Indian Financial System

Dilipraj Dongre

Financial System
Existence

system

of a well organized financial

Promotes Money

the well being and standard of living of the people of a country and monetary assets the saving investment

Mobilize

Promotes

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Seekers of funds (Mainly business firms Flow of financial services and government)
Incomes , and financial claims Flow of funds (savings)

Suppliers of funds (Mainly households)

Financial System

Indian Financial System

Organize d Regulators Financial Institutions Financial Markets Financial services

Non- Organized Money lenders Local bankers Traders Landlords 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

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Organized Indian Financial System

Regulator s Financial Instruments Financial Markets Financial Intermediarie s Credit Market

Forex Market

Capital Market

Money Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

Mechanism Affected Process In

which allows people to trade

by forces of supply and demand

used

Finance, Financial markets facilitates

Financial Markets

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.

Why Capital Markets Exist

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

Role of Capital Markets

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was for a privileged few Archaic systems - Out cry method Lack of Transparency - High tones costs No use of Technology Outdated banking system Volumes - less than Rs. 300 cr per day No settlement Indian Capital guarantee - Historical Market mechanism High risks perspective

Stock

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- Capital markets Indian Major Stocks move to Rolling Sett 2003- T+2 settlements in all stocks Chronology 2003 - Demutualisation of Exchanges

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 Capital Markets - Reforms Inter-action between banking and exchanges

Each

scam has brought in reforms - 1992 /

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 Reforms / Initiatives post 2000 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

Primary

Secondary

Brokers Investment Bankers Stock Exchanges Underwriters Hybrid

Equity

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) Madras Stock Exchange

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 Exchange

 Raising

capital for businesses savings for investment

Mobilizing Facilitate

company growth of wealth

Redistribution

The role of the stock exchange

 Corporate Creates

governance

investment opportunities for small investors raises capital for development

Government

projects

Barometer

of the economy

The role of the stock exchange

Sl.No. As on 31st December 1 No. of Stock Exchanges 2 No. of Listed Cos. 3 No. of Stock Issues of Listed Cos. 4 Capital of Listed Cos. (Cr. Rs.) 5 Market value of Capital of Listed Cos. (Cr. Rs.) 6 Capital per Listed Cos. (4/2) (Lakh Rs.) 7 Market Value of Capital per Listed Cos. (Lakh Rs.) (5/2) 8 Appreciated value of Capital per

Growth Pattern of the Indian Stock Market

1946 7 1125 1506 1961 7 1203 2111 1971 8 1599 2838 1975 8 1552 3230 1980 9 2265 3697 1985 14 4344 6174

1991 20 6229 8967

1995 22 8593 11784

270 971

753 1292

1812 2675

2614 3273

3973 6750

9723

32041

59583

25302 110279 478121

24

63

113

168

175

224

514

693

86

107

167

211

298

582

1770

5564

358

170

148

126

170

260

344

803

Capital Market Instruments

Equity

Hybrid

Debt

Equity Shares

Preference Shares

ADR / GDR

Debentures Zero coupon bonds

Deep Discount Bonds

of Development banks & Industrial financial institution. Legislative measures Growing public confidence Increasing awareness of investment Factors contributing to opportunities

Establishment

growth of Indian Capital Market

of underwriting business Setting up of SEBI Mutual Funds Credit Rating Agencies Factors contributing to

Growth

growth of Indian Capital Market

Indian Capital Market deficiencies

Lack

of transparency Physical settlement Variety of manipulative practices Institutional deficiencies Insider trading

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

Money Market
It

is a place for Large Institutions and government to manage their short-term cash needs is a subsection of the Fixed Income Market specializes in very short-term debt securities They are also called as Cash Investments

It

It

Defects of Money Market

Lack Lack

of Integration of Rational Interest Rates structure of an organized bill market of funds in the Money Market

Absence Shortage Seasonal

Stringency of funds and fluctuations in Interest rates banking facilities

Inadequate

Treasury Bills Commercial Paper Certificate of Deposit Money Market Mutual Funds Repo Market

Money Market Instruments

Segmen Issuer t Governm Central ent Government

Instruments Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.

Public Sector

Government Agencies / Statutory Bodies Public Sector Units

Govt. Guaranteed Bonds, Debentures

PSU Bonds, Debenture, Commercial Paper Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits Certificate of Deposits, Bonds Certificate of Deposits, Bonds

Private

Corporate

Banks Financial Institutions

Financial Regulators

Securities

and Exchange Board of India (SEBI) Bank of India of Finance

Reserve Ministry

Financial Regulators

and Exchange Board of India (SEBI) was first established in the year 1988 Its a non-statutory body for regulating the securities market Security Exchange Board of It became an autonomous body in India 1992 (SEBI)

Securities

Functions Of SEBI
Regulates Checks Checks

Capital Market.

Trading of securities. the malpractices in securities

market.

It

enhances investor's knowledge on market by providing education. Functions Of SEBI regulates the stockbrokers and subbrokers. promote Research and Investigation

It

To

It

tries to develop the securities market. Investors Interest.

Promotes Makes

rules and regulations for the securities market.

Objectives of SEBI

The Recent Initiatives Undertaken

Sole For For For

Control on Brokers

Underwriters Share Prices Mutual Funds

Established

on April 1, 1935 in accordance with the provisions of the RBI Act, 1934. Central Office of the Reserve Bank has been in Mumbai. acts as the apex monetary authority of the country.

The

It

Reserve Bank of India

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

Functions Of RBI
broad parameters of banking

operations Maintain public confidence, protect depositors' interest and provide cost-effective banking services. Authority On Foreign Exchange:
Manages

1999. Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.

the Foreign Exchange Management Act,

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.

Functions Of RBI

(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.

Monetary Measures

Pre-reforms period Steps taken Objectives Conclusion

Reforms in the Financial System

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 Price

and financial institutions acted as a deposit agencies. discovery process was prevented.

Government Till

failed to generate resources for investment and public services. 90s it was closed, highly regulated, and segmented system.

Pre-Reforms Period

Economic The He

reforms initiated in June 1991.

committee appointed under the chairmanship of M Narasimham. submitted report with all the recommendations liberalized the various sectors in the economy. of the public sector and tax system.

Government Reform

Steps Taken

Reorientation Macro To To To

of the economy

economic stability

Increase competitive efficiency in the operations remove structural rigidities and inefficiencies

attain a balance between the goals of Objectives financial stability & integrated & efficient markets

Reduce Lift

the level of state ownership in banking restrictions on foreign ownership of banks the development of the corporate-bond market

Spur

legal protections Recommendations

Recommendations

Strengthen

Deregulate Drop

the insurance industry

proposed limits on pension reforms consumer ownership of mutual-fund products a gold deposit scheme

Increase

Introduce

Recommendations

Speed

up the development of electronic payments. the RBI's regulatory and central-bank functions the remaining capital account controls out statutory priority lending and restrictions on asset allocation

Separate Lift

Phase

Recommendations

The

financial system is fairly integrated, stable, efficient. need to be addressed. reforms have been more capital centric in nature. capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.

Weaknesses The

Foreign

Conclusion

Thank you