information.

Thank You