Indian Financial

System
 Financial System
• Existence of a well organized financial
system
• Promotes the well being and standard of
living of the people of a country
• Money and monetary assets
• Mobilize the saving
• Promotes investment
 Financial System
Financial System of any country consists
of financial markets, financial
intermediation and financial instruments
or financial products
Flow of funds (savings)
Seekers of funds
Suppliers of funds
(Mainly business firms
Flow of financial services (Mainly households)
and government)
Incomes , and financial
claims
 Indian Financial System

Non- Organized
Organized
Money lenders
Regulators
Local bankers
Financial Institutions
Traders
Financial Markets
Landlords
Financial services
Pawn brokers
Chit Funds
Evolution of Financial System
Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks
 Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies
Stock Exchanges
Market Operations
Specialized Financial Institutions

Merchant Banking
Universal Banking
 Interrelation--Financial system & Economy

Financial System

Savers Lenders Households Foreign

Sectors

Corporate Sector Un-organized

Investors
Govt.Sector Sector
Borrowers

Economy
 Organized Indian Financial System

Regulators Financial Financial Financial

Instruments Markets Intermediaries

Forex Capital Money Credit

Market Market Market Market

Primary Market

Secondary Market

Money Market Capital Market

Instrument Instrument
 Financial Markets
• Mechanism which allows people to trade

• Affected by forces of supply and demand

• Process used

• In Finance, Financial markets facilitates

 Why Capital Markets Exist
• Capital markets facilitate the transfer of
capital (i.e. financial) assets from one owner
to another.
• They provide liquidity.
– Liquidity refers to how easily an asset can

be transferred without loss of value.

• A side benefit of capital markets is that the
transaction price provides a measure of the
value of the asset.
 Role of Capital Markets
• Mobilization of Savings & acceleration of
Capital Formation
• Promotion of Industrial Growth
• Raising of long term Capital
• Ready & Continuous Markets
• Proper Channelisation of Funds
• Provision of a variety of Services
 Indian Capital Market -
Historical perspective
• Stock Market was for a privileged few
• Archaic systems - Out cry method
• Lack of Transparency - High tones costs
• No use of Technology
• Outdated banking system
• Volumes - less than Rs. 300 cr per day
• No settlement guarantee mechanism - High
risks
 Indian Capital markets -
Chronology
• 1994-Equity Trading commences on NSE
• 1995-All Trading goes Electronic
• 1996- Depository comes in to existence
• 1999- FIIs Participation- Globalisation
• 2000- over 80% trades in Demat form
• 2001- Major Stocks move to Rolling Sett
• 2003- T+2 settlements in all stocks
• 2003 - Demutualisation of Exchanges
 Capital Markets - Reforms
• Each scam has brought in reforms - 1992 / 2001
• Screen based Trading through NSE
• Capital adequacy norms stipulated
• Dematerialization of Shares - risks of fraudulent
paper eliminated
• Entry of Foreign Investors
• Investor awareness programs
• Rolling settlements
• Inter-action between banking and exchanges
 Reforms / Initiatives post
2000
• Corporatisation of exchange memberships
• Banning of Badla / ALBM
• Introduction of Derivative products - Index /
Stock Futures & Options
• Reforms/Changes in the margining system
• STP - electronic contracts
• Margin Lending
• Securities Lending
 MARKET STRUCTURE
(JULY 31, 2005)
• 22 Stock Exchanges,
• Over 10000 Electronic Terminals at over 400 locations all
over India.
• 9108 Stock Brokers and 14582 Sub brokers
• 9644 Listed Companies
• 2 Depositories and 483 Depository Participants
• 128 Merchant Bankers, 59 Underwriters
• 34 Debenture Trustees, 96 Portfolio Managers
• 83 Registrars & Transfer Agents, 59 Bankers to Issue
• 4 Credit Rating Agencies
 Indian Capital Market

Market Instruments Intermediaries Regulator

SEBI
•Brokers
•Investment Bankers
Primary Secondary •Stock Exchanges
•Underwriters

