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Indian Financial

System

BY :
AMIT KHARE
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
Organize
d 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

Regulator Financial Financial Financial


s Instruments Markets Intermediarie
s

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
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 • Bombay Stock Exchange
• Hyderabad Stock Exchange • Madhya Pradesh Stock Exchange
• Uttar Pradesh Stock Exchange • Vadodara Stock Exchange
• Coimbatore Stock Exchange • The Ahmedabad Stock Exchange
• Cochin Stock Exchange
• Magadh Stock Exchange
• Bangalore Stock Exchange
• Gauhati Stock Exchange
• Saurashtra Kutch Stock
Exchange • Bhubaneswar Stock Exchange
• Pune Stock Exchange • Jaipur Stock Exchange
• National Stock Exchange • Delhi Stock Exchange Assoc
• OTC Exchange of India • Ludhiana Stock Exchange
• Calcutta Stock Exchange
• Inter-connected Stock
Exchange (NEW)
• Madras Stock Exchange
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.No. As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
December
1 No. of 7 7 8 8 9 14 20 22
Stock Exchanges
2 No. of 1125 1203 1599 1552 2265 4344 6229 8593
Listed Cos.
3 No. of Stock 1506 2111 2838 3230 3697 6174 8967 11784
Issues of
Listed Cos.
4 Capital of Listed 270 753 1812 2614 3973 9723 32041 59583
Cos. (Cr. Rs.)
5 Market value of 971 1292 2675 3273 6750 25302 110279 478121
Capital of Listed
Cos. (Cr. Rs.)
6 Capital per 24 63 113 168 175 224 514 693
Listed Cos. (4/2)
(Lakh Rs.)
7 Market Value of 86 107 167 211 298 582 1770 5564
Capital per Listed
Cos. (Lakh Rs.)
(5/2)
8 Appreciated value 358 170 148 126 170 260 344 803
of Capital per
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
Segmen Issuer Instruments
t

Governm Central Zero Coupon Bonds, Coupon Bearing Bonds,


ent Government Capital Index Bonds, Treasury Bills.

Public Government Govt. Guaranteed Bonds, Debentures


Sector Agencies /
Statutory
Bodies
Public Sector PSU Bonds, Debenture, Commercial Paper
Units
Private Corporate Debentures, Bonds, Commercial Paper,
Floating 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