RVS Institute of Management Studies & Research

Sulur, Coimbatore 641 402.

Indian Financial System

Indian Financial System

Financial Services
Financial Markets
Financial Instruments
Financial Institutions

Financial Services
These services generally include the
banking services, Foreign exchange
services,
investment
services,
insurance services and few others.
1.Banking Services Includes all the
operations provided by the banks
including to the simple deposit and
withdrawal of money to the issue of
loans, credit cards etc.
2.Foreign Exchange services this
includes the currency exchange, foreign
exchange banking or the wire transfer
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Financial Services
3. Investment Services It generally
includes the asset management, hedge
fund management and the custody
services
4. Insurance Services It deals with the
selling of insurance policies, brokerages,
insurance underwriting or the reinsurance
5. Some of the other services include the
advisory services, venture capital, angel
investment etc.

Indian Financial System

Financial Services
Financial Markets
Financial Instruments

Financial Institutions
7

Financial Institutions
A financial intermediary is an institution
which connects the deficit and the surplus.
The best example of an intermediary can be
a bank which transforms the bank deposits
to bank loans.
The role of financial intermediary is to
channel funds from people who have extra
inflow of money i.e., the savers to those
who do not have enough money to fulfill the
needs or to carry out the basic activities i.e.
the borrowers.

Functions of Financial
Intermediaries
Maturity transformation Deals with the
conversion of short-term liabilities to long term
assets.
Risk transformation Conversion of risky
investments into relatively risk-free ones.
Convenience denomination Way of making the
unmatched matching which is matching small
deposits with large loans and large deposits
with small loans.
Financial Intermediaries are classified into two
types namely, Depository and Non-Depository
Institutions.

Indian Financial System

Financial Services
Financial Markets

Financial Instruments

Financial Institutions

10

Financial Instruments
Financial Instrument is a trade-able asset which can
be in terms of cash, agreement, evidence of an
ownership in an entity; or a contractual right which
has the right to deliver cash or any kind of asset.
Types
1. Deposits Deposit in a laymans term, means to
save or to keep safely. Deposits can be made either
with banking or non-banking firm.
2. Stock Stocks represents the ownership of the
issuing company. It is a form of corporate equity
ownership where in the total stock of the company
is divided into shares and the individuals has the
provision to trade the shares in the exchange.

Financial Instruments
3. Debts Unlike the stocks, financial assets
which are in the form of debts create an
obligation on the borrower of the fund to
repay the amount borrowed. The debt
instrument, thus in a sense, is a contract
entered into by the borrower and the
lender which specifies the amount of fund
borrowed, period of borrow, the rate of
interest that will be charged and the
repayment methods.

Indian Financial System

Financial Services

Financial Markets

Financial Instruments
Financial Institutions

13

Financial Markets
Financial Market is a mechanism that allows
people to indulge themselves in the buying
and selling i.e. trade of financial securities
(for example stocks and bonds), commodities
(for example precious metals) at prices that
reflect the markets effectiveness.
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.

Financial Markets
1) Capital Market Market where business enterprises

or government entities raise fund for long term using

the weapon of securities or debts. It includes the Stock
market (equities) and Bond Market (debt) for fund
raising.
Provided resources needed by medium and large
scale industries.
Capacity Expansion
Investments - Mergers and Acquisitions
Deals in long term instruments and sources of funds
Functioning as an institutional mechanism to
channelize funds from those who save to those who

2) Commodity Market Commodity is a good

for which there is a demand by the people
thus commodity market is the market where
such goods are traded.
3) Money Market Deals with the assets
involved in short-term borrowing and lending
with original maturities ranging from a period
of one year or even lesser time frames.
Main Function
To channelize savings into short term
productive investments like working capital
.

Money Market
Instruments in Money Market
Call money market
Treasury bills market
Markets for commercial paper
Certificate of deposits
Bills of Exchange
Money market mutual funds
Promissory Note

Financial Markets
4) Derivative Market The derivative
market is the financial market meant
for derivatives.
The financial instruments like the
futures contracts or options, which
are derived from other forms of
assets, are traded in these markets.

Financial Markets
5) Insurance Market Deals with the trading of
insurance policies.
6) Futures Market A vertical in financial market
where people can trade standardized futures
contracts which is a contract to buy specific
number of quantities of a commodity or
financial instrument at a specified price with the
delivery
of
the
commodity
or
financial
instrument set at a specified time in the future.
7) Foreign Exchange Market Also known as Forex
is a global, worldwide decentralized financial
market meant only for the trading of currencies.

