Indian Financial System

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Debjani Singha

3/18/12

Financial System

Existence of a well organized financial system the well being and standard of living of the people of a country and monetary assets the saving
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Promotes

Money

Mobilize

Definition
The processes and procedures used by an organizations management to exercise financial control and accountability

These measures include recording , verification ,and timely reporting of transaction that affect revenues , expenditures ,Assets and Liabilities.
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Seekers of funds (Mainly business firms and government)

Flow of funds (savings)

Suppliers of funds (Mainly households)

Flow of financial services Incomes , and financial claims

Financial System
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Signification of Financial System

Money

& Finance play an important Role in Economic activities. of Economic

Development

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Basic Econ Concepts

Click to edit Master subtitle wants, and junk like that Like scarcity, needs andstyle

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Economics is the Social Science that analyzes the production , distribution , and consumption of goods and Services

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Needs and Wants

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Limited

quantities of resources to meet unlimited wants.

Whats that mean?

Scarcity
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Your

wants are pretty much unlimited.

Even if yours personally arent, once you add up everybody in the population, the collective wants are unlimited.
All

resources, goods, and services are limited, however. means its impossible for all the wants to be met.

This

Scarcity
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Economics,

then, tries to solve the problem of scarcity.

This doesnt mean to make unlimited stuff, but figuring how to distribute scarce, limited stuff in the best way to meet wants. It also wants to see how people satisfy needs and wants by the choices they make.

Scarcity
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Goods

Stuff.
Services

Things people do for others.

Goods and Services

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When

there isnt enough stuff.

Not enough of a product can be supplied or it wont be supplied. At least not at current prices. If prices go up, it may become profitable for somebody to provide the good or service and that will eliminate the shortage.

Shortage
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Land, These

Labor, Capital

have specific meanings in economics.

Factors of Production
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All

natural resources used to produce goods and services.

Land
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Work

people get paid for.

Labor
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Human-made

resources used to produce stuff or provide services.

Note this is different from land, which is natural resources. Two types: Physical and Human.

Capital
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Interrelation-Financial system & Economy Financial System

Savers Lenders Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy
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Components of Financial System

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Indian Financial System

Organize d Regulators Financial Institutions Financial Markets Financial services

NonOrganized Money lenders Local bankers Traders Landlords Chit Funds

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Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products

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Components of Financial System

Regulator s

Financial Instruments

Financia l Markets Capital Market Money Marke t

Financial Intermediarie s Credit Marke t

Forex Marke t

Primary Market Secondary Market Money Market Instrument Capital Market 3/18/12 Instrument

RBI
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The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934

The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.

The Bank was constituted for the need of following:

1) To regulate the issue of banknotes 2 )To maintain reserves with a view to securing monetary stability and 3) To operate the credit and currency system of the country to its advantage.

Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

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Organization & Managements of RBI

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Function of Reserve bank of India(RBI)

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1) Bank of Issue 2) Banker to Government 3) Bankers' Bank and Lender of the Last Resort 4) Controller of Credit 5) Custodian of Foreign Reserves 6) Supervisory functions 7) Promotional functions
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Issues and exchanges or

destroys currency and coins

not fit for circulation.

Objective:

to give the public adequate quantity of supplies of currency notes and coins and in good quality

The assets and liabilities of the Issue Department are

kept separate from those of the Banking Department

Bank of Issue
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The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations provides Loans to Local and state banks

The

Its

as to Government Bankeradviser to the Government on all monetary and

It acts

banking matters.

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The Reserve Bank of India acts as the bankers' bank.

According to the provisions of the Banking Companies

Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India.
banks have been asked to keep cash reserves equal

to 3

Bankers' Bank and Lender of the Last Resort

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per cent of their aggregate deposit .

 The Reserve Bank of India is the

controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash Controller of Credit reserves of all the scheduled banks. 3/18/12

Manages the Foreign Exchange Management Act, 1999. to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. maintaining fixed exchange rates with all other member countries of the I.M.F. (International Monetary Fund )

Objective:

The Reserve Bank has the responsibility of

Custodian of Foreign Reserves

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Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. protect depositors interest and provide cost-effective banking services to the public. the payment systems Authorises setting up of payment systems Lays down standards for operation of the payment system Issues direction, calls for returns/information from payment system operators

Objective: maintain public confidence in the system,

Regulator and supervisor of

Supervisory functions
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The Bank now performs a variety of developmental and promotional functions:

1) Industrial Development Bank of India also in 1964.

2) Agricultural Refinance Corporation of India in 1963

3) Industrial Reconstruction Corporation of India in 1972

4) Agricultural Refinance and Development Corporation to provide longterm finance to farmers.

Promotional functions agricultural credit . 5) Agricultural Credit Department to provide

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Credit creation

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Money creation is the process by which the money supply of a country or a monetary region is increased due to some reason.

There are two principal stages of money creation.

1)

First, the central bank introduces new money into the economy (termed 'expansionary monetary policy') by purchasing financial assets or lending money to financial institutions.

1)

Second, the new money introduced by the central bank is multiplied by commercial banks through fractional reserve banking; this expands the amount of broad money (i.e. cash plus demand deposits)

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credit control

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 Objectives
1)

of Credit Control

Price Stability:Price stability is an important objective of credit control policy. The central bank, by regulating the supply of credit in accordance with the commercial needs of the people, can bring about price stability in the country.

2) Economic Stability:Operation of the business cycle brings instability in a capitalist economy. The objective of the credit control policy of the central bank should be to eliminate cyclical fluctuations and ensure economic stability in the economy.

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3) Maximisation of Employment:
Therefore economic stability with full employment and high per capita income has been considered as an important objective of credit control policy of a country.

4 ) Economic Growth:
Countries generally suffer from the deficiency of financial resources. Hence, the central banks in these countries should solve the problem of financial scarcity through planned expansion of bank credit.

5) Stabilisation of Money Market:

Credit control should not be exercised there should be equilibrium in the demand and supply of money should be achieved at all times.

6) Exchange Rate Stability:

Instability in the exchange rates is harmful for the foreign trade of the country Thus, the central bank, in the countries largely dependent upon 3/18/12 foreign trade, should attempt to eliminate the fluctuations in the foreign exchange rates through its credit control policy.

Monetary policy

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Monetary policy is a tool

used by the central bank to manage money supply in the economy in order to achieve a desirable growth bank controls the money supply by increasing and decreasing the cost of money, the rate of interest.

The central

What is monetary policy?

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Expansionary policy :- The policy makers increase the

money supply in the system by lowering interest rates. This is done mainly to boost economic growth and decrease level of unemployment.
Contractionary policy:-the cost of money is made

dearer by increasing the rate of interest, which in turn helps in reducing the money supply in the system and combat inflation

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1) Open Market Operations : An important In times

instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities. rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.

2) Bank Rate : Bank

Usually,

an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through Monetary Policy Instrument ofaltering the cost of credit.
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3) Direct Regulation of Interest Rate : The

RBI can control the monetary policy by regulating market rate of interest Directly .It has been fixing all deposit rate of commercial bank and their lending rates are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. SLR securities
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4) Cash Reserve Ratio : All commercial banks

5) Statutory Liquidity Ratio : Banks

These are collectively known as

6) Reserve requirements (RR): percentages

of certain types of deposits that banks must keep on hand in their own vaults or on deposit at a Federal Reserve Bank banks reduce lending banks increase lending

RR raised RR lowered

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Monetary Policy Fiscal policy

Monetary policy is typically implemented by a central bank.

while fiscal policy decisions are set by the national government

Monetary policy is expected to improve Fiscal policies, tax cuts, and spending the economy's rate of growth of output increases are normally expected to (measured by Gross Domestic Product stimulate economic growth in the short or GDP) run Monetary policy is policy by which the Government spending and taxing amount of money and credit available policies that aim to affect the economy aims to affect the economy. are fiscal policies. Eg:- Fed has decided to lower or raise the interest rate

Eg:- the recent economic stimulus package, through which the government spent a great deal of money in order to try and stimulate the economy

What is the difference between fiscal and monetary policy?

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Indian Capital Market

Market

Instrument s

Intermediaries Regulator
SEBI

Primar y

Secondary

Brokers Investment Bankers Stock Exchanges Underwriters Hybrid Debt Players

Equity

CRA

Corporate Intermediaries 3/18/12

Individual

Banks/FI

FDI /FII

Thank you