Equity Hybrid Debt

Players

CRA Corporate Intermediaries Individual Banks/FI FDI /FII

Stock Exchanges in INDIA
• Mangalore Stock
Exchange
• Hyderabad Stock
Exchange
• Uttar Pradesh Stock
Exchange
• Coimbatore Stock
Exchange
• Cochin Stock Exchange
• Bangalore Stock
Exchange
• Saurashtra Kutch Stock
Exchange
• Pune Stock Exchange
• National Stock Exchange
• OTC Exchange of India
• Calcutta Stock Exchange
• Inter-connected Stock
Exchange (NEW)
• Bombay Stock Exchange
• Madhya Pradesh Stock
Exchange
• Vadodara Stock
Exchange
• The Ahmedabad Stock
Exchange
• Magadh Stock Exchange
• Gauhati Stock Exchange
• Bhubaneswar Stock
Exchange
• Jaipur Stock Exchange
• Delhi Stock Exchange
Assoc
• Ludhiana Stock
The role of the stock exchange
• Raising capital for businesses

• Mobilizing savings for investment

• Facilitate company growth

• Redistribution of wealth
The role of the stock exchange
• Corporate governance

• Creates investment opportunities for

small investors

• Government raises capital for

development projects

• Barometer of the economy

 Growth Pattern of the Indian Stock Market
Sl.N As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
o. December
No. of 7 7 8 8 9 14 20 22
1
Stock Exchanges
No. of 1125 1203 1599 1552 2265 4344 6229 8593
2
Listed Cos.
No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
3 Issues of
Listed Cos.
Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
4
Cos. (Cr. Rs.)
Market value of 971 1292 2675 3273 6750 25302 11027 47812
5 Capital of Listed 9 1
Cos. (Cr. Rs.)
Capital per 24 63 113 168 175 224 514 693
6 Listed Cos. (4/2)
(Lakh Rs.)
Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
7
Cos. (Lakh Rs.)
(5/2)
Appreciated value 358 170 148 126 170 260 344 803
of Capital per
8
 Capital Market Instruments

Equity Hybrid Debt

Deep
Equity Preference ADR / GDR Debentures Zero coupon
Shares bonds Discount
Shares
Bonds
Factors contributing to growth
of Indian Capital Market
• Establishment of Development banks &
Industrial financial institution.
• Legislative measures
• Growing public confidence
• Increasing awareness of investment
opportunities
Factors contributing to growth
of Indian Capital Market

• Growth of underwriting business

• Setting up of SEBI
• Mutual Funds
• Credit Rating Agencies
 Indian Capital Market
deficiencies
• Lack of transparency
• Physical settlement
• Variety of manipulative practices
• Institutional deficiencies
• Insider trading
 Money Market
• Market for short-term money and financial
assets that are near substitutes for money.

• Short-Term means generally period upto one

year and near substitutes to money is used to
denote any financial asset which can be
quickly converted into money with minimum
transaction cost
 Money Market

• It is a place for Large Institutions and

government to manage their short-term cash
needs

• It is a subsection of the Fixed Income Market

• It specializes in very short-term debt securities

• They are also called as Cash Investments

 Defects of Money Market
• Lack of Integration
• Lack of Rational Interest Rates structure
• Absence of an organized bill market
• Shortage of funds in the Money Market
• Seasonal Stringency of funds and fluctuations in
Interest rates
• Inadequate banking facilities
Money Market Instruments
• Treasury Bills
• Commercial Paper
• Certificate of Deposit
• Money Market Mutual Funds
• Repo Market
Segment Issuer Instruments

Govern Central Zero Coupon Bonds, Coupon Bearing Bonds,

ment Government Capital Index Bonds, Treasury Bills.

Government
Public Agencies /
Govt. Guaranteed Bonds, Debentures
Sector Statutory
Bodies
Public Sector
PSU Bonds, Debenture, Commercial Paper
Units
Debentures, Bonds, Commercial Paper, Floating
Private Corporate Rate Bonds, Zero Coupon Bonds, Inter-
Corporate Deposits
Banks Certificate of Deposits, Bonds
Financial
Certificate of Deposits, Bonds
Institutions
Financial Regulators
 Financial Regulators

• Securities and Exchange Board of India (SEBI)

• Reserve Bank of India

• Ministry of Finance
Security Exchange Board of India
(SEBI)
• Securities and Exchange Board of India
(SEBI) was first established in the year
1988
• Its a non-statutory body for regulating
the securities market
• It became an autonomous body in 1992
 Functions Of SEBI
• Regulates Capital Market.

• Checks Trading of securities.

• Checks the malpractices in securities market.

 Functions Of SEBI
• It enhances investor's knowledge on market
by providing education.

• It regulates the stockbrokers and sub-brokers.

• To promote Research and Investigation

 Objectives of SEBI
• It tries to develop the securities market.

• Promotes Investors Interest.

• Makes rules and regulations for the securities

market.
 The Recent Initiatives
Undertaken
• Sole Control on Brokers

• For Underwriters

• For Share Prices

• For Mutual Funds

 Reserve Bank of India
• Established on April 1, 1935 in accordance
with the provisions of the RBI Act, 1934.

• The Central Office of the Reserve Bank has

been in Mumbai.

• It acts as the apex monetary authority of the

country.
 Functions Of RBI
Monetary Authority:
• Formulation and Implementation of monetary

policies.
• Maintaining price stability and ensuring adequate

flow of credit to the Productive sectors.

Issuer of currency:
• Issues and exchanges or destroys currency and coins.

• Provide the public adequate quantity of supplies of

currency notes and coins.

 Functions Of RBI
Regulator and supervisor of the financial system:
• Prescribes broad parameters of banking operations
• Maintain public confidence, protect depositors'
interest and provide cost-effective banking services.

Authority On Foreign Exchange:

• Manages the Foreign Exchange Management Act,
1999.
• Facilitate external trade, payment, promote orderly
development and maintenance of foreign exchange
market.
 Functions Of RBI
Developmental role:
•Performs a wide range of promotional functions to
support national objectives.

Related Functions:
• Banker to the Government: performs merchant
banking function for the central and the state
governments.
• Maintains banking accounts of all scheduled banks.
 Monetary Measures
(a) Bank Rate:
The Bank Rate was kept unchanged at 6.0 per cent.
(b) Reverse Repo Rate:
The Repo rate is around 7 per cent and Reverse
repo rate is around 6.10 per cent.
(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is
currently at 5.0 per cent.
 Reforms in the Financial
System
• Pre-reforms period

• Steps taken

• Objectives

• Conclusion
 Pre-Reforms Period
• The period from the mid 1960s to the early 1990s.
• Characterized by:

– Administered interest rates

– Industrial licensing and controls
– Dominant public sector
– Limited competition
– High capital-output ratio
 Pre-Reforms Period
• Banks and financial institutions acted as a
deposit agencies.

• Price discovery process was prevented.

• Government failed to generate resources for

investment and public services.

• Till 90s it was closed, highly regulated, and

segmented system.
 Steps Taken
• Economic reforms initiated in June 1991.
• The committee appointed under the
chairmanship of M Narasimham.
• He submitted report with all the
recommendations
• Government liberalized the various sectors in
the economy.
• Reform of the public sector and tax system.
 Objectives
• Reorientation of the economy
• Macro economic stability
• To Increase competitive efficiency in the
operations
• To remove structural rigidities and inefficiencies
• To attain a balance between the goals of financial
stability & integrated & efficient markets
 Recommendations
• Reduce the level of state ownership in
banking
• Lift restrictions on foreign ownership of banks
• Spur the development of the corporate-bond
market

• Strengthen legal protections

 Recommendations
• Deregulate the insurance industry

• Drop proposed limits on pension reforms

• Increase consumer ownership of mutual-
fund products

• Introduce a gold deposit scheme

 Recommendations
• Speed up the development of electronic
payments.
• Separate the RBI's regulatory and central-
bank functions
• Lift the remaining capital account controls
• Phase out statutory priority lending and
restrictions on asset allocation
 Conclusion
• The financial system is fairly integrated, stable,
efficient.
• Weaknesses need to be addressed.
• The reforms have been more capital centric in
nature.
• Foreign capital flows and foreign exchange
reserves have increased but absorption of foreign
capital is low.
Thank you