Functions of the Financial system

To link the savers & investors.
To inspire the operators to monitor the
performance of the investment.
To achieve optimum allocation of risk
bearing.
It makes available price - related
information.
It helps in promoting the process of financial
deepening and broadening

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Indian Financial System

Functions

Saving Function

Liquidity Function

Payment Function

Risk Function

Policy Function

Indian Financial System An

Overview
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 intermediary institutions in longterm financing of industry
9. Industry had limited access to outside
saving/resources

Indian Financial System An Overview

1951 to 1990
1. Moneylenders ruled till 1951. No worthwhile Banks at that time. Industries
depended upon their own money. 1951
onwards 5 years PLAN commenced.
2. PVT. SECTORS TO PUBLIC SECTOR MIXED
ECONOMY
3. 1st 5 year PLAN in 1951 Planned Economic
Process. As part of Alignment of Financial
Systems Priorities laid down by Govt.
Policies.
4. MAIN Elements of Fin. Organisations
5. Public ownership of Financial Institution
6. Strengthening of Institutional Structure
7. Protection to Investors
8. Participation in Corporate Management
9. Organisational Deficiencies.

Indian Financial System An Overview

1951-1990

Nationalisation
1.RBI
1948
2.SBI
1956 (take-over of Imperial Bank of
India)
3.LIC
1956 (Merges of over 250 Life
Insurance
Companies)
4.Banks
1969 (14 major banks with Deposits
of over
Rs. 50 Crs.nationalised)
1980
(6 more Banks)
5.Insurance 1972 (General Insurance Corp. GIC
by New
India, Oriental, united and
National

Indian Financial System An Overview

1951-1990

Development
1. Directing the Capital in confirmity with
Planning priorities
2. Encouragement to new entrepreneurs
and small set-ups
3. Development of Backward Region
4. IFCI (1948)
5. State Finance Corporation (1951) Purely
Mortgage institution
6. IDBI (1964) As subsidiary of RBI to
provide Project / Term Finance
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Indian Financial System An Overview

1951-1990

Development

1.ICICI (1966) Channellising of Foreign

Currency Loan from World Bank to Pvt.
Sector and underwriting of Capital issues.
2.SIDCs & SIIC State Level Corporations for
SME sector
3.UTI (1964) to enable small investors to
share Industrial Growth
4.IRCI (1971) to take care of rehabilitation of
sick-mills promoted by IDBI, Banks & LICName changed to IIBI in 1997.
26

Indian Financial System An Overview

5. NCC (1968) National Credit Council to assess the

demand of Credit & determine priorities for grant of
Loans, advances, investment & requirements of
priority sector (presently 40%)
6. Credit Guarantee Scheme (1960) for SSI Finance upto
75% of defaulted amount or guarantee amount
whichever is lower with ceiling of Rs. 7.5 Lacs for
W/Cap & Rs. 2.5 Lacs for T/L per borrower.
7. Agriculture Finance Corp. (AFC) for financing
agriculture projects and help Banks. Lead Districts
(580) Service Area Approach. Scrapped in 2006.
8. ARC (1963) Agriculture Refinance Corp. for refinance
of medium & long term loans.
9. ECGC (1964) FOR Export Performance

Indian Financial System An Overview

Commercial Banks
1. Continued old way of Deposit Banking & short
term credit to trade
2. Selective Credit Control (Control through
quantum, rate of interest margin etc).
3. Extensive Branch Expansion. (4000 in 1969 now
over 5,00,000)
4. Refinance Facility to share risk & also cost of
Banks funds (Nationalisation. Objectives of
Madame Indira Gandhi)
1.
2.
3.
4.
5.

Better needs of Economic development

Create job opportunities
Fulfilment of Plan objectives
Servicing maximum population by Branch expansion
Setting up Committees. Tandon (1974) to regulate
Bank Credit & follow-up
6. Bank Credit to Priority Sector. (substantial increase)

Indian Financial System An Overview

LIC

1. Mobilised massive long term funds & single

largest organisation with large long term
savings. Dominant role in underwriting issues
and direct push of industrial activities.
2. LIC helped in price stabilization during
downswing (e.g. mid 2008 when market faced
crisis due to turmoil in global finance market).
3. Premium Amount (Rs. in Crs.) Rs. 87108 Crs.*
4. Life Insurance Policies
Nos. 5.09 Crs.
5. Nos. of Agents/Selling fore 10,00,000+
6. Rent Income
Rs. 7000 Crs.
p.a.
7. * The largest Pvt. Sector ICICI prudential is Rs.
6813 Crs. (less than 10%)

Indian Financial System An Overview

STEPS TAKEN (LEGAL/ADMINISRTATIVE)

1.Companies Act 1956 to regulate

Companies, Capital Structure.
2.Capital Issues (Control) Act, 1947
implemented through CCI in MOF to regulate
Capital Issues & Foreign Investment
(repealled in 1992)
3.Securities Contract (Regulation) Act, 1956
enforced through Directorate of Stock
Exchange under MOF to regulate Capital
Market.
4.MRTPA (1970) to avoid (a) concentration of
economic power and
Control
monopolistic and restrictive trade practices.
5.FERA (1973) to regulate foreign investment
& foreign business.

Indian Financial System An Overview

Participation of Corporate Management
By Financial Institutions (IDBI, IFCI, ICICI, IRBI, SFC,
SIIC etc.
By LIC
By GIC

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Indian Financial System An Overview

POST 1990s

IMPORTANT DEVELOPMENTS
1. Development Financial Institutions :
(DFIs)
2. Started providing Working Capital
3. Set up CREDIT RATING AGENCIES
4. CRISIL(IPO IN 1993-94; standard &
poor acquires 9.68% in 1996-97 S & P
acquires shares / holding upto 58.46%)
5. ICRA Set up in 1991 by leading
FIs/Banks/Fin. Ser. Cos. And Moodys
CARE Set-up by IFCI/Banks.
6. FITCH a 100% subsidiary of FITCH
Group.
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Privatisation of DFI
1. Reduction in Govt. holding & Public
Participation e.g. IFCI Ltd., IDBI Ltd.,
ICICI Ltd.
2. Conversion into Banking / Merger into
Banking Companies IDBI Bank & ICICI
Bank
3. Issuance of Bond by DFIs without
Govt.s Guarantees to mobilise
resources.
4. Reduction in holding of Govt. in
Banks, i.e. Public Participation /
Listing

Indian Financial System An Overview

POST 1990

INDUSTRIES
1.Rise & Growth of Service Sector
industries.
2.Reliance & Dependance on technology.
3. E-mail & mobile made sea-change in
communication, data collection etc.
4.Computerisation a catch phrase and
inevitable need of an hour.
5.Dependent on Capital Market rather
than only Debts dependancy.
6.Scalability of operations through
globally competitive size.
7.Broad basing of Board.
8.Professional Management. 35

NBFC
1.NBFC under RBI governance to finance
retail assets and mobilise small/medium
sized savings.
2.Very large NBFCs are emerging (Shri
Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance
Finance, DLF, Religare etc.

Indian Financial System An Overview

POST 1990
Commercial Bank
1.Govt. holding reduced even by upto 40%
2.Setting up of Universal Banks (from
CASA to Corp. Finance)
3.One-stop Banking.
4.Capital Adequacy. (Basel II accepted) 9%
5.Assets classification (Regular, Problem,
Anxiety, Causing, Non-Performing) and
Provisioning norms identified/reviewed &
revised.
6.NPA classification substandard,
Doubtful & Loss Assets.
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Commercial Bank
7. Focus on Non-Fund Business like L/C,
Guarantees, Acceptance, FOREX etc.
8. Promoting Signature-based and consultancy
services like Project Counselling, Merchant
Banking, New Issues Management, Capital
Market
related
activities,
Merger
&
Acquisitions, debt syndication, trusteeship
of debts, sponsoring Mutual Funds, Wealth
Management, Sales & Services of insurance
(both life & non-life) products etc.
9. New Private Sector Banks (AXIS, YES, HDFC,
KOTAK MAHINDRA etc.)
10. CAMELS Rating (C-Capital Adequacy, AAsset Quality, M-Management, E-Earning, LLiquidity, & S-Systems & controls).

IFM An Overview
POST 1990

Mutual Funds
1.Bifurcation of UTI and UTI (AMC) put under
SEBI.
2.Banks, Broking Houses, Finance Companies
Insurance Companies, Pvt. Sector in Foreign
collaboration, FII and Merchant Banks set up
Mutual Funds with a varieties of schemes.
3.Helps small investors in big way
4.Backbone of Capital Markets
5.Mutual Funds, AIG, Baroda Pioneer, Birla
Sunlife, Canara Robeco, DBS Chola, Edelweiss,
Fidelity, Fortis, Franklin, HSBC, HDFC, ICICI
Prudential, IDFC, ING, JM, Kotak, LIC, Magnum,
Mirae, Morgan, Quantum, Reliance, Religare,
Sahara, Sundaram BNP, Tata Tourus, UTI etc.
6.Mutual Funds Investment Schemes (over 1000
in Nos.)

Indian Financial System An Overview

Securities/Capital Market
Primary Market
- Phenominal increase in number of investors.
- New intermediatories i.e. Merchant Bankers,
Lead Manager & Book-Builders, Underwriters,
Bankers to Issue, Registrar to Issue, Share
Transfer
Agents,
Portfolio
Managers,
Depositories,
FIIs,
Custodians,
Rating
Agencies, etc. are playing important role.
- FIIs are allowed to invest & participate in
public issues of Debt & Equities within sectoral
limits fixed by the Govt.

Indian Financial System An Overview

Secondary Market
- Over 90% Securities Dematerialised.
- Depository Act 1996; 2 Depositories NSDC &
CDSL.
- Settlement Cycle reduced from 15 days to T + 2.
- Clearing & Settlement by Clearing Corp.
- Securities related derivatives introduced.
- Future, Option, Arbitrage, Hedging permitted.
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Indian Financial System An Overview

Money Market
- Primary Dealers
- Money Market Mutual Funds came up
- Call/Notice Market
- Treasury Bills Market
- Commercial Paper Market (CP)
- Certificate of Deposit Market (CD)
- Repo Market
- FOREX Market